Hill International
Annual Report 2010

Plain-text annual report

Hills Industries Limited ABN 35 007 573 417 Annual report for the year ended 30 June 2010 Hills Industries Limited ABN 35 007 573 417 Annual report - 30 June 2010 Contents Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' report Corporate governance statement Directors' declaration Lead auditor’s independence declaration under section 307C of the Corporations Act 2001 Independent auditor's report to the members Shareholder information Page 2 3 4 5 6 7 72 93 99 100 101 103 These financial statements are the consolidated financial statements of the consolidated entity consisting of Hills Industries Limited and its subsidiaries. The financial statements are presented in the Australian currency. Hills Industries Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Hills Industries Limited 944 - 956 South Road Edwardstown SA 5039 A description of the nature of the Group's operations and its principal activities is included in the review of operations and activities within the Directors’ report on pages 72 - 75, which is not part of these financial statements. The financial statements were authorised for issue by the Directors on this 10th day of September 2010. The Directors have the power to amend and reissue the financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All press releases, financial reports and other information are available within Corporate Information on our website: www.hills.com.au. For queries in relation to our reporting please call +61 8 8301 3200 or e-mail info@hills.com.au. -1- Revenue from continuing operations Other income Hills Industries Limited Consolidated income statement For the year ended 30 June 2010 Consolidated Notes 2010 $'000 2009 $'000 3 4 1,156,326 1,192,081 1,921 2,983 1,158,247 1,195,064 Expenses, excluding finance costs 5 (1,092,778) (1,149,134) Results from operations Finance income Finance costs Net finance expense Profit before income tax Income tax expense Profit for the year Profit is attributable to: Owners of Hills Industries Limited Non-controlling interests Profit for the year 5 5 5 6 65,469 45,930 4,166 (7,575) 767 (23,438) (3,409) (22,671) 62,060 23,259 (18,965) (7,604) 43,095 15,655 40,188 2,907 9,506 6,149 43,095 15,655 Cents Cents 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 24 24 16.7 16.7 4.9 4.9 The above consolidated income statement should be read in conjunction with the accompanying notes. -2- Profit for the year Other comprehensive income Loss on revaluation of land and buildings Changes in the fair value of cash flow hedges Exchange differences on translation of foreign operations Income tax relating to components of other comprehensive income Other comprehensive income for the year, net of tax Hills Industries Limited Consolidated statement of comprehensive income For the year ended 30 June 2010 Notes 22(a) 22(a) 22(a) 6(d) Consolidated 2010 $'000 2009 $'000 43,095 15,655 - (707) 318 212 (7,407) 329 110 2,064 (177) (4,904) Total comprehensive income for the year 42,918 10,751 Total comprehensive income for the year is attributable to: Owners of Hills Industries Limited Non-controlling interests 40,011 2,907 4,602 6,149 42,918 10,751 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. -3- ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Total current assets Non-current assets Investments Property, plant and equipment Deferred tax assets Intangible assets Derivative financial instruments Total non-current assets Total assets LIABILITIES 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 earnings Hills Industries Limited Consolidated statement of financial position As at 30 June 2010 Consolidated Notes 2010 $'000 2009 $'000 7 8 9 14 10 11 12 13 14 15 16 17 18 14 19 20 14 56,915 186,002 181,496 800 67,978 197,480 196,569 - 425,213 462,027 2 219,658 23,771 116,300 - 2 227,494 25,828 114,326 333 359,731 367,983 784,944 830,010 128,048 1,384 10,622 33,445 262 120,902 3,852 8,186 33,835 5,924 173,761 172,699 105,684 6,318 2,682 218,498 5,975 4,318 114,684 228,791 288,445 401,490 496,499 428,520 21 22(a) 306,595 47,899 126,107 248,598 46,495 107,442 Capital and reserves attributable to owners of Hills Industries Limited 480,601 402,535 Non-controlling interests Total equity 15,898 25,985 496,499 428,520 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. -4- Hills Industries Limited Consolidated statement of changes in equity For the year ended 30 June 2010 Consolidated Attributable to owners of Hills Industries Limited Contributed equity $'000 Reserves $'000 Retained earnings $'000 Notes Total $'000 Non- controlling interests $'000 Total equity $'000 Balance at 1 July 2008 223,091 51,369 133,759 408,219 21,298 429,517 Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity net of transaction costs and tax Non-controlling interest in share capital issued by subsidiary Non-controlling interest on acquisition of subsidiary Dividends provided for or paid Dividends paid to non-controlling interests in subsidiaries Executive share options - value of employee services Transfers to/(from) reserves - (4,904) 9,506 4,602 6,149 10,751 21 25,507 23 22 - - - - - - - - - 25,507 - 25,507 - - 38 38 - - - (35,863) - (35,863) (83) - (83) (35,863) - 70 (40) - - 40 - (1,431) (1,431) 70 - 14 - 84 - Balance at 30 June 2009 248,598 46,495 107,442 402,535 25,985 428,520 Balance at 1 July 2009 248,598 46,495 107,442 402,535 25,985 428,520 Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs and tax Non-controlling interest in share capital issued by subsidiary Change in non-controlling interest on acquisition of subsidiary Dividends provided for or paid Dividends paid to non-controlling interests in subsidiaries Executive share options - value of employee services - (177) 40,188 40,011 2,907 42,918 21 57,997 32 23 22 - - - - - - - 1,551 - - 30 - 57,997 - 57,997 - - 640 640 - (21,523) 1,551 (21,523) (11,551) - (10,000) (21,523) - - - (2,083) (2,083) 30 - 30 Balance at 30 June 2010 306,595 47,899 126,107 480,601 15,898 496,499 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. -5- Hills Industries Limited Consolidated statement of cash flows For the year ended 30 June 2010 Consolidated Notes 2010 $'000 2009 $'000 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) 1,281,583 (1,160,308) 1,374,725 (1,288,577) Cash generated from operations Interest received Interest paid Income taxes paid 121,275 86,148 1,596 (7,575) (13,748) 763 (13,318) (11,260) Net cash inflow from operating activities 35 101,548 62,333 Cash flows from investing activities Payment for acquisition of subsidiary, net of cash acquired Payment for acquisition of business operations, net of cash acquired Payments to increase ownership interest in subsidiary Payments for property, plant and equipment Payments for patents, trademarks and intellectual property Proceeds from sale of property, plant and equipment Proceeds from disposal of asset held for sale Rent received Net cash (outflow) from investing activities Cash flows from financing activities Proceeds from issues of shares Proceeds from borrowings Repayment of borrowings Loans (paid to) / received from other entities Proceeds from share issues to non-controlling interests in subsidiaries Dividends paid to Company's shareholders Dividends paid to non-controlling interests in subsidiaries Net cash (outflow) from financing activities Net (decrease) increase 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 31 31 11 13 23 - (3,953) (10,064) (19,094) (3,010) 4,138 - 864 (3,980) (619) - (32,047) - 903 20,850 842 (31,119) (14,051) 57,098 374 (115,465) (1,058) 640 (21,523) (2,630) 25,238 36,707 (26,865) 272 - (35,863) (1,431) (82,564) (1,942) (12,135) 67,650 16 46,340 21,310 - Cash and cash equivalents at the end of the financial year 7 55,531 67,650 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. -6- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for Hills Industries Limited (the "Company" or "parent entity") and its subsidiaries (together referred to as the "Group" or "Consolidated Entity" and individually as "Group Entities"). (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards (AASB), including Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board, and the Corporations Act 2001. Compliance with IFRS The financial report of the Group also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention These financial statements have been prepared on the basis of historical costs, except for the following: • • financial instruments at fair value through profit or loss are measured at fair value; and land and buildings are measured at fair value. The methods used to measure fair values are discussed further in note 30. 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 31 - business combinations Note 13 - measurement of the recoverable amounts of cash-generating units containing goodwill Note 25 - measurement of share-based payments Notes 18, 20 and 28 - provisions and contingencies Note 14 - financial instruments Financial statement presentation During the current year the allocation of expenses by function and the allocation of sales rebates was reviewed. The comparative information has been adjusted to be consistent with the allocations for the current financial year. The Group has applied the revised AASB 101 Presentation of Financial Statements which became effective on 1 January 2009. The revised standard requires the separate presentation of a statement of comprehensive income and a statement of changes in equity. All non-owner changes in equity must now be presented in the statement of comprehensive income. As a consequence, the Group had to change the presentation of its financial statements. Comparative information has been re-presented so that it is also in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share. -7- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (b) Parent entity financial information The financial information for the parent entity, Hills Industries Limited, disclosed in note 33 has been prepared on the same basis as the consolidated financial statements. (c) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June 2010 and the results of all subsidiaries for the year then ended. Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(i)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position, respectively. Investments in subsidiaries are accounted for at cost in the separate financial statements of Hills Industries Limited. (ii) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of Hills Industries Limited. When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. If the ownership interest in a jointly-controlled entity or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. (iii) Changes in accounting policy The Group has changed its accounting policy for transactions with non-controlling interests and the accounting for loss of control, joint control or significant influence from 1 July 2009 when a revised AASB 127 Consolidated and Separate Financial Statements became operative. The revisions to AASB 127 contained consequential amendments to AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures. Previously transactions with non-controlling interests were treated as transactions with parties external to the Group. Disposals therefore resulted in gains or losses in profit or loss and purchases resulted in the recognition of goodwill. On disposal or partial disposal, a proportionate interest in reserves attributable to the subsidiary was reclassified to profit or loss or directly to retained earnings. -8- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (c) Principles of consolidation (continued) Previously when the Group ceased to have control, joint control or significant influence over an entity, the carrying amount of the investment at the date control, joint control or significant influence ceased became its cost for the purposes of subsequently accounting for the retained interests as associates, jointly controlled entity or financial assets. The Group has applied the new policy prospectively to transactions occurring on or after 1 July 2009. As a consequence, no adjustments were necessary to any of the amounts previously recognised in the financial statements, and there was no material impact on earnings per share. (d) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the operating segments, has been identified as the Group Managing Director. Operating segments that exhibit similar long-term economic characteristics, and have similar products, processes, customers, distribution methods and regulatory environments are aggregated. Change in accounting policy The Group has adopted AASB 8 Operating Segments from 1 July 2009. AASB 8 replaces AASB 114 Segment Reporting. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. This has resulted in an increase in the number of reportable segments presented. In addition, the segments are reported in a manner that is consistent with the internal reporting provided to the chief operating decision maker. Comparatives for 2009 have been restated. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share. (e) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency'). The consolidated financial statements are presented in Australian dollars, which is Hills Industries Limited's functional and presentation currency and the functional and presentation currency of the majority of the Group. (ii) Transactions and balances Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. (iii) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and all resulting exchange differences are recognised in other comprehensive income. -9- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (f) Revenue recognition Revenue is recognised for the major business activities as follows: (i) Goods sold Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. (ii) Services Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to estimates of work performed. (iii) Rental income Rental income from investment property is recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. (iv) Dividends Dividends are recognised as revenue when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profits. However, the investment may need to be tested for impairment as a consequence, refer note 1(n). Change in accounting policy The Group has changed its accounting policy for dividends paid out of pre-acquisition from 1 July 2009 when a revised AASB 127 Consolidated and Separate Financial Statements became operative. Previously, dividends paid out of pre-acquisition profits were deducted from the cost of the investment. In accordance with the transitional provisions, the new accounting policy is applied prospectively. It was therefore not necessary to make any adjustments to any of the amounts previously recognised in the financial statements. There is no material impact on earnings per share. (g) Income tax The income tax expense or revenue for the period is the tax payable on the current period's taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries and associates operate and generate taxable income. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. -10- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (g) Income tax (continued) Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (i) Tax consolidation legislation Hills Industries Limited and its wholly-owned Australian controlled entities are part of a tax consolidated group. The head entity, Hills Industries Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts arising from temporary differences. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone taxpayer in its own right. In addition to its own current and deferred tax amounts, Hills Industries Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Details about the tax funding agreement are disclosed in note 6. (h) Leases Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (note 29). Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. (i) Business combinations The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the Group's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified as a financial liability. Amounts are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. Change in accounting policy A revised AASB 3 Business Combinations became operative on 1 July 2009. All purchase consideration is now recorded at fair value at the acquisition date. Contingent payments classified as debt are subsequently remeasured through profit or loss. Under the Group's previous policy, contingent payments were only recognised when the payments were probable and could be measured reliably and were accounted for as an adjustment to the cost of acquisition. Acquisition-related costs are expensed as incurred. Previously, they were recognised as part of the cost of acquisition and therefore included in goodwill. -11- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (i) Business combinations (continued) Non-controlling interests in an acquiree are now recognised either at fair value or at the non-controlling interest's proportionate share of the acquiree's net identifiable assets. This decision is made on an acquisition-by-acquisition basis. Under the previous policy, the non-controlling interest was always recognised at its share of the acquiree's net identifiable assets. There is no material impact on earnings per share. (j) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (k) Cash and cash equivalents For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the consolidated statement of financial position. (l) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due for settlement within 30 to 90 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment loss is recognised in profit or loss. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against expenses in profit or loss. (m) Inventories Raw materials and stores, work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Cost includes the transfer from equity of any gains/losses on qualifying cash flow hedges relating to purchases of raw material. Costs are assigned to individual items of inventory on the basis of the first-in-first-out principle. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. -12- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (n) Investments and other financial assets Classification The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the assets were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluates this designation at the end of each reporting date. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held-for-trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are classified as held-for-trading unless they are designated as hedges. Assets in this category are classified as current and non current assets on the basis of the maturity of the underlying derivative. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are included in current assets - trade and other receivables (note 8) in the consolidated statement of financial position. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Subsequent measurement Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Details on how the fair value of financial instruments is determined are disclosed in note 30. Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is evidence of impairment for any of the Group's financial assets carried at amortised cost, the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred. The cash flows are discounted at the financial asset's original effective interest rate. The loss is recognised in profit or loss. (o) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. -13- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (o) Derivatives and hedging activities (continued) The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 14. Movements in the hedging reserve in shareholders' equity are shown in note 22. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. (i) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and within the hedging reserve in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in profit or loss within ‘finance income' or 'finance costs'. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in profit or loss within ‘sales'. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed assets) the gains and losses previously deferred in equity are reclassified from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in profit or loss as cost of goods sold in the case of inventory, or as depreciation or impairment in the case of fixed assets. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss. (ii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss. (p) Property, plant and equipment Land and buildings are shown at fair value less subsequent depreciation for buildings. Land and buildings are independently valued at least every four years on the basis of open market values, and in the intervening years are valued by the Directors based on the most recent independent valuation combined with current market information. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. All other plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Increases in the carrying amounts arising on revaluation of land and buildings are recognised, net of tax, in other comprehensive income and accumulated in reserves in equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first recognised in other comprehensive income to the extent of the remaining surplus attributable to the asset; all other decreases are charged to profit or loss. -14- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (p) Property, plant and equipment (continued) Land is not depreciated. Depreciation on other assets is calculated using the diminishing value or straight line method as considered appropriate to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: - Buildings - Plant and equipment - Leasehold improvements 2010 0.75% 5.00% to 40.00% 20.00% to 66.67% 2009 0.75% 5.00% to 40.00% 20.00% to 66.67% The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (note 1(j)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts included in other reserves in respect of those assets to the asset realisation reserve. (q) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing (note 13). The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. (ii) Patents and Trademarks Patents and trademarks have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of patents and trademarks over their estimated useful lives, which vary from 10 to 20 years. (iii) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be measured reliably. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life, which is estimated to be 5 to 20 years. (r) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are paid in accordance with the Group's terms of trade. -15- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (s) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (t) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. (i) Claims The provision for claims is the estimated future liability of the Group’s self-insurance arrangements. The value of the provision is determined in consultation with the Group’s actuaries or legal advisers as appropriate. The claims estimate is based on historical claims data and a weighting of the possible outcomes against their associated probabilities. Outstanding claims are recognised for incidences that have occurred that may give rise to a claim and are measured at the cost that the entity expects to incur in settling the claims, discounted using a Commonwealth government bond rate with a maturity date approximating the terms of the Group’s obligations. (u) Employee benefits (i) Wages and salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees' services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (iii) Retirement benefit obligations A defined contribution plan is a post employment benefit plan which receives fixed contributions from Group entities' and the Group’s legal or constructive obligation is limited to these contributions. Contributions to defined contribution plans are recognised as an expense as they become payable. (iv) Share-based payments Share-based compensation benefits are provided to employees via the Executive Share Option Plan and the Employee Share Plan. Information relating to these schemes is set out in note 25. -16- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (u) Employee benefits (continued) Executive Share Option Plan The Executive Share Option Plan allows Group executives to acquire shares of the Company. The fair value of options granted under the Executive Share Option Plan is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted, measured at the grant date, which includes any market performance conditions but excludes the impact of any service and non-market performance vesting conditions and the impact of any non-vesting conditions. The valuation method takes into account the exercise price of the option, the life of the option, the current price of the underlying shares, the expected volatility of the share price, the dividends expected of the shares and the risk-free interest rate for the life of the option. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. No change is made for changes in market conditions. Employee Share Bonus Plan The Employee Share Bonus Plan allows Group employees to acquire shares of the Company. Up to $1,000 per year in shares is allotted to employees who have served a qualifying period. The fair value of shares issued is recognised as an employee expense with a corresponding increase in equity. The fair value of the shares granted is measured using a present value method based upon independent advice. (v) Profit-sharing and bonus plans A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably, or where there is past practice that has created a constructive obligation. (v) Contributed equity Ordinary shares are classified as equity (note 21). Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. If the entity reacquires its own equity instruments, for example as the result of a share buy-back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. (w) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period. (x) Finance income and expense Finance income comprises interest income on funds invested, fair value gains on interest rate swap contracts not accounted for using hedge accounting and the ineffective portion of cash flow hedges relating to interest rate swaps. Interest income is recognised as it accrues in profit or loss. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, fair value losses on interest rate swap contracts not accounted for using hedge accounting and the ineffective portion of cash flow hedges relating to interest rate swaps. Borrowing costs are recognised in profit or loss using the effective interest method. -17- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (y) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: • • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares; by the weighted average number of ordinary shares outstanding during the financial year (note 24). (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares; and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (z) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (aa) Rounding of amounts The Group 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 financial statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (ab) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2010 reporting periods. The Group's assessment of the impact of these new standards and interpretations is set out below. (i) AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project (effective for annual periods beginning on or after 1 January 2010) In May 2009, the AASB issued a number of improvements to existing Australian Accounting Standards. The Group will apply the revised standards from 1 July 2010. The Group does not expect there to be any significant impact as a result of applying the revised rules. (ii) AASB 2009-8 Amendments to Australian Accounting Standards - Group Cash-Settled Share-based Payment Transactions [AASB2] (effective from 1 January 2010) The amendments made by the AASB to AASB 2 confirm that an entity receiving goods or services in a group share-based payment arrangement must recognise an expense for those goods or services regardless of which entity in the group settles the transaction or whether the transaction is settled in shares or cash. They also clarify how the group share-based payment arrangement should be measured, that is, whether it is measured as an equity or a cash-settled transaction. The Group will apply these amendments retrospectively for the financial reporting period commencing on 1 July 2010. There will be no impact on the financial statements of the Group. -18- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (ab) New accounting standards and interpretations (continued) (iii) AASB 2009-10 Amendments to Australian Accounting Standards - Classification of Rights Issues [AASB 132] (effective from 1 February 2010) In October 2009 the AASB issued an amendment to AASB 132 Financial Instruments: Presentation which addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative liabilities. The amendment must be applied retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. The Group will apply the amended standard from 1 July 2010. As the Group has not made any such rights issues, the amendment will not have any effect on the Group's financial statements. (iv) Revised AASB 124 Related Party Disclosures and AASB 2009-12 Amendments to Australian Accounting Standards (effective for annual reporting periods beginning on or after 1 January 2011) In December 2009 the AASB issued a revised AASB 124 Related Party Disclosures. It is effective for accounting periods beginning on or after 1 January 2011 and must be applied retrospectively. The amendment clarifies and simplifies the definition of a related party. The Group will apply the amended standard from 1 July 2011. It is not expected to have any effect on the Group's related party disclosures. (v) AASB 9 Financial Instruments and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 (effective from 1 January 2013) AASB 9 Financial Instruments addresses the classification and measurement of financial assets and is likely to affect the Group’s accounting for its financial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. Retrospective application is generally required, although there are exceptions, particularly if the Group adopts the standard for the year ended 30 June 2012 or earlier. The Group has not yet decided when to adopt AASB 9 and has not yet determined the potential effect of the standard. (vi) AASB Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments and AASB 2009-13 Amendments to Australian Accounting Standards arising from Interpretation 19 (effective 1 July 2010) AASB Interpretation 19 clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished by the debtor issuing its own equity instruments to the creditor (debt for equity swap). It requires a gain or loss to be recognised in profit or loss which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. The Group will apply the interpretation from 1 July 2010. It is not expected to have any impact on the Group's financial statements since it is only retrospectively applied from the beginning of the earliest period presented (1 July 2009) and the Group has not entered into any debt for equity swaps since that date. (vii) AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project and AASB 2010-4 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project (effective from 1 July 2010) In June 2010, the AASB made a number of amendments to Australian Accounting Standards as a result of the IASB's annual improvements project. The Group will apply the amendments from 1 July 2010. The Group does not expect there to be any significant impact as a result of applying the revised rules. -19- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 2 Segment information (a) Description of segments The Group has four reportable segments, based upon reports reviewed by the Group Managing Director that are used to make strategic decisions. The following summary describes the operations in each of the Group’s reportable segments: Electronic Security and Entertainment – includes 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 – includes outdoor clothes driers, ladders, ironing boards, laundry trolleys, security doors, garden sprayers, rehabilitation and mobility products, water tanks and other rotationally moulded products, solar hot water products, stainless steel products and plumbing products. Building and Industrial – comprises the Fielders Steel Roofing and Orrcon Steel businesses and includes structural, precision and large steel tubing, steel doorframes, roll formed metal building products, carports and shed systems. Korvest – comprises the business of Korvest Ltd and includes electrical and cable support systems, pipe support systems, walkway systems, steel fabrication, associated metal treatment and galvanising services. The Group principally considers the business from a products and services perspective. The Electronic Security and Entertainment and Home, Hardware and Eco divisions are each managed separately by Group General Managers. The Electronic Security and Entertainment businesses meet the aggregation criteria of the Standard because of similarities of products, markets, distribution and regulatory environments. The Home, Hardware and Eco division comprises a number of business units, which individually would not comprise reportable segments, however, rather than reporting these businesses as “other operations” they are reported as Home, Hardware and Eco as this reflects the manner in which the Group manages these businesses. In previous financial years the Building and Industrial segment comprised the operations of Orrcon, Fielders and Korvest. These businesses are run by separate General Managers and the Group considers them separate operating segments. However, for the purposes of disclosure under AASB 8 Operating Segments, the Orrcon and Fielders businesses meet the aggregation criteria of the Standard because of similarities of products, markets, distribution and regulatory environments. However, Korvest does not meet the aggregation criteria, and as a consequence is reported separately. Although the Group's divisions are managed on a products and services basis they operate in two main geographical areas: Australia Comprises manufacturing facilities and sales offices and customers in all states and territories. Overseas Principally comprises manufacturing facilities and sales offices in New Zealand. -20- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 2 Segment information (continued) (b) Segment information provided to the Group Managing Director 2010 Electronic Security & Entertainment $'000 Home, Hardware & Eco $'000 Building & Industrial $'000 Korvest Ltd $'000 Total $'000 Segment revenue 349,506 176,311 574,366 55,279 1,155,462 Segment EBIT 32,525 10,235 20,622 5,706 69,088 Segment assets 143,955 128,840 372,623 35,882 681,300 Segment liabilities 33,099 26,989 81,830 7,070 148,988 2009 Electronic Security & Entertainment $'000 Home, Hardware & Eco $'000 Building & Industrial $'000 Korvest Ltd $'000 Total $'000 Segment revenue 336,019 193,517 598,811 62,892 1,191,239 Segment EBIT 30,852 (3,106) 23,790 8,044 59,580 Total segment assets 145,299 152,544 370,783 33,712 702,338 Total segment liabilities 31,885 30,680 73,472 6,977 143,014 (c) Notes to, and forming part of, the segment information (i) Accounting policies Segment revenues, expenses, assets and liabilities are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Segment assets include all assets used by a segment and consist primarily of receivables, inventories, property, plant and equipment and goodwill and other intangible assets, net of related provisions. Segment assets do not include income taxes. Segment revenues, expenses and results include transfers between segments. Such transfers are priced on a ''cost plus'' basis and are eliminated on consolidation. (ii) Segment revenue Segment revenue reconciles to total revenue from continuing operations as follows: Total segment revenue Other revenue Total revenue from continuing operations (note 3) Consolidated 2010 $'000 2009 $'000 1,155,462 864 1,191,239 842 1,156,326 1,192,081 The Group is domiciled in Australia. The amount of its revenue from external customers in Australia is $1,116,159,000 (2009: $1,149,652,000), and the total of revenue from external customers in other countries is $39,303,000 (2009: $41,587,000). Segment revenues are allocated based on the country in which the customer is located. The Group does not derive 10% or more of its revenues from any single external customer. -21- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 2 Segment information (continued) (iii) Segment EBIT Segment EBIT reconciles to operating profit before income tax as follows: Segment EBIT Interest revenue Interest expense Fair value profit/(loss) on interest rate swaps and forward exchange contracts Restructuring costs Impairment of other assets Other Consolidated 2010 $'000 2009 $'000 69,088 1,596 (7,575) 2,570 - (1,680) (1,939) 59,580 767 (13,298) (10,140) (14,048) - 398 Profit before income tax from continuing operations 62,060 23,259 (iv) Segment assets The amounts provided to the Group Managing Director with respect to total assets are measured in a manner consistent with that of the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. Reportable segment assets are reconciled to total assets as follows: Segment assets Cash Deferred tax assets Investments Derivative financial instruments Corporate assets Consolidated 2010 $'000 2009 $'000 681,300 56,915 23,771 2 800 22,156 702,338 67,978 25,828 2 333 33,531 Total assets as per the consolidated statement of financial position 784,944 830,010 The total of non-current assets other than financial instruments and deferred tax assets located in Australia is $327,890,000 (2009: $333,776,000), and the total of these non-current assets located in other countries is $8,070,000 (2009: $8,046,000). Segment assets are allocated to countries based on where the assets are located. (v) Segment liabilities The amounts provided to the Group Managing Director with respect to total liabilities are measured in a manner consistent with that of the financial statements. These liabilities are allocated based on the operations of the segment. The Group's borrowings and derivative financial instruments are not considered to be segment liabilities but rather managed by the treasury function. Reportable segments' liabilities are reconciled to total liabilities as follows: Segment liabilities Tax liabilities (including GST payable) Borrowings Derivative financial instruments Corporate liabilities Consolidated 2010 $'000 2009 $'000 148,988 15,646 107,068 2,944 13,799 143,014 16,528 222,350 10,242 9,356 Total liabilities as per the consolidated statement of financial position 288,445 401,490 -22- 3 Revenue From continuing operations Sales revenue Sale of goods Services Other revenue Rents and sub-lease rentals 4 Other income Net gain on disposal of property, plant and equipment Foreign exchange gains (net) Other income 5 Expenses Classification of expenses by function Cost of goods sold Cost of services provided Distribution expenses Sales and marketing expenses Administration expenses Other expenses Net loss on disposal of property plant & equipment Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 $'000 2009 $'000 1,094,540 60,922 1,122,199 69,040 1,155,462 1,191,239 864 842 1,156,326 1,192,081 Consolidated 2010 $'000 2009 $'000 179 14 1,728 1,921 65 34 2,884 2,983 Consolidated 2010 $'000 2009 $'000 756,558 53,143 87,337 129,091 64,486 2,163 - 791,128 58,381 88,576 132,707 63,263 14,994 85 1,092,778 1,149,134 During the current year the allocation of expenses by function and the allocation of sales rebates was reviewed. The comparative information has been adjusted to be consistent with the allocations for the current financial year. -23- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 $'000 2009 $'000 1,644 21,233 1,199 21,341 22,877 22,540 996 40 1,036 567 - 567 23,913 23,107 174,818 15,383 18,556 7,701 1,993 467 170,633 14,633 24,481 10,457 1,660 454 218,918 222,318 1,596 2,504 66 4,166 763 - 4 767 (7,575) - (13,298) (10,140) (7,575) (23,438) (3,409) (22,671) 22,625 20,250 22,625 20,250 467 417 1,680 3,836 3,336 - - 5,750 3,689 5,380 8,852 14,819 5 Expenses (continued) Profit before income tax includes the following specific expenses: Depreciation Buildings Plant and equipment Total depreciation Amortisation Patents and trademarks Development costs Total amortisation Total depreciation and amortisation Personnel expenses Wages and salaries Defined contribution superannuation expense Other associated personnel expenses Increase in liability for annual leave Increase in liability for long service leave Equity-settled share-based payment transactions Total personnel expenses Finance income Interest income Fair value gains on derivatives Ineffectiveness in fair value of cash flow hedges Finance expenses Interest and finance charges paid/payable Fair value loss on derivatives Net finance costs expensed Rental expense relating to operating leases Minimum lease payments Total rental expense relating to operating leases Research and development Impairment of financial and other assets Property, plant and equipment Inventories Receivables Intangible assets Total impairment losses - financial and other assets -24- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 5 Expenses (continued) Profit after tax for the year includes the following items that are unusual because of their nature and size: Financial expenses (a) Net fair value loss on derivatives Less: Applicable income tax benefit Other expenses (b) Restructuring costs Less: Applicable income tax benefit (a) Net fair value loss on derivatives Consolidated 2010 $'000 2009 $'000 - - - - - - (10,140) 3,042 (7,098) (14,048) 2,600 (11,448) 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. The Group does not trade in these instruments and does not speculate on movements in rates. In the previous financial year the significant movements in the Australian dollar resulted in a non cash fair value loss before tax on forward exchange contracts of $5,822,000 and the significant reduction in interest rates over the previous financial year resulted in a non cash fair value loss before tax on interest rate swaps of $4,318,000. In the current reporting period, all existing forward exchange contracts from 1 July 2009 and all new forward exchange contracts from inception were designated into hedge relationships and hedge accounting applied. All new interest rate swaps from inception and all existing interest rate swaps from during the first quarter of the current financial year are designated into hedge relationships and hedge accounting applied. This is in accordance with the Group's existing accounting policy. (b) Restructuring costs In the previous financial year, the Group undertook a detailed review of operations with particular emphasis on the Home, Hardware and Eco Products division. A number of restructuring initiatives were implemented during that 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 $11,448,000, of which the cash cost was $2,564,000. Included in the non cash costs was the impairment of the goodwill associated with the Alquip business. This totalled $5,380,000. -25- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 6 Income tax expense (a) Income tax expense Current tax Deferred tax Adjustments for current tax of prior periods Deferred income tax expense (revenue) included in income tax expense comprises (note 12) Decrease (increase) in deferred tax assets Adjustments for deferred tax of prior periods (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30% (2009 - 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Goodwill impairment Impairment of other assets Depreciation of buildings Non deductable expenses Tax exempt income Difference in overseas tax rates Adjustments for current and deferred tax of prior periods Tax losses not recognised Previously unrecognised tax losses now recouped to reduce current tax expense Consolidated 2010 $'000 2009 $'000 17,659 2,795 (1,489) 15,542 (7,333) (605) 18,965 7,604 2,693 102 2,795 (6,916) (417) (7,333) 62,060 18,618 23,259 6,978 - 504 274 819 (180) 4 (1,387) 313 - 1,614 - - 500 (650) - (1,022) 239 (55) Total income tax expense 18,965 7,604 (c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity: Net deferred tax - debited (credited) directly to equity (note 12) (526) - (d) Amounts recognised in other comprehensive income Gains / (losses) on revaluation of land and buildings (notes 12, 22) Cash flow hedges (notes 12, 22) - (212) (2,163) 99 (212) (2,064) -26- 6 Income tax expense (continued) (e) Tax losses Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 $'000 2009 $'000 Unused capital tax losses for which no deferred tax asset has been recognised 29,918 29,083 Potential tax benefit @ 30% 8,975 8,725 The tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future capital gains will be available against which the Group can utilise the benefits from these items. Revenue tax losses for which no deferred tax asset has been recognised total $1,121,000 (2009: $1,356,000). The potential deferred tax asset not recognised totals $336,000 (2009: $407,000). (f) Current tax assets and liabilities The current tax liability for the Group of $10,622,000 (2009: $8,186,000) represents the amount of income taxes payable in respect of current and prior financial periods. (g) Tax consolidation legislation The Company and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The accounting policy in relation to this legislation is set out in note 1(g). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Hills Industries Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Hills Industries Limited for any current tax payable assumed and are compensated by Hills Industries Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Hills Industries Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities' financial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables and eliminated on consolidation. -27- 7 Current assets - Cash and cash equivalents Cash at bank and in hand Deposits at call Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 $'000 2009 $'000 10,610 46,305 63,931 4,047 56,915 67,978 (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 consolidated statement of cash flows as follows: Balances as above Bank overdrafts (note 16) Balances per consolidated statement of cash flows (b) Risk exposure Consolidated 2010 $'000 2009 $'000 56,915 (1,384) 67,978 (328) 55,531 67,650 The Group's exposure to interest rate risk is discussed in note 30. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents mentioned above. (c) Fair value The carrying amount for cash and cash equivalents equals the fair value. 8 Current assets - Trade and other receivables Consolidated 2010 $'000 2009 $'000 188,818 (9,418) 201,484 (7,782) 179,400 193,702 - 4,105 2,497 219 1,865 1,694 186,002 197,480 Net trade receivables Trade receivables Provision for impairment of receivables (note (a)) Net other receivables Receivable from associates Other receivables Prepayments -28- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 8 Current assets - Trade and other receivables (continued) (a) Impaired trade receivables The ageing of the Group's trade receivables at the reporting date is as follows: Not past due Past due 0 - 30 days Past due 31 - 90 days Past due more than 90 days Movements in the provision for impairment of receivables are as follows: At 1 July Provision for impairment recognised during the year Receivables written off during the year as uncollectible At 30 June Consolidated 2010 $'000 2009 $'000 103,215 60,019 16,494 9,090 112,974 61,291 17,155 10,064 188,818 201,484 Consolidated 2010 $'000 2009 $'000 (7,782) (3,336) 1,700 (5,528) (3,689) 1,435 (9,418) (7,782) Based on historic default rates, the Group believes that no impairment allowance is necessary in respect of trade receivables not yet past due. The provision for impaired receivables for the Group of $9,418,000 (2009: $7,782,000) relates to receivables past due more than 30 days, based upon a case by case assessment. Receivables past due between 0 and 30 days are not considered impaired. (b) Foreign exchange and interest rate risk Information about the Group's exposure to foreign currency risk and interest rate risk in relation to trade and other receivables is provided in note 30. (c) Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. The fair value of securities held for certain trade receivables is insignificant as is the fair value of any collateral sold or repledged. Refer to note 30 for more information on the risk management policy of the Group and the credit quality of the Group's trade receivables. -29- 9 Current assets - Inventories Raw materials and stores - at cost and net realisable value - impairment losses Work in progress - at cost and net realisable value - impairment losses Finished goods - at cost and net realisable value - impairment losses 10 Non-current assets - Investments Other listed securities Equity securities These financial assets are carried at cost. Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 $'000 2009 $'000 54,859 (3,152) 48,649 (1,213) 51,707 47,436 5,224 - 5,224 4,665 (2) 4,663 147,293 (22,728) 165,369 (20,899) 124,565 144,470 181,496 196,569 Consolidated 2010 $'000 2009 $'000 2 2 -30- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 11 Non-current assets - Property, plant and equipment Consolidated At 1 July 2008 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2009 Land - Fair Value $'000 Buildings - Fair Value $'000 Plant and equipment - Cost & Fair Value $'000 Total $'000 47,501 - 47,501 54,743 (2,384) 247,860 (121,296) 350,104 (123,680) 52,359 126,564 226,424 Opening net book amount Exchange differences Revaluation to fair value Acquisitions through business combinations Additions Disposals Depreciation charge 47,501 36 (3,305) - - - - 52,359 33 (4,102) - 2,192 (8) (1,199) 126,564 7 - 73 29,599 (915) (21,341) 226,424 76 (7,407) 73 31,791 (923) (22,540) Closing net book amount 44,232 49,275 133,987 227,494 At 30 June 2009 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2010 Opening net book amount Exchange differences Revaluation to fair value Acquisition through business combinations Additions Disposals Impairment charge recognised in profit and loss Depreciation charge Closing net book amount At 30 June 2010 Cost or fair value Accumulated depreciation Net book amount 44,232 - 44,232 44,232 62 - - - - - - 44,294 44,294 - 44,294 52,134 (2,859) 252,500 (118,513) 348,866 (121,372) 49,275 133,987 227,494 49,275 50 - - 1,946 (20) - (1,644) 133,987 11 - 1,463 17,148 (3,939) (1,680) (21,233) 227,494 123 - 1,463 19,094 (3,959) (1,680) (22,877) 49,607 125,757 219,658 54,072 (4,465) 258,663 (132,906) 357,029 (137,371) 49,607 125,757 219,658 -31- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 11 Non-current assets - Property, plant and equipment (continued) (a) Assets in the course of construction The carrying amounts of the assets disclosed above include the following expenditure recognised in relation to property, plant and equipment which is in the course of construction: Property, furniture, fittings, plant and equipment Total assets in the course of construction (b) Impairment loss Consolidated 2010 $'000 2009 $'000 13,023 18,548 13,023 18,548 The impairment loss relates to property, plant and equipment in the course of construction. The whole amount was included in profit or loss, as there was no amount previously included in the asset revaluation reserve relating to the relevant asset. The recoverable amount of the asset was determined by reference to a report provided by an independent valuer as fair value less cost to sell based on an active market. 12 Non-current assets - Deferred tax assets The balance comprises temporary differences attributable to: Employee benefits Property, plant and equipment Inventories Receivables Loans and borrowings Provisions Self insurance provisions Other accruals Software and prepayments Derivative financial instruments Other items Net deferred tax assets Consolidated 2010 $'000 2009 $'000 10,865 (1,921) 4,614 2,543 1,218 2,155 83 1,576 439 1,233 966 10,873 (1,961) 5,511 2,423 1,218 1,997 83 2,136 385 2,942 221 23,771 25,828 -32- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 12 Non-current assets - Deferred tax assets (continued) Movements - Consolidated Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Self insurance provisions Other accruals Software and prepayments Derivative financial instruments Other items Movements - Consolidated Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Self insurance provisions Other accruals Software and prepayments Derivative financial instruments Other items Balance at 1 July 2008 $'000 Recognised in profit or loss $'000 Recognised in equity $'000 Acquisition of subsidiary $'000 Balance at 30 June 2009 $'000 Recognised in other compre- hensive income $'000 (4,330) 3,235 9,994 1,752 1,218 2,095 897 616 320 - 606 206 2,276 800 671 - (98) (814) 1,520 65 3,041 (334) 2,163 - - - - - - - - (99) - 16,403 7,333 2,064 - - - - - - - - - - - - - - 79 - - - - - - - (51) (1,961) 5,511 10,873 2,423 1,218 1,997 83 2,136 385 2,942 221 28 25,828 Balance at 1 July 2009 $'000 Recognised in profit or loss $'000 Recognised in equity $'000 Acquisition of subsidiary $'000 Balance at 30 June 2010 $'000 Recognised in other compre-he nsive income $'000 (1,961) 5,511 10,873 2,423 1,218 1,997 83 2,136 385 2,942 221 40 (897) (8) 120 - 158 - (560) 54 (1,921) 219 - - - - - - - - - 212 - 25,828 (2,795) 212 - - - - - - - - - - 526 526 - - - - - - - - - - - (1,921) 4,614 10,865 2,543 1,218 2,155 83 1,576 439 1,233 966 - 23,771 -33- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Development costs $'000 Goodwill $'000 Patents, trademarks and other rights $'000 Total $'000 13 Non-current assets - Intangible assets Consolidated At 1 July 2008 Cost Accumulated amortisation and impairment 176 (176) 116,549 (5,663) 8,144 (4,868) 124,869 (10,707) Net book amount - 110,886 3,276 114,162 Year ended 30 June 2009 Opening net book amount Acquisitions through business combinations Impairment charge ** Amortisation charge ** Derecognised on disposal Closing net book amount At 30 June 2009 Cost Accumulated amortisation and impairment Net book amount Year ended 30 June 2010 Opening net book amount Additions Amortisation charge ** Closing net book amount At 30 June 2010 Cost Accumulated amortisation and impairment Net book amount - 200 - - - 200 200 - 200 200 - (40) 160 200 (40) 160 110,886 5,912 (5,380) - - 111,418 122,461 (11,043) 111,418 3,276 - - (567) (1) 2,708 2,946 (238) 2,708 114,162 6,112 (5,380) (567) (1) 114,326 125,607 (11,281) 114,326 111,418 - - 111,418 2,708 3,010 (996) 4,722 114,326 3,010 (1,036) 116,300 122,461 (11,043) 111,418 5,957 (1,235) 128,618 (12,318) 4,722 116,300 ** The amortisation and impairment charge is recognised in expenses in the income statement. (a) Impairment tests for goodwill During the year ended 30 June 2010 the Group determined that there is no impairment of any of its cash generating units (CGU) containing goodwill or intangible assets with indefinite useful lives. For the purpose of impairment testing, goodwill is allocated to the Group’s operating units that represent the lowest level within the Group at which the goodwill is monitored for internal management purposes (cash generating units). -34- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 13 Non-current assets - Intangible assets (continued) The aggregate carrying amounts of goodwill allocated to each cash generating unit, analysed at a segment level, are as follows: Cash generating unit 2010 & 2009 Hills SVL Hills Healthcare LW Gemmell Fielders Orrcon Opticomm UHS Team Poly Total Group Building and Industrial $'000 Electronic Security and Entertainment $'000 Home, Hardware and Eco $'000 Total $'000 - - - 7,789 49,589 - - - 57,378 16,237 - - - - 756 5,293 - 22,286 - 11,839 3,324 - - - - 16,591 31,754 16,237 11,839 3,324 7,789 49,589 756 5,293 16,591 111,418 The cash generating unit impairment tests are based on value in use calculations which were determined by discounting the future cash flows generated from the continuing use of the unit and were based on the following key assumptions: Cash flow projections have been based on the coming year's budget and Board agreed forecasts with key assumptions for future years relating to sales, gross margins and expenses. Sales are based on management assessments with allowances for future growth based upon assessments of growth rates in the markets to which the assets belong. Gross margins and expense levels are based on past experience. A terminal value has been determined at the end of the five year strategic plan using a growth rate of 3% (2009: 3%), which is no greater than the long term average growth rate for the market to which the asset is dedicated. A pre-tax discount rate of between 14.17% and 14.77% (2009: 13.57% and 14.68%), determined by reference to the Group’s weighted average cost of capital and specific industry factors was applied in determining the recoverable amount of the units. (b) Impact of possible changes in key assumptions With the exception of the Orrcon and the Team Poly cash generating units, a reasonably possible change in the key assumptions above would not have resulted in the carrying amount exceeding the recoverable amount for any of the Group’s cash generating units. The Orrcon cash generating unit's recoverable amount (which exceeds its carrying value in use by approximately $53.6 million (2009: $15.2 million) is sensitive to a possible change in EBIT. The business is forecasting for annualised EBIT growth of 20% per annum over the five year model period. A decrease in forecast annual EBIT of 21% (2009: 3%) could result in an impairment. The Team Poly cash generating unit's recoverable amount (which exceeds its carrying value in use by approximately $9.3 million (2009: $5.9 million) is sensitive to a possible change in EBIT. The business is forecasting for EBIT over the five year period to return to levels consistent with 2007. A decrease in forecast annual EBIT of 21% (2009: 5%) could result in an impairment. (c) Impairment charge The impairment charge of $5,380,000 recorded in the previous financial year arose as a result of the closure of the Alquip business. The decision to close the business and subsequent sale of assets resulted in the goodwill associated with this cash generating unit being impaired. -35- 14 Derivative financial instruments Current assets Forward foreign exchange contracts - cash flow hedges Total current derivative financial instrument assets Non-current assets Interest rate swaps - cash flow hedges Total non-current derivative financial instrument assets Total derivative financial instrument assets Current liabilities Interest rate swaps - cash flow hedges Forward foreign currency contracts - held for trading Total current derivative financial instrument liabilities Non-current liabilities Interest rate swaps - cash flow hedges Interest rate swaps - held for trading Total non-current derivative financial instrument liabilities Total derivative financial instrument liabilities Net derivative financial instrument liabilities Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 $'000 2009 $'000 800 800 - - 800 250 12 262 2,682 - 2,682 - - 333 333 333 - 5,924 5,924 - 4,318 4,318 2,944 10,242 (2,144) (9,909) The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group's financial risk management policies (refer to note 30). (i) Interest rate swap contracts - cash flow hedges Bank loans of the Group at 30 June 2010 bear an average variable interest rate of 4.75% (2009: 3.26%). It is the Group's policy to manage exposure to increasing interest rates by hedging a proportion of the Group's exposure to variable rate bank loans. Accordingly, the Group has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. Interest rate swaps in place at 30 June 2010 cover approximately all (2009: 56%) of the loan principal outstanding and are taken out with terms of between three and seven years. The fixed interest rates average 6.2% (2009: 6.1%). The contracts require net settlement of the interest receivable or payable each 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. In the current financial year, all existing interest rate swaps were, during the first quarter of the financial year, designated into hedge relationships and hedge accounting applied. All new interest rate swaps are, from inception, designated into hedge relationships and hedge accounting applied. The gain or loss from remeasuring the hedging instruments at fair value is recognised in other comprehensive income in the hedging reserve, to the extent that the hedge is effective, and reclassified into profit and loss when the hedged item is derecognised. In the year ended 30 June 2010 a gain of $66,000 was reclassified into profit and loss (2009: gain of $4,000) and included in finance cost due to hedge ineffectiveness in the current or prior year and a gain of $1,998,000 was reclassified into profit and loss (2009: nil) to offset net interest expense paid. -36- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 14 Derivative financial instruments (continued) (ii) Forward exchange contracts - cash flow hedges The Group purchases goods and materials from overseas, principally in US dollars. In order to protect against exchange rate movements, the Group has entered into forward exchange contracts to purchase US dollars. These contracts are hedging highly probable forecasted purchases for approximately the next two to three months. In the current financial year, all existing forward exchange contracts from 1 July 2009 and all new forward exchange contracts from inception are designated into hedge relationships and hedge accounting applied. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income. When the cash flows occur, the Group adjusts the initial measurement of the component recognised in the statement of financial position by removing the related amount from other comprehensive income. During the year ended 30 June 2010 a gain of $nil (2009: $nil) was reclassified from other comprehensive income and included in the cost of inventories and subsequently in profit and loss within cost of goods sold. A loss of $11,000 was recognised in profit or loss for the ineffective portion of these hedging contracts (2009: $nil). (iii) Forward exchange contracts and interest rate swaps - held for trading In previous financial years the Group had entered into forward exchange contracts and interest rate swap contracts which did not satisfy the requirements for hedge accounting. In the current financial year Group subsidiaries entered into a small number of forward exchange contracts. These contracts are subject to the same risk management policies as all other derivative contracts, see note 30 for details. However, they are accounted for as held for trading. (a) Risk exposures Information about the Group's exposure to credit risk, foreign exchange and interest rate risk is provided in note 30. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of derivative financial assets mentioned above. 15 Current liabilities - Trade and other payables Trade payables Amounts due to associates (note 27) Other loans Other trade payables and accrued expenses (a) Risk exposure Information about the Group's exposure to foreign exchange risk is provided in note 30. Consolidated 2010 $'000 2009 $'000 76,813 134 - 51,101 77,077 - 165 43,660 128,048 120,902 -37- 16 Current liabilities - Borrowings Bank overdrafts ** Loans from related parties* Bills payable ** Total current borrowings Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 $'000 2009 $'000 1,384 - - 1,384 328 1,059 2,465 3,852 * Further information relating to loans from related parties (which include loans from minority shareholders) is set out in note 27. ** Further information on the bank overdrafts and bills payable are set out in note 19. (a) Security and fair value disclosures Information about the security relating to each of the secured liabilities and the fair value of each of the borrowings is provided in note 19. (b) Risk exposures Details of the Group's exposure to risks arising from current and non-current borrowings are set out in note 30. 17 Current liabilities - Current tax liabilities Consolidated 2010 $'000 2009 $'000 10,622 8,186 Consolidated 2010 $'000 2009 $'000 27,248 - - 5,701 496 26,563 400 550 5,751 571 33,445 33,835 Income tax 18 Current liabilities - Provisions Employee benefits Contingent consideration Provision for dividend Outstanding claims Site restoration Information on non current provisions is set out in note 20. -38- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 18 Current liabilities - Provisions (continued) (i) Outstanding claims The provision for claims comprises amounts set aside for estimated claims, as well as the estimated future liability of the Group’s self-insurance arrangements. The value of the provision is determined in consultation with the Group’s actuaries or legal advisers as appropriate. (ii) Contingent consideration The contingent consideration provision represents the present value of the estimated consideration payable, on acquisition of subsidiaries or business operations, if the acquiree meets certain performance criteria over a specified period of time. (iii) Provision for dividend The provision for dividend remaining unpaid at the end of the previous financial year is an amount recognised on the acquisition of a subsidiary. (iv) Site restoration Other provisions comprise mainly a provision for site restoration and safety upgrades. (a) Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: Contingent consideration $'000 Provision for dividend $'000 Outstanding claims $'000 Site restoration $'000 Total $'000 2010 Current & non current Carrying amount at start of year Charged/(credited) to profit or loss / retained earnings - additional provisions recognised - reductions from remeasurement or settlement without cost Amounts used during the year Dividend foregone - SIP 400 550 5,751 799 7,500 - 24,362 - - 24,362 (400) - - - (24,199) (713) (50) - - (65) (42) - (515) (24,241) (713) - - 5,701 692 6,393 4,971 452 5,807 42,025 - (35,753) (6,272) 550 550 780 - - - - 5,751 435 21 (109) - 43,240 37 (35,862) (6,272) - 799 550 7,500 Carrying amount at end of year - 2009 Current & non current Carrying amount at start of year Charged/(credited) to profit or loss / retained earnings - additional provisions recognised - other movements Amounts used during the year Dividend foregone - SIP Amounts recognised on acquisition of subsidiary Carrying amount at end of year 384 - 16 - - - 400 -39- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 19 Non-current liabilities - Borrowings Unsecured Bills payable Other loans Loans from non-controlling interests Total unsecured non-current borrowings Total non-current borrowings (a) Financing arrangements The Group had access to the following undrawn borrowing facilities at the reporting date: Facilities Bank overdraft Unsecured bank loans Standby letters of credit Short term money market Used at balance date Bank overdrafts Unsecured bank loans Standby letters of credit Unused at balance date Bank overdrafts Unsecured bank loans Standby leters of credit Short term money market Consolidated 2010 $'000 2009 $'000 105,000 663 21 218,000 498 - 105,684 218,498 105,684 218,498 Consolidated 2010 $'000 2009 $'000 2,828 218,169 6,831 5,000 1,900 263,585 16,126 16,000 232,828 297,611 1,384 105,000 6,831 328 220,465 331 113,215 221,124 1,444 113,169 - 5,000 1,572 43,120 15,795 16,000 119,613 76,487 (b) Bank loans and bank overdraft Bank overdrafts Bank overdrafts are denominated in both $A and $NZ. The bank overdraft of a controlled entity is secured by a guarantee from the Company. Interest on bank overdrafts is charged at prevailing market rates. The bank overdrafts are payable on demand and are subject to annual review. The Company and a number of its subsidiaries have a net bank overdraft facility of $1,000,000 (2009: $1,900,000) and the Company's New Zealand subsidiary has a separate bank overdraft facility of $1,828,000. -40- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 19 Non-current liabilities - Borrowings (continued) Unsecured bank loans The Group has a number of multi option facilities with its bankers. Generally, these facilities can be utilised for a combination of bank loans, guarantees and standby letters of credit. Bank loans are denominated in both $A and $NZ. The bank loans are Commercial Bills and Fully Drawn Advances with interest charged at prevailing market rates. The Company and its wholly owned subsidiaries have provided an interlocking guarantee and indemnity to its financiers for these facilities. An assessment of the contractual maturities of financial liabilities is provided in note 30. Standby letter of credit The standby letter of credit facility forms part of the multi option facilities negotiated with the Group's bankers. Short term money market Borrowings on the short-term money market are denominated in $A. Interest on the borrowings is charged at the prevailing market rates. (c) Fair value The carrying amounts and fair values of borrowings at the end of reporting period are: Consolidated Non-traded financial liabilities Bank overdrafts Bills payable Other loans (d) Risk exposures 2010 2009 Carrying amount $'000 Fair value $'000 Carrying amount $'000 Fair value $'000 1,384 105,000 684 1,384 105,000 684 328 220,465 1,557 328 220,465 1,557 107,068 107,068 222,350 222,350 Information about the Group's exposure to interest rate and foreign currency changes is provided in note 30. For an analysis of the sensitivity of borrowings to interest rate risk and foreign exchange risk refer to note 30. 20 Non-current liabilities - Provisions Employee benefits Site restoration and safety upgrades Movements in provisions are set out in note 18. Consolidated 2010 $'000 2009 $'000 6,122 196 6,318 5,747 228 5,975 -41- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 2010 Shares '000 2009 Shares '000 2010 $'000 2009 $'000 247,697 204,601 306,595 248,598 Details Number of shares '000 $'000 185,789 4,648 3,006 554 320 10,284 - 223,091 9,342 - 270 1,022 14,912 (39) 204,601 248,598 204,601 29,185 11,956 674 382 899 - 248,598 40,859 16,738 1,255 - 373 - (1,228) 247,697 306,595 21 Contributed equity (a) Share capital Ordinary shares Fully paid (b) Movements in ordinary share capital: Date 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 Purchase Plan Less: Transaction costs arising on share issue 30 June 2009 Balance 1 July 2009 Opening balance Issued under the capital raising Issued under the Share Purchase Plan 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 Less: Transaction costs arising on share issue 30 June 2010 Balance (c) Ordinary shares During the year the Company conducted a placement of ordinary fully paid shares to institutional and sophisticated investors. The share issue price was $1.40 per share. Following completion of the institutional placement the Company invited shareholders to participate in a Share Purchase Plan. Each shareholder was entitled to purchase up to $5,000 worth of shares at a share issue price of $1.40 per share, the same as the issue price for the institutional placement. The Share Purchase Plan was oversubscribed and shares allotted were scaled back by approximately 50%. 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 5% 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. -42- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 21 Contributed equity (continued) (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 25. (g) Capital risk management The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the gearing ratio in conjunction with its review of the Group'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 statement of financial position less cash and cash equivalents. Total equity is equity as shown in the statement of financial position (including non-controlling interests). During 2010, the Group's strategy, which was unchanged from 2009, was to maintain a target gearing ratio less than 45%. The gearing ratios at 30 June 2010 and 30 June 2009 were as follows: Total borrowings Less: cash and cash equivalents Net debt Total equity Gearing ratio Consolidated 2010 $'000 2009 $'000 107,068 (56,915) 222,350 (67,978) 50,153 154,372 496,499 428,520 10.1% 36.0% The decrease in the gearing ratio during 2010 resulted primarily from the capital raising and from cash from operations generated during the year. The Group is not subject to externally imposed capital requirements. -43- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 $'000 2009 $'000 35,634 (265) 12,019 (1,653) 613 1,551 44,828 230 2,825 (1,971) 583 - 47,899 46,495 44,828 - - - (9,194) 50,112 (7,407) 2,163 (40) - 35,634 44,828 230 (707) 212 (265) - 329 (99) 230 (1,971) 269 49 (2,081) 110 - (1,653) (1,971) 2,825 9,194 12,019 2,825 - 2,825 583 30 613 513 70 583 22 Reserves (a) Reserves Asset revaluation reserve Hedging reserve - cash flow hedges Asset realisation reserve Foreign currency translation reserve Equity compensation reserve Non-controlling interests acquisition reserve Movements: Asset revaluation reserve Balance 1 July Revaluation - gross (note 11) Deferred tax (note 12) Transfer (to) / from retained earnings Transfer to asset realisation reserve Balance 30 June Hedging reserve - cash flow hedges Balance 1 July Revaluation - gross (note 14) Deferred tax (notes 6 and 12) Balance 30 June Foreign currency translation reserve Balance 1 July Currency translation differences arising during the year Disposal of foreign subsidiary Balance 30 June Asset realisation reserve Balance 1 July Transfer from asset revaluation reserve Balance 30 June Equity compensation reserve Balance 1 July Executive share option plan expense Balance 30 June -44- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 22 Reserves (continued) Non-controlling interests acquisition reserve Balance 1 July Adjustment to non-controlling interest upon increase in Group shareholding Balance 30 June (b) Nature and purpose of reserves (i) Asset revaluation reserve Consolidated 2010 $'000 2009 $'000 - 1,551 1,551 - - - The asset revaluation reserve is used to record increments and decrements on the revaluation of property, plant and equipment, as described in note 1(p). (ii) Hedging reserve - cash flow hedges The hedging reserve is used to record changes in the fair value of derivative financial instruments designated in a cash flow hedge relationship that are recognised in other comprehensive income, as described in note 1(o). Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. (iii) 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. (iv) Foreign currency translation reserve Exchange differences arising on translation of the financial statements of a foreign controlled entity are recognised in other comprehensive income as described in note 1(e) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. (v) Equity compensation reserve The equity compensation reserve represents the value of options 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 options are exercised and 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. (vi) Non-controlling interests acquisition reserve The non controlling interests acquisition reserve arises upon changes in the Group's ownership interest in subsidiaries after control is obtained. The reserve represents the difference between the fair value of consideration paid or received, and the amount of the change in the non controlling interest's share of net assets of the subsidiary. -45- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 23 Dividends (a) Ordinary shares Final dividend for the year ended 30 June 2009 of 2.0 cents (year ended 30 June 2008: 14.0 cents) per fully paid share paid on 23 November 2009 (year ended 30 June 2008: 29 September 2008) Fully franked based on tax paid @ 30% Final dividend foregone for Share Investment Plan Interim dividend for the year ended 30 June 2010 of 7.0 cents (2009: 8.0 cents) per fully paid share paid on 3 March 2010 (2009: 7 April 2009) Fully franked based on tax paid @ 30% Interim dividend foregone for Share Investment Plan Total dividends provided for or paid (b) Dividends and share reinvestment plan Company 2010 $'000 2009 $'000 4,917 (713) 26,149 (3,993) 4,204 22,156 17,319 - 15,986 (2,279) 17,319 13,707 21,523 35,863 The Dividend Investment Plan and Share Investment Plan will not operate in respect of the proposed final dividend. Company 2010 $'000 2009 $'000 (c) Dividends not recognised at year end In addition to the above dividends, since year end the Directors have recommended the payment of a final dividend of 5.5 cents per fully paid ordinary share (2009: 2.0 cents) fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 27 September 2010 out of retained profits at 30 June 2010, but not recognised as a liability at year end, is 13,623 4,876 (d) Franked dividends The franked portions of the final dividends recommended after 30 June 2010 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 2011. Company 2010 $'000 2009 $'000 Franking credits available for subsequent financial years based on a tax rate of 30% (2009: 30%) 41,240 19,505 -46- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 23 Dividends (continued) The above amounts represent the balance of the franking account as at the reporting date, adjusted for: (a) (b) (c) franking credits that will arise from the payment of the amount of the provision for income tax; franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and 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 $5,838,000 (2009: $2,090,000). 24 Earnings per share (a) Basic earnings per share Profit attributable to the ordinary shareholders of the Company Profit before unusual / significant items attributable to the ordinary shareholders of the Company (b) Diluted earnings per share Profit attributable to the ordinary shareholders of the Company Profit before unusual / significant items attributable to the ordinary shareholders of the Company (c) Reconciliations of earnings used in calculating earnings per share Consolidated 2010 Cents 2009 Cents 16.7 16.7 16.7 16.7 4.9 14.6 4.9 14.6 Consolidated 2010 $'000 2009 $'000 Basic earnings per share Profit attributable to the ordinary shareholders of the Company used in calculating basic earnings per share 40,188 9,506 Diluted Earnings per share Profit attributable to the ordinary shareholders of the Company used in calculating diluted earnings per share 40,188 9,506 Basic earnings per share before unusual / significant items Profit attributable to the ordinary shareholders of the Company used in calculating basic earnings per share Adjusted for unusual / significant items: Fair value loss on derivatives Restructuring costs 40,188 9,506 - - 7,098 11,448 Profit attributable to the ordinary shareholders of the Company before unusual / significant items used in calculating basic earnings per share 40,188 28,052 -47- 24 Earnings per share (continued) (d) Weighted average number of shares used as the denominator Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) Consolidated 2010 2009 Number '000 Number '000 Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 240,481 192,623 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 523 703 241,004 193,326 25 Share-based payments In October 1997, the Group established a share option plan that entitles selected senior managers to acquire shares in the Company subject to the successful achievement of performance targets related to improvements in total shareholder returns. Previously the options were exercisable if the total shareholder return (measured as share price growth plus dividends paid) over a two-year period from the grant date exceeded ten percent plus CPI per annum. Once exercised the shares were forfeited if the holder ceased to be an employee of the Group within a further three-year period. The shareholders approved an amendment to this plan as part of the 2007 Annual General Meeting such that the option period over which the shareholder return must be achieved was extended to three years. The three-year period during which the shares were restricted has now been removed. This amendment is applicable for all share options granted after the resolution was passed. No changes were made to the rules governing options already granted. The shares issued pursuant to these options are financed by an interest free loan from the holding Company repayable within twenty years from the proceeds of dividends declared by the holding Company. These loans are of a non-recourse nature. For accounting purposes these 20-year loans are treated as part of the options to purchase shares, until the loan is extinguished at which point the shares are recognised. The options are offered only to selected senior managers and executives. In relation to the financial year ended 30 June 2010, the Board suspended the long term incentive bonus scheme and accordingly no long term incentive bonus was allocated to the Managing Director or senior executives. Details of the options are as follows: Grant Date / Expiry Date Exercise date Exercise price Balance at start of the year Number Granted during the year Number Exercised during the year Number Forfeited / lapsed during the year Number Balance at end of the year Number Consolidated - 2010 Feb 2001 / Jan 2003 Feb 2002 / Jan 2004 Feb 2003 / Jan 2005 Feb 2004 / Jan 2006 Feb 2005 / Jan 2007 Feb 2008 / Jan 2011 Feb 2009 / Jan 2012 Total Jan 2023 Jan 2024 Jan 2025 Jan 2026 Jan 2027 Jan 2031 Jan 2032 $2.50 $2.90 $3.23 $3.66 $4.16 $5.49 $3.01 55,000 58,000 90,000 145,000 215,000 455,000 525,000 1,543,000 - - - - - - - - - - - - - - - - 50,000 (5,000) 53,000 (5,000) (10,000) 80,000 (10,000) 135,000 (10,000) 205,000 (10,000) 445,000 525,000 - (50,000) 1,493,000 Weighted average exercise price $3.95 $- $- $3.85 $3.96 -48- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 25 Share-based payments (continued) Grant Date / Expiry Date Exercise date Exercise price Balance at start of the year Number Granted during the year Number Exercised during the year Number Forfeited / lapsed during the year Number Balance at end of the year Number Consolidated - 2009 Feb 2001 / Jan 2003 Feb 2002 / Jan 2004 Feb 2003 / Jan 2005 Feb 2004 / Jan 2006 Feb 2005 / Jan 2007 Feb 2007 / Jan 2009 Feb 2008 / Jan 2011 Feb 2009 / Jan 2012 Total Jan 2023 Jan 2024 Jan 2025 Jan 2026 Jan 2027 Jan 2029 Jan 2031 Jan 2032 $2.50 $2.90 $3.23 $3.66 $4.16 $5.53 $5.49 $3.01 120,000 133,000 210,000 260,000 340,000 465,000 515,000 - - - - - - - - 535,000 (65,000) (65,000) (90,000) (80,000) (80,000) - 55,000 58,000 (10,000) (30,000) 90,000 (35,000) 145,000 (45,000) 215,000 - (60,000) 455,000 (10,000) 525,000 (465,000) - - - 2,043,000 535,000 (380,000) (655,000) 1,543,000 Weighted average exercise price $4.47 $3.01 $3.34 $5.15 $3.95 Details of options outstanding under accounting standards are as follows: Grant Date Consolidated - 2010 February 2001 February 2002 February 2003 February 2004 February 2005 February 2008 February 2009 Total Consolidated - 2009 February 2001 February 2002 February 2003 February 2004 February 2005 February 2007 February 2008 February 2009 Total Options granted Number Outstanding at balance date AIFRS Number Outstanding at balance date ASX Number 195,000 245,000 280,000 370,000 460,000 625,000 535,000 50,000 53,000 80,000 135,000 205,000 445,000 525,000 - - - - - 445,000 525,000 2,710,000 1,493,000 970,000 195,000 245,000 280,000 370,000 460,000 595,000 625,000 535,000 55,000 58,000 90,000 145,000 215,000 - 455,000 525,000 - - - - - - 455,000 525,000 3,305,000 1,543,000 980,000 Fair value of options granted The model inputs for options granted during the year ended 30 June 2010 included: (a) options are granted for no consideration (b) exercise price: $n/a (2009: $3.01) (c) grant date: not granted (2009: 4 February 2009) (d) expiry date: not applicable (2009: 31 January 2012) (e) share price at grant date: $n/a (2009: $1.99) The fair value of services received in return for share options granted during the year was $nil (2009: $nil). This amount is amortised over the life of the option (and the three year holding period for those options issued prior to 2008). The estimate of the fair value of the services received is based on a model that includes the length of the option period and the relationship between the market price at the date of the grant of the option and the strike price of the option. This method has been applied consistently. -49- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 25 Share-based payments (continued) (a) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Options issued under executive share option plan Shares issued under employee share scheme 26 Key management personnel disclosures (a) Directors Consolidated 2010 $'000 2009 $'000 49 418 467 168 308 476 The following persons were Directors of Hills Industries Limited during the financial year and unless otherwise indicated were Directors for the entire period: (i) Chairman - non-executive Jennifer Helen Hill-Ling (ii) Executive Directors Graham Lloyd Twartz (Group Managing Director) (iii) Non-executive Directors Ian Elliot Roger Baden Flynn Geoffrey Guild Hill Peter William Stancliffe Fiona Rosalyn Vivienne Bennett (appointed 31 May 2010) The only change in key management personnel since the end of the financial year and prior to the date when the financial report is authorised for issue was that David Moray Spence was appointed as a non-executive Director on 1 September 2010. (b) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the financial year and unless otherwise indicated were key management personnel for the entire period: Name L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge K Middleton A Muir Position Employer / Division Managing Director Group General Manager General Manager Business Development Group General Manager Managing Director Company Secretary CEO General Manager Finance -50- Orrcon Operations Pty Ltd Hills Industries Limited / Electronic Security and Entertainment Hills Industries Limited Hills Industries Limited / Home, Hardware and Eco Korvest Limited Hills Industries Limited Fielders Australia Pty Ltd Hills Industries Limited Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 26 Key management personnel disclosures (continued) All of the above persons were key management persons during the year ended 30 June 2010, except for D Lethbridge, who commenced employment with the Group on 6 January 2010. All of the above persons were also key management persons during the year ended 30 June 2009, except for D Lethbridge, K Middleton who was appointed CEO on 22 April 2009 and D Edgecombe who became a key management person on 1 July 2009. In addition, J Easling was a key management person during the year ended 30 June 2009, until he ceased employment on 22 April 2009. During the year the Group conducted a review of executives classified as key management personnel and determined that only those personnel that report directly to the Managing Director should be classified as key management personnel. Accordingly, G Daher, R Meacham and A Oliver, who were classified as key management personnel during the year ended 30 June 2009, are not classified as key management personnel in the year ended 30 June 2010. (c) Key management personnel compensation The key management personnel (KMP) compensation included in 'personnel expenses' in note 5 is as follows: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated 2010 $ 2009 $ 4,134,474 344,880 18,349 26,095 4,449,841 391,694 - 82,900 4,523,798 4,924,435 Information regarding individual Directors' and Executives' compensation and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 are provided in the Remuneration report on pages 79 to 88. Apart from the details disclosed in this note, no Director has entered into a material contract with the Group since the end of the previous financial year and there were no material contracts involving Directors' interests existing at year end. (d) Equity instrument disclosures relating to key management personnel (i) Options provided as remuneration Details of options over ordinary shares in the Company provided as remuneration to each key management person of the Group and held, directly, indirectly or beneficially, are set out below. When exercisable, each option is convertible into one ordinary share of the Company. Further information on the options is set out in note 25. Name Directors of Hills Industries Limited GL Twartz Other key management personnel of the Group L Andrewartha S Cope J Easling D Edgecombe R Gros A Kachellek D Lethbridge K Middleton A Muir Number of options granted during the year Number of options vested during the year 2010 2009 2010 2009 - - - - - - - - - - 100,000 60,000 60,000 60,000 60,000 - 25,000 60,000 - - 25,000 60,000 60,000 - - - - - - - 10,000 - - 10,000 - - - - - 10,000 No options were held by key management person related entities. -51- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 26 Key management personnel disclosures (continued) (ii) Options provided as remuneration and shares issued on exercise of such options Details of options provided as remuneration and shares issued on the exercise of such options, together with terms and conditions of the options, can be found in the Remuneration report on page 86-88. (iii) Option holdings The numbers of options over ordinary shares in the Company held during the financial year by each Director of the Company and other key management personnel of the Group, including their personally related parties, are set out below. 2010 Balance at start of the year Granted as compen- sation Options lapsed / forfeited Balance at end of the year Vested and exercisable Unvested Exercised 363,000 Name Directors of Hills Industries Limited G Twartz Other key management personnel of the Group L Andrewatha S Cope D Edgecombe R Gros A Kachellek D Lethbridge K Middleton A Muir 2009 180,000 120,000 25,000 120,000 - - 45,000 105,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - 363,000 203,000 160,000 180,000 120,000 25,000 120,000 - - 45,000 105,000 60,000 - - - - - - 20,000 120,000 120,000 25,000 120,000 - - 45,000 85,000 Balance at start of the year Granted as compen- sation 323,000 Name Directors of Hills Industries Limited G Twartz Other key management personnel of the Group L Andrewartha S Cope G Daher J Easling R Gros A Kachellek R Meacham K Middleton A Muir A Oliver 180,000 120,000 35,000 110,000 120,000 - 70,000 30,000 70,000 260,000 100,000 60,000 60,000 25,000 - 60,000 - 25,000 25,000 60,000 25,000 Options lapsed / forfeited Balance at end of the year Vested and exercisable Unvested Exercised - - - - - - - - - - - (60,000) 363,000 143,000 220,000 (60,000) (60,000) (15,000) (110,000) (60,000) - (25,000) (10,000) (25,000) (45,000) 180,000 120,000 45,000 - 120,000 - 70,000 45,000 105,000 240,000 - - - - - - 10,000 - 10,000 145,000 180,000 120,000 45,000 - 120,000 - 60,000 45,000 95,000 95,000 (iv) Share holdings The numbers of shares in the Company held during the financial year by each Director of Hills Industries Limited and other key management personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation aside from those issued to the Executives as part of the employee share scheme. The analysis does not include options exercised, as options subject to a non-recourse loan for the purchase of shares are not recognised as exercised by International Financial Reporting Standards, until the loan is extinguished at which point the shares are recognised. Share disclosures for JH Hill-Ling includes 1,188,918 (2009: 1,174,550) shares owned by Hills Associates & Poplar Pty Ltd (jointly held) and 13,455,689 (2009: 13,313,300) shares owned by Hills Associates Ltd, of which J H Hill-Ling is a Director. -52- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 26 Key management personnel disclosures (continued) 2010 Balance at the start of the year 16,343,161 8,486 4,449 31,740 87,953 17,115 - Name Directors of Hills Industries Limited Ordinary shares J Hill-Ling G Twartz I Elliot R Flynn G Hill P Stancliffe F Bennett Other key management personnel of the Group Ordinary shares L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge K Middleton A Muir 411 - 421 1,802 - - 520 2,514 2009 Balance at the start of the year 15,336,811 4,100 1,000 26,296 76,056 12,121 Name Directors of Hills Industries Limited Ordinary shares J Hill-Ling G Twartz I Elliot R Flynn G Hill P Stancliffe Other key management personnel of the Group Ordinary shares L Andrewartha S Cope G Daher J Easling R Gros A Kachellek R Meacham K Middleton A Muir A Oliver - - 6,137 5,905 1,391 - 6,894 1,391 3,402 42,901 Granted during reporting year as compensation Received during the year on the exercise of options Other changes during the year Balance at the end of the year - 459 - - - - - 459 459 459 459 - - 459 459 - - - - - - - - - - - - - - - 169,308 16,512,469 9,036 6,235 35,665 92,505 19,104 4,000 91 1,786 3,925 4,552 1,989 4,000 358 - 1,810 1,786 - - 1,811 1,786 1,228 459 2,690 4,047 - - 2,790 4,759 Granted during reporting year as compensation Received during the year on the exercise of options Other changes during the year Balance at the end of the year - 411 - - - - 411 - 411 411 411 - 411 411 411 411 - - - - - - - - - - - - - - - - 1,006,350 16,343,161 8,486 4,449 31,740 87,953 17,115 3,975 3,449 5,444 11,897 4,994 - - 673 (6,316) - - 755 (1,282) (1,299) 4,641 411 - 7,221 - 1,802 - 8,060 520 2,514 47,953 (e) Loans to key management personnel There were no loans outstanding at the reporting date to key management personnel and their related parties. Option loans are not recognised as loans as they are included in the fair value of the options as required by IFRS. -53- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 26 Key management personnel disclosures (continued) (f) Other transactions with key management personnel A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Group in the reporting period. The terms and conditions of the transactions with key management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non key management personnel related entities on an arm’s length basis. The aggregate amounts recognised during the year relating to key management personnel and their related parties were as follows: • • The Group rents certain property from a company in which J Easling is a shareholder and director. Amounts were billed based on normal market rentals and were due and payable under normal payment terms. The total amount recognised as an expense during the period that he was a key management person was $nil (2009: $889,456). Minibrook Pty Ltd and Elliot & Kellard, entities associated with I Elliot, have provided brand consulting and presentation skills training to the Group. Amounts were billed and payable under normal commercial terms and conditions. The total amount recognised as an expense during the year was $nil (2009: $151,000). There were no amounts receivable from and payable to key management personnel at reporting date arising from these transactions (2009: $nil). From time to time, key management personnel of the Company or its controlled entities, or their related entities, may purchase goods from the Group. These purchases are on the same terms and conditions as those entered into by other Group employees or customers and are trivial or domestic in nature. 27 Related party transactions (a) Parent entities The parent entity within the Group and the ultimate parent entity is Hills Industries Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 32. (c) Key management personnel Disclosures relating to key management personnel are set out in note 26. (d) Transactions with other related parties The following transactions occurred with related parties: Subsidiaries All transactions with partly owned controlled entities are on normal commercial terms and conditions. Transactions with controlled entities are determined on a cost basis. Sales of goods and services that eliminated with cost of goods sold and services provided amounted to $24,719,000 (2009: $32,943,000) for the Group. Loans and borrowings with Australian wholly owned controlled entities are interest free and payable on demand while loans to or from non-wholly owned subsidiaries are charged interest at rates no more favourable than current market rates. Inter entity interest paid and received during the year was $2,681,000 (2009: $8,433,000) for the Group. Entities within the Group rent properties to or from other entities within the Group at rentals that are market related. Property rentals during the year were $2,223,000 (2009: $2,142,000) for the Group. -54- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 27 Related party transactions (continued) Group entities charge an administration fee for services rendered which during the year was $10,451,000 (2009: $10,490,000) for the Group. Inter entity dividends paid and received during the year amounted to $15,502,000 (2009: $14,828,000) for the Group. Key management persons related parties For details of these transactions refer to key management personnel related disclosures in note 26. Other related parties Contributions to superannuation funds on behalf of employees are disclosed in note 5. (e) Loans to/from related parties Subsidiaries Group entity trading transactions and borrowings result in balances arising in respect of current and non-current assets and liabilities. At 30 June 2010 the Group current assets and liabilities were $272,047,000 (2009: $193,795,000) and the Group non-current assets and liabilities were $441,000 (2009: $126,489,000). Other related parties Loans (from) / to associated entities amounted to ($134,000) (2009: $219,000). 28 Contingencies (a) Contingent liabilities The Group had contingent liabilities at 30 June 2010 in respect of: Guarantees (a) Letters of credit established in favour of suppliers / creditors amounting to $6,831,000 (2009: $331,000). (b) Bank guarantees in favour of customers and suppliers amounting to $18,557,000 (2009: $13,721,000). 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. Claims Other than guarantees listed above, the Group did not have any contingent liabilities as at 30 June 2010. At 30 June 2009, certain legal claims for damages had been made against 413 King William Street Pty Ltd (a company in which Hills Industries Limited has a 50% interest) and the Company in relation to a property development for the Hills head office in Adelaide. These claims were settled during the year ended 30 June 2010. (b) Contingent assets There are no contingent assets where the probability of future receipts is not considered remote. -55- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 29 Commitments (a) Capital commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Property, plant and equipment Payable: Within one year Consolidated 2010 $'000 2009 $'000 9,129 9,129 6,068 6,068 (b) Lease commitments: Group as lessee The Group leases a number of warehouse and factory facilities under operating leases. The leases run for a period ranging from 1 to 15 years with the majority running for a period of 5 years, with an option to renew the lease after that date. Lease payments are increased each renewal period to reflect market rentals. Some leases provide for additional rent payments that are based on changes in a local price index. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years Consolidated 2010 $'000 2009 $'000 22,408 55,904 32,096 26,667 64,216 23,023 110,408 113,906 (c) Lease commitments: where a Group company is the lessor The future minimum lease payments receivable under non cancellable operating leases are as follows: Within one year Later than one year and not later than five years Later than five years Consolidated 2010 $'000 2009 $'000 944 157 - 807 942 - 1,101 1,749 -56- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 30 Financial risk management The Group's activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. Derivatives are exclusively used for risk minimisation purposes, ie not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and aging analysis for credit risk. Risk management is carried out by a central treasury department (Treasury) under policies approved by the Board of Directors. Treasury identifies, evaluates and minimises financial risks in close co-operation with the Group's operating units. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. The Group holds the following financial instruments: Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Investments Financial liabilities Trade and other payables Borrowings Derivative financial instruments (a) Market risk (i) Foreign exchange risk Consolidated 2010 $'000 2009 $'000 56,915 186,002 800 2 67,978 197,480 333 2 243,719 265,793 128,048 107,068 2,944 120,902 222,350 10,242 238,060 353,494 The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises when future commercial transactions and recognised financial assets and financial liabilities are denominated in a currency that is not the Group's functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. Management and Group Treasury manage the Group's foreign exchange risk against their functional currency. The companies and business units within the Group are required to hedge their foreign exchange risk exposure arising from future commercial transactions and recognised assets and liabilities using forward contracts transacted by Group Treasury. Forward contracts, transacted by Group Treasury, are used to manage foreign exchange risk. Group Treasury is responsible for managing exposures in each foreign currency by using external forward currency contracts. The Group Treasury's risk management policy is to hedge approximately three months of anticipated cash flows (mainly purchases of inventory) in US dollars. External foreign exchange contracts are designated at Group level as hedges of foreign exchange risk on specific assets, liabilities or future transactions on a gross basis. -57- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 30 Financial risk management (continued) The Group's exposure to foreign currency risk at the reporting date, was as follows: USD $'000 30 June 2010 euro NZD '000 $'000 JPY '000 USD $'000 30 June 2009 euro NZD '000 $'000 JPY '000 Trade receivables Cash at bank Bank loans Trade payables Forward exchange contracts - buy foreign currency (cash flow hedges) Forward exchange contracts - buy foreign currency (FVTPL) Group sensitivity 933 30 6,509 - - (1,704) (4,398) (1,904) - - - - - - (80) (2,350) (7,795) 1,217 752 (758) (2,010) (106) 1,498 - - - - - - - (309) (41,577) (29,460) (875) - - - - - - - (35,025) - - - - - - Based on the financial instruments held at 30 June 2010, had the Australian dollar weakened / strengthened by 10% against other currencies with all other variables held constant, the Group's pre-tax profit for the year before the impact of forward foreign exchange contracts would have been $204,000 lower / $167,000 higher (2009: $1,017,000 lower/$832,000 higher), mainly as a result of foreign exchange gains / losses on translation of US dollar denominated financial assets and liabilities as detailed in the above table. Profit is less sensitive to movements in the Australian dollar / US dollar exchange rates in 2010 than 2009 because of the reduced amount of US dollar denominated trade creditors and borrowings. The forward foreign exchange contract impact on pre-tax profit for the year of a 10% weakening / strengthening in the Australian dollar would have been $217,000 higher / $172,000 lower (2009: $5,052,000 higher / $4,133,000 lower). Profit is less sensitive to movements in the Australian dollar / US dollar exchange rates in 2010 than 2009 because of the reduced amount of US dollar denominated forward foreign exchange contracts and the hedging of the Australian portfolio of forward foreign exchange contracts. Other components of equity would have been $3,813,000 higher / $3,125,000 lower (2009: $nil higher / $nil lower) had the Australian dollar weakened / strengthened by 10% against the US dollar, arising from forward foreign exchange contracts designated as cash flow hedges. Forward foreign exchange contracts were not designated as cash flow hedges in 2009. (ii) Price risk The Group has no material financial exposure to other market price risk as it is not exposed to equity securities price risk. The Group does not enter into commodity contracts other than to meet the Group's expected usage requirements. (iii) Cash flow and fair value interest rate risk The Group's main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Group policy is to maintain approximately 50% to 75% of its borrowings at fixed rate using interest rate swaps to achieve this when necessary. During 2010 and 2009, the Group’s borrowings at variable rate were denominated in Australian Dollars and NZ Dollars. The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional principal amounts. -58- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 30 Financial risk management (continued) At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was: Consolidated Bank overdrafts and bank loans Cash and cash equivalents Loans to / (from) minority shareholders Interest rate swaps (notional principal amount) An analysis by maturities is provided in (c) below. Sensitivity 30 June 2010 30 June 2009 Weighted average interest rate % Balance $'000 Weighted average interest rate % Balance $'000 4.8% 4.4% - % 6.2% (106,384) 56,915 - 105,000 3.3% 2.8% 6.2% 6.1% (220,465) 67,978 (1,059) 122,000 At 30 June 2010, if interest rates had increased by 100 or decreased by 100 basis points from the year end rates with all other variables held constant, pre-tax profit for the year before the impact of unhedged interest rate swaps would have been $547,000 higher / $1,064,000 lower (2009: $1,535,000 lower/$1,535,000 higher), mainly as a result of higher / lower interest expense from borrowings. Other components of equity would have been $2,466,000 higher / $2,064,000 lower (2009: $1,174,000 higher / $1,242,000 lower) mainly as a result of an increase / decrease in the fair value of the cash flow hedges of borrowings. The unhedged interest rate swap impact of a + 100/- 100 basis point change on pre-tax profit for the year would have been $nil higher / $nil lower (2009: $2,336,000 higher / $2,442,000 lower). (iv) Summarised sensitivity analysis The following table summarises the sensitivity of the Group's financial assets and financial liabilities to interest rate risk and foreign exchange risk. Consolidated 30 June 2010 Financial assets Cash and cash equivalents Trade and other receivables Derivatives - cash flow hedges Financial liabilities Derivatives - cash flow hedges Derivatives - fair value through profit or loss Trade and other payables Borrowings Interest rate risk -100bps +100bps Foreign exchange risk +10% -10% Amount $'000 Profit Equity Profit Equity Profit Equity Profit Equity $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 56,915 186,002 800 569 - - - - - (569) - - - - - 4 709 - - 16 3,813 (3) (580) - - (8) (3,125) (2,932) - (12) (128,048) - (107,068) (1,064) 52 2,466 (569) (2,064) - - - - - - - - 1,064 - 201 (763) (154) - - - - - (164) 624 126 - - - - Total increase/ (decrease) (1,064) (2,064) 547 2,466 13 3,813 (5) (3,125) Consolidated 30 June 2009 Financial assets Cash and cash equivalents Trade and other receivables Derivatives - cash flow hedges Financial liabilities Derivatives - fair value through profit or loss Trade and other payables Borrowings Interest rate risk -100bps +100bps Foreign exchange risk +10% -10% Amount $'000 Profit Equity Profit Equity Profit Equity Profit Equity $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 67,978 197,480 333 - (680) - - (5) (1,242) - 680 - - 4 1,174 104 302 - - - - (85) (247) - (10,242) (2,442) (120,902) - (222,350) 2,219 - 2,336 - - - (2,219) - 5,052 - (1,244) (179) - - (4,133) - 1,018 146 - - - - - - - - Total increase/ (decrease) (908) (1,242) 801 1,174 4,035 - (3,301) -59- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 30 Financial risk management (continued) (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions. Management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings and trade references. Purchase limits are established for each customer, which represent the maximum open amount without requiring further approval. These limits are reviewed monthly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or incorporated legal entity, whether they are a wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity and existence of previous financial difficulties. In most cases goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a priority claim. In certain circumstances the Group requires collateral in respect of trade and other receivables. The Group has established an allowance for impairment that represents the estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. The aging of the Group's trade receivables is analysed in note 8. (c) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Due to the dynamic and diversified nature of the underlying businesses, Group Treasury aims at maintaining flexibility in funding by keeping committed credit lines available with a variety of counterparties. Surplus funds are generally only invested in instruments that are tradeable in highly liquid markets. The Group has mulit otpion financing facilities totalling $225,000,000 (2009: $263,585,000) of which $80,000,000 has been approved until 30 June 2012, a further $80,000,000 has been approved until 30 November 2012 and the remainder of the facility has been approved until 30 June 2013. For more information please refer to note 19 (bank loans and standby letters of credit). Maturities of financial liabilities The tables below analyse the Group's financial liabilities including derivative financial instruments into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. For interest rate swaps the cash flows have been estimated using forward interest rates applicable at the reporting date. -60- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 30 Financial risk management (continued) Contractual maturities of financial liabilities Less than 6 months 6 - 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Consolidated - at 30 June 2010 $'000 $'000 $'000 $'000 $'000 Total contract- ual cash flows $'000 Carrying Amount (assets)/ liabilities $'000 Non-derivatives Non-interest bearing Variable rate Fixed rate 128,048 3,905 - - - - 2,491 64,982 46,027 - - - 684 128,732 128,732 - 117,405 106,384 - - - Total non-derivatives 131,953 2,491 64,982 46,027 684 246,137 235,116 Derivatives Net settled (interest rate swaps and forward exchange contracts) Consolidated - at 30 June 2009 (143) 595 851 1,300 (47) 2,556 2,144 Non-derivatives Non-interest bearing Variable rate Fixed rate 120,902 5,871 - - - 5,178 73,813 152,038 - - - - 498 121,400 121,400 - 236,900 221,852 - - - Total non-derivatives 126,773 5,178 73,813 152,038 498 358,300 343,252 Derivatives Net settled (interest rate swaps and forward exchange contracts) (d) Fair value measurements 7,517 1,544 2,982 4,980 905 17,928 10,242 A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) Land and buildings Fair value at 30 June 2010 is based on a Directors’ valuation as at 30 June 2010, which itself was based on a Directors' valuation at 30 June 2009 and an independent valuation of all freehold land and buildings dated March 2008 and updated based upon the Directors' assessments of changes in market conditions affecting the components of those valuations. Fair value of land and buildings at 30 June 2008 was based on an independent valuation of all freehold land and buildings carried out during March 2008. The valuation process was managed by AON Risk Services Australia Limited with the individual valuations being performed by various certified valuers. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The valuations were determined having regard to the highest and best use of the assets for which market participants would be prepared to pay. The costs of additions since the valuations are deemed to be the fair value of those assets. The Directors are of the opinion that these bases provide a reasonable estimate of fair value. The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. -61- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 30 Financial risk management (continued) (b) Intangible assets The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. (c) Inventories The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. (d) Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. (e) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. (f) Derivatives The fair value of forward exchange contracts is based on their listed market pice, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk free interest rate (based on government bonds). The fair value of interest rate swaps is determined by discounting estimated future cash flows based on the terms and maturity of each contract and using market rates at the measurement date. (g) Share-based payment transactions For information regarding the fair value of share-based payments refer to note 25. (h) Fair value measurement heirachy As of 1 July 2009, the Group has adopted the amendment to AASB 7 Financial Instruments: Disclosures which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) (b) (c) Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs). The following table presents the Group’s financial assets and liabilities carried at fair value at 30 June 2010. Comparative information has not been provided as permitted by the transitional provisions of the new rules. At 30 June 2010 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 - - - - 800 800 2,944 2,944 - - - - 800 800 2,944 2,944 The carrying amounts of cash and cash equivalents, trade receivables and trade payables are assumed to approximate their fair values due to their short term nature. The fair value of borrowings approximates their carrying amount, as the impact of discounting is not significant. -62- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 31 Business combination Current period (a) Summary of acquisition On 31 May 2010 the Group acquired certain assets of the operations of The Steel Barn Pty Ltd in Queensland. Details of the purchase consideration and the net assets and liabilities acquired are as follows: Purchase consideration Cash paid Total purchase consideration Fair value of net identifiable assets acquired (refer to (b) below) Goodwill (refer to (b) below and note 13) (b) Assets and liabilities acquired The assets and liabilities recognised as a result of the acquisition are as follows: Inventories Property, plant and equipment (note 11) Other assets Provision for employee benefits Net identifiable assets acquired Add: goodwill Net assets acquired (c) Purchase consideration - cash outflow Outflow of cash to acquire business operation Cash consideration Direct costs relating to acquisition (note 35) Outflow of cash - investing activities Acquisition-related costs $'000 3,558 3,558 3,558 - Fair value $'000 2,359 1,463 12 (276) 3,558 - 3,558 Consolidated 2010 $'000 2009 $'000 3,558 395 3,953 - - - Acquisition-related costs of $395,000 are included in expenses in profit or loss and in investing cash flows in the statement of cash flows. -63- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 31 Business combination (continued) Prior period (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. Purchase consideration (refer to (b) below): Cash paid Direct costs relating to the acquisition Total purchase consideration Fair value of net identifiable assets acquired Goodwill note 13) (b) Cash flow information Outflow of cash to acquire business, net of cash acquired Cash consideration Less cash balances acquired Outflow of cash - investing activities (c) Assets and liabilities acquired The assets and liabilities recognised as a result of the acquisition are as follows: Cash and cash equivalents Receivables Inventories Plant and equipment (note 11) Net deferred tax asset (note 12) Intangible assets: research and development (note 13) Payables Borrowings Employee benefit liabilities, including superannuation Current tax liability Provision for dividend Net identifiable assets acquired Add: goodwill Net assets acquired $'000 5,100 107 5,207 (86) 5,293 Consolidated 2010 $'000 2009 $'000 - - - 5,100 1,120 3,980 Fair value $'000 1,120 3,016 1,111 73 28 200 (1,789) (2,863) (221) (211) (550) (86) 5,293 5,207 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 Group's existing Electronic Security and Entertainment business. -64- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 32 Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(c): Name of entity incorporation Class of shares Equity holding Country of 2010 % 2009 % Hills Finance Pty Ltd Hills Industries NZ Limited Korvest Limited (i) (ii) Korvest NZ Limited (iii) Hills Hoists Pty Ltd Bailey Aluminium Products Pty Ltd ACN 000 195 951 Pty Ltd (formerly Triton Manufacturing & Design Co Pty Ltd) ACN 089 622 622 Pty Ltd (formerly Triton Workshop Systems (UK) Pty Ltd) Woodroffe Industries Pty Ltd Fielders Australia Pty Ltd (note (a)) Fielders Mobile Mill Pty Ltd Zen 99 Pty Ltd Orrcon Holdings Pty Ltd Orrcon Operations Pty Ltd Orrcon Tubing Pty Ltd Access Television Services Pty Ltd Techlife Solutions Pty Ltd (shelved) Audio Telex Communications Pty Ltd Crestron Control Solutions Pty Ltd Team Poly Pty Ltd KDB Engineering Pty Ltd Kerry Equipment (Aust) Pty Ltd Step Electronics 2005 Pty Ltd (i) Greenwattle Investments Pty Ltd Access Scaffolding (Aust) Pty Ltd Greenwattle Equipment Pty Ltd ACN 095 224 034 Pty Ltd (formerly Alquip (Holdings) Pty Ltd) Alquip Pty Ltd Pathfinder (Edwardstown) Pte Ltd Hills Nominees Pty Ltd DAS Security Wholesalers Pty Ltd Pacific Communications Pty Ltd Pacom Security Pty Ltd CBS Hardware Pty Ltd Step Electronics Pty Ltd Opticomm Co Pty Ltd (i) UHS Systems Pty Ltd UHS Pty Ltd Cygnus Satellite Pty Ltd (i) Australia New Zealand Australia New Zealand Australia Australia Australia Registered branch in United Kingdom Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Singapore Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 46 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 50 51 100 50 100 100 46 100 100 100 100 100 100 60 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 50 51 100 - Names inset indicate shares held by the company immediately above the inset. (i) These companies are controlled by virtue of the Company’s control of the company’s Board through the chairman’s casting vote, effective management of the company and exposure to the risks and benefits of ownership, or control of voting rights through the dilution of the minority shareholders. -65- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 32 Subsidiaries (continued) (ii) During the year Korvest Ltd issued 19,920 (2009: 26,352) ordinary shares pursuant to its Employee Share Bonus Plan for no consideration. Hills Industries Ltd does not participate in this plan. As a result of this transaction Hills Industries Ltd decreased its interest in Korvest Ltd. (iii) Korvest NZ Limited was deregistered on 28 August 2009. (a) Transactions with non-controlling interests On 16 November 2009, the Group increased its shareholding in Fielders Australia Pty Ltd from 60% to 74.9% through a rights issue and conversion of debt to equity. The consideration paid was $19,955,000. On 6 April 2010 the Group acquired the remaining 25.1% of Fielders Australia Pty Ltd by way of a $10,000,000 selective share buy back. 2010 $'000 2009 $'000 Carrying amount of non-controlling interests acquired Consideration paid to non-controlling interests Excess consideration paid recognised in the transactions with non-controlling interests reserve within equity 11,551 (10,000) 1,551 - - - 33 Parent entity financial information (a) Summary financial information The individual financial statements for the Company show the following aggregate amounts: Statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Contributed equity Reserves Asset revaluation reserve Hedging reserve - cash flow hedges Asset realisation reserve Equity compensation reserve Retained earnings Total shareholders' equity Profit for the year Total comprehensive income -66- Company 2010 $'000 2009 $'000 359,661 408,704 260,983 269,586 620,644 678,290 142,551 154,597 113,480 227,794 256,031 382,391 306,595 248,598 37,517 (265) 1,855 592 18,319 37,517 - 1,855 568 7,131 364,613 295,669 32,711 13,035 32,216 9,095 Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 33 Parent entity financial information (continued) (b) Guarantees entered into by the Company Bank guarantees given by the Company in favour of customers and suppliers amounted to $7,486,000 (2009: 7,949,000). Cross guarantees are given by the Company and its wholly owned subsidiaries as described in note 34. Under the terms of the Deed of Cross Guarantee the Company and its wholly owned subsidiaries have guaranteed the debt in each other's companies. Guarantees amount to $289,252,000 (2009: $354,165,000). No material deficiency in net tangible assets exists in these companies at reporting date with net tangible assets amounting to $329,736,000 (2009: $257,504,000). (c) Contractual commitments for the acquisition of property, plant or equipment As at 30 June 2010, the Company had contractual commitments for the acquisition of property, plant or equipment totalling $1,530,000 (2009: $1,273,000). These commitments are not recognised as liabilities as the relevant assets have not yet been received. 34 Deed of cross guarantee Pursuant to ASIC Class Order 98/1418 (as amended) dated 13 August 1998, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Directors’ reports. It is a condition of the Class Order that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are: Hills Finance Pty Ltd Hills Hoists Pty Ltd Bailey Aluminium Products Pty Ltd KDB Engineering Pty Ltd Kerry Equipment (Aust) Pty Ltd Woodroffe Industries Pty Ltd ACN 000 195 951 Pty Ltd (Formerly Triton Manufacturing & Design Co Pty Ltd) Orrcon Operations Pty Ltd Orrcon Holdings Pty Ltd Greenwattle Investments Pty Ltd (Alquip) Audio Telex Communications Pty Ltd Team Poly Pty Ltd Fielders Australia Pty Ltd Access Television Services Pty Ltd All of the subsidiaries except KDB Engineering Pty Ltd, Kerry Equipment (Aust) Pty Ltd, Orrcon Operations Pty Ltd, Orrcon Holdings Pty Ltd, Greenwattle Investments Pty Ltd, Audio Telex Communications Pty Ltd, Team Poly Pty Ltd, Fielders Australia Pty Ltd and Access Television Services Pty Ltd became a party to the deed on 15 April 2004 by virtue of a Deed of Assumption. KDB Engineering Pty Ltd, Kerry Equipment (Aust) Pty Ltd, Orrcon Holdings Pty Ltd and Orrcon Operations Pty Ltd became parties to the deed on 23 June 2006, by virtue of a Deed of Assumption. Greenwattle Investments Pty Ltd (Alquip) and Audio Telex Communications Pty Ltd became parties to the deed on 25 June 2007. Team Poly Pty Ltd became a party to the deed on 14 May 2008. Fielders Australia Pty Ltd and Access Television Services Pty Ltd became parties to the deed on 29 June 2010. Hills Industries Limited is the Holding Company and Pacom Security Pty Ltd is the Trustee under the Deed. -67- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 34 Deed of cross guarantee (continued) The above companies represent a ‘closed group' for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by Hills Industries Limited, they also represent the ‘extended closed group'. Set out below is a consolidated income statement, a consolidated statement of comprehensive income, a summary of movements in consolidated retained earnings for the year ended 30 June 2010 and a consolidated statement of financial position as at 30 June 2010 of the Company and controlled entities that are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee. (a) Consolidated income statement, statement of comprehensive income and summary of movements in consolidated retained earnings 2010 $'000 2009 $'000 1,062,568 1,217 (3,566) (1,003,351) 773,930 - (19,689) (752,015) 56,868 2,226 (15,726) (919) 41,142 1,307 40,044 1,098 1,307 - 41,142 1,307 41,142 1,307 - (707) 212 (6,837) 329 1,951 (495) (4,557) 40,647 (3,250) 64,954 40,044 99,400 1,307 17,928 (21,523) - (35,753) 101,403 64,954 Income statement Revenue from continuing operations Other income Finance costs Other expenses Profit before income tax Income tax expense Profit for the year Profit is attributable to: Owners of the Company Non-controlling interests Profit for the year Statement of comprehensive income Profit for the year Other comprehensive income Gain on revaluation of land and buildings Changes in the fair value of cash flow hedges Income tax relating to components of other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive income for the year Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year Profit for the year Adjustment to retained profits at the beginning of the year on inclusion of additional companies in the Class Order Dividends provided for or paid Retained earnings at the end of the financial year -68- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 34 Deed of cross guarantee (continued) (b) Consolidated statement of financial position 2010 $'000 2009 $'000 51,476 191,943 165,982 800 53,349 199,743 157,790 - 410,201 410,882 11,140 195,515 25,443 99,561 - 15,473 175,174 19,726 89,757 333 331,659 300,463 741,860 711,345 125,674 8,191 9,917 31,151 250 84,416 6,931 5,845 22,933 5,822 175,183 125,947 105,663 5,724 2,682 218,498 5,402 4,318 114,069 228,218 289,252 354,165 452,608 357,180 306,595 44,610 101,403 248,597 43,629 64,954 452,608 357,180 Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Total current assets Non-current assets Investments Property, plant and equipment Deferred tax assets Intangible assets Derivative financial instruments Total non-current assets Total assets 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 earnings Total equity -69- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 35 Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Depreciation and amortisation Impairment of goodwill Acquisition costs relating to business operations acquired Non-cash employee benefits expense - share-based payments Net (gain) loss on sale of non-current assets Fair value (gain) loss on derivatives Foreign currency translation reserve recycled through profit or loss on disposal of subsidiary Impairment of trade receivables Impairment of inventories Impairment of property, plant and equipment Rent received Amounts set aside to provisions Change in operating assets and liabilities, net of effects from purchase of controlled entities and business operations: Decrease / (increase) in trade and other receivables Decrease / (increase) in inventories Decrease / (increase) in deferred tax assets Increase / (decrease) trade and other creditors Increase / (decrease) in provision for income taxes payable (Decrease) / increase in other provisions Net cash inflow (outflow) from operating activities Consolidated 2010 $'000 2009 $'000 43,095 15,655 23,913 - 395 467 (179) (8,471) 49 3,336 3,836 1,680 (864) 16,833 23,107 5,380 - 343 20 10,136 - 3,699 1,981 - (842) 17,763 8,059 13,670 2,289 7,053 2,944 (16,557) 42,482 (17,101) (7,374) (20,183) 3,658 (16,391) 101,548 62,333 -70- Hills Industries Limited Notes to the consolidated financial statements 30 June 2010 (continued) 36 Remuneration of auditors 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: (a) Audit services KPMG Australia: Audit and review of financial reports Overseas KPMG Firms: Audit and review of financial reports Total remuneration for audit and other assurance services (b) Non-audit services Taxation services KPMG Australia: Taxation and other services Overseas KPMG Firms: Taxation services Total remuneration for taxation services Other services KPMG Australia: Consulting services Total remuneration for other services Consolidated 2010 $ 2009 $ 450,000 400,000 31,905 36,458 481,905 436,458 126,354 157,048 10,542 30,430 136,896 187,478 - - 54,195 54,195 37 Events occurring after the reporting period No matter or circumstance has occurred subsequent to year end that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. -71- Hills Industries Limited Directors' report 30 June 2010 Directors' report Your Directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of Hills Industries Limited (the Company) and the entities it controlled at the end of, or during, the year ended 30 June 2010, and the independent auditor's report thereon. Directors The following persons were Directors of the Company during the whole of the financial year and up to the date of this report: Jennifer Helen Hill-Ling Graham Lloyd Twartz Ian Elliot Roger Baden Flynn Geoffrey Guild Hill Peter William Stancliffe Fiona Rosalyn Vivienne Bennett and David Moray Spence were appointed as Directors on 31 May 2010 and 1 September 2010 respectively and continue in office at the date of this report. Review of operations Overview The Hills Group of companies achieved a profit after tax attributable to shareholders of $40.2 million, which was a 43.3% improvement compared to the previous year’s result (excluding unusual and significant items). The year in review The much-improved 2009-2010 result - including solid contributions from all of our operating divisions - was achieved despite trading conditions remaining difficult in a number of markets during the year. Most pleasing was the turnaround in the Home, Hardware and Eco division as a result of significant and successful restructuring initiatives implemented in the prior year. Your Directors were pleased to increase the full year dividend by 25% to a total of 12.5 cents per share fully franked. Cash flows from operations were at record levels during the year due to a more disciplined and focussed approach on the control of working capital, and a reduction in capital expenditure. The capital raisings during the year, combined with the strong operating cash flows, resulted in our gearing (measured as debt divided by equity) significantly lower at just over 10% at balance date. The very strong nature of our balance sheet provides us with confidence that we can implement our growth initiatives for the benefit of Hills shareholders. Group strategy Our strategy is to consistently grow shareholder value over time by investing in businesses that deliver superior service and/or innovative products, and which are exposed to high growth markets. This approach is built on a commitment to diversification in order to mitigate the impact of short-term changes to individual markets and economies. Consistent with this overall strategy, we are seeking approval at the upcoming Annual General Meeting to change the Company’s name to Hills Holdings Limited. This proposed change reflects the transition of the Hills Group from an industrial company to a diversified investment company. Trading conditions The impact of the global financial crisis continued during the year under review and led to quite patchy trading conditions across Australia and New Zealand. The New Zealand economy remained generally weak, while Australia performed relatively well compared to other global economies. The at times subdued conditions in the commercial building sector led to a reluctance on the part of corporations to commit to certain projects, which in turn affected demand in our electronics businesses and some of our building and industrial operations. -72- Hills Industries Limited Directors' report 30 June 2010 (continued) Review of operations (continued) Vision and values Hills is a diversified company operating mainly in Australia and New Zealand. We aim for the company to be recognised as a superior investment by developing a portfolio of profitable and growing businesses. To achieve this we value and promote: • • • • • A culture of individual development, personal growth and safety; Being open, ethical and earning the trust of those we deal with; An emphasis on commercial acumen designed to deliver superior shareholder returns; A leadership style that encourages autonomy and initiative; and A never ending process of continuous improvement designed to deliver reliable, quality and innovative products and services. Dividends Given the increased full-year profit, the Hills Board was pleased to announce a 25% increase in the annual dividend to a fully franked 12.5 cents per share. This comprised an interim dividend of 7.0 cents per share paid in March 2010 and a final dividend of 5.5 cents per share to be paid in September 2010. This represents 75% of the earnings per share for the year. Given Hills’ strong balance sheet position, the Dividend Reinvestment Plans have remained suspended for both the interim and final dividend. Shareholders We value the support of our shareholders at all times, and in particular during the more difficult environment of recent years. We have continued our practice of offering employees who meet the relevant criteria to participate in our Employee Share Plan. This is in line with our belief that widespread share ownership by our employees has many positive benefits for the employees, the Company and all of our shareholders. Likely developments The outlook for the new financial year continues to revolve around much comment and debate on the timing and recovery of local and global economies. We expect trading conditions to remain fragile in the current year as we continue to experience subdued activity in the Australian large contract market and the commercial building sector. Notwithstanding these challenges, we have a number of growth initiatives in place and remain focussed on retaining the business improvements successfully implemented in the past two years. We expect to deliver a modest improvement in profits in the current year. Electronic Security & Entertainment 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. Our ongoing strategy for this expanding business is to develop the core range of products including our own intellectual property, while at the same time representing many of the world’s leading electronic security companies. We believe this mix of products provides us with a sustainable competitive advantage. The market is characterised by a reasonably predictable level of day to day sales supplemented by larger project opportunities. While the overall level of activity in the project market continued to be subdued during the year, the steady improvement in the Australian Dollar in the second half of the year saw margins return to historic levels. Highlights of the year included the successful launch of our EVO range of camera domes and monitors in the CCTV market as well as the market success of our VoiceNav security control panel. We also benefited from the first full year of our majority ownership of Ultra High Speed Pty Ltd (UHS), and although UHS export markets were quiet as a result of trading conditions in Europe, we were very pleased with their contribution to this business unit. -73- Hills Industries Limited Directors' report 30 June 2010 (continued) Review of operations (continued) Hills Sound, Vision and Lighting Hills Sound, Vision and Lighting (SVL) is the leading supplier to the professional audio markets in Australia and New Zealand. This includes our distribution of a range of advanced control automation systems under the Crestron brand for the integrated control of audio, video and data. During the year, we launched our range of Australian Monitor Revolution Series digital audio products, and also added new products to become the one-stop-shop for all of our customers’ needs. Overall, despite a quite weak market, Hills SVL grew its market share and profitability during the course of the year. Hills Antenna & TV Systems This business unit provides a full range of reception and distribution equipment for: • • • • Subscription television; Free to air television; The wireless voice and data market; and The DGTEC range of consumer electronics. The unit increased its market share during the year and capitalised on product opportunities as a result of the Australian Federal Government’s decision to progressively shut down the analogue television signal. We continue to develop innovative new products, and partner with leading overseas suppliers to provide the most comprehensive range of television reception equipment to the market. 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. During the past year, the ATS contract to provide services to AUSTAR was renewed for a further three years and we were also successful in obtaining a Federal Government contract to install digital television solutions for certain qualifying customers as part of the Government’s plan to close the analogue spectrum over the next three years. ATS has further diversified its business to provide installation services in the rollout of Fibre to the Home networks, including Stage 1 of the National Broadband Network in Tasmania. OptiComm OptiComm provides infrastructure and services to the Fibre to the Node and Fibre to the Home market. Our open platform offer is generally the preferred solution for customers and developers and we were particularly pleased during the period to open our network operation centre in Hobart in support of NBN Tasmania’s Stage 1 rollout of its network. During the year, we also signed further contracts with major developers, which will deliver improved results over the medium-term for the OptiComm business. Home, Hardware & Eco Consumer Products Our market leading brands - including Hills, Bailey and Oldfield Ladders – are among a range of predominantly metal based branded hardware products distributed by this business unit to our consumer and trade customers. The Home, Hardware and Eco business unit, which produced a much-improved and most pleasing result during the period, is now focussed on a smaller range of products and has achieved significant efficiencies and improvements in supply chain and customer service. There were small but pleasing contributions from Hills Solar and LW Gemmell businesses during the year. Hills Healthcare Hills Healthcare, which manufactures a range of mobility, rehabilitation and aged care products for domestic and overseas markets, comprises K•Care, Kerry Equipment and Air Comfort Seating Systems. Both sales and profitability were affected during the year by a very low level of activity in the building of new nursing homes. The results and outlook for Hills Healthcare improved towards the end of the year and we have continued with our strategy of introducing new products in this growing market sector. Team Poly Team Poly is Australia’s leading manufacturer or rotationally moulded polyethylene water tanks. The level of activity in the water tank industry remains below historical levels as a result of wide-spread rainfall and a significant reduction in Government subsidies. We note that a number of market players have experienced financial difficulties during the period, including insolvency. As a result of lower sales volumes, we have since the end of the past year implemented further restructuring initiatives, with profit improvement plans in place. -74- Review of operations (continued) Hills Industries Limited Directors' report 30 June 2010 (continued) -75- Hills Industries Limited Directors' report 30 June 2010 (continued) Information on Directors (continued) Graham Lloyd Twartz BA (Adel) DipAcc (Flinders). Group Managing Director. Age 53. 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 listed company directorships Director of Korvest Ltd (since 1999). Former listed company directorships in last 3 years None. Special responsibilities Managing Director. Interests in shares and options at the date of this report 212,036 ordinary shares in Hills Industries Limited and 29,115 ordinary shares in Korvest Ltd. 60,000 options over ordinary shares in Hills Industries Limited. Ian Elliot FAICD. Independent Non-Executive Director. Age 56. Experience and expertise Appointed Director in August 2003. Ian Elliot has spent 37 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. In addition to his listed company directorships he was formerly a director of Zenith Media Pty Ltd and Cordiant Communications Group and former Chairman of Allied Brands Limited, Artist & Entertainment Group Limited and Chairman and CEO of George Patterson Advertising. Other current listed company directorships Director of Salmat Limited (since 2005). Former listed company directorships in last 3 years Former Chairman of Promentum Limited (2003 - 2007). Special responsibilities Chairman of the Nomination Committee, Member of the Remuneration Committee. Interests in shares and options at the date of this report 6,235 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. Age 60. Experience and expertise Appointed Director in November 1999 (Lead independent Director). Roger Flynn has extensive experience in manufacturing and distribution industries in Australia and the United States, including over 40 Board years of experience in ASX listed companies. He has been Managing Director of four ASX listed companies over an 18 year period. Other current listed company directorships Executive Chairman of Coventry Group Limited (since 2001). Former listed company 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 35,665 ordinary shares in Hills Industries Limited. Nil options over ordinary shares in Hills Industries Limited. -76- Hills Industries Limited Directors' report 30 June 2010 (continued) Information on Directors (continued) Geoffrey Guild Hill FCPA FAICD F.S.I BEc (Syd) MBA (NSW). Independent Non-Executive Director. Age 64. 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. In addition to his listed company directorships he is the Chairman of International Pacific Securities (Group) Limited and Asian Property Investments Limited and was formerly the Chairman of Fielders Australia Pty Ltd. He was formerly a Director of Biron Apparel Limited and Pacific Strategic Investments Limited. Other current listed company directorships Chairman of Metals Finance Limited (Director since 2006), Heritage Gold NZ Limited (Director since 1998) and Centrex Metals Limited (Director since 2008). Director of Outback Metals Limited (since 2010). Former listed company directorships in last 3 years Former Director of Undercoverwear Limited (from 2006 to 2007), Brickworks Investment Company Limited (from 2005 to 2009) and Huntley Investment Company Limited (from 1998 to 2009). Special responsibilities Member of the Audit and Compliance Committee, the Nomination Committee and the Remuneration Committee. Interests in shares and options at the date of this report 92,505 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 62. Experience and expertise Appointed Director in August 2003. Peter Stancliffe has over 40 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. In addition to his listed company directorships he is a director of Harris Scarfe Pty Ltd. Other current listed company directorships Chairman of Korvest Ltd (since 2009). Director of Automotive Holdings Group Limited (since 2005). Former listed company directorships in last 3 years Former Chairman of View Resources Limited (from 2006 to 2009). Special responsibilities Chairman of the Audit and Compliance Committee. Interests in shares and options at the date of this report 19,104 ordinary shares in Hills Industries Limited and 1,000 ordinary shares in Korvest Ltd. Nil options over ordinary shares in Hills Industries Limited. Fiona Rosalyn Vivienne Bennett BA (Hons) FCA FAICD FAIM. Independent Non-Executive Director. Age 54. Experience and expertise Appointed Director on 31 May 2010. Fiona Bennett is a Chartered Accountant with over 30 years experience in business and financial management, corporate governance, risk management and audit. She has previously held senior executive positions at BHP Billiton Limited and Coles Group Limited and has been a Chief Financial Officer at several organisations in the health sector. Ms Bennett is a graduate of The Executive Program at the University of Virginia's Darden Graduate School and the AICD Company Directors' course. Other current listed company directorships Director of Boom Logistics Limited (since March 2010). Former listed company directorships in last 3 years None Special responsibilities None Interests in shares and options at the date of this report 4,000 ordinary shares in Hills Industries Limited. Nil options over ordinary shares in Hills Industries Limited. -77- Hills Industries Limited Directors' report 30 June 2010 (continued) Information on Directors (continued) David Moray Spence B Com CA (SA). Independent Non-Executive Director. Age 58. Experience and expertise Appointed Director on 1 September 2010. David Spence has experience in a number of industries and more recently in the technology and communications industry. He has over 25 years of senior management experience, including as CFO of Freedom Furniture and OPSM, where he also assumed responsibility for manufacturing and logistics. He has been directly involved in many internet and communications companies including the building of Australia's first and largest dial up ISP, OzEmail. Mr Spence was the chief executive officer of Unwired Australia until February this year. He has been involved in a number of listed and non-listed boards including WebCentral, uuNet, Access1, Emitch, Commander Communications, Chaosmusic, ubowireless, Vividwireless and is a past chairman of the Internet Industry Association. He is currently a non-executive Director of AWA Limited. Other current listed company directorships Chairman of VOCUS Communications Ltd (since June 2010). Former listed company directorships in last 3 years Director Unwired Group Limited (to December 2007). Special responsibilities None. Interests in shares and options at the date of this report 19,000 ordinary shares in Hills Industries Limited. Nil options over ordinary shares in Hills Industries Limited. Company secretary Mr David Lethbridge, LLB (Otago, NZ), Grad Dip ACG, FCIS, GAICD was appointed to the position of Company Secretary in January 2010. Mr Lethbridge was previously the company secretary of NIB Holdings Limited and prior to that was Board Secretary and Legal Counsel for the New Zealand Apple and Pear Marketing Board. Mr Andrew Muir, BEc, MBA (Adelaide) was appointed to the position of Company Secretary in July 2008 and held this position until January 2010. Mr Muir is the Company's General Manager of Finance and was formerly the General Manager of Business Development for five years. 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 2010, and the numbers of meetings attended by each Director were: Jennifer Helen Hill-Ling Graham Lloyd Twartz * Ian Elliot ^ Roger Baden Flynn Geoffrey Guild Hill Peter William Stancliffe Fiona Rosalyn Vivienne Bennett Full meetings of Directors Meetings of committees Audit & Compliance Nomination Remuneration A B A B A B A B 19 19 15 19 16 19 2 19 19 19 19 19 19 2 - - - 5 3 5 - - - - 5 5 5 - 7 - 7 - 7 - - 7 - 7 - 7 - - 6 - 6 - 5 - - 6 - 6 - 6 - - 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 -78- Hills Industries Limited Directors' report 30 June 2010 (continued) Remuneration report - audited Below is a summary of Hills Industries Limited's (Hills or the Group) executive and non-executive Director remuneration arrangements in place for the year ended 30 June 2010. During the year, with the assistance of external advisers, Hills undertook a review of the executive remuneration strategy and the remuneration framework to ensure the approach meets Hills’ business needs, shareholder expectations and contemporary market practice. The outcomes of this review are set out in this report in Section A (e). This Remuneration report forms part of the Directors Report and has been prepared in accordance with section 300A of the Corporations Act 2001 for the Group. The information provided in this Remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. For the purposes of this report, the remuneration arrangements disclosed in this report apply to the non-executive Directors, the Managing Director and other senior executives set out below and include the five highest remunerated executives of the Group and the Company during the reporting period. The following sections covered in this Remuneration report are: A B C D E Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation Additional information. A Principles used to determine the nature and amount of remuneration (a) Role of the Remuneration Committee Information on the composition and functions of the Remuneration Committee ("the Committee") are set out in the Corporate Governance Statement in this Annual Report. The charter of the Committee is available from the Hills' internet site at www.hills.com.au. As an overview, the Board established the Committee to provide advice to the Board 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 Board regularly reviews the remuneration strategy and framework to assess its effectiveness in achieving its objectives. As part of these reviews, the Board relies on external and independent remuneration consultants. (b) Executive remuneration policy Hills’ remuneration strategy is designed to attract, motivate and retain senior executives and Hills' employees generally. The key principles on which the Hills' remuneration strategy is based are as follows: Market competitive and fair Executive remuneration is reviewed annually. Performance driven Hills’ aim is to provide market competitive remuneration against jobs of comparable size and responsibility. External remuneration consultants provide analysis and advice to ensure base pay is set to reflect the market for a comparable role. Remuneration is designed to reward executives for performance against business plans and longer term shareholder returns to a level that is appropriate for the results delivered. A portion of the executive remuneration is at risk and performance dependent. The variable components of the remuneration are driven by targets that focus on external and internal measures of financial and non financial performance. Alignment with shareholder interests Incentive plans and performance measures are aligned with Hills’ short and long term success. -79- Hills Industries Limited Directors' report 30 June 2010 (continued) Remuneration report - audited (continued) Principles used to determine the nature and amount of remuneration (continued) (c) Executive remuneration framework The executive pay and reward framework has the following components: Fixed remuneration: Variable remuneration: • Base pay • Superannuation • Other short term benefits • Short-term incentives • Long-term incentives (suspended for the time being from the commencement of the 2009 / 2010 financial year) The combination of these comprises an executive’s total remuneration. The Board considers that the performance linked remuneration structure is generating the desired outcome for Hills. Fixed remuneration Fixed remuneration is targeted at or above the median of the market for jobs of comparable size and responsibility. In some cases, superior performance or strong market demands for specific job categories may justify above median fixed remuneration. Structured as a total employment cost package, the base pay may be delivered as a combination of cash and prescribed non-financial benefits at the executives' discretion. There are no guaranteed base pay increases included in any executives' contracts. Salaries of all senior executives have been frozen across the Group since 1 October 2008, except in accordance with promotions or limited special circumstances. Retirement benefits comprise employer contributions to superannuation funds. Short- term incentives Hills’ executives all participate in an short-term incentive (STI) Plan. The plan is broadly the same for all executives. Features of all executive’s STI plans are as follows: Purpose of the STI plan Frequency and timing Performance measures used Financial measures used Non financial measures To drive individual and team performance to deliver annual business plans and increase shareholder value. Participation is determined on an annual basis with performance measured over the financial year ending 30 June. Payment is usually made in September following the release of the annual results to the market. Each year the Remuneration Committee recommends to the Board the key performance indicators (KPIs) for the key management personnel. KPIs generally include measures relating to the Group, the relevant business segment and the individual, and may include a mix of financial and non financial performance measures. These performance measures are chosen to drive divisional and individual performance designed to deliver value to shareholders. For senior executive roles: EBIT and return on funds employed (ROFE); and For the Managing Director: ROFE and earnings per share (EPS). A principal focus of Hills is earnings before interest and tax (EBIT). The measures used in the STI plan are; • • Non financial measures vary with position and responsibility and are chosen because they are critical to Hills’ short term and long term success, and are aligned to the business plan. The measures typically cover areas including: • • • • • Safety; Strategic outcomes; Operational improvements; Restructuring and rationalisation; and Other discretionary performance targets. -80- Hills Industries Limited Directors' report 30 June 2010 (continued) Remuneration report - audited (continued) Principles used to determine the nature and amount of remuneration (continued) Achievement levels The percentage of variable remuneration awarded as an STI varies depending on the role and responsibility of the senior executives. Assessment of performance Service condition Long-term incentives At the end of the financial year each executive’s performance is assessed based on the actual performance of the Group and the relevant segment and individual performance overall and against KPIs set at the beginning of the financial year. The Managing Director makes recommendations in respect of each senior executive to the Remuneration Committee who in turn makes recommendations to the Board in relation to the payment of individual short term bonuses. New executives may be eligible to participate in the STI plan on a pro-rata entitlement basis. The Board retains the discretion in awarding payment to executives who retire, die or are retrenched during the financial year. No payments are made to executives who have their employment terminated for inadequate performance or misconduct, before the end of the financial year. Long-term incentives have been provided in previous years to certain employees as options over ordinary shares of the Company under the rules of the Executive Share Option Plan. The Group established a share option plan in October 1997 that entitles selected senior managers and executives to acquire shares in the Company subject to the successful achievement of performance targets related to improvements in total shareholder returns. Prior to 2008 the options were exercisable if the total shareholder return (measured as share price growth plus dividends paid) over a two-year period from the grant date exceeded ten percent plus CPI per annum. Once exercised the shares were forfeited if the holder ceased to be an employee of the Group within a further three-year period. The shareholders approved an amendment to this plan as part of the 2007 Annual General Meeting (AGM) such that the option period over which the shareholder return must be achieved was extended to three years. The three-year period during which the shares were restricted has now been removed. This amendment is applicable for all share options granted after the resolution was passed. No changes were made to the rules governing options already granted. Executives who acquired shares through the exercise of options were 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. In relation to the financial year ended 30 June 2010, the Board suspended the long term incentive bonus scheme and accordingly no long term incentive bonus was allocated to the Managing Director or senior executives. The Board has determined to establish a new long term incentive plan (see Section (e) for more details). In accordance with Hills’ Securities Trading Policy, participants in equity-based remuneration plans are not permitted to enter into any transactions that would limit the economic risk of options or other unvested entitlements. Employee share plan The Hills Employee Share Bonus Plan provides that eligible employees may receive $1,000 of Hills' ordinary shares for no consideration. Shares are allotted under the plan in two tranches, (one of $400 usually in March/April and one of $600 in September/October). Shares issued under the Hills Employee Share Bonus Plan cannot be sold until seven years after issue. The number of Hills Shares each eligible employee receives is the value of the allotment divided by the weighted average price at which the Company’s shares are traded on the ASX on the five business days prior to the date of the allotment, rounded down to the nearest whole share. Link between remuneration and Group performance As mentioned above, a key underlying principle of the executive reward strategy is that remuneration should be linked to performance. Also as discussed earlier, STI payments are based on a variety of performance conditions, both financial and non financial. The key financial measures are EBIT and ROFE, at a business unit and divisional level for some executives and at a Group level for other executives. The non financial measures include safety, strategic outcomes, operational improvements, restructuring and rationalisation and other discretionary performance targets. In the financial year ended 30 June 2010 the Group performance improved on the prior year, with EBIT (before significant items) increasing 9.2% to $65.469 million and net profit after tax (before significant items) increasing 26% to $43.095 million. Individual division results varied though, with the Home, Hardware and Eco division increasing EBIT whilst EBIT declined in the Building and Industrial division. -81- Hills Industries Limited Directors' report 30 June 2010 (continued) Remuneration report - audited (continued) Principles used to determine the nature and amount of remuneration (continued) As a result, the STI payments in relation to financial performance for the year ended 30 June 2010, either increased or decreased depending upon whether each executive was measured on business unit, divisional or Group EBIT and ROFE results. The following table summarises financial and share price information over the last five years: Key financials FY10 FY09 FY08 FY07 FY06 Earnings before interest and tax (EBIT) ($'000) 65,469 59,978 87,772 82,273 73,265 Shareholders' funds ($'000) 496,499 428,520 429,517 348,764 324,411 Return on funds employed (ROFE) based on year end Funds Employed Net profit before significant items ($'000) Net profit after significant items ($'000) Basic earnings per share before significant items (cents) 12.0% 10.3% 14.2% 16.6% 16.5% 43,095 34,201 53,589 52,042 48,210 43,095 15,655 52,360 52,042 48,210 16.7 14.6 27.3 27.6 25.9 Dividends (cents) Share price ($) 12.5 2.15 10.0 1.57 27.5 3.34 27.5 5.33 26.0 4.80 (d) Non-executive Director remuneration 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. Non-executive Directors do not receive performance-based pay. 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. Directors' fees The current base remuneration for Directors was last reviewed in August 2008. Non-executive Directors who chair a committee receive an additional $10,000 per annum. Directors’ fees were not increased during the period. Non-executive Directors’ fees are determined within an aggregate Directors’ fee pool limit, which is periodically recommended for approval by shareholders. The maximum currently stands at $950,000 per annum, and was last approved by shareholders at the annual general meeting on 31 October 2008. The following fees have applied: Base fees Chairman Other non-executive directors Additional fees Committee - Chairman Retirement allowances for directors $200,000 $100,000 $10,000 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 since 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. -82- Remuneration report - audited (continued) Principles used to determine the nature and amount of remuneration (continued) (e) Outcomes of the review of executive remuneration Hills Industries Limited Directors' report 30 June 2010 (continued) A review of the Hills' remuneration framework was undertaken in order to improve alignment of reward with business goals and shareholder expectations. In particular the objectives of the review included developing a remuneration strategy that: • • • • • • reinforces the key objectives set by the Hills' business plans; facilitates the attainment of the Hills' commercial goals; reinforces the corporate values and behaviours identified as core to a successful culture at Hills; is logical, transparent and easily understood by all levels of staff and stakeholders; is proactive by incorporating market trends rather than reacting to lagging indicators; and is flexible for future business opportunities. The outcomes of the review are proposed to be implemented from 1 July 2010 onwards, including the establishment of a new long term incentive scheme for nominated senior executives. B Details of remuneration Amounts of remuneration Details of the remuneration of the Directors, the key management personnel of the Company and the Group (as defined in AASB 124 Related Party Disclosures) and the five highest paid executives of the Company and the Group are set out in the following tables. The key management personnel of the Group includes the Directors as per pages 75 to 78 above and the following executive officers who report directly to the Managing Director and have authority and responsibility for planning, directing and controlling the activities of the Group: • • • • • • • • L Andrewartha - Managing Director - Orrcon Operations Pty Ltd S Cope - Group General Manager - Electronic Security and Entertainment D Edgecombe - General Manager - Business Development (from 1 July 2009) R Gros - Group General Manager - Home, Hardware & Eco A Kachellek - Managing Director - Korvest Ltd D Lethbridge - Company Secretary (from 6 January 2010) K Middleton - CEO - Fielders Australia Pty Ltd A Muir - General Manager - Finance During the year the Group conducted a review of executives classified as key management personnel and determined that only those personnel that report directly to the Managing Director should be classified as key management personnel. Accordingly, G Daher, R Meacham and A Oliver, who were classified as key management personnel during the year ended 30 June 2009, are not classified as key management personnel in the year ended 30 June 2010. 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: • • G Daher - General Manager - Direct Alarm Supplies A Oliver - General Manager - Antenna and TV Systems Changes since the end of the reporting period 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. -83- Remuneration report - audited (continued) Details of remuneration (continued) Key management personnel of the Group and other executives of the Company and the Group Hills Industries Limited Directors' report 30 June 2010 (continued) 2010 Short-term employee benefits Post- employment benefits Cash salary and fees $ Cash bonus (A) $ Non monetary benefits $ Other $ Super- annuation $ Long- term benefits Long service leave $ Share- based payments (B) Options $ Shares $ Total $ Name Non-executive Directors J Hill-Ling + I Elliot R Flynn G Hill* P Stancliffe* F Bennett Sub-total non-executive Directors Executive Director G Twartz Other key management personnel (Group) L Andrewartha^ S Cope#^ D Edgecombe R Gros#^ D Lethbridge A Kachellek K Middleton^ A Muir# Total key management personnel compensation (Group) Other Company and Group executives G Daher# A Oliver#^ 192,661 100,917 91,743 199,743 150,917 8,009 743,990 - - - - - - - - - - - - - 5,600 - - - - - 17,339 9,083 8,257 8,257 13,583 721 - 5,600 57,240 - - - - - - - - - - - - - - - 215,600 - 110,000 - 100,000 - 208,000 - 164,500 8,730 - - 806,830 724,943 211,795 13,113 16,009 72,215 18,349 3,399 999 1,060,822 335,079 299,393 239,061 285,539 103,598 221,129 326,903 293,578 48,223 60,516 4,497 57,289 - 67,114 45,608 24,497 - - - - - - - - 1,400 1,400 375 1,400 - 350 700 1,400 33,356 33,399 21,468 30,183 8,650 25,587 33,413 29,369 - - - - - - - - 3,399 1,976 - 1,976 - 5,635 659 1,060 999 422,456 999 397,683 999 266,375 999 377,386 - 112,248 998 320,813 999 408,282 999 350,903 3,573,213 519,539 13,113 28,609 344,880 18,349 18,104 7,991 4,523,798 197,693 73,843 227,581 111,150 - - 3,150 15,849 23,733 28,295 3,269 3,640 659 1,890 999 303,346 999 389,404 (A) The short-term incentive bonus is for performance during the respective financial year using the criteria set out above. (B) Share based payment remuneration comprises options in the Executive Share Option Plan and shares under the Employee Share Plan. No options were granted during the year. Options granted in the previous two years expire three years after the grant date 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 (Chairman until April 2010) and P Stancliffe remuneration includes Board fees from Korvest Ltd. + J Hill-Ling remuneration includes a dividend of $5,600 paid as a shareholder of Hills Associates Limited. -84- Hills Industries Limited Directors' report 30 June 2010 (continued) Remuneration report - audited (continued) Details of remuneration (continued) 2009 Short-term employee benefits Post-emp- loyment benefits Share-based payments (B) Name Non-executive Directors J Hill-Ling I Elliot R Flynn G Hill P Stancliffe Sub-total non-executive directors Executive Director G Twartz Other key management personnel (Group) L Andrewartha^ S Cope^# G Daher J Easling R Gros# A Kachellek R Meacham# K Middleton^ A Muir# A Oliver^# Total key management personnel compensation (Group) Other Group executives D Salvaterra^ Cash salary and fees $ Cash bonus (A) $ Non monetary benefits $ Other $ Super- annuation $ Termination benefits $ Options $ Shares $ Total $ 181,957 94,801 88,685 157,585 122,859 - - - - - - - - - - - 16,433 8,532 - 7,982 - - 7,982 - 11,057 - - - - - - - - - - - 198,390 - 103,333 - 96,667 - 165,567 - 133,916 645,887 - - - 51,986 - - - 697,873 673,012 50,459 23,550 9,535 66,483 - 14,276 998 838,313 330,000 280,833 185,115 215,290 273,359 210,941 188,139 314,183 259,939 218,423 52,661 67,954 82,285 - 33,770 105,786 80,129 16,133 32,110 92,047 - - - - - - - - - - - 34,439 - 31,448 - 24,066 - 19,421 - 27,642 - 27,996 - 24,201 - 29,728 - 26,342 27,942 8,301 - - 11,729 8,884 - - 2,583 - 8,884 - 5,374 - 4,600 - 1,678 - - 4,600 - 10,312 998 998 998 998 998 998 998 998 998 429,827 390,117 295,047 235,709 344,653 - 350,097 298,067 362,720 323,989 358,023 3,795,121 613,334 23,550 17,836 391,694 - 72,920 9,980 4,924,435 88,390 100,849 - - 24,288 154,074 - 500 368,101 The relative proportions of remuneration for the year ended 30 June 2010 (30 June 2009) as set out above that are linked to performance and that are fixed are as follows: Name Fixed remuneration % At risk -STI % 2010 2009 2010 2009 Executive Directors of Hills Industries Limited G Twartz Other key management personnel of Group L Andrewartha S Cope J Easling D Edgecombe R Gros A Kachellek D Lethbridge K Middleton A Muir Other Company and Group executives G Daher R Meacham A Oliver 80 89 85 - 98 85 79 100 89 93 76 - 71 20 11 15 - 2 15 21 - 11 7 24 - 29 6 12 17 - - 10 29 - 4 10 28 27 26 94 88 83 100 - 90 71 - 96 90 72 73 74 -85- Value of options as proportion of remuneration % 2009 2010 0.33 0.81 0.50 - - 0.53 1.76 - 0.16 0.30 0.22 - 0.49 1.75 2.73 2.28 - - 2.58 - - 0.46 1.42 0.88 1.54 2.88 Hills Industries Limited Directors' report 30 June 2010 (continued) Remuneration report - audited (continued) C Service agreements Executives The details of the contracts of Hills’ senior executives named in the remuneration tables (excluding the Managing Director) can be summarised as follows: • • • • All executives have ongoing contracts of no fixed term; The period of notice required to be given to terminate a contract varies depending upon an executive’s contract, with an executive’s period of notice to the Company ranging from one to six months, and the Company’s period of notice to an executive ranging from three to six months or payment in lieu of that notice; Upon termination, executives are entitled to payment of annual and long service leave; If an executive is retrenched, the executive is not entitled to contractual termination payments other than those generally applicable to all staff. Managing Director Graham Twartz was appointed as Managing Director effective 1 July 2008. The details of the Managing Director’s contract and the remuneration package for the financial year are as follows: Term Fixed remuneration Short-term incentive D Share-based compensation Options The contract is for indefinite duration. The contract can be terminated by the Company or the Managing Director giving three month’s notice to the other. The Managing Director has received an annual base salary, inclusive of superannuation, for the year ended 30 June 2010 of $800,000. The Managing Director’s remuneration has been fixed since 1 October 2008. An annual maximum STI opportunity of $325,000. The performance of the Managing Director against performance measures, as discussed in Section A, is assessed and the payment determined by the Board. 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 current or a future reporting period are as follows: Grant date Date exercisable / vested Expiry date Exercise price 28 Feb 2005 28 Feb 2006 28 Feb 2007 28 Feb 2008 4 Feb 2009 31 Jan 2007 / 31 Jan 2010 31 Jan 2008 / 31Jan 2011 31 Jan 2009 / 31 Jan 2012 31 Jan 2011 / 31 Jan 2011 31 Jan 2012 / 31 Jan 2012 31 Jan 2027 31 Jan 2028 31 Jan 2029 31 Jan 2031 31 Jan 2032 $4.16 $4.83 $5.53 $5.49 $3.01 Value per option at grant date $0.48 $0.56 $0.64 $0.19 $0.00 Performance achieved % Vested Yes No No n/a n/a 55% 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 above. 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. 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. The options that vested during the financial year related to the options issued in February 2005. Further information on the options is set out above and in note 25 to the financial statements. -86- Remuneration report - audited (continued) Share-based compensation (continued) Number of options granted during the year - Name Directors of Hills Industries Limited G Twartz Other key management personnel of the Group L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge K Middleton A Muir Other Group and Company executives G Daher A Oliver - - - - - - - - - - Hills Industries Limited Directors' report 30 June 2010 (continued) Value of options at grant date Number of options vested during the year Number of options lapsed / forfeited during the year Value at lapse / forfeit date $- $- $- $- $- $- $- $- $- $- $- 60,000 60,000 - - - - - - 10,000 - 45,000 - - - - - - - - - - - $- $- $- $- $- $- $- $- $- $- $- 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. E Additional information Details of remuneration: Bonuses and share-based compensation benefits For each cash bonus and grant of options included in the tables on pages 84 - 85 and 86 - 87, the percentage of the available bonus or grant that was paid, or that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. No part of the bonus is payable in future years. The options vest after three years, provided the vesting conditions are met (see page 86 above). No options will vest if the conditions are not satisfied, hence the minimum value of the option yet to vest is nil. The maximum value of the 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. Cash Bonus Paid / Year granted Vested Name G Twartz L Andrewartha S Cope D Edgecombe R Gros D Lethbridge K Middleton A Muir G Daher A Oliver Payable Forfeited % 65 93 86 45 100 - 100 61 94 92 % 35 7 14 55 - - - 39 6 8 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 Financial years in which options may vest Share-based compensation benefits (options) Minimum total value of grant yet to vest $ - - - - - - - - - - - - - - - - - - - - Lapsed / Forfeited % - - - - - - - - - - - - - - - - - - - - 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 % - - - - - - - - - - - - - - - - - - - - Maximum total value of grant yet to vest $ 988 - 988 - 988 - - - 988 - - - 330 - 412 - 330 - 412 - -87- Hills Industries Limited Directors' report 30 June 2010 (continued) Remuneration report - audited (continued) Additional information (continued) 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. Name G Twartz L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge K Middleton A Muir G Daher A Oliver A Value at grant date $ - - - - - - - - - - - B Value at exercise date $ - - - - - - - - - - - C Value at lapse / forfeit date $ - - - - - - - - - - - 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. No options were granted in the current year as the Executive Share Option Plan is currently suspended. 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. No options were exercised in the current year. 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. There were no options that lapsed during the year. Principal activities The principal activities of the Group during the course of the year are outlined within the Review of Operations 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 were 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; continue to improve our safety performance; continue to source cost effective supplies; and further develop our employees. -88- Dividends - Hills Industries Limited Dividends paid to members during the financial year were as follows: Final ordinary dividend for the year ended 30 June 2009 of 2.0 cents per fully paid share paid on 23 November 2009 Final dividend foregone for Share Investment Plan Interim ordinary dividend for the year ended 30 June 2010 of 7.0 cents per fully paid share paid on 3 March 2010 Hills Industries Limited Directors' report 30 June 2010 (continued) 2010 $'000 4,917 (713) 17,319 21,523 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 $13,623,000 (5.5 cents per fully paid share) to be paid on 27 September 2010 out of retained profits at 30 June 2010. The financial effect of these dividends has not been brought to account in the financial statements for the year ended 30 June 2010 and will be recognised in subsequent financial periods. For more information regarding dividends please refer to note 23. Significant changes in the state of affairs Significant changes in the state of affairs of the Group during the financial year were as follows: Contributed equity increased by $57,997,000 (from $248,598,000 to $306,595,000) principally as a result of a capital raising with institutional and sophisticated investors (raising $40,859,000) and a share purchase plan with existing shareholders (raising $16,738,000). Details of the changes in contributed equity are disclosed in note 21. The net cash received from the increase in contributed equity was used to repay borrowings and will be used over time to finance further acquisitions. The Group increased its shareholding in Fielders Australia Pty Ltd from 60% to 100% through a rights issue and conversion of debt to equity (increasing its shareholding from 60% to 74.9%) followed by a selective share buy back (increasing its shareholding from 74.9% to 100%). Details of these transactions are disclosed in note 32. Matters subsequent to the end of the financial year 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. Likely developments and expected results of operations For likely developments please refer to the Review of Operations section of the Directors’ report. 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. -89- Hills Industries Limited Directors' report 30 June 2010 (continued) -90- Hills Industries Limited Directors' report 30 June 2010 (continued) 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. 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 Group are important. Details of the amounts paid or payable to the auditor of the Group, 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; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. -91- Non-audit services (continued) During the year the following fees were paid or payable for services provided by the auditor of the Group, its related practices and non-related audit firms: Hills Industries Limited Directors' report 30 June 2010 (continued) 1. Audit services KPMG Australia: Audit and review of financial reports Overseas KPMG firms - audit and review of financial reports Total remuneration for audit services 2. Non-audit services Taxation services KPMG Australia: Tax compliance services Overseas KPMG firms - tax compliance services Total remuneration for taxation services Consulting services Total remuneration for other services Total remuneration for non-audit services Auditor's independence declaration Consolidated 2010 $ 2009 $ 450,000 400,000 31,905 36,458 481,905 436,458 126,354 157,048 10,542 30,430 136,896 187,478 - - 54,195 54,195 136,896 241,673 A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 100. 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. -92- Hills Industries Limited Corporate governance statement 30 June 2010 Corporate governance statement This report sets out Hills Industries Limited’s (Hills) annual statement on its corporate governance framework for the year ended 30 June 2010. Hills and the Board are committed to achieving and demonstrating the highest standards of corporate governance. The Board undertook a detailed review of Hills’ corporate governance framework and practices during 2010 to ensure that they continue to comply with the requirements of the ASX Corporate Governance Council’s (ASXCGC) 2007 Principles of Good Corporate Governance and Best Practice Recommendations and meet the interests of shareholders. A description of Hills’ main corporate governance practices is set out below. All these practices, unless otherwise stated, were in place for the entire year and comply with the ASXCGC Corporate Governance Principles and Recommendations. Full details of the location of the references in this statement (and elsewhere in this Annual Report) which specifically sets out how Hills applies each ASXCGC Principle and Recommendation are contained in the corporate governance section within the Hills website which can be found at www.hills.com.au. This website also contains copies of the charters and policies referred to in this report. ASXCGC Principle 1: Lay solid foundations for management and oversight The Board operates in accordance with the broad principles set out in its Board charter. The charter details the roles and responsibilities of the Board, as well as the membership and operation of the Board. The Board’s role is to provide the overall strategic direction for Hills, ensure that Hills’ activities comply with its constitution and with all legal and regulatory requirements, and define the powers to be reserved to the Board and those that are delegated to its committees and management. The Board is responsible to the shareholders for the performance of Hills in both the short and the longer term and seeks to balance sometimes competing objectives in the best interests of Hills as a whole. The responsibilities of the Board include: • • • • • • • Strategy and planning - reviewing and approving Hills’ business strategies and monitoring their implementation; Oversight of management - the appointment, and if appropriate, the removal of the Managing Director, setting the Managing Director's terms and conditions of employment, approving the remuneration policies and practices for all Hills employees, monitoring the performance of the Managing Director and reviewing on a regular basis executive succession planning; Financial and Capital Management – reviewing and approving Hills annual and half yearly financial reports, monitoring Hills’ financial position on an ongoing basis, overseeing Hills’ accounting and financial systems, reviewing the progress of major capital expenditures and other significant corporate projects including any acquisitions or divestments, approving capital management decisions and the dividend policy; Shareholders – overseeing effective communication with and reporting to shareholders; Other stakeholders – overseeing and approving policies that govern the relationship with other stakeholders; Ethics and sustainability – monitoring Hills’ culture and its ethics, overseeing and approving Hills’ Code of Conduct; and Compliance and risk management - overseeing Hillls’ systems for corporate governance, internal control and risk management. The Board has delegated to the Managing Director the authority to manage the day to day affairs of Hills and the authority to control the affairs of Hills in relation to all matters delegated by the Board in the Hills’ Delegation of Authority. These delegations are reviewed on an annual basis. As part of the oversight of management, 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. This performance assessment for senior executives was undertaken during the reporting period. ASXCGC Principle 2: Structure the Board to add value Board composition The Board charter states: • • the Board will consist of a majority of non-executive independent Directors; and the Chairman is a non-executive Director appointed by the Board. -93- Hills Industries Limited Corporate governance statement 30 June 2010 (continued) ASXCGC Principle 2: Structure the Board to add value (continued) The Board seeks to ensure that it has a board of Directors with an appropriate range of skills, experience, expertise and who have the understanding and competence to deal with current and emerging issues in Hills’ business. Directors' independence The Board has adopted specific principles in relation to Directors' independence. These state that when determining independence, the Board should consider whether the Director: • • • • • is a substantial shareholder of Hills or an officer of, or otherwise associated directly with, a substantial shareholder of Hills; is or has been employed in an executive capacity by Hills or any other group member within three years before commencing to serve on the Board; within the last three years has been a principal of a material professional adviser or a material consultant to Hills or any other group member, or an employee materially associated with the service provided; is a material supplier or customer of Hills or any other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; and has a material contractual relationship with Hills or a controlled entity other than as a Director of the Group. In determining whether a relationship between a Director and Hills is considered to be material, the Board assesses a range of quantitative and qualitative matters including the proportion the transactions represent to both Hills and the Director and the value or strategic importance of the relationship to both Hills 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 seven non-executive Directors, six of whom have no relationships adversely affecting independence and so are deemed independent under the principles set out above. Chairman and Managing Director The Chairman, Ms Jennifer Hill-Ling is not considered an independent Chairman. Hills considers this departure is appropriate however given: • • The Hill-Ling family’s interest in Hills; and Ms Hill-Ling’s considerable experience within Hills. The Chairman is independent of the role of the Managing Director of Hills. Term of office Hills’ constitution specifies that all non-executive Directors must retire from office no later than the third annual general meeting (AGM) following their last election. A Director may stand for re-election. Induction The induction provided to new Directors enables them to actively participate in Board decision-making as soon as possible. It ensures that they have a full understanding of Hills’ financial position, strategies, operations and risk management policies. It also explains the respective rights, duties, responsibilities and roles of the Board and senior executives. Commitment The Board held 19 Board meetings and an additional corporate strategy workshop during the year. The number of meetings of the Company's Board of Directors and of each Board Committee held during the year ended 30 June 2010, and the number of meetings attended by each Director is disclosed on page 78. Independent professional advice Following consultation with the Chairman, Directors are entitled to seek independent professional advice at Hills’ expense. -94- Hills Industries Limited Corporate governance statement 30 June 2010 (continued) ASXCGC Principle 2: Structure the Board to add value (continued) Performance assessment The Board undertakes a regular annual assessment of its performance and that of individual Directors. 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. Board committees The Board has established a number of committees to assist in the execution of its duties and to allow detailed consideration of complex issues. Current committees of the Board are the Nomination, Remuneration and Audit and Compliance Committees. Each is comprised entirely of non-executive Directors. The committee structure and membership is reviewed on an annual basis. Each committee has its own written charter setting out its role and responsibilities, composition, structure, membership requirements and the manner in which the committee is to operate. All of these charters are reviewed on an annual basis and are available on Hills’ website. All matters determined by committees are submitted to the full Board as recommendations for Board decisions. Minutes of committee meetings are tabled at the subsequent Board meeting. Additional requirements for specific reporting by the committees to the Board are addressed in the charter of the individual committees. Nomination committee The Nomination Committee consists of the following non-executive Directors (a majority of whom are independent): I Elliot (Chair) J H Hill-Ling G G Hill Details of these Directors' attendance at Nomination Committee meetings are set out in the Directors' Report on page 78. The Nomination Committee operates in accordance with its charter which is available on Hills’ website. The main responsibilities of the Committee are to assist and make recommendations to the Board on: • • • Director selection and appointment practices; Board composition and tenure; and succession planning for the Board. When a new Director is to be appointed, the Committee reviews the range of skills, experience and expertise of candidates and prepares a short-list of candidates for consideration by the Board. Advice is sought from independent search consultants as required. The Board then appoints the most suitable candidate who must stand for election at the next annual general meeting of Hills. The Board’s nomination of existing Directors for reappointment is not automatic and is contingent on their past performance, the requirements of Hills and shareholder approval. The Board is also aware of the advantages of Board renewal and succession planning. Notices of meetings for the election of directors comply with the ASX Corporate Governance Council's best practice recommendations. New Directors are provided with a letter of appointment setting out Hills’ expectations, their responsibilities, rights and the terms and conditions of their employment. All new Directors participate in a comprehensive, formal induction program which covers the operation of the Board, its committees and financial, strategic, operations and risk management issues. ASXCGC Principle 3: Promote ethical and responsible decision making Code of conduct Hills has developed a Code of conduct (the Code) which has been approved by the Board and applies to all Hills Directors, officers, employees, contractors, consultants and associates (collectively Hills employees). The Code is regularly reviewed and updated as necessary to ensure it reflects the highest standards of behaviour and professionalism and the practices necessary to maintain confidence in Hills’ integrity and to take into account legal obligations and reasonable expectations of Hills’ stakeholders. In summary, the Code sets out the standards of behaviour Hills expects from Hills Employees and informs them of their responsibilities to Hills’ shareholders, customers, employees, suppliers and the broader community. The Code is available on Hills’ website. -95- Hills Industries Limited Corporate governance statement 30 June 2010 (continued) ASXCGC Principle 3: Promote ethical and responsible decision making (continued) Security Trading Policy Hills has adopted a securities trading policy, available on Hills’ website, which sets out Hills’ policy regarding buying and selling Hills shares and complying with the law on insider trading. The policy applies to all Hills Directors, officers and employees within the Hills group and provides that where a person possesses inside information relating to Hills shares, that person must not deal in Hills shares, procure another person to deal in the shares or pass the inside information to another person. The policy also restricts Directors and senior employees from dealing in shares during “black out periods” commencing at midnight on 31 December for the Hills half yearly results and midnight on 30 June for the Hills annual results and continuing until midnight (Adelaide time) on the next ASX trading day after the day on which the Hills results are released to the ASX. Whistleblower Protection Policy Hills encourages its Directors, employees and contractors to report conduct that is dishonest, fraudulent, corrupt or illegal, endangers health and safety, is a suspected breach of Hills’ Code of Conduct or any Hills policy. Hills has adopted a whistleblower protection policy to ensure concerns regarding unacceptable conduct can be raised on a confidential basis without fear of reprisal, dismissal or discriminatory conduct. The Whistleblower Protection Policy is available on Hills’ website. ASXCGC Principle 4: Safeguard integrity in financial reporting Audit and Compliance Committee The Audit and Compliance Committee consists of the following non-executive Directors: P Stancliffe (Chair) R B Flynn G G Hill Details of these Directors' qualifications and attendance at Audit and Compliance Committee meetings are set out in the Directors' report on pages 75 - 78. All members of the Audit and Compliance Committee are financially literate and have an appropriate understanding of the industries in which Hills operates. The Audit and Compliance Committee operates in accordance with a charter which is available on Hills’ website. The role of the Committee is to assist the Board in: • • • Reviewing Hills’ financial statements and financial information distributed externally; Monitoring the internal control framework, procedures that are designed to ensure compliance with statutory responsibilities and other external reporting requirements, the activities of internal audit, and the adequacy of Hills’ risk management framework; and Liaison with the external auditor. In fulfilling its responsibilities, the Committee: • • • • • • Receives regular reports from management, the internal auditor and the external auditors; Regularly meets with the internal auditor and external auditors; Reviews the processes the Managing Director and CFO have in place to support their certifications to the Board; Reviews any significant disagreements between the auditors and management, irrespective of whether they have been resolved; Meets separately with the external auditors and the internal auditor at least once a year without the presence of management; Provides the internal auditor and external auditors with a clear line of direct communication at any time to either the Chair of the Audit and Compliance Committee or the Chair of the Board. The Audit and Compliance Committee has authority, within the scope of its responsibilities, to seek any information it requires from any employee or external party. -96- Hills Industries Limited Corporate governance statement 30 June 2010 (continued) External auditors Hills policy is to appoint external auditors who clearly demonstrate quality and independence. The performance of the external auditor is reviewed annually. KPMG is Hills’ current external auditor. It is KPMG's policy to rotate audit engagement partners on listed companies at least every five years. An analysis of fees paid to the external auditors, including a break-down of fees for non-audit services, is provided in the Directors' Report and in note 36 to the financial statements. It is the policy of the external auditors to provide an annual declaration of their independence to the Board and the Audit and Compliance Committee. The external auditor will attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the audit report. ASXCGC Principles 5 and 6: Make timely and balanced disclosures and respect the rights of shareholders Continuous disclosure and shareholder communication Hills has a Communication and Market Disclosure Policy that focuses on continuous disclosure of any information concerning Hills that a reasonable person would expect to have a material effect on the price of Hills securities. This policy also includes the arrangements Hills has in place to promote communication with shareholders and encourage effective participation at general meetings. The Communication and Market Disclosure Policy is available on Hills’ website. The Company Secretary’s role includes responsibility for ensuring compliance with the continuous disclosure requirements in the ASX Listing Rules. All information disclosed to the ASX is posted on Hills’ website as soon as it is disclosed to the ASX. ASXCGC Principle 7: Recognise and manage risk The Board, through the Audit and Compliance Committee, is responsible for ensuring there are adequate policies in relation to risk management compliance and internal control systems. In summary, Hills’ policies are designed to ensure that strategic, operational, legal, reputational and financial risks are identified, assessed, effectively and efficiently managed and monitored to enable achievement of Hills’ business objectives. Considerable importance is placed on maintaining a strong control environment. There is an organisation structure with clearly drawn lines of accountability and delegation of authority. Detailed control procedures cover management accounting, financial reporting, project appraisal, environment, health and safety, IT security, compliance and other risk management issues. Internal audit carries out regular systematic monitoring of control activities and reports to both relevant business unit management and the Audit and Compliance Committee. In April 2010 the Board established a Risk Committee consisting of the Managing Director, senior executives from the executive management group and a non-executive Director. The Risk Committee’s role is to assist and make recommendations to the Audit and Compliance Committee on the design of the risk management framework, the manner in which it is implemented, the measures used to assess the framework’s effectiveness and, through continuous improvement, how the framework can be enhanced. The Board and the Audit and Compliance Committee have received reports from the Risk Committee and management as to the effectiveness of Hills’ management of material risks that may impede meeting business objectives. Corporate reporting The Board has received: • • Declarations from the Managing Director and Chief Financial Officer required in accordance with Section 295A of the Corporations Act 2001 that Hills’ financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Group and are in accordance with relevant accounting standards; and Assurance from the Managing Director and Chief Financial Officer that the Section 295A declaration was founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board and that Hills’ risk management and internal compliance and control is operating efficiently and effectively in all material respects in relation to financial reporting risks. -97- Hills Industries Limited Corporate governance statement 30 June 2010 (continued) ASXCGC Principle 8: Remunerate fairly and responsibly Remuneration committee The Remuneration Committee consists of the following non-executive Directors (a majority of whom are independent): J H Hill-Ling (Chair) G G Hill I Elliott Details of these Directors' attendance at Remuneration Committee meetings are set out in the Directors' Report on page 78. The Remuneration Committee operates in accordance with its charter which is available on Hills’ website. The Remuneration Committee is responsible for developing and making recommendations to the Board on the remuneration framework for the Chairman, the Board Committees, non-executive Directors, and Hills’ remuneration and incentive policies and practices for the Managing Director, direct reports to the Managing Director and other senior executives. Further information on Directors' and executives' remuneration, including principles used to determine remuneration, is set out in the Directors' Report under the heading "Remuneration report". In accordance with Hills’ Securities Trading Policy, participants in equity-based remuneration plans are not permitted to enter into any transactions that would limit the economic risk of options or other unvested entitlements. -98- Hills Industries Limited Directors' declaration 30 June 2010 In the opinion of the Directors' of Hills Industries Limited (the Company): (a) the consolidated financial statements and notes set out on pages 1 to 71 and the Remuneration report in the Directors' report, set out on pages 79 to 88, are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Australian Accounting Standards (including the Australian Accounting Intepretations) and, the Corporations Regulations 2001; and giving a true and fair view of the Group's financial position as at 30 June 2010 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and There are reasonable grounds to believe that the Company and the group entities identified in note 34 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those group entities pursuant to ASIC Class Order 98/1418. (b) (c) Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and the chief financial officer for the financial year ended 30 June 2010. This declaration is made in accordance with a resolution of the Directors. -99- -100- -101- -102- The shareholder information set out below was applicable as at 27 August 2010. A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Hills Industries Limited Shareholder information 30 June 2010 Holding 1 1,001 5,001 10,001 100,001 1,000 5,000 10,000 100,000 - - - - and over Ordinary shares Shares 5,034 10,175 4,996 3,565 80 23,850 Options - - - 10 6 16 There were 220 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 equity securities are listed below: Name Poplar Pty Limited Hills Associates Limited JP Morgan Nominees Australia Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited Jacaranda Pastoral Pty Ltd RBC Dexia Investor Services Australia Nominees Pty Limited (PIPOOLED A/C) Australian Foundation Investment Company Limited Argo Investments Ltd Citicorp Nominees Pty Limited Cogent Nominees Pty Limited AMP Life Limited ANZ Nominees Limited Donald Cant Pty Ltd Milton Corporation Ltd Colleen Sims Nominees Pty Ltd Bond Street Custodians Limited Queensland Investment Corporation Hills Associates Limited & Poplar Pty Ltd Gwynvill Trading Pty Limited C. Substantial holders Substantial holders in the Company are set out below: Name Poplar Pty Limited Hills Associates Limited -103- Ordinary shares Number held Percentage of issued shares 20,286,335 13,455,689 11,470,273 8,828,009 8,785,871 5,968,699 4,791,830 4,262,130 4,208,604 3,806,905 2,712,801 2,445,555 2,246,288 1,979,060 1,719,260 1,694,798 1,493,795 1,341,327 1,188,918 1,100,000 8.17 5.42 4.62 3.56 3.54 2.40 1.93 1.72 1.70 1.53 1.09 0.99 0.90 0.80 0.69 0.68 0.60 0.54 0.48 0.44 103,786,147 41.80 Ordinary shares Number held Percentage of issued shares 20,286,335 13,455,689 8.17% 5.42% Hills Industries Limited Shareholder information 30 June 2010 (continued) D. Voting rights The voting rights attaching to each class of equity securities are set out below: 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. 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 David Lethbridge Principal Registered Office 944-956 South Road Edwardstown SA 5039 Telephone: (08) 8301 3200 Facsimile: (08) 8297 4468 Web: www.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 -104- 

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