Hill International
Annual Report 2011

Plain-text annual report

iv Hills Holdings Limited (formerly Hills lndustries Limited) ABN 35 AA7 573 417 Annual report for the year ended 30 June 2011 Hills Holdings Limited ABN 3s oo7 573417 Annual report - 30 June 2011 Gontents Financial statements Consolidated income statement Consolidated statement of comprehensive lncome 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 lndependence Declaration under Section 307C of the Coryorations Act 2001 lndependent auditor's report to the members Shareholder information Page 2 3 4 5 6 7 68 94 104 105 106 108 These financial statements are the consolidated fìnancial statements of the consolidated entity consisting of Hills Holdings Limited and its subsidiaries. The financial statements are presented in the Australian currency. Hills Holdings Limited is a company limited by shares, incorporated and domiciled in Australia. lts registered offìce and principal place of business is: Hills Holdings Limited 159 Port Road Hindmarsh SA 5007 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 68 - 72, which is not part of these fìnancial statements. The fìnancial statements were authorised for issue by the Directors on this 11th day of September 2O11. 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, fìnancial reports and other information are available within Corporate lnformation on our website: www. hillsholdings.com.au. For queries in relation to our reporting please call +61 I 8301 3200 or e-mail info@hillsholdings.com.au. 1 Revenue from continuing operations Other income Expenses excluding fìnance costs (Loss)/profìt before net finance expense and income tax Finance income Finance expenses Net finance expense (Loss)/profit before income tax I ncome tax benefiU(expense) (Loss)/profit for the year (Loss)/profit is attributable to: Owners of Hills Holdings Limited Non-controlling interests (Loss)/profit for the year Earnings per share for (loss)/profit from continuing operatíons attributable to the ordinary equity holders of the Company: Hills Holdings Limited Consolidated income statement For the year ended 30 June 201 I Consolidated 2011 Notes $'000 2010 $'000 3 4 1,095,845 1 ,156,326 1.156 1.921 5 5 5 1,097,001 1,159,247 n.171.464t (1,092,778) Í4.463t 65.469 1,974 (6.000) 4,166 (7.575\ (4.026) (3,409) (78,489) 62,060 s.373 (18,965) (73,116) 43,095 (74,955) 1.839 40,1 88 2,907 (73,1161 43,095 Cents Cents Basic earnings per share Diluted earnings per share 25 25 (30.2) (30.2) 16.7 16.7 The above consolidated income statement should be read in conjunction with the accompanying nofes. 2 Hills Holdings Limited Consolidated statement of comprehensive income For the year ended 30 June 201 1 Consolidated Notes 2011 $'000 2010 $'000 (73,116) 43,095 (Loss)/profit for the year Other com prehensive income/(loss) Gain on revaluation of land and buildings Changes in the fair value of cash flow hedges Exchange differences on translation of foreign operations lncome tax relating to components of other comprehensive income 23 23 23 6 Other comprehensive income/(loss) for the year, net of tax Total comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year is attributable to: Owners of Hills Holdings Limited Non-controlling interests Total comprehensive (loss)/income for the year 13,480 (1,4841 (74s) (3.512) 7.735 (707) 318 212 (177\ (65,381) 42.918 (67,686) 2.305 40,011 2.907 (65.381) 42.918 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 lnventories Derivative financial instruments Assets classifled as held for sale Total current assets Non-current assets lnvestments Property, plant and equipment Deferred tax assets lntangible assets 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 fìnancial instruments Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Capital and reserves attributable to owners of Hills Holdings Limited Non-controlling interests Totalequity Hills Holdings Limited Consolidated statement of financial position As at 30 June 2011 Consolidated Notes 2011 $'000 2010 $'000 7 8 I 14 15 1022 11 12 13 7,158 184,042 167,999 359,199 2,702 56,915 186,002 181 ,496 800 425,213 361.901 425.213 197,040 31,485 49.213 277.740 639.641 219,658 23,771 116,300 359,731 784,944 16 17 18 19 14 20 21 14 22 23 98,671 6,833 242 30,963 128,048 1,384 10,622 33,445 91,479 6,570 2,056 105,684 6,318 2.682 100,105 114.684 237.334 288.445 402.307 496,499 306,790 57,245 21.504 385,539 16.768 402,307 306,595 47,899 126.107 480,601 15,898 496,499 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 4 Hills Holdings Limited Consolidated statement of changes in equity For the year ended 30 June 201 1 Attributable to owners of Hills Holdings Limited Gontributed equity $'000 Notes Retained Reserves earnings $'000 $'000 Non- Total $'000 $'000 controlling Total interests equity $'000 Consolidated Balance at I July 2009 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 interests 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 Employee share options - value of employee services Balance at 30 June 2010 Balance at I July 2010 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 interests 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 Employee share options - value of employee services Transfer to Reserves 22 33 24 23 22 33 24 23 248,598 46,495 107,42 402,535 25,985 428,520 t177t 40.188 40.011 2.907 42.918 57,997 57,997 - 640 57,997 640 1,551 - (21,523) 1,551 (21,523) (1 1 ,551) (10,000) (21,523) - (2,083) (2,083) 30 30 306.595 47.899 126.107 480.601 15.898 496.499 306,595 47,899 126,',107 480,601 15,898 496,499 7 _269 t74.955t t67.686t 2.305 t65.381t 195 195 (332) - - (332) (27,273) (27,273) - 750 '195 750 (81 1) - (1,143) (27,273) (1,37e) (1,37e) 539 Balance at 30 June 2011 306.790 34 2.375 (2.375\ 21.504 57.245 34 385.539 16.768 402.307 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 5 Hills Holdings Limited Consolidated statement of cash flows For the year ended 30 June 2011 Consolidated Notes $'000 20'11 2010 $'000 32 11 13 1,204,824 1,281,593 (1 .'.t70304t (1 ,160,308) 34,520 121,275 798 (5,960) (16.378) 12.980 1,596 (7,575) (13,748\ 10't ,548 (1,143) (26,823) (2e3) 832 860 (26.567) (3,s53) (10,064) (19,0e4) (3,010) 4,138 864 (31 .1 I 9) - - (1s,000) I,976 300 (27,2731 (1,379) (41.376t 57,098 374 (1 15,465) (1,058) 640 (21,523) (2.630) (82,564) (54,963) (12,135) 55,531 67,650 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) Cash generated from operations lnterest received lnterest paid lncome taxes paid Net cash inflow from operating activities Cash flows from investing activities 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 Rent received Net cash (outflow) from investing activities Gash flows from financing activities Proceeds from issues of shares Proceeds from borrowings Repayment of borrowings Loans received from / (paid to) 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) in cash and cash equivalents Cash and cash equivalents at the beginning of the flnancial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year The above consolidated statement of cash flows should be rcad in conjunction with the accompanying nofes. 6 Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I I Summary of s¡gn¡ficant account¡ng pol¡c¡es The principal accounting policies adopted in the preparation of these fìnancial statements are set out below. These policies have been consistently applied to all the years presented, unless othen¡rise stated. The financial statements are for Hills Holdings 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 lnterpretations, other authoritative pronouncements of the Australian Accounting Standards Board, and lhe Corporations Act 2001 . These accounting policies have been consistently applied by each entity in the Group to all periods presented. (i) Compliance with IFRS The financial report of the Group also complies with lnternational Financial Reporting Standards (IFRS) as issued by the lnternational Accounting Standards Board (IASB). (ii) Historical cost convention These fìnancial statements have been prepared on the basis of historical costs, except for the following: . . financial instruments at fair value through profìt 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 notes 1(o), 1(p), 1 1 and 31 . (iii) Critical accountingesfimafes 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. Note 32 - business combinations Note 13 - measurement of the recoverable amounts of cash-generating units containing goodwill ln particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most signifìcant effect on the amounts recognised in the financial statements are described in the following notes: . ¡ . . . . Notes 1 1 and '13 - measurement of the useful lives of property, plant and equipment and intangible assets (excluding goodwill) Notes 19,21 and 29 - provisions and contingencies Note 26 - measurement of share-based payments Note 14 - financial instruments (iv) Early adoption of standards The Group has not elected to early adopt any accounting standards or amendments. 7 Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) I Summary of significant account¡ng pol¡c¡es (continued) (b) Parent entity financial informatíon The fìnancial information forthe parent entity, Hills Holdings Limited, disclosed in note 34 has been prepared on the same basis as the consolidated financial statements. (c) Principles of consolidation (i) Subsrdranes The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June 2011 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 fìnancial 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 'l (i)). lntercompany 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. (¡¡) Changes in ownership rnferesfs 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 Holdings 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 profìt 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. ln 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 profìt or loss. lf 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 profìt or loss where appropriate. (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. 8 Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) I Summary of s¡gn¡ficant accounting pol¡c¡es (continued) (e) Foreign currency translation (i) Functional and presentation currency Items included in the fìnancial 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 the Company'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: . o e assets and liabilities for each statement of fìnancial 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. (f) Revenuerecognition Revenue is recognised for the major business activities as follows: (i) Goods so/d 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 signifìcant 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) Rentalincome Rental income from investment property is recognised in profìt 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. (¡v) 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). I Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) I Summary of s¡gn¡ficant account¡ng pol¡c¡es (continued) (S) lncome 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 fìnancial statements However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also 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. 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. ln this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (i) Tax consolidation legislation Hills Holdings Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, Hills Holdings 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. ln addition to its own current and deferred tax amounts, Hills Holdings 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 30). Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. -1 0- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 1 Summary of s¡gn¡ficant account¡ng pol¡c¡es (continued) (i) Businesscombinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fairvaluesoftheassetstransferred,theliabilitiesincurredandtheequityinterestsissuedbytheGroup. Theconsideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. ldentifiable 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 interests in the acquiree either at fair value or at the non-controlling interests'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 overthe fair value of the Group's share of the net identifiable assets acquired is recorded as goodwill. lf those amounts are less than the fair value of the net identifìable 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 classifìed as a fìnancial liability. Amounts are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. ü) lmpairment of non-financial assets Goodwill and intangible assets that have an indefìnite 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 identifìable 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 insignifìcant risk of changes in value, and bank overdrafts and at call borrowings. Bank overdrafts and at call borrowings 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. 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. 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 diffìculties 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. -11- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) I Summary of s¡gn¡ficant account¡ng pol¡c¡es (continued) (l) Trade receivables (continued) 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) lnventories 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 fìrst-in-fìrst-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. 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 profìt margin based on the effort required to complete and sell the inventories. (n) lnvestments and other financial assets Classification The Group classifies its financial assets in the following categories: financial assets at fair value through profìt or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The classifìcation depends on the purpose for which the investments were acquired. Management determines the classifìcation of its investments at initial recognition and, in the case of assets classifìed as held-to-maturity, re-evaluates this designation at the end of each reporting period. (i) Financial assefs at fair value through profit or loss Financial assets at fair value through profìt or loss are flnancial assets held-for-trading. A fìnancial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are classifled as held-for{rading 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 classifìed as non-curient assets. Loans and receivables are included in current assets - trade and other receivables (note 8) in the consolidated statement of fìnancial 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 prof¡t or loss are initially recognised at fair value and transaction costs are expensed in profìt or loss. Financial assets are derecognised when the rights to receive cash flows from the fìnancial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Measurement Loans and receivables and held to maturity investments are subsequently carried at amortised cost using the effective interest method. Details on how the fair value of financial instruments is determined are disclosed in note 1(o). lmpairment The Group assesses at the end of each reporting period whether there is objective evidence that a flnancial asset or group of fìnancial assets is impaired. lf there is evidence of impairment for any of the Group's flnancial 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. -12- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 1 Summary of significant account¡ng pol¡c¡es (continued) (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. 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 23. 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. The fair value of forward exchange contracts is based on their listed market price, if available. lf a listed market price is not available, then fair value is estimated by discounting the difference between the contractual fonvard price and the current fonryard 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. (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 profìt or loss in the periods when the hedged item affects proflt 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 'fìnance costs'. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in profìt 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 reclassifìed 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. 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. 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. -1 3- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) I Summary of significant account¡ng pol¡c¡es (continued) (p) Property, plant and equipment (continued) The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. 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. lncreases 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. 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 2011 0.75% 5.00% to 40.00% 20.00% to 66.67% 2010 o.75% 5.00% to 40.00% 20.00o/o 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 1fi)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profìt 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) lntangible assets (t) Goodwill Goodwill represents the excess of the cost of a business 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. lnstead, 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. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefìt from the business combination in which the goodwill arose. (¡i) 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. (iit) 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 benefìts 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. -14- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) I Summary of s¡gn¡ficant account¡ng pol¡c¡es (continued) (q) lntangible assets (continued) (iv) Fairvalues 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. (r) Non-current assets (or disposal groups) held for sal Non-current assets (or disposal groups) are classifìed as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from employee beneflts and fìnancial assets that are carried at fair value. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition. Non-current assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for sale. lnterest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognised. Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the consolidated statement of financial position. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the consolidated statement of fìnancial position. (s) Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost. They represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. The amounts are unsecured and are paid in accordance with the Group's terms of trade. (0 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. 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. 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. ln this case, the fee is deferred until the draw down occurs. To the efent 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. (u) 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 end of each reporting period. The discount rate used to determine the present value is a pre{ax rate that 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. -1 5- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) I Summary of significant account¡ng pol¡c¡es (continued) (v) Employee benefits (i) Wages and salaies, and annual leave Liabilities for wages and salaries, including non-monetary beneflts 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 benefìts. All other short-term employee benefit obligations are presented as payables. (¡i) Long service leave The liability for long service leave is recognised in the provision for employee benefìts 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. (ii¡) Retirementbenefitobligations A defìned 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 Long Term lncentive Share Plan (previously the Executive Share Option Plan) and the Employee Share Plan. lnformation relating to these schemes is set out in note 26. Long Term lncentive Plan The Long Term lncentive Share Plan (in previous years the Executive Share Option Plan) allows Group executives to acquire shares of the Company. The fair value of Performance Rights / options granted under the Long term lncentive Share Plan / Executive Share Option Plan is recognised as an employee benefìts expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the Performance Rights / options granted, measured at the grant date, which includes any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. The valuation method takes into account the exercise price of the Performance Right / option, the life of the Performance Right / 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 Performance Right / 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. lt 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 profìt-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. -16- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) I Summary of s¡gn¡ficant account¡ng pol¡c¡es (continued) (w) Contributed equity Ordinary shares are classified as equity. lncremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. lf 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. (x) 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. (V) 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. lnterest 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. (zl Earnings per share (i) Basic eamings per share Basic earnings per share is calculated by dividing: o . the profìt 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 fìnancial year. (i¡) Diluted eamings 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 (aa) 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. ln this case it is recognised as part of the cost of acquisition of the asset or as part ofthe 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. (ab) Rounding of amounts The Group is of a kind referred to in Class Order 98/100, issued by the Australian Securities and lnvestments Commission, relating to the "rounding off' of amounts in the financial statements. Amounts in the flnancial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. -17- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) I Summary of s¡gn¡ficant account¡ng pol¡c¡es (continued) (ac) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2011 reporting periods. The Group's assessment of the impact of new standards is set out below. AASB 9 Financial lnstruments, AASB 2009-1 1 Amendments to Australian Accounting Standards arising from ÁASB 9 and AASB 2010-T Amendments to Australian Accounting Sfandards arising from AASB 9 (December 2010) (effective from 1 January 2013) AASB 9 Financial lnstruments addresses the classifìcation, measurement and derecognition of financial assets and fìnancial liabilities and is likely to affect the Group's accounting for its fìnancial assets and financial liabilities. 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. The Group has not yet decided when to adopt AASB g and has not yet determined the potential effect of the standard. 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: Electronics & Communications - includes electronic security systems, closed circuit television systems, home and commercial automation and control systems, professional audio products, consumer electronic equipment, fìbre optic transmission solutions, communications related products and services, domestic and commercial antennas, master antenna television systems, communications antennas, amplifìers, and subscription W installation services. Lifestyle & Sustainability - 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 & lndustrial - comprises the Fielders Steel Roofìng 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 businesses from a products and services perspective. The Electronics & Communications division is managed separately by a group general manager and the Lifestyle & Sustainability division is managed by the chief operating offlcer The Electronics & Communications businesses meet the aggregation criteria of the Standard because of similarities of products, markets, distribution and regulatory environments. The Lifestyle & Sustainability 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 Lifestyle & Sustainability as this reflects the manner in which the Group manages these businesses. For management reporting purposes, the Building & lndustrial division comprises 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 I Operating Segmenfs, 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 Comprises sales offices and customers in New Zealand. -1 8- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 2 Segment information (continued) (b) Segment information provided to the Group Managing Director 2011 Total segment revenue lnter-segment revenue Revenue from external customers Segment EBIT Depreciation and amortisation Total segment assets Total assets include: Additions to non-current assets (other than fìnancial assets and deferred tax) $'000 $'000 Electronics & Lifestyle & Building & Communications Sustainability lndustrial Korvest Ltd $'000 $'000 340,675 161,M0 553,242 67,383 1,',122,740 Q3.296\ ß.622\ 317.379 160.760 549.620 28.027 9.697 e.402t Q7.755], 67.226 1.094.985 5.556 (680) (157\ 40.878 Total $'000 3,339 4,995 142.608 107.815 277.649 11,769 1,278 42.434 21,381 570.506 5,175 4,396 11.215 2.040 22,826 Total segment liabilities 37,846 19,900 57.047 8.974 123,767 2010 Total segment revenue lnter-segment revenue Revenue from external customers Segment EBIT Depreciation and amortisation Total segment assets Total assets include: Additions to non-current assets (other than financial assets and deferred tax) Electronics & Communications Sustainability lndustrial Korvest Ltd Lifestyle & Building & $'000 $'000 $'000 $ 000 Total $'000 368,901 (19,395) 349,506 32.525 3,291 143,955 177,444 578,061 (1,133) (3,695) 176.311 574,366 10.235 20.622 5,803 12,110 128.840 372.623 (496) 55,775 I ,180,181 Q4.719\ 55,279 1.155.462 5,706 1,060 35,882 681.300 22,264 69,088 2,956 2,128 13,068 2,362 20,514 Segment liabilities 33,099 26,989 81,830 7.070 148,988 (c) Notes to, and forming part of, the segment information (i) Accountingpolicies 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. -19- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 2 Segment information (continued) (ii) Segment revenue Segment revenue reconciles to total revenue from continuing operations as follows: Consolidated Total segment revenue lntersegment eliminations Other revenue Total revenue from continuing operations (note 3) 2010 $'000 2011 $'000 1,122,740 1,190,191 (24,719) 864 1 .095,845 1 ,1 56.326 (27,7551 860 The Group is domiciled in Australia. The amount of its revenue from external customers in Australia is $1,050.138 million (2010: $1,1 16.159 million), and the total of revenue from external customers in other countries is $44.847 million (2010: $39.303 million). 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. (i¡i) Segment EBIT Segment EBIT reconciles to (loss)/profit before income tax as follows: Segment EBIT lnterest revenue lnterest expense Fair value profit on interest rate swaps and forward exchange contracts Goodwill impairment lmpairment of other assets Closure costs Other (Loss)/profit before income tax from continuing operations (iv) Segment assefs Consolidated 2011 $'000 2010 $'000 40,878 798 (5,960) 1,136 (66,182) (43,694) 69,088 1,596 (7,575) 2,570 (1,680) 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 segments' assets are reconciled to total assets as follows: Segment assets Cash Deferred tax assets lnvestments Derivative financial instruments Corporate assets Total assets as per the consolidated statement of financial position Consolidated 2011 $'000 570,506 7,159 31,485 2 30.490 639.641 2010 $'000 681,300 56,915 23,771 2 800 22.156 784.944 The total of non-current assets other than financial instruments and deferred tax assets located in Australia is $238.629 million (2010: $327.890 million), and the total of these non-current assets located in other countries is $7.624 million (20'10: $8.070 million). Segment assets are allocated to countries based on where the assets are located. -20- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 2 Segment information (continued) (v) Segmentliabilities 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: Consolidated 2011 $'000 123,767 4,916 98,312 2,576 7.763 237.334 2010 $'000 148,988 15,646 107,068 2,944 13,799 288.445 Consolidated 2011 $'ooo 2010 $'000 61.468 1,033,517 1 ,094,540 60,922 1,094.985 1.155.462 860 864 1.095.845 1,156.326 Consolidated 2011 $'000 2010 $'000 Segment liabilities Tax liabilities (including GST payable) Borrowings Derivative financial instruments Corporate liabilities Total liabilities as per the consolidated statement of financial position 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 -21- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 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 (Loss)/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 employee benefits expense Equity-settled share-based payment transactions Finance expenses lnterest and finance charges paid/payable lneffective portion of changes in fair value of cash flow hedges Finance income lnterest income Fair value gains on derivatives lneffective portion of changes in fair value of cash flow hedges Net fìnance costs expensed Rental expense relating to operating /eases Minimum lease payments Research and development -22- Consolidated 2011 $'000 2010 $'000 714,556 54,331 89,409 135,022 63,307 114.839 756,558 53,143 87,337 129,O91 64,486 2j63 1,'t71.464 1.092.778 1,769 1,644 '|'92,454 16,238 17,292 184,512 15,383 18,556 5,960 40 6,000 (7s8) (1,176) (.9741 4.026 7,575 7,575 (1,5e6) (2,5O4) (66) (4,166) 3,409 25,191 446 22,625 467 5 Expenses (continued) lmpairment of financial and ofher assefs Plant and equipment lnventories Receivables lntangible assets Total impairment losses - financial and other assets Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) Gonsolidated 2011 $'ooo 2010 $'000 37,210 3,783 1,635 66.182 108.810 1,680 3,836 3,336 8,852 (Loss)/profit after tax for the year includes the following items that are unusual because of their nature and size: (a) lmpairment of Orrcon plant and equipment (recognised within Other expenses) Less: Applicable income tax benefìt (b) lmpairment of Orrcon inventory (recognised within Other expenses) Less: Applicable income tax benefit (c) lmpairment of Orrcon goodwill (recognised within Other expenses) Less: Applicable income tax benefìt (d) lmpairment of Team Poly plant and equipment (recognised within Other expenses) Less: Applicable income tax benefit (e) lmpairment of Team Poly goodwill (recognised within Other expenses) Less: Applicable income tax beneflt (f) Closure costs (recognised within Other Expenses) Less: Applicable income tax benefit 49.590 1,748 15241 1.224 16,592 As a result of poor trading conditions during the year at Orrcon and Team Poly and the decision to close Orrcon's Unanderra operations, the Group has undertaken a comprehensive review of the carrying values of the assets including the goodwill of Orrcon and Team Poly. This has resulted in total non cash impairment of assets and goodwill of $109.876 million, comprising impairment to Orrcon inventory of $7.324 million, impairment in Orrcon plant and equipment of $34.622 million, impairment in Orrcon goodwill of $49.590 million, impairment in Team Poly goodwill of $16.592 million and impairment in Team Poly assets relating to decommissioned assets of $'l .748 million. The after tax impact of these impairments is $96.768 million. The decision to close Orrcon's Unanderra operations was announced and communicated to affected parties in May 2011. Costs associated with the closure totalling $4.963 million have been recognised in the financial statements at 30 June 2ü1.fhe aftertax impact of these costs is $3.474 million. Further details on the impairment of Orrcon plant and equipment and Team Poly plant and equipment are disclosed in note 11. Further details on the impairment of Orrcon goodwill and Team Poly goodwill are disclosed in note 13. -23- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 6 lncome tax expense (a) lncome tax (benefit)/expense: Current tax Deferred tax Adjustments for current and deferred tax of prior periods Deferred income tax (revenue)/expense included in income tax expense comprises: (lncrease)/decrease in deferred tax assets (note 12) Adjustments for deferred tax of prior periods Consolidated 20í1 $'000 2010 $'000 8,389 (11,406) (2.356) (5.373) (11,406) (11.406) 17,659 2,795 (1,489) 18.965 2,693 102 2.795 (b) Numerical reconciliation of income tax (benefit)/expense to prima facie tax payable (Loss)/profit from continuing operations before income tax (benefit)/expense Tax at the Australian tax rate of 30% (2010: 30%) (78.489) (23,547',) 62,060 18,618 Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Goodwill impairment lmpairment of other assets Depreciation of buildings Non deductable expenses R&D allowances Difference in overseas tax rates Adjustments for current and deferred tax of prior per¡ods Tax losses not recognised Total income tax (benefit)/expense (c) Amounts recognised directly in equity 19,855 252 249 (s0) 28 (2,356) 236 (5.37s) 504 274 819 (1 80) 4 (1,387) 313 18.965 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) 180 (526) (d) Tax expense / (income) relating to items of other comprehensive income Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss but directly debited or credited to other comprehensive income: Gains / (losses) on revaluation of land and buildings (note 12) Cash flow hedges (notes 12, 23) -24- 6 lncome tax expense (continued) (e) Tax losses Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) Consolidated 20'11 $'000 2010 $'000 Unused capital tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 30% 41.320 12.396 29,918 8.975 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 benefìts from these items. Revenue tax losses for which no deferred tax asset has been recognised total $2,417,000 (2010: $1 ,121,000). The potentialdeferred tax asset not recognised totals $725,000 (2010: $336,000). (f) Current tax assets and liabilities The current tax liability for the Group of $242,000 (2010: $10,622,000) represents the amount of income taxes payable in respect of current and prior financial periods (S) 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 Holdings Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Hills Holdings Limited for any current tax payable assumed and are compensated by Hills Holdings Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Hills Holdings Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities' fìnancial 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 fìnancial 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. 7 Current assets - Cash and cash equ¡valents Consolidated 2011 $'ooo 2010 $'000 Cash at bank and in hand Deposits at call -25- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 7 Gurrent assets - Cash and cash equ¡valents (continued) (a) Reconciliation to cash at the end of the year The above fìgures are reconciled to cash at the end of the flnancial year as shown in the consolidated statement of cash flows as follows: Balances as above Bank overdrafts (note 17) Borrowings - at call (note 17) Balances per consolidated statement of cash flows (b) Risk exposure Consolidated 2011 $'ooo 2010 $'000 7,159 (1,5121 (5.000ì 56,915 (r,384) 646 55,531 The Group's exposure to interest rate risk is discussed in note 31. The maximum exposure to credit risk at the end of each 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. I Current assets - Trade and other rece¡vables Consolidated 2011 $'000 2010 $'000 Net trade receivables Trade receivables Provision for impairment of receivables (note (a)) Net other receivables Other receivables Prepayments (a) lmpaired trade receivables ïhe ageing of the Group's trade receivables at the reporting date is as follows: 180,45 (9.180) ,171.265 188,818 (9,418) 179.400 10,888 1.889 184.042 4,105 2.497 186,002 Not past due Past due 0 - 30 days Past due 31 - 90 days Past due more than 90 days 96,409 55,728 18,673 9.635 180.45 -26- Consolidated 2011 $'000 2010 $'000 103,215 60,019 16,494 9,090 188.818 Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) I Current assets - Trade and other rece¡vables (continued) 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 2011 $'000 2010 $'000 (9,418) (1,635) 1.873 (9.180) (7,782) (3,336) 1 ,700 (9,418) 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 $9,1 80,000 (201 0: $9,41 8,000) 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 lnformation about the Group's exposure to foreign currency risk and interest rate risk in relation to trade and other receivables is provided in note 31 . (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 31 for more information on the risk management policy of the Group and the credit quality of the Group's trade receivables. Consolidated 2011 $'000 2010 $'000 5'1,273 (5.629) 45.64 54,859 (3.152\ 51,707 6,577_ 5,224 9 Current assets - lnventories Raw materials - 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 -27- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) Consolidated 20'11 $'000 2010 $'000 22 l0 Non-current assets - lnvestments Other listed securities Equity securities These financial assets are carried at cost. 11 Non-current assets - Property, plant and equ¡pment Consolidated At I July 2009 Cost or fair value Accumulated depreciation and impairment Net book amount Year ended 30 June 2010 Opening net book amount Exchange differences Acquisitions through business combinations Additions Disposals lmpairment charge recognised in profìt or loss Depreciation charge Closing net book amount At 30 June 2010 Cost or fair value Accumulated depreciation and impairment Net book amount Year ended 30 June 20ll Opening net book amount Exchange differences Revaluation to fair value Additions Disposals Transfers to assets held-for-sale Depreciation charge lmpairment charge recognised in profìt or loss Closing net book amount At 30 June 201 I Cost or fair value Accumulated depreciation and impairment Net book amount Land - Fair Value $'ooo Buildings - Fair Value $'ooo Plant and equipment - Cost & Fair Value $'000 Total $'ooo 44,232 44.232 44,232 62 - 44.294 52,134 (2,859) 49.275 49,275 50 1,946 (20) _ (.644\ 49,607 252,500 348,866 (1 18,5'13) (21 .372\ '133.987 227.494 133,987 11 1,463 17,148 (3,e3e) (1,680) Q1.233\ 227,494 123 1,463 19,094 (3,e5e) (1,680) (22.877\ 125.757 219,658 44,294 44.294 54,072 (4,465) 49.607 258,663 357,029 (132,906) (37 .371\ 125.757 219,658 44,294 (201) 10,333 49,607 (172) 3,147 1,663 (20) (1,76e) 54.426 52.456 125,757 (2e) 25,1 60 (706) (2,702) (20,112) ß7,210\ 90,158 219,658 (402) 13,480 26,823 (726) (2,702) (21,881) ß7.210\ 197.040 54,426 54.426 57,838 230,248 342,512 (5,382) ('140,090) (45.472\ 90,158 52.456 197.040 -28- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) I I Non-current assets - Property, plant and equ¡pment (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: Consolidaúed 2011 $'ooo 2010 $'000 Property, furniture, fittings, plant and equipment Total assets in the course of construction (b) Valuations of land and buildings 15.732 15.732 13.023 13.023 The valuation basis of land and buildings is fair value being the amounts for which the assets could be exchanged between willing parties in an arm's length transaction, based on current prices in an active market for similar properties in the same location and condition. The 201 1 valuations were based on independent assessments by a member of the Australian Property lnstitute as at 31 May 2011 and the 2010 valuations were made by the Directors as at 30 June 2010. The revaluation surplus net of applicable deferred income taxes was credited to the asset revaluation reserve in shareholders' equity (note 23). (c) lmpairment loss The impairment loss relates to certain plant and equipment within the Orrcon and Team Poly cash generating units and 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 assets. The recoverable amount of certain plant and equipment within the Orrcon cash generating unit (Unanderra plant and equipment) was determined on a fair value less cost to sell basis, using an independent valuation of these assets. Based on this assessment the recoverable amount of this plant and equipment was determined to be $34.622 million lower than its carrying amount. The recoverable amount of certain decommissioned plant and equipment within the Team Poly cash generating unit was determined on a fair value less cost to sell basis. Based on this assessment the recoverable amount of this plant and equipment was determined to be $1 .748 million lower than its carrying amount. The recoverable amount of the asset in the course of construction was determined by reference to a report provided by an independent valuer as fair value less costs to sell based on an active market. Based on this assessment the recoverable amount was determined to be $0.840 million lower than its carrying amount -29- 12 Non-current assets - Deferred tax assets The balance comprises temporary differences attributable to: Property, plant and equipment lnventories Employee benefìts Receivables Loans and borrowings Provisions Other accruals Derivative fìnancial instruments Other items Net deferred tax assets Movements - Consolidated Property, plant and equipment lnventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative fìnancial instruments Other items At 30 June 2010 Movements - Consolidated Property, plant and equipment lnventories Employee benefìts Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Other items Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) Consolidated 201',\ $'000 2010 $'000 5,368 4,969 10,737 2,8'11 1,218 2,201 2,293 1,303 685 31.485 (1,921) 4,614 10,865 2,543 1,218 2,238 1,576 1,233 1.405 23.771 Balance at I July 2009 $'000 Recognised in profit or loss $'000 Recognised in other compre- hensive Recognised income $'000 in equity $'000 Balance at 30 June 2010 $'000 (1,921) 4,614 10,865 2,543 1,218 2,238 1,576 1,233 1.405 23.771 212 212 526 526 Recognised in other GOmpre- hensive income $'000 (3,e57) Recognised Balance at in equity 30 June 201I $'000 $'000 5,368 4,869 10,737 2,811 1,218 2,201 2,293 1,303 685 31,485 445 ß.512\ (1 80) (180) (1,961) 5,511 10,873 2,423 1,218 2,080 2,136 2,942 606 25,828 40 (8e7) (8) 120 158 (560) (1,e21) 273 Q.795\ Balance at I July 2010 $'000 Recognised in profit or loss $'000 (1,921) 4,614 10,865 2,543 1,218 2,238 1,576 1,233 1.405 23.771 11,246 255 (1 28) 268 (37) 717 (375) (540) 11.406 -30- l3 Non-current assets - lntangible assets Consolidated At 1 July 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 Year ended 30 June 20ll Opening net book amount Additions lmpairment charge ** Amortisation charge "* Closing net book amount At 30 June 2011 Cost Accumulated amortisation and impairment Net book amount Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) Development costs $'000 Goodwill $'000 Patents, trademarks and other rights $'000 Total $'ooo 200 200 122,461 (11.043) 111.418 200 111,418 111.418 125,607 (1.281\ 114.326 114,326 3,010 (1,036) 116,300 128,618 (2.318\ 1 16,300 111,418 (66,182) 4,722 293 - (1,158) 3,857 l'16,300 293 (66,182) (1,198) 49.213 6,250 (2,393) 3,857 128,911 (79,698) 49.213 ** The amortisation and impairment charges are recognised in expenses in the consolidated income statement. (a) lmpairment tests for goodwill During the year ended 30 June 201 1 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, except for goodwill relating to the Orrcon and Team Poly CGUs. 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). -31- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 13 Non-current assets - lntangible 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 Electronic Building and and Commun- Lifestyle and lndustrial ications Sustainability $'000 $'000 $'000 Total $'000 2011 Hills SVL Hills Healthcare LW Gemmell Fielders Orrcon Opticomm UHS Team Poly Total Group 2010 Hills SVL Hills Healthcare LW Gemmell Fielders Orrcon Opticomm UHS Team Poly Total Group - 16,237 7,789 - - 754 5.293 11,839 3,324 16,237 11,839 3,324 7,789 754 5,293 7 .789 22.284 15,163 45.236 7,789 49,589 1'1,839 3,324 16,237 756 5,293 57 ,378 22.286 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. o o A terminal value has been determined at the end of the five year strategic plan using a growth rate of 2.5% - 3% (2010:3o/"), 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 13.19% and 14.91o/o (2010: 14J7% and 14.77o/o), 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) lmpact of possible changes in key assumptions With the exception of the Fielders 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 Fielders cash generating unit's recoverable amount (which exceeds its carrying value in use by approximately $16.535 million (2010: $48.454 million) is sensitive to a possible change in EBIT. The business is forecasting for EBIT to return to 2009 levels by the end of the five year model period. A decrease in forecast annual EBIT of 15% (2010:32%) could result in an impairment. -32- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) l3 Non-current assets - Intangible assets (continued) (c) lmpairment charge The recoverable amount of the Orrcon cash generating unit was estimated based on its value in use for the Orrcon business. Theestimateofvalueinusewasdeterminedusingapretaxdiscountrateof projections have been based on 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. The Orrcon cash generating unit recoverable amount is sensitive to a possible change in EBIT. The Orrcon business is forecasting annualised EBIT growth of 2o/o - 3% per annum over the flve year model period. A terminal value has been determined at the end of the five year strategic plan using a growth rate of 2.5% (2010: 3%), which is no greater than the long term average growth rate for the market to which the assets are dedicated. Based on this assessment assets are impaired by $49.590 million and in accordance with Accounting Standards the impairment was allocated against goodwill. '13.19%(2010 14.17o/o).Cashflow The recoverable amount of the Team Poly cash generating unit was estimated based on its value in use for the Team Poly business. The estimate of value in use was determined using a pre tax discount rate of 14.91% (2010: 14.77o/o). Cash flow projections have been based on 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. The Team Poly cash generating unit recoverable amount is sensitive to a possible change in EBIT. The Team Poly business is forecasting average annualised EBIT growth of 3% - 3.5% per annum over the five year model period. A terminal value has been determined at the end of the five year strategic plan using a growth rate of 3% (2010: 3%), which is no greater than the long term average growth rate for the market to which the assets are dedicated. Based on this assessment assets are impaired by $16.592 million and in accordance with Accounting Standards the impairment was allocated against goodwill Consolidated 2011 $'000 2010 $'ooo 800 800 I 4 Derivative financial instruments Current assets Forward foreign exchange contracts - cash flow hedges (rr) Total current derivative financial instrument assets Current liabilities lnterest rate swaps - cash flow hedges (r) Forward foreign exchange contracts - held for trading (ør) Total current derivative fìnancial instrument liabilities Non-current liabilities lnterest rate swaps - cash flow hedges (i/ Total non-current derivative flnancial instrument liabilities Total derivative fìnancial instrument liabilities Net derivative financial instrument liabilities -33- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) l4 Derivative financial instruments (continued) The Group is party to derivative flnancial 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 31). (i) lnterest rate swap contracts - cash flow hedges Bank loans of the Group at 30 June 2011 bear an average variable interest rate of 5.O1o/" (2010: 4.75%). lt 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. lnterest rate swaps in place at 30 June 20'l 1 cover approximately 83% (2010: 100%) of the loan principal outstanding and are taken out with terms of between three and seven years. The fixed interest rates average 6.2% (2010:6.2%). 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. 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 or loss when the hedged item is derecognised. ln the year ended 30 June 2011 a loss of $40,000 was reclassifìed into profit or loss (2010: gain of $66,000) and included in fìnance cost due to hedge ineffectiveness in the current or prior year and a gain of $1,176,000 was reclassified into profìt or loss (20'1 0: $1,998,000) to offset net interest expense paid (ii) Forward foreign exchange contracts - cash flow hedges The Group purchases goods and materials from overseas, principally in US dollars. ln 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. 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 201 1 a gain of $8,000 was recognised in profit or loss for the ineffective portion of these hedging contracts (2010: loss of $1 1,000). (iii) Forward foreign exchange contracts and interest rate swaps - held for trading Group subsidiaries have entered into fon¡rard foreign exchange contracts which are economic hedges but do not satisfy the requirements for hedge accounting. These contracts are subject to the same risk management policies as all other derivative contracts, see note 31 for details. However, they are accounted for as held for trading. (a) Risk exposures and fair value measurements lnformation about the Group's exposure to credit risk, foreign exchange and interest rate risk and about the methods and assumptions used in determining fair values is provided in note 31 . The maximum exposure to credit risk at the end of each reporting period is the carrying amount of each class of derivative fìnancial assets mentioned above. -34- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) 15 Non-current assets classified as held for sale Plant and equipment Consolidated 2011 $'ooo 2010 $'000 2.702 As part of the restructuring of Orrcon, in May 2011 the Directors decided to close certain operations and assets previously used in manufacturing have been classifìed as held for sale. An active programme of marketing and selling the assets is undenaray. There are interested parties and the sales are expected to be completed during the financial year. The assets are presented within total assets of the Building and lndustrial segment in note 2.The losses on measuring the assets at fair value less costs to sell are presented within "impairment of property, plant and equipment" in note 5 and disclosed within note 11. l6 Current liabilities - Trade and other payables Consolidated 201'1 $'ooo 2010 $'000 Trade payables Amounts due to associates (note 28) Other trade payables and accrued expenses 54,162 993 43.516 98.671 76,813 134 51,101 128.048 (a) Risk exposure lnformation about the Group's exposure to foreign exchange risk is provided in note 3'1 . l7 Gurrent liabilities - Borrowings Bank overdrafts ** Short term money market Other loans Total current borrowings 1,5'12 5,000 321 6.833 Consolidated 2011 $'ooo 2010 $'000 1,384 1.384 "* Further information on the bank overdrafts and bills payable are set out in note 20. (a) Security and fair value disclosures lnformation about the security relating to each of the secured liabilities and the fair value of each of the borrowings is provided in note 20. (b) Risk exposures Details of the Group's exposure to risks arising from current and non-current borrowings are set out in note 31. -35- l8 Gurrent liabilities - Current tax liabilities lncome tax l9 Gurrent liabilities - Provisions Employee benefits Outstanding claims Other provisions Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) Consolidated 2011 $'ooo 2010 $'000 242 10,622 Consolidated 2011 $'ooo 2010 $'000 27,046 3,339 27,248 5,701 lnformation on non-current provisions is set out in note 21. Outstanding claims The provision for claims comprises the 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. 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. Other provisions 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: Provisionfor Outstanding dividend $'000 claims $'000 Other Provisions $'000 Total $'000 2011 Current & non-current Carrying amount at start of year Charged/(credited) to profìt or loss / retained earnings - additional provisions recognised - reductions from remeasurement or settlement without cost Amounts used during the year Carrying amount at end of year - 5,701 27,273 Q7.273\ (2,362) 3,339 692 269 (50) 911 4.250 -36- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 19 Current liabilities - Provisions (continued) Contingent Provision Outstanding Other consideration for dividend claims Provisions $'000 $'000 $'000 $'000 Total $'000 2010 Current & non-current Carrying amount at start of year Charged/(credited) to profÌt or loss / retained earnrngs - additional provisions recognised - reductions from remeasurement or settlement without cost Amounts used during the year Dividend foregone - SIP Carrying amount at end of year 20 Non-current l¡ab¡lities - Borrowings Unsecured Bills payable Other loans Loans from non-controlling interests Total unsecured non-current borrowings Total non-current borrowrngs (a) Bank loans and bank overdraft Bank ove¡drafts 400 550 5,751 799 7,500 - (400) - 24,362 (24,1ee) (713) - (65) (42) - 692 24,362 (515) (24,241) (713) 6,393 (50) 5,701 Consolidated 2011 $'000 2010 $'000 90,000 1,458 21 91.479 105,000 663 21 105.684 91,479 105,684 Bank overdrafts are denominated in both AUD and NZD. The bank overdraft of a controlled entity is secured by a guarantee from the Company. lnterest 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 (2010: $1 ,000,000) and the Company's New Zealand subsidiary has a separate bank overdraft facility of $1 ,737,000 (2010: $1 ,828,000). 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 AUD and NZD. 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. The bank loan facility of a controlled entity is secured by a guarantee from the Company, to the extent of the Company's ownership interest. An assessment of the contractual maturities of fìnancial liabilities is provided in note 31. Standby letter of credit The standby letter of credit facility forms part of the multi option facilities negotiated with the Group's bankers. Shotl-te rm money ma¡ket Borrowings on the short-term money market are denominated in AUD. lnterest on the borrowings is charged at the prevailing market rates. -37- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 20 Non-current l¡ab¡lities - Borrowings (continued) (b) Financingarrangements 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 Short term money market Unused at balance date Bank overdrafts Unsecured bank loans Standby letters of credit Short term money market (c) Fair value The carrying amounts and fair values of borrowings at the end of reporting period are Consolidated 2011 $'000 2010 $'000 4,437 207,088 10,869 5.000 227.394 '1,512 90,000 10,439 5.000 2,828 218,169 6,831 5.000 232.828 1,384 105,000 6,831 106.95r 113.215 2,925 117 ,088 430 1,444 1 1 3,1 69 5'000 120.443 1 19,613 - Gonsolidated Non-tra ded fi n an ci al Ii ab il itie s Bank overdrafts Short term money market Bills payable Other loans (d) Risk exposures 2011 Carrying amount Fair value $'000 $'000 2010 Carrying amount Fair value $'000 $'000 1,512 5,000 1,512 5,000 1,384 1,384 105,000 684 107,068 lnformation about the Group's exposure to interest rate and foreign currency changes is provided in note 31. For an analysis of the sensitivity of borrowings to interest rate risk and foreign exchange risk refer to note 31. -38- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) Gonsolidated 2011 $'ooo 2010 $'000 6,237 6,122 2011 Shares'000 2010 Shares'000 2011 $'ooo 2010 $'000 248.636 247,697 306.790 306,595 Details Number of shares'000 $'OOO 21 Non-current liab¡lities - Provisions Employee benefìts Other provisions Movements in provisions are set out in note 19. 22 Contributed equity (a) Share capital Ordinary shares Fully paid (b) Movements in ordinary share capital: Date 1 July 2009 Opening balance lssued under the capital raising lssued under the Share Purchase Plan lssued under the Dividend lnvestment Plan lssued under the Share lnvestment Plan lssued under the Employee Share Bonus Plan Less: Transaction costs arising on share issue 30 June 2010 Balance 1 July 2010 Opening balance lssued under the Employee Share Bonus Plan Less: Movement in deferred tax asset relating to transaction costs arising on share issue 30 June 201 1 Balance (c) Ordinary shares 204,601 29,185 11,956 674 382 899 248,598 40,859 16,738 1,255 373 (,228\ 247,697 306,595 247,697 306,595 375 939 (1 80) 248.636 306.790 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. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (d) Dividend investment plan and share investment plan The Dividend lnvestment Plan and the Share lnvestment Plan did not operate in respect of dividends issued during the financial year. -39- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 22 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 meet¡ng the service criteria were eligible to participate in the issue. The shares are issued at market value. (f) Executive Shares, Performance Rights and Options lnformation relating to the Long Term lncentive Share Plan and the Executive Share Plan, including details of Performance Rights and options issued, exercised and lapsed during the financial year and Performance Rights and options outstanding at the end of the fìnancial year, is set out in note 26. (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 benefìts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. ln 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 201 1, the Group's strategy, which was unchanged from 2010, was to maintain a target gearing ratio less lhan 45o/o. The gearing ratios at 30 June 2011 and 30 June 2010 were as follows: Total borrowings Less: cash and cash equivalents Net debt Totalequity Gearing ratio Gonsolidated 2011 $'000 2010 $'000 98,312 (7.1s8) 107,068 (56,915) 91,154 402,307 50,1 53 496,499 22.7olo 10.1o/o The increase in the gearing ratio during 2011 resulted primarily from lower levels of cash generated from operations and the decrease in total equity, due to the impairment of assets recorded. 23 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 -40- Gonsolidated 2011 $'000 2010 $'000 47,041 (1,304) 11,954 (2,2121 647 1,219 57.245 35,634 (265) 12,019 (1,653) 613 1.551 47.899 Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 23 Reserves (continued) Movements: Asset revaluation reserve Balance 1 July Revaluation - gross Deferred tax Transfer (to) / from retained earnings Transfer to asset realisation reserve Balance 30 June Hedging reserve - cash flow hedges Balance 1 July Revaluation - gross Deferred tax Balance 30 June Assef reallsa ti on re se ¡ve Balance 1 July Transfer from asset revaluation reserve Transfer (to)/from retained earnings Balance 30 June F o re ign cu rre ncy trans I ation rese rue Balance 1 July Currency translation differences arising during the year Disposal of foreign subsidiary Transfer (to)/from retained earnings Balance 30 June Eq u ity com pen sati on rese tve Balance I July Long Term lncentive Share Plan and Executive Share Option Plan expense Balance 30 June 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 2011 $'ooo 201 0 $'000 35,634 12,814 (3,757) 2,350 47.04'1 35.634 (265) ('l,4841 230 (707) 12,019 (165) 1 1.854 2,825 9,194 12.019 (l,653) (722Ì. (27l. 190 e.2121 613 34 647 (1,e71) 269 49 (1,653) 583 30 613 1,551(332) 1,219 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). -41- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) 23 Reserves (continued) (ii) Hedging reserve - cash flow hedges The hedging reserve is used to record changes in the fair value of derivative fìnancial instruments designated in a cash low 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 reseNe 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 proflt or loss when the net investment is disposed of. (v) Equity compensation reseNe The equity compensation reserve represents the value of Performance Rights and 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 Performance Rights and 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. 24 Dividends (a) Ordinary shares Final dividend for the year ended 30 June 2010 of 5.5 cents (year ended 30 June 2009: 2.0 cents) per fully paid share paid on 27 September 2010 (year ended 30 June 2009: 23 November 2009) Fully franked based on tax paid @ 30% Final dividend foregone for Share lnvestment Plan lnterim dividend for the year ended 30 June 201 I of 5.5 cents (2010: 7.0 cents) per fully paid share paid on 21 March 2011 (2010:3 March 2010) Fully franked based on tax paid @ 30o/" Total dividends provided for or paid (b) Dividends and share reinvestment plan Consolidated 2011 $'000 2010 $'000 13,623 13,623 4,917 (713) 4,204 13.650 27.273 17 .319 21.523 The Dividend lnvestment Plan and Share lnvestment Plan will not operate in respect of the proposed final dividend. -42- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 24 Dividends (continued) Consolidated 2011 $'000 2010 $'000 (c) Dividends not recognised at the end of the reporting period ln addition to the above dividends, since year end the Directors have recommended the payment of a fìnal dividend of 4.5 cents per fully paid ordinary share (2010: 5.5 cents) fully franked based on tax paid al30%. The aggregate amount of the proposed dividend expected to be paid on 26 September 2O11 out of retained profits at 30 June 2011, but not recognised as a liability at year end, is 11.189 13.623 (d) Franked dividends The franked portions of the fìnal dividends recommended after 30 June 201 1 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 2012. Franking credits available for subsequent fìnancial years based on a tax rate of 30% (2010:300/o) 32.713 41.240 2011 $'000 2010 $'000 franking credits that will arise from the payment of the amount of the provision for income tax; The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: (a) (b) (c) 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 the end of the reporting period, but not recognised as a liability at the reporting date, will be a reduction in the franking account of $4,795,000 (2010: $5,838,000). 25 Earnings per share Consolidated 2011 Cents 2010 Cents (a) Basic earnings per share From (loss)/profit from continuing operations attributable to the ordinary equity holders of the Company From profit from continuing operations before unusual / significant items attributable to the ordinary equity holders of the Company (b) Diluted earnings per share From (loss)/profit from continuing operations attributable to the ordinary equity holders of the Company From profìt before unusual / significant items attributable to the ordinary equity holders of the Company (30.2) 10.2 (30.2) 10.2 16.7 16.7 16.7 16.7 -43- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 25 Earnings per share (continued) (c) Reconciliations of earnings used in calculating earnings per share Consolidated 201',l $'000 2010 $'000 Basic eamings per share (Loss) / profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share (74.955) 40.188 Diluted eamings per share (Loss) / profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share (74.955) 40,188 Basic eamings per share before unusual / significant items (Loss) / profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share (74,955) 40,1 88 Adjusted for unusual / significant items: lmpairment of Orrcon plant and equipment lmpairment of Orrcon inventory lmpairment of Orrcon goodwill lmpairment of Team Poly plant and equipment lmpairment of Team Poly goodwill Closure costs 24,235 5,127 49,590 1,224 16,592 3.474 Profit attributable to the ordinary equity holders of the Company before unusual / significant items used in calculating basic earnings per share 25.287 40,188 (d) Weighted average number of shares used as the denominator Consolidated 2011 2010 Number'000 Number'000 Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Effect of share options on issue Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 248,',171 240,481 523 248.171 241.004 -44- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 26 Share-based payments ln 2010 the Group established the Hills Holdings Limited Long Term lncentive Share Plan (LTIP). The Plan is designed to provide long term incentives to eligible senior employees in the Company and entitles them to acquire shares in the Company, subject to the successful achievement of performance hurdles related to earnings per share (EPS) and total shareholder returns (TSR). Under the plan, eligible employees are offered Performance Rights, which enables the employee to acquire one fully paid ordinary share in the Company for no monetary consideration, once the Performance Rights vest. The conditions attached to the Performance Rights are measured over the three year period commencing at the beginning of the financial year in which the Performance rights are granted. lf the performance conditions at the end of the three year period are met, in whole or in part, all or the relevant percentage of the Performance Rights will vest. The previous plan, the Executive Share Option Plan (ESOP), which is still operational for employees granted options under that plan, was established in 1997. The share option plan entitled selected senior managers to acquire shares in the Company subject to the successful achievement of performance targets related to improvements in total shareholder returns. The shares issued pursuant to these options are financed by an interest free loan from the Company repayable within twenty years from the proceeds of dividends declared by the Company. These loans are of a non-recourse nature. For accounting purposes these 2O-year loans are treated as part of the options to purchase shares, until the loan is extinguished at which point the shares are recognised. ln relation to the previous 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 Performance Rights and Options under the current and previous scheme are as follows: Grant date / Exercise date Consolidated - 2011 Current Plan - LTIP April 2011 Previous Plan - ESOP Feb 2001 I Jan2003 Feb2002l Jan2004 Feb 2003 I Jan2005 Feb 2004 / Jan 2006 Feb 2005 I Jan2007 Feb 2008 I Jan2011 Feb 2009 I Jan2012 Total Balance at Granted Expiry Exercise start of the during the date price year Forfeited / Exercised lapsed Balance at during the during the end of the year year year Number Number Number Number Number year June 2013 $- 209,740 209,740 Jan2023 Jan 2024 Jan2025 Jan2026 Jan 2027 Jan 2031 Jan2032 $2.50 50,000 $2.90 53,000 $3.23 80,000 $3.66 135,000 $4.16 205,000 $5.49 445,000 $3.01 525,000 50,000 53,000 80,000 (10,000) 125,000 (10,000) 195,000 (445,000) (1 10.000) 415,000 1.493.000 209.740_______-________ (575,000) 1.127.740 - - - Weighted average exercise price (Executive Share Option Plan) - - $3.96 $- $- $4 96 $3.33 -45- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 26 Share-based payments (continued) Grant date / Exercise Date Balance at Expiry Exercise start of the date price year Number Forfeited / Granted Exercised lapsed Balance at during the during the during the end of the year year Number Number Number Number year year Consolidated - 2010 Feb 2001 / Jan 2003 Feb 2002 I Jan 2004 Feb 2003 I Jan2005 Feb 2004 / Jan 2006 Feb 2005 I Jan2007 Feb 2008 I Jan2011 Feb 2009 I Jan2012 Total (5,000) 50,000 Jan 2023 $2.50 55,000 (5,000) 53,000 Jan 2024 $2.90 58,000 (10,000) 80,000 Jan 2025 $3.23 90,000 Jan 2026 $3.66 145,000 (10,000) 135,000 Jan2027 $4.16 215,000 (10,000) 205,000 Jan 2031 $5.49 455,000 (10,000) 445,000 Jan 2032 $3.01 525,000 ________________ ________________ ________________ 525.000 1,543,000 Weighted average exercise price $3.95 $- $- $3.85 $3.96 Details of options outstanding under accounting standards are as follows: Grant Date Consolidated -2011 February 2001 February 2002 February 2003 February 2004 February 2005 February 2008 February 2009 Total Consolidated - 2010 February 2001 February 2002 February 2003 February 2004 February 2005 February 2008 February 2009 Total Outstanding Outstanding Options at balance at balance granted date AIFRS date ASX Number Number Number 195,000 245,000 280,000 370,000 460,000 625,000 535,000 2,710.000 50,000 53,000 80,000 125,000 195,000 415,000 415,000 918,000 415,000 195,000 50,000 245,000 s3,000 280,000 80,000 370,000 135,000 460,000 205,000 625,000 445,000 445,000 535,000 525,000 525,000 2.710.000 1,493,000 970.000 -46- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 26 Share-based payments (continued) Fair value of Pe¡'formance Rights granted The share price used to calculate the number of Performance Rights issued to the Managing Director and Senior Executives was $2.31237, being the volume weighted average price of the Company's shares for the ten trading days commencing on the day after the announcement of the Company's full year financial results for the year ended 30 June 2010. The fair value assessed in accordance with AASB 2 Share Based Payment at grant date of Performance Rights granted during the year ended 30 June 201 1 was 90.5 cents per Performance Right. The fair value at grant date is independently determined using a Monte Carlo valuation methodology that takes into account the exercise price, the expected life and vesting period of the Performance Right, the share price at grant date and expected price volatility of the underlying shares, the expected dividend yield, the risk free interest rate for the term of the Performance Rights and the volatility of the ASX 200 lndustrials lndex. The model inputs for the valuation of Performance Rights in accordance with AASB 2 Share Eased Payment for Performance Rights granted during the year ended 30 June 2011 included: (a) (b) (c) (d) (e) (f) (S) (h) (i) exercise price: $0.00 vesting period: 3 years grant date (for Accounting Standards) .28 April2011 expiry date: 30 June 2013 share price at grant date: $1.53 expected price volatility of the Company's shares: 35% expected dividend yield:8.7% risk-free interest rate:5.01% volatility of index: 17% (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: Consolidated 2011 $'000 2010 $'000 Performance Rights / options issued under executive long term incentive plan / share option plan Shares issued under employee share scheme 53 425 478 49 418 467 -47- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 27 Key management personnel disclosures (a) Directors The following persons were Directors of Hills Holdings Limited during the fìnancial year and unless otheruvise indicated were Directors for the entire period: (¡) Chairman - non-executive Jennifer Helen Hill-Ling (ii) ExecutiveDirectors Graham Lloyd Twartz (Group Managing Director) (¡ii) Non-executive Directors Fiona Rosalyn Vivienne Bennett lan Elliot Roger Baden Flynn Geoffrey Guild Hill (retired 24 April2011) David Moray Spence (appointed 1 September 2010) Peter William Stancliffe There were no changes in Directors since the end of the financial year and prior to the date when the financial report is authorised for issue. (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 fìnancial year and unless otherwise indicated were key management personnel for the entire period: Name L Andrewartha S Cope Position Managing Director CEO Orrcon Operations Pty Ltd Employer/ Division Hills Holdings Limited / Electronics and Communications D Edgecombe R Gros A Kachellek D Lethbridge M McKinstry K Middleton A Muir T Sullivan Hills Holdings Limited / Lifestyle and Sustainability General Manager Business Development Hills Holdings Limited (untill November2010) Group General Manager (until 4 March 2011) Managing Director Company Secretary Chief Operating Officer (from 6 June 2011) CEO Chief Financial Officer Group General Manager Strategy (from 11 October2010) Hills Holdings Limited Hills Holdings Limited Hills Holdings Limited Hills Holdings Limited Korvest Ltd Fielders Australia Pty Ltd All of the above persons were key management persons during the year ended 30 June 201 1 , except for T Sullivan, who commenced employment with the Group on 11 October 2010, M McKinstry, who commenced employment with the Group on 6 June 2011 , D Edgecombe, who moved to a different position within the Group with effect from 1 November 2010 and R Gros, who resigned from the Group with effect from 4 March 2011. All of the above persons were also key management persons during the year ended 30 June 2010, except for D Lethbridge, who commenced employment with the Group on 6 January 2010,T Sullivan and M McKinstry. Since the end of the financial year A Muir resigned from the position of Chief Financial Officer on 7 July 2011 and G Logan was appointed Chief Financial Officer for the Group on 7 July 2011 with effect from 8 August 2011. -48- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 27 Key management personnel disclosures (cont¡nued) (c) Key management personnel compensation The key management personnel (KMP) compensation included in 'personnel expenses' in note 5 is as follows: Short{erm employee beneflts Post-employment benefi ts Long{erm benefits Share-based payments Consolidated 20'11 $ 2010 $ 345,549 74,082 37Jt94 4,335,545 4,134,474 344,880 18,349 26,095 4.792.370 4.523.798 lnformation 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 76 to 89. 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) Rights and options provided as remuneration Details of Rights and 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 Right or option is convertible into one ordinary share of the Company. Further information on the Rights and options is set out in note 26 and pages 86 to 91. Name Directors of Hills Holdinos Limited GL Twartz Other kev manaqement personnel of the Group L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge M McKinstry K Middleton A Muir T Sullivan Number of Rights granted durino the vear 2011 2010 Number of Rights / options vested durino the vear 2010 2011 118.926 21,623 ,a,rrt_ 10,811 21,62; 15,134 - | 60.000 60,000 10,000 No Rights or options were held by key management person related entities. (ii) Rights and options provided as remuneration and shares rssued on exercise of such Rights / options Details of rights / options provided as remuneration and shares issued on the exercise of such Rights / options, together with terms and conditions of the Rights / options, can be found in the Remuneration report on pages 79 to 80 and 86 to 89. (iii) Rights / option holdings The numbers of Rights / options over ordinary shares in the Company held during the fìnancial year by each Director of the Company and other key management personnel of the Group, including their personally related parties, are set out below. -49- 27 Key management personnel disclosures (continued) Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) Options Balance at lapsed / end ofthe Vested and forfeited year exercisable Unvested (60,000) 421,926 203,000 218,926 (60,000) 141,623 60,000 81,623 (60,000) 81,623 81,623 (25,000) (120,000) - - 10,81 1 - 10,81 1 (20,000) 46,623 (25,000) 80,000 20,000 15,134 - 46,623 60,000 15,134 Balance at Granted as start of the compen- yeil sation Exercised 363,000 118,926 of the Group 180,000 21,623 120,000 21,623 25,000 '120,000 - 10,81 1 45,000 21,623 105,000 - 15,134 Balance at Granted as start of the compen- year sation Exercised Options Balance at lapsed / end ofthe Vested and forfeited year exercisable Unvested 363,000 of the Group 180,000 120,000 25,000 120,000 45,000 105,000 363,000 203,000 160,000 180,000 60,000 120,000 120,000 120,000 25,000 25,000 120,000 120,000 - - - 45,000 105,000 20,000 45,000 85,000 2011 Name Directors of Hills Holdings Limited G Twartz Other key management personnel L Andrewatha S Cope D Edgecombe R Gros A Kachellek D Lethbridge M McKinstry K Middleton A Muir T Sullivan 2010 Name Directors of Hills Holdings Limited G Twartz Other key management personnel L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge K Middleton A Muir (¡v) Share holdings The numbers of shares in the Company held during the financial year by each Director of Hills Holdings 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 lnternational 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 (2010.1,188,918) shares owned by Hills Associates & Poplar Pty Ltd (ointly held) and 13,455,689 (2010: 13,455,689) shares owned by Hills Associates Ltd, of which J H Hill-Ling is a Director. Other changes during the year for JH Hill-Ling are a consequence of JH Hill-Ling ceasing to be one of a number of shareholders in a private company that is a trustee of a trust that holds voting shares in the Company. The transfer of the shares in the private company was part of the finalisation of an estate. There has been no change in the underlying benefìcial interest in the ownership of the Company's shares. JH Hill-Ling did not have a beneficial interest in those Company shares. Other changes during the year for G Hill comprises the removal of the disclosure of his shareholdings in the Company, as G Hill ceased to be a Director of the Company on24 April 201 1 -50- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 27 Key management personnel disclosures (cont¡nued) Granted during Received during Balance at the reporting year the year on the start ofthe as year Balance at exercise of Other changes the end of compensation Rights/options during the year the year 2011 2010 16,512,469 9,036 4,000 6,235 35,665 92,505 19,104 Name Directors of Hills Holdings Limited Ordinary shares J Hill-Ling G Twartz F Bennett I Elliot R Flynn G H¡II P Stancliffe D Spence Other key management personnel of the Group Ordinary shares L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge M McKinstry K Middleton A Muir T Sullivan 1,228 459 2,690 4,047 2,790 4,759 519 519 256 256 519 519 (1,694,798) (4,6e4) 14,817,671 4,342 4,000 6,235 35,665 (e2,505) 19,000 (2,e46) (4,303) 1 9,1 04 19,000 1,747 978 3,309 5,278 Granted during Received during Balance at the reporting year the year on the start of the as Balance at exercise of Other changes the end of year compensation options during the year the year Name Directors of Hills Holdings Limited Ordinary shares J Hill-Ling G Twartz F Bennett I Elliot R Flynn G H|II P Stancliffe 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 (e) Loans to key management personnel 16,343,161 8,486 4,449 31,740 87,953 17,115 411 - 421 1,802 520 2,514 459 459 459 459 459 459 459 - - - - - - - - _ _ - - 169,308 16,512,469 9,036 4,000 6,235 35,665 92,505 19,104 91 4,000 1,786 3,925 4,552 1,989 358 .l ,810 1,786 1,811 1,786 1,228 459 2,690 4,O47 2,790 4,759 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. -51- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 27 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 signiflcant influence over the financial or operating policies of those entities. There were no other transactions during the financial year with key management personnel and their related parties. There were no amounts receivable from or payable to key management personnel at reporting date arising from these transactions (201 0: $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. 28 Related party transactions (a) Parent entities The parent entity within the Group and the ultimate parent entity is Hills Holdings Limited. (b) Subsidiaries lnterests in subsidiaries are set out in note 33. (c) Key management personnel Disclosures relating to key management personnel are set out in note 27. (d) Transactions with other related parties The following transactions occurred with related parties: Subsrdranþs 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 within the Group, that eliminated with cost of goods sold and services provided amounted to $27,755,000 (201 o: $24,7 19,000). 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. lnter entity interest paid and received during the year was $431 ,000 (2010: $2,681 ,000). Entities within the Group rent properties to or from other entities within the Group at rentals that are market related. Property rentals within the Group during the year were $2,234,000 (2010: $2,223,000). Group entities charge an administration fee for services rendered which during the year was $11 ,967,000 (201 0: $10,451 ,000). lnter entity dividends paid and received during the year amounted to $13,236,000 (2010: $15,502,000). Key management persons related pafties For details of these transactions refer to key management personnel related disclosures in note 27. Other related pafties Contributions to superannuation funds on behalf of employees are disclosed in note 5. -52- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) 28 Related party transactions (continued) (e) Loans to/from related parties Subsrdranes Group entity trading transactions and borrowings result in balances arising in respect of current and non-current assets and liabilities. At 30 June 201 1 the Group current assets and liabilities that were eliminated were $258,907,000 (2010: $272,047,O00) and the Group non-current assets and liabilities that were eliminated were $426,000 (2010: $441,000). Other related pafties Loans (from) / to associated entities amounted to ($993,000) (2010: ($134,000)). 29 Contingent liabilities (a) Gontingentliabilities The Group had contingent liabilities at 30 June 2O11 in respect of: (i) CIaims Responding to a request from the Environmenlal Protection Authority, the extent of groundwater contamination potentially originating from the Company's former Edwardstown site is being assessed by the Company. The Company has provided for the anticipated cost of ongoing assessment. At this time the possibility of or cost of potential claims is unknown and no provision has been made. (ii) Guarantees (a) Letters of credit established in favour of suppliers / creditors amounting to $10,439,000 (2010: $6,831,000). (b) Bank guarantees in favour of customers and suppliers amounting to $19,302,000 (2010: $18,557,000). The Group has various commercial legal claims common to businesses of its type which constitute contingent liabilities, no one of which is material to Hills' fìnancial position. The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifìce of economic benefìts will be required. (b) Contingent assets There are no contingent assets where the probability of future receipts is not considered remote. 30 Gommitments (a) Capitalcommitments Capital expenditure contracted for at the end of each reporting period but not recognised as liabilities is as follows: Consolidated 2011 $'ooo 2010 $'ooo Property, plant and equipment Payable: Within one year (b) Lease commitments: Group as lessee 12.938 9.129 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 the consumer price index, local capital city consumer price indices or a fixed percentage. -53- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 30 Commitments (continued) 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 2011 $'ooo 2010 $'000 25,557 22,408 55,904 6',1,249 37.429 32.096 124.235 110.408 (c) Lease commitments: where a Group company is the lessor The future minimum lease payments receivable under non cancellable operating leases are as follows: Consolidated 2011 $'000 2010 $'000 Within one year Later than one year and not later than five years 3l Financial risk management 143 143 944 157 1,101 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 identifìes, 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 lnvestments Financial liabilities Trade and other payables Borrowings Derivative fi nancial instruments 7,159 184,042 2 191.202 98,671 98,312 2.576 199.559 -54- Gonsolidated 2011 $'ooo 2010 $'000 56,915 186,002 800 2 243.719 128,048 107,068 2.944 238,060 Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 3l Financial risk management (continued) (a) Market risk (¡) Foreign exchange risk 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 The Group Treasury's risk management policy is to hedge approximately three months of anticipated cash flows (mainly purchases of inventory) in US dollars. The Group's exposure to foreign currency risk at the reporting date, was as follows: USD $'000 30 June 201 I NZD euro $'000 '000 30 June 2010 JPY USD NZD euro '000 $'000 $'000 '000 JPY '000 Trade receivables Cash at bank Bank loans Trade payables Fonryard exchange contracts - buy foreign currency (cash flow hedges) Forward exchange contracts - buy foreign currency (FVTPL) Group sensitivity 1,052 35 (12,933) 5,699 3 (1,958) (3,080) (31,514) (1,096) - -30 933 6,509 tr oãl (66,57;) t¿,sg8l (1,704) (1,e04) raõr (2,350) (2e,460) (875) Based on the financial instruments held at 30 June 2011,had the Australian dollarweakened / strengthened by 10% against other currencies with all other variables held constant, the Group's pre-tax profit for the year would have been $1,130,000 lower / $918,000 higher (2010: $13,000 higher/$5,000 lower), 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 more sensitive to movements in the Australian dollar / US dollar exchange rates in 201 1 than 2010 because of the increased amount of US dollar denominated trade creditors. Other components of equity would have been $2,856,000 higher / $3,077,000 lower (20'10: $3,813,000 higher / $3,125,000 lower) had the Australian dollar weakened / strengthened by 10% against the US dollar, arising from forward foreign exchange contracts designated as cash flow hedges. (i¡) Price isk 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 enler 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 2011 and 2010, the Group's borrowings at variable rate were denominated in Australian Dollars and NZ Dollars. -55- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 31 Financial risk management (continued) The Group manages its cash flow interest rate risk by using floating{o-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 fìxed 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 specifìed intervals (mainly quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional principal amounts At the end of the reporting period the interest rate profìle of the Group's variable rate borrowings and interest rate swap contracts was: Consolidated Bank overdrafts and bank loans Cash and cash equivalents Other loans lnterest rate swaps (notional principal amount) An analysis by maturities is provided in (c) below. Sensitivity 30 June 201 I 30 June 2010 Weighted average interest rate ot TO Balance $'000 Weighted average interest rate o/o Balance $'000 5.3% 4.3% 3.9% 6.2% (96,512) 7,158 (1,2811 75.000 4.8o/o (106,384) 44% 56,915 - o/o 6.2% 105.000 At 30 June 20111 , rt 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 profìt for the year would have been $946,000 higher / $1,839,000 lower (2010: $547,000 higher / $1,064,000 lower), mainly as a result of higher / lower interest income from cash and cash equivalents and higher / lower interest expense from borrowings. Other components of equity would have been $1,733,000 higher / $909,000 lower (20'l 0: $2,466,000 higher / $2,064,000 lower) mainly as a result of a decrease in the fair value of the cash flow hedges of borrowings. (iv) Summaised sensitivity analysis The following table summarises the sensitivity of the Group's fìnancial assets and fìnancial liabilities to interest rate risk and foreign exchange risk. Consolidated 30 June 201 1 Financial assets Cash and cash equivalents Trade and other receivables Total ¡ncrease/(decrease) in financial assets Financial liabilities Derivatives - cash flow hedges Derivatives - fair value through profit or loss Trade and other payables Borrowings Total increase/(decrease) in financial liabilities Total increase/ (decrease) lnterest rate risk -1 00bps +1 00bps Foreign exchange risk +'lOVo -10o/o Amount Profit Equity Profit Equity Profit Equity Profit Equity $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 7,158 184.042 1s 19 - - (re) (19) 5-(4) ø94\ - (6) (3,077) (2,474) (93r ) (102) (98,671) ß8.312\ ß2n _ (909) 38 1 ,733 (1) 2,856 158 (1 ,723) (168) - - (129) 1 ,410 927 - 137 _____________:_ (1,858) (909) 965 1.733 (.734\ 2.856 1.412 (3.077\ (1,839) (909) 946 1.733 (1.130) 2.856 918 (3,077) -56- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 3l Financial risk management (continued) Consolidated 30 June 2010 Financial assets Cash and cash equívalents Trade and other receivables Derivatives - cash flow hedges lnterest rate risk -1 00bps +1 00bps Foreign exchange risk -1Ùo/o +1oo/o Amount Profit Equity Profìt Equity Profit Equity Profit Equity $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 56,915 186,002 800 Total increase/(decrease) in financial assets 569-(569)-729 3 813 1591ì t3 1251 Financial liabilities Derivatives - cash flow hedges Derivatives - fair value through profit or loss Trade and other payables Borrowings Total increase/(decrease) in financial liabilities Total increase/ (decrease) (b) Credit risk (2,e32) (569) (2,064) 52 2,466 (12) (128,048) (107.068) (1 ,064) - 201 (763) - - (164) 624 1,064 ___________:_ (154) ___________:_ 126 _____________:_ (1.633) (2,064) 1.116 2.466 __(Zl_Ù í.064) (2,0641 547 2.466 13 3.813 (5) (3.125) ----5€0- - Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, favourable derivative financial instruments 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. ln 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 fìnancial diffìculties. ln 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. Depending upon the Group's assessment of industry or company risk, the Group requires personal guarantees from customer company directors and charging clauses over real property. 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 specifìc 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 identifÌed. The collective loss allowance is determined based on historical data of payment statistics for similar fìnancial assets. The ageing 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 fìnancial 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 profilesoffinancial assetsandliabilities. Duetothedynamicanddiversifiednatureoftheunderlyingbusinesses,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. -57- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 3l Financial risk management (continued) The Group has multi option financing facilities totalling $225,000,000 (2010: $225,000,000) of which $65,000,000 has been approved until 30 June 2013, a further $80,000,000 has been approved until 30 July 2013 and the remainder of the facility has been approved until 30 November 2013. For more information please refer to note 20 (bank loans and standby letters of credit). Matuities of financial liabilities The tables below analyse the Group's financial liabilities including derivative fìnancial 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. Gontractual maturities of financial liabilities Less than 6 months Consolidated - at 30 June 2011 $'000 6 - 12 Between I Between 2 Over 5 Total Carrying years contract- Amount months and2 ual cash (assets)/ flows liabilities $'000 $'000 $'000 $'000 $'000 $'ooo yeañs years and 5 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non-derivatives Derivatives Net settled (interest rate swaps and forward exchange contracts) Consolidated - at 30 June 2010 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non-derivatives Derivatives Net settled (interest rate swaps and forward exchange contracts) (d) Fair value measurements Fair value measurement hierarchy 98,671 8,935 2,256 212 108.226 2.468 620 425 48,781 45,188 177 49,206 45,365 519 99,190 99,190 - 105,160 96,512 1.434 - 1,281 519 205.784 196,983 781 343 624 463 2.211 2.576 128,048 3,905 2,491 64p8; 46,02; uu1 128,732 128,732 117,405 106,384 13'1,953 2.491 64.982 46.027 684 246.137 235.116 (43\ 595 851 1,300 ø7\ 2,556 2.144 AASB 7 Financial lnstruments: Drsc/osures requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) (b) (c) Level I - 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 financial liabilities measured and recognised at fair value at 30 June 2011 and 30 June 2010. -58- 3l Financial risk management (continued) At 30 June 201 I Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities At 30 June 2010 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) Level I $'000 Level 2 $'000 Level 3 $'ooo Total $'000 2.576 2.576 2.576 2.576 Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'ooo 800 800 2.944 2.944 The fair value of financial instruments that are not traded in an active market (for example derivatives used for hedging) is determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specifìc estimates. All signifìcant inputs required to fair value derivatives used for hedging are observable, and hence the instruments are included in level 2. 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. 32 Business combinat¡on Current period There were no acquisitions of subsidiaries or business operations in the current reporting period. Prior 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: -59- Hills Holdings Limited Notes to the consolidated financial statements 30 June 2011 (continued) 32 Business combination (continued) Purchase consideration Cash paid Total purchase consideration Fair value of net identifiable assets acquired (refer to (b) below) Goodwill (b) Assets and liabilities acquired The assets and liabilities recognised as a result of the acquisition are as follows: lnventories Property, plant and equipment 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 Outflow of cash - investing activities Ac q u i s iti o n -relafed cosfs 3.558 Consolidated 2011 $'000 2010 $'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. -60- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) 33 Subsidiaries (a) lnvestments in subsidiaries The consolidated flnancial 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 Country of incorporation Class of shares Equity holding 20'|'1 of to 2010 % Hills Finance Pty Ltd Hills lndustries NZ Limited Korvest Limited (i) (note (b)) Hills Hoists Pty Ltd Bailey Aluminium Products Pty Ltd Australia New Zealand Australia Australia Australia Zen 99 Pty Ltd Hills lndustries Pty Ltd (formerly Triton Manufacturing & Design Co Pty Ltd) Orrcon Holdings Pty Ltd Fielders Mobile Mill Pty Ltd Orrcon Operations Pty Ltd Orrcon Tubing Pty Ltd Australia Registered branch in ACN 089 622 622 Pty Ltd (formerly Triton Workshop United Systems (UK) Pty Ltd) Kingdom Woodroffe lndustries Pty Ltd Australia Fielders Australia Pty Ltd Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Team Poly Pty Ltd KDB Engineering Pty Ltd Kerry Equipment (Aust) Pty Ltd Step Electronics 2005 Pty Ltd (i) Greenwattle lnvestments Pty Ltd Access Scaffolding (Aust) Pty Ltd Greenwattle Equipment Pty Ltd ACN 095 224 O34 Pty Ltd (formerly Alquip (Holdings) Pty Ltd) ACN 009 696 084 Pty Ltd (formerly Alquip Pty Ltd) Access Television Services Pty Ltd Techlife Solutions Pty Ltd (shelved) Audio Telex Communications Pty Ltd Crestron Control Solutions Pty Ltd Pathfìnder (Edwardstown) Pte Ltd (liquidated) Hills Nominees Pty Ltd DAS Security Wholesalers Pty Ltd Pacifìc Communications (PACOM) 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 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 100 100 49 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 50 51 100 50 100 100 46 100 100 100 100 100 100 100 100 100 100 r00 100 't00 100 100 100 100 100 50 100 100 '100 100 100 100 100 100 100 100 100 100 50 51 100 50 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. -61- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) 33 Subsidiar¡es (continued) (b) Transactions with non-controlling interests On 23 August 2010, the Group increased its shareholding in Korvest Ltd from 45.9Yo to 48.8% through an on market acquisition of 250,000 shares at $4.56. The total consideration paid was $1.143 million. ln the previous flnancial year, on 16 November 2009, the Group increased its shareholding in Fielders Australia Pty Ltd from 60% lo 74.9% through a rights issue and conversion of debt to equity. The consideration paid was $19.955 million. On 6 April 2010 the Group acquired the remaining25.1% of Fielders Australia Pty Ltd by way of a $10.0 million selective share buy back. 2011 $'ooo 2010 $'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 811 nJ'ßl (332) 11,551 (10,000) 1.551 34 Parent ent¡ty financial information (a) Summary financial information The individual financial statements for the Company show the following aggregate amounts: Company 2011 $'000 2010 $'000 340,124 359,661 272.425 260,983 612.549 620.644 137,846 98.641 236.487 142,551 1 13,480 256,031 306,790 306,595 45,034 (1,303) I,855 620 23.066 37,517 (265) 1,855 592 18,319 376.062 364,613 32.020 38.497 32.711 32,216 Statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Shareholders' equity Contributed equity Reserves Asset revaluation reserve Hedging reserve - cash flow hedges Asset realisation reserve Equity compensation reserve Retained earnings Total shareholder's equity Profit for the year Total com prehensive income -62- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 34 Parent ent¡ty financial information (continued) (b) Guarantees entered into by the Company Bank guarantees given by the Company in favour of customers and suppliers amounted to $8,723,000 (2010: 7,486,000). Cross guarantees are given by the Company and its wholly owned subsidiaries as described in note 35. 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 $260,277 ,000 (201 0: $289,252,000). No material deficiency in net tangible assets exists in these companies at reporting date with net tangible assets amounting to $296,171,000 (2010: $329,736,000). (c) Contingent liabilities of the Company The parent entity had a contingent liability in respect of claims, as disclosed in note 29. For information about guarantees given by the parent entity, please see above. (d) Contractual commitments for the acquisition of property, plant or equipment As at 30 June 2011, the Company had contractual commitments for the acquisition of property, plant and equipment totalling $8,479,000 (2010: $1 ,530,000). These commitments are not recognised as liabilities as the relevant assets have not yet been received. 35 Deed of cross guarantee Pursuant to ASIC Class Order 9811418 (as amended) dated 13 August 1998, the wholly-owned subsidiaries listed below are relieved from the Coryorations Act 2001 requirements for preparation, audit and lodgement of fìnancial reports, and Director's 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 lhe Coryorations Act 2001 . lÍ 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 lndustries Pty Ltd Hills lndustries Pty Ltd (Formerly Triton Manufacturing & Design Co Pty Ltd) Orrcon Operations Pty Ltd Orrcon Holdings Pty Ltd Greenwattle lnvestments 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 lnvestments 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. -63- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) 35 Deed of cross guarantee (continued) 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 lnvestments 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 Holdings Limited is the Holding Company and Pacom Security Pty Ltd is the Trustee under the Deed. 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 Holdings 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 201 I and a consolidated statement of flnancial position as at 30 June 2011 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, consolidated statement of comprehensive income and summary of movements in consolidated retained earnings 2011 $'ooo 2010 $'000 993,991 1,062,568 1,217 (3,566) fl.074.0171 (1,003,351) 2,873 (3,964) (81,1171 56,868 7.543 fl3.5741 (5.726\ 41.142 (73,574]- 41,142 12,250 ('l,4841 (3.230ì 7,536 (707) 212 (495) (66.038) 40.647 101,403 (73,574]. (s33) 64,954 40,044 Co n so I i dated i ncom e state m ent Revenue from continuing operations Other income Finance costs Other expenses (Loss)/profït before income tax lncome tax benefit / (expense) (Loss)/profit for the year Consolidated statement of comprehensive income (Loss)/profit for the year Other comprehensive income Gain on revaluation of land and buildings Changes in the fair value of cash flow hedges lncome tax relating to components of other comprehensive income Other comprehensive income/(loss) for the year, net of tax Total comprehensive (loss)/income for the year Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year (Loss)/profìt for the year Transfers to and from reserves 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 -64- Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) 35 Deed of cross guarantee (continued) (b) Gonsolidated statement of financial position 2011 $'ooo 2010 $'000 2,669 210,750 154,093 51,476 191 ,943 165,982 800 367.512 410.201 12,453 174,009 33,322 32.503 252.287 11,140 195,515 25,443 99.561 331.659 619,799 741 ,860 118,040 13,467 104 29,023 125,674 8,1 91 9,917 31,151 91,458 5,711 2.056 99.225 105,663 5,724 2.682 114,069 260.277 289.252 359.522 452,608 306,790 306,595 52,709 44,610 101 ,403 359.522 452,608 Current assets Cash and cash equivalents Trade and other receivables lnventories Derivative financial instruments Total current assets Non-current assets lnvestments Property, plant and equipment Deferred tax assets lntangible assets 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 fi nancial instruments Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Totalequity -65- 36 Reconciliation of (loss)/profit after income tax to net cash inflow from operating activities Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 1 (continued) (Loss)/profit for the year Depreciation and amortisation lmpairment 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 profìt or loss on disposal of subsidiary lmpairment of trade receivables lmpairment of inventories lmpairment of property, plant and equipment Rent received Amounts set aside to provisrons Change in operating assets and liabilities, net of effects from purchase of controlled entities and business operations: (lncrease)/decrease in trade and other receivables Decrease in inventories (lncrease)/decrease in deferred tax assets (Decrease)/increase in trade and other creditors (Decrease)/increase in provision for income taxes payable (Decrease) in other provrsrons Net cash inflow from operating activities 37 Remunerat¡on of auditors Consolidated 2011 $'000 (73,116) 23,079 66,182 478 (106) (l,054) (27l- 1,635 3,783 37,2',10 (860) 13,726 2010 $'000 43,095 23,913 395 467 (17e) (8,471) 49 3,336 3,836 1,680 (864) '16,833 (1 03) 9,508 (10,884) (29,648) (10,883) (15.940) 12.980 8,059 13,670 2,289 7,053 2,944 (16.557) 101 ,548 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 flnancial 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 non-audit services -bb- Consolidated 2011 $ 2010 $ 488,500 450,000 31.768 31,905 520.268 481,905 113,838 126,354 26.824 140.662 10.542 136,896 Hills Holdings Limited Notes to the consolidated financial statements 30 June 201 I (continued) 38 Events occurr¡ng after the report¡ng per¡od On 23 August 2011 the Company announced an on-market buy-back which will give Hills the option to acquire up to 10% of its issued ordinary shares. The buy-back is for ongoing capital management purposes and will take place over the twelve months from the date of the announcement. Apart from the matter noted above, no other matter or circumstance has occurred subsequent to year end that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. -67- Hills Holdings Limited Directors' report 30 June 201 1 Directors' report The Directors present their report on the consolidated entity (referred to hereafter as the Group or Hills) consisting of Hills Holdings Limited (the Company) and the entities it controlled at the end of, or during, the year ended 30 June 201 1, 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 lan Elliot Roger Baden Flynn Peter William Stancliffe Fiona Rosalyn Vivienne Bennett David Moray Spence was appointed as a Director on 1 September 2010 and continues in office at the date of this report. Geoffrey Guild Hill was a Director from the beginning of the fìnancial year until his retirement on 24 April 2011. Review of operations Overview The Hills Group of companies achieved an underlying profit after tax before unusual/signifìcant items from ordinary activities attributable to shareholders of $25.287 million, which was a 37.1o/o decline compared to the previous year's results. After recording a number of unusual impairment losses, comprising the impairment of goodwill and certain assets of Orrcon Steel and Team Poly, the loss after tax attributable to members was $74.955 million. A reconciliation of underlying profit to the reported loss after tax attributable to members is provided in note 25 to the financial statements. The year in review Despite generally satisfactory performances from many of the Hills business units, in particular those in the Lifestyle & Sustainability and Electronics & Communications divisions, very poor trading conditions in the building, construction and steel markets, and to a lesser extent, the DGTEC consumer electronics and Team Poly businesses, saw the Company produce a lower profit from ordinary activities before unusual / significant items this year. These unusual / signifìcant items are discussed later in this report. As a result of this reduced profìt the full year dividend of 10.0 cents per share fully franked was lower than the prior year by 2.5 cents per share. The Directors resolved to increase the percentage of the earnings of the Company to be paid as dividends to the top end of the targeted range, which is between 50% and 100o/o of profits. Whilst debt levels were increased during the year, the balance sheet remains conservatively geared with debt to equity at balance date of 22.7%. There were a number of highlights during the period, including: ¡ ¡ the introduction of a number of new products during the year in Hills' Electronics & Communications Division; the launch of a number of new products during the year in the traditional home hardware businesses, including a new range of clotheslines and ladders; increased profitability from Hills Electronic Security; the successful completion by OptiComm of projects in the fibre market that were undertaken with the National Broadband Network in Tasmania, the new Westfield property in Sydney and a record number of new greenfields project signings; gaining further contracts to provide digital television services under a Federal Government program in South Australia, Victoria and Queensland; the launch of Cygnus Satellite, a joint venture business which provides bandwidth to remote locations, including the mining sector; and an increase in Hills SVL's share of the sound vision and lighting markets. o ¡ r ¡ . Group strategy The Company's 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 diversiflcation in order to mitigate the impacts of short term changes to individual markets and economies. -68- Hills Holdings Limited Directors' report 30 June 201 I (continued) Review of operations (continued) Unusual items As a result of the well publicised diffìculties in the Australian steel industry and in the market for rain water tanks, the Directors have booked impairment write downs of $100.242 million after tax. Orrcon Steel As a result of losses incurred by Orrcon during the year and the increasing market share held by imports, the Directors reviewed the carrying value of the Orrcon business in line with accounting standards and announced a non-cash impairment of goodwill after tax of $49.590 million. ln addition, as a result of a deteriorating market for the pipeline industry, it was decided to close the large pipe and tube manufacturing business of Orrcon Steel at Unanderra. This closure was announced in May 2011 and resulted in non-operating costs of $30.0 million after tax, including after tax cash costs of $3.5 million. Team Poly Trading conditions in the water tank market continued to be depressed during the period as a result of above average rainfall across much of Australia and the continued lack of Government subsidies. There have been a number of insolvencies of water tank manufacturers and although management have continued to implement a number of profit improvement initiatives, which are expected to deliver profits in the future, the Directors reviewed the carrying value of the Team Poly business and announced a non-cash impairment of goodwill and fixed assets of $17.816 million after tax. Vision and values Hills cares about its people, its customers and the environment; Hills is a diversified company operating mainly in Australia and New Zealand. The Company's aim is to be recognised as a superior investment by delivering a portfolio of profìtable and growing businesses. The Company's values can be summarised as follows: o o . . lnnovation is Hills past, present and future - the lifeblood of the company; Hills invests the best of its time and talent to deliver on its promises. Hills is in many businesses but comes together as one team; Funding Hills net debt at 30 June 2011 was $91.2 million. Gearing, measured as debt to equity, stood at 22.7o/o al the end of the period. Hills bank facilities have been extended such that the earliest date for review of any of the debt facilities is June 2013. Hills continues to comfortably meet all of its banking covenants. Dividends The Directors have announced an annual dividend of 'l 0.0 cents per share. This dividend is fully franked and comprised an interim dividend of 5.5 cents per share paid in March 2011 and a final dividend of 4.5 cents per share to be paid in September 201 1 . This represents a payout ratio of slightly under 100% for the year. Given Hills strong balance sheet position, the Dividend Reinvestment Plans have remained suspended for both the interim and fìnal dividends. On market share buy-back Given Hills' low levels of debt and the current share price at below net asset backing, the Board resolved to undertake an on market buy-back of its issued shares. The announcement of the buy back gives Hills the option to acquire up to 10% of the issued Hills shares and will be earnings per share accretive and will not affect Hills' existing dividend policy. -69- Hills Holdings Limited Directors' report 30 June 2011 (continued) Review of operations (continued) Likely developments While future trading conditions are forecast to remain difficult in many of the markets in which Hills operates in Australia and New Zealand, Hills'strategy remains focused on growth sectors and investing in the Electronics & Communications Divison and those profitable businesses in the Lifestyle & Sustainability Division. The Group is currently evaluating a number of potential acquisitions, focussing on high growth markets. Hills has implemented a number of overhead reduction initiatives to reflect the current demand for its products and services to improve performance. The outlook for the commercial building and the steel industry remains subdued and increased competition from imports continues across those sectors. ln view of the above, and the current market volatility, the Company is unable at this time to provide specific profìt guidance for the year ending 30 June 2012. The recent appointments of Mike McKinstry as Chief Operating Officer and Grant Logan as Chief Financial Officer have strengthened the Company's senior management team, and will enable the Company to apply the resources and focus to the implementation of its strategic plans and restructuring initiatives. El ectron ics & Com m u n ication s The Electronics & Communications division comprises Hills Electronic Security, Hills Antenna & TV Systems, Hills Signalmaster, Hills Sound, Vision and Lighting, Access Television Services, Techlife, Step Electronics, UHS, OptiComm and Cygnus Satellite. The Division continues to produce the highest profit margins and return on assets employed within any of the Hills divisions. Revenue of $317.4 million was 9.2% below the previous year while the EBIT of $28.0 million was 13.8% below 2010. Hills Electronic Security . Hills Electronic Security comprises the market leading business operations of Pacific Communications, Direct Alarm Supplies and Ultra High Speed. Demand for security products remained at acceptable levels, although with the strength of the Australian dollar, selling prices continued to decrease across the period. This business unit markets an extensive range of electronic security products, ranging from simple domestic alarms to complex integrated surveillance and access control systems. o Although the level of large project work remained subdued, the business continued to release a range of new products made specifically for the Australian and New Zealand markets and has delivered an improved result for the year despite a lower profit from UHS as a result of poor export sales to the UK. Hills Antenna & TV Systems . Hills Antenna & TV Systems 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 DGTEC consumer electronic equipment. . . Demand from the subscription television and free-to-air television markets was good during the period. Furthermore, the business continues to look for opportunities as a result of the Australian Federal Government's decision to progressively shut down the analogue television signal. ln the previous year, the DGTEC range of consumer electronics experienced good growth and contributed to profit. The appreciation in the Australian dollar, price deflation and fierce competition adversely affected the DGTEC business during the year. As a result, this business produced a loss of $3.4 million (before tax). The business and its product range have been restructured to ensure that these losses are not repeated. Access Television Services ¡ Access Television Services (ATS) in Australia and Signalmaster in New Zealand provide subscription television installation services to AUSTAR and SkyTV respectively. Demand from subscription television providers, in particular AUSTAR, was strong in the second half. The Techlife Solutions business has been successful in winning further contracts to provide installation services to non-subscription television providers. . Of particular note was the successful conclusion to the Mildura, regional South Australia and regional Victoria Federal Government funded project to install digital television solutions for certain qualifying customers. ln addition, Techlife Solutions has won installation contracts in rolling out fibre to the home networks, including Stage 1 of the National Broadband Network in Tasmania. -70- Hills Holdings Limited Directors'report 30 June 201 I (continued) Review of operations (continued) Hills SVL . Hills Sound Vision and Lighting (SVL) is the leading provider of professional audio, lighting and control systems to a wide range of customers in Australia and New Zealand and to a number of export markets. SVL's results from its Australian and New Zealand operations during the period were pleasing on the back of a range of new products launched under the Crestron and Australian Monitor brands. Unfortunately, the key export markets of the USA and Europe were weak due to the strength of the Australian dollar and very weak demand as a result of poor economic conditions in those markets. We continue to look for acquisitions and complementary products to add to our range. OptiComm/Cygnus o Hills' strategy to expand its exposure to communications markets continued with the establishment of Cygnus Satellite, a new 50% joint venture to offer satellite bandwidth to rural and remote markets in Australia. This complements Hills' other 50% owned joint venture, OptiComm, which provides fibre to the node and fibre to the home in new housing developments. OptiComm's open platform offer is generally the preferred solution for customers and developers. The Company is forecasting improving profìtability as the number of homes connected continues to increase. OptiComm completed Stage 1 of the National Broadband Network's rollout in Tasmania and continues to operate the network operation centre for NBN Tasmania in Hobart. The business was pleased to sign a number of new greenfìelds estates to the OptiComm solution as a result of delays in the NBN offer. Also, during the period, OptiComm completed the fibre network in the new Westfield shopping centre in Pitt Street, Sydney. This was a fìrst for OptiComm and for the Australian retail shopping centre market. ln both cases, all costs associated with the start-up of operations have been expensed. As a result, Cygnus generated an EBIT loss of $0.8 million (before tax) in the period under review. These losses are not forecast to continue. Lifestyle & Sustai nabi lity The Lifestyle & Sustainability division comprises our branded Home and Hardware Products operations in Australia and New Zealand, the Hills Healthcare rehabilitation and mobility business, LW Gemmell plumbing supplies, Hills Solar and Team Poly. During the year revenue declined by 8.8% to $160.8 million and the division produced EBIT of $9.7 million, which was 5.3% below the prior year. Home & Hardware Products . The results of Hills' traditional Hills Branded Products business continued the improvement of the previous year. The business has focussed on a smaller range of products and looks to achieve operational excellence in its supply chain and customer service. The rise in the Australian dollar has helped margins and the Directors were pleased with the solid contribution from the LW Gemmell plumbing distribution business. Since year end, the business has launched a new range of clotheslines with additional features designed to increase market share. ln addition, the new range of 150k9 Bailey Professional ladders has been launched. Hills Healthcare o Hills Healthcare is the leading manufacturer of rehabilitation, mobility and hospital equipment in Australia. The business achieved a small improvement in profit during the period as a result of some additional nursing home construction activity, compared to the prior period, but also as a result of the higher Australian dollar. The Directors believe this business is well placed to grow over the next few years. Team Poly/Hills Eco ¡ Team Poly is one of Australia's leading manufacturers of rotationally moulded polyethylene water tanks. As a result of significant and widespread rainfall, the level of activity in the water tank industry remains at historically very low levels. During the period, other market players experienced financial diffìculties including insolvency. Revenue was reduced this year compared to the prior comparable period. A number of profìt improvement initiatives within Team Poly, focussing on improvements in supply chain and the manufacturing process have continued to be undertaken. The other Hills Eco business, Hills Solar, suffered from changes to government subsidies and delays in its products launch programme. These businesses delivered an operating loss of around $2.0 million (before tax) for the year. Profìt improvement initiatives are expected to deliver better results in a difficult market. Building & lndustrial TheBuildingandlndustrial DivisioncomprisesOrrconSteel,FieldersandKorvest. Revenuesdeclinedby2%to$616.8 million while EBIT declined by 88o/o to $3.2 million. -71- Hills Holdings Limited Directors' report 30 June 201 I (continued) Review of operations (continued) Orrcon Steel . Orrcon Steel is a leading manufacturer and distributor of steel tube and pipe in Australia, specialising in the manufacture of precision tube, structural tube, rectangular hollow sections and water, oil and gas pipelines. After delivering an improved result in the prior year, demand for Orrcon Steel's products fell signifìcantly below expectations. The strengthening of the Australian dollar has led to increased competition for steel and tube products in a weak market and this, combined with very low priced imported product, has contributed to a greater market share for imported tube. ln addition, inventory reductions by Orrcon Steel customers and a decline in demand for steel tube saw lower sales for Orrcon Steel. ln particular, a number of pipeline projects were deferred or sourced with imported product, which has adversely affected the results from Orrcon Steel's Pipeline and lnfrastructure operation. ln response to deteriorating market conditions, Hills undertook a restructure and cost reduction program in the Structural and Precision tube businesses, and after an unsuccessful process to sell the large pipe business, the Board announced in May the closure of the Unanderra plant. lt is expected that all customer requirements will be met to enable a final closure in September 201 1. The losses incurred by this operation, of around $7.0 million (before tax) and which are included in profit from operations, will not recur this year. While profit improvement initiatives have been initiated as a result of these lower levels of activity, volumes are not forecast to improve in the near term. This is consistent with information from other industry participants The Orrcon Steel business will focus more on the domestic structural and precision markets, and will continue contracting for large major projects with imported product in the coming year. Fielders . Korvest r The Fielders rollforming business is a market leader in new and innovative products in a market that is not generally known for innovation. While Fielders sales to domestic customers remained strong, the level of commercial building activity remained low, affecting the overall result for Fielders. Despite this, Fielders' national market share grew over the year, but in a contracting market. During the period, the New South Wales operation relocated to new premises, and the business is seeing improved results from its New South Wales and Queensland operations. Since balance date, activity in both the commercial and domestic construction markets has further deteriorated. As a result, a number of cost reduction initiatives have been implemented in Fielders. Hills holds 48 8% of Korvest which comprises the market leading EzyStrut cable and pipe support business, Korvest Galvanisers and lndax industrial access equipment. The Korvest business recorded increased revenue but reduced profìt during the period. Korvest is a separately listed public company and further details of its results are obtainable from Korvest's website. lnformation on Directors Jennifer Helen Hill-Ling LLB (Adel) FAICD. Chairman Non-lndependent Non-Executive Director. Age 49. Experience and expeftise Appointed Director in August 1985. Appointed Deputy Chairman in June 2004. Appointed Chairman 28 October 2005. Jennifer Hill-Ling has extensive experience in corporate and commercial law, specialising in corporate and business structuring, mergers and acquisitions, joint ventures and related commercial transactions. She practiced law for some 25 years and was a senior partner in two Sydney law firms in that time. ln addition to any listed company directorships she is also currently a director of Hills Associates Limited and Hills lndustries NZ Limited and was formerly a director of Tower Trust Limited. She is a fellow of the Australian lnstitute of Company Directors. Other current listed company directorshíps None Former listed company directorships in lasú 3 years None S p eci a I responsiöiliÍies Chairman of the Board, Chairman of the Remuneration Committee, Member of the Nomination Committee. lnteresús in shares and options at the date of this report 15,602,477 ordinary shares in Hills Holdings Limited (including 1 ,188,918 shares owned by Hills Associates Limited and Poplar Pty Ltd (ointly held) and 14,24O,495 shares owned by Hills Associates Limited of which JH Hill-Ling is a Director). Nil options over ordinary shares in Hills Holdings Limited. -72- Hills Holdings Limited Directors' report 30 June 201 I (continued) lnformation on Directors (continued) Graham Lloyd TwarÞ BA (Adel) DipAcc (Flinders). Group Managing Director. Age 54. Experi en ce and expertise Appointed Director in July 1993. Appointed as Group Managing Director 1 July 2008. Graham Twa¡12 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 25 years experience in his fìeld. 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. Spec ial responsibi I ities Managing Director. lnterests in shares and options at the date of this report 207 ,342 ordinary shares in Hills Holdings Limited and 29,115 ordinary shares in Korvest Ltd. 118,926 Performance Rights and 100,000 options over ordinary shares in Hills Holdings Limited. lan Elliot FAICD. lndependent Non-Executive Director. Age 57. Experience and ex pertise Appointed Director in August 2003. lan Elliot has spent 38 years in marketing. His speciality is brand building, with extensive involvement in a number of icon brands. Mr Elliot is a fellow of the Australian lnstitute of Company Directors and graduate of the Harvard Business School Advanced Management Program. ln 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, Promentum Limited and 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 Íast 3 years None. Specral responsibi lities Chairman of the Nomination Committee, Member of the Remuneration Committee. /nferests in shares and options at the date of this repoñ 6,235 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. Roger Baden Flynn BEng (Hons) MBA FIE (Aust) FAICD. lndependent Non-Executive Director. Age 61. Experience and experti se Appointed Director in November 1999 (Lead independent Director). Roger Flynn has extensive experience in manufacturing and distribution industries in Australia, Asia 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. Mr Flynn is a fellow of the Australian lnstitute of Company Directors. Other current listed company directorships Executive Chairman of Coventry Group Limited (since 2001). Former listed company directorships rn lasú 3 years None. Spec ial responsibi lities Lead independent non-executive Director. Interests in shares and options at the date of this repoft 35,665 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. -73- Hills Holdings Limited Directors' report 30 June 201 1 (continued) lnformation on Directors (continued) Peter William Stancliffe BE (Civil) FAICD. lndependent Non-Executive Director. Age 63. Experience and expeñise 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. ln 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 rn lasf 3 years Former Chairman of View Resources Limited (from 2006 to 2009). Special responsi bi lities Member of the Audit and Compliance Committee, Member of the Nomination Committee. /nferesfs in shares and options at the date of this report 19,104 ordinary shares in Hills Holdings Limited and 1,000 ordinary shares in Korvest Ltd. Nil options over ordinary shares in Hills Holdings Limited. Fiona Rosalyn Vivienne Bennett BA (Hons) FCA FAICD FAIM. /ndependent Non-Executive Director. Age 55. Experience and expeñise Appointed Director on 3'1 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 rn last 3 years None Special responsibi lities Chairman of the Audit and Compliance Committee. lnferesfs in shares and options at the date of this repoft 4,000 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. David Moray Spence B Com CA (SA). Independent Non-Executive Director. Age 59. 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 lSP, OzEmail. Mr Spence was the chief executive officer of Unwired Australia until February 2010. He has been involved in a number of listed and non-listed boards including WebCentral, uuNet, Accessl, Emitch, Commander Communications, Chaosmusic, ubowireless, Vividwireless and is a past chairman of the lnternet lndustry 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 None. -74- Hills Holdings Limited Directors' report 30 June 2011 (continued) lnformation on Directors (continued) Specraf responsiöilífies Member of the Audit and Compliance Committee, Member of the Remuneration Committee. lnúeresús in shares and options at the date of this report 19,000 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. Geoffrey Guild Hill FCPA FAICD F.S.l BEc (Syd) MBA (NSW). Independent Non-Executive Director. Age 65. Experience and expeftise Appointed Director in February 1999, retired as Director on 24 April 2011. 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 fìeld since 1979. ln addition to his listed company directorships he is the Chairman of lnternational Pacifìc Securities (Group) Limited and Asian Property lnvestments Limited and was formerly the Chairman of Fielders Australia Pty Ltd. He was formerly a Director of Biron Apparel Limited and Pacific Strategic lnvestments Limited. Other current listed company directorships Chairman of Metals Finance Limited (Director since 2007) and Heritage Gold NZ Limited (Director since '1999). Former listed company directorships in last 3 years Former Director of Brickworks lnvestment Company Limited (from 2005 to 2009), Huntley lnvestment Company Limited (from 1998 to 2009), Centrex Metals Limited (from 2008 to December 20'10) and Outback Metals Limited (until November 201 0). Specraf responsi bilities None lnúeresfs rn sf¡ares and options at the date of this report None. Company secretary David Lethbridge, LLB (Otago, NZ), Grad Dip ACG, FCIS, GAICD was appointed to the position of Company Secretary in January 20'l 0. 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. 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 2011, and the numbers of meetings attended by each Director were: Meetings of committees Full meetings Audit & of Directors Gompliance Nomination Remuneration A B Jennifer Helen Hill-Ling Graham Lloyd Twartz * lan Elliot Roger Baden Flynn Geoffrey Guild Hill ^ Peter William Stancliffe Fiona Rosalyn Vivienne Bennett David Moray Spence '18 18 16 16 13 18 18 12 18 18 18 18 14 18 18 15 3 1 7 4 4 A = Number of meetings attended B = Number of meetings held during the time the Director held offìce or was a member of the committee during the year * = An executive Director ^ = Retired 24 April2011 -75- Hills Holdings Limited Directors' report 30 June 201 1 (continued) Remuneration report - audited The Directors of Hills Holdings Limited present this Remuneration report for the Group for the year ended 30 June 201 1. This Remuneration repoft forms part of the Directors' report and has been prepared in accordance with section 3004 of the Corporations Act 2001(Cth) (Corporations Act) for the Group. The information provided in this Remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. Below is a summary of Hills Holdings Limited's (Hills or the Group) executive and non executive Director remuneration arrangements in place for the year ended 30 June 2011. Directors and executives drsc/osed rn this repoft The Remuneration report sets out the remuneration arrangements that apply to the non executive Directors, the Managing Director and other senior executives who are the key management personnel of the Group for the purposes of the Corporations Act and Accounting Standards. They include the fìve highest remunerated executives of the Group and the Company during the reporting period. The key management personnel of the Group includes the Directors as per pages 72 to 75 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: Name Position Non-executive and executive Directors - see pages 72 to 75 above. Other key management personnel L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge M McKinstry K Middleton A Muir T Sullivan Managing Director - Orrcon Operations Pty Ltd CEO - Electronics and Communications Division General Manager - Business Development (until 31 October 2010) Group General Manager - Lifestyle and Sustainability Division (until 4 March 201 1) Managing Director - Korvest Ltd Company Secretary Chief Operating Offìcer (from 6 June 201 1) CEO - Fielders Australia Pty Ltd Chief Financial Offìcer Group General Manager Strategy (from 11 October 2010) In addition, the following persons are among the 5 highest remunerated Group and / or Company executives: G Daher R Meacham A Oliver General Manager - Direct Alarm Supplies General Manager - Pacific Communications General Manaqer - Antenna and TV Svstems Changes since the end of the reporting period Since the end of the reporting period Mr A Muir resigned from the position of Chief Financial Officer on 7 July 2011 and Mr G Logan was appointed Chief Financial Officer for the Group on 7 July 2011 with effect from 8 August 201'1. Payments to persons before taking office There were no payments to persons before taking office. Principles used to determine the nature and amount of remuneration (a) Role of the Remuneration Commiltee lnformation on the composition and functions of the Remuneration Committee ("the Committee") is 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. h i llsholdi n gs. com. au. The Committee assists and makes recommendations to the Board on remuneration policies, strategies and practices for the Board, its Committees, the Managing Director, the direct reports to the Managing Director, senior executives and other management as appropriate. 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. -76- Remuneration report - audited (continued) Principles used to determine the nature and amount of remuneration (continued) Hills Holdings Limited Directors' report 30 June 201 I (continued) the remuneration framework for the Non-Executive Directors and Board Committees; The Committee's responsibilities include developing, reviewing and making recommendations to the Board on: ¡ . . remuneration incentive schemes for the Managing Director and senior executives. the remuneration policy for the Managing Director and senior executives; and 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 rem.rneration policy Hills' remuneration strategy is designed to attract, motivate and retain senior executives and Hills' employees generally. Given the diversified nature of the Group, the Board has developed a remuneration framework which reflects this diversity and is structured to reward executives for performance both at the Group level and at the operating divisional level. ¡ The key principles on which the Hills' remuneration strategy is based are as follows: (i) Market competitive and fair: . . Executive remuneration is reviewed annually; Hills' aim, in attracting and retaining the best people for the job, is to provide market competitive remuneration against jobs of comparable size and responsibility, with an opportunity for highly competitive total remuneration for superior performance; and External remuneration consultants provide analysis and advice to ensure base pay is set to reflect the market for a comparable role. (ii) Performance driven: . 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; and The variable components of the remuneration are driven by targets that focus on external and internal measures of financial and non financial performance. ¡ ¡ (iii) Alignment with shareholder interests: o (c) Executive remuneration framework lncentive plans and performance measures are aligned with Hills' short and long term success. The executive remuneration framework has a mix of fìxed and variable ("at risk") pay. lt has three components: . . r Fixed remuneration, being base pay, superannuation and other short term benefìts; Short term incentives; and Long term incentives. The combination of these comprises an executive's total remuneration. The Board considers that the performance linked remuneration structure generates the desired outcome for Hills. The relative weightings of the three components comprising an executive's total remuneration are typically between 60% - 7Oo/o fixed remuneration ,20o/o - 25% short term incentives and 10% long term incentives. The weightings are calculated on the basis that the "at risk" components (STl and LTI) are at therr maxrmum. (i) Fixed remuneration Fixed remuneration is targeted at or above the median of the market for jobs of comparable size and responsibility in companies in the ASX 200 and it also takes into account an individual's responsibilities, performance, qualifications and experience. ln some cases, experience, superior performance or strong market demands for specifìc job categories may justiff 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. Retirement benefits comprise employer contributions to defined contribution superannuation funds. -77- Hills Holdings Limited Directors' report 30 June 201 1 (continued) Remuneration report - audited (continued) Principles used to determine the nature and amount of remuneration (continued) (ii) Short term incentives Hills' executives all participate in an STI Plan which is designed to drive individual and team performance to deliver annual business plans and increase shareholder value by providing rewards for achievement of business financial performance goals and individual performance goals which are focussed on non-fìnancial performance. Each year the Remuneration Committee recommends to the Board the key performance indicators (KPls) for the key management personnel. KPls generally include measures relating to the Group, the relevant business segment and the individual, and may include a mix of fìnancial and non financial performance measures. Typically, the STI plan is weighted 75o/olo financial metrics and25o/o to individual metrics. Features of all executive's STI plans for FY 2011 are as follows: Frequency and timing Financial measures used Participation is determined on an annual basis with performance measured over the financial year ending 30 June. A principal focus of Hills is earnings before interest and tax (EBIT) and returns on funds employed (ROFE) which measures effective utilisation of assets and earnings per share (EPS). Non financial measures Assessment of performance Service condition STI awarded in FY 2011 for senior executive roles with corporate responsibility: EPS; for senior executives with divisional responsibility: EBIT and ROFE; and for the Managing Director: ROFE and EPS. 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: . o o . ¡ o At the end of the financial year each senior executive's performance is assessed based on the actual peformance of the Group and the relevant segment and individual performance overall and against KPls set at the beginning of the financial year. Safety; Strategic outcomes; Operational improvements; Succession planning; Restructuring and rationalisation; and Other discretionary performance targets. 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. At the Board's discretion, 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 fìnancial year. ln terms of the targets set by the Board for FY 2011, the annual STI awarded to the Senior Executives reflected the following: ¡ The overall financial performance for the Group did not meet the financial targets set; ¡ ¡ The overall financial performance for the Electronics and Communications division met or exceeded the financial targets set; The Building and lndustrial and Lifestyle and Sustainability divisions did not meet the financial targets set; ¡ Certain strategy and succession planning targets were met; and o The Group's safety targets were exceeded. -78- Hills Holdings Limited Directors' report 30 June 2011 (continued) Remuneration report - audited (continued) Principles used fo determine the nature and amount of remuneration (continued) (iii) Long term incentives (a) Long Term lncentive Plan (LTIP) ln 2010, consistent with Hills' remuneration strategy of rewarding executives for performance against business plans and longer term shareholder returns to a level that is appropriate for the results delivered, Hills established the LTIP. The aim of the LTIP is to incentivise senior executives by aligning their long term incentives with the interests of shareholders. General features of the Plan are as follows: . eligible employees may be offered shares in Hills (which will be held in trust pending the satisfaction of specified performance conditions) (Deferred Shares) or a right to receive shares in the Company in the future (subject to the satisfaction of specifìed performa nce conditions) (Performance R i ghts) ; o . . . ¡ o . the Board imposes performance conditions on Deferred Shares or Performance Rights at the time at which an offer is made in respect of such Deferred Shares or Performance Rights; except in special circumstances, Deferred Shares or Performance Rights do not vest unless the performance conditions attaching to them have been satisfied within the prescribed period; Performance Rights or Deferred Shares which have not vested will lapse or be forfeited (respectively) if an eligible employee ceases to be employed by Hills before vesting has occurred (unless the Board determines otherwise), or in the Board's opinion, the eligible employee has acted fraudulently, dishonestly, or committed an act of harassment or discrimination or brought the Company into disrepute; with the Board's approval, the eligible employee may nominate someone else to hold the Deferred Share or Performance Right (generally a relative or dependant or entity under the eligible employee's control); the Board may impose disposal restrictions on trading Performance Shares (that is shares received by the eligible employee or their nominee on vesting of a Performance Right) or Deferred Shares for up to a maximum of seven years although this is not currently proposed; no payment is required for the grant of a Performance Right (unless the Board specifies otherwise) and the Board may determine the price (if any) at which Deferred Shares will be offered; an eligible employee will receive all dividends paid by the Company in respect of Deferred Shares which have not yet vested. However, the eligible employee will not be entitled to any dividends in respect of Performance Rights which have not yet vested. At Hills' 2010 Annual General Meeting, shareholder approval was obtained for the Managing Director to be issued with 1 '1 8,926 Performance Rights under the LTIP. Following the approval given at the 2010 AGM, certain senior executives were also invited to participate in Hills' LTIP and receive Performance Rights under the LTIP. The details of the LTIP Performance Rights allocations made to the Managing Director and senior executives are set out in this table and the table set out on page 87 of this Report. -79- Hills Holdings Limited Directors' report 30 June 2011 (continued) Remuneration report - audited (continued) Principles used fo determine the nature and amount of remuneration (continued) Participation Executive participation is determined by the Board. Performance Conditions Performance Measures Performance Testing Vesting Schedule The performance conditions attaching to the Performance Rights will be measured over a three year period commencing from 1 July 2010. lf the relevant performance conditions at the end of that three year period have been met, in whole or in part, all or the relevant percentage of the Performance Rights (as applicable) will vest. The senior executive (or nominees) will be entitled to be issued or transferred one ordinary share in the Company for each Performance Right that has vested. Vesting of the Performance Rights will be determined by reference to EPS and TSR performance conditions. These performance conditions have been chosen as EPS focuses attention on the Hill's three year strategic and fìnancial objectives and TSR measures growth in the price of Hills' shares and dividends against the ASX 200 lndustrial Accumulation lndex. The principles used in setting the performance conditions are as follows: (a) the EPS hurdle - a compound annual growth rate in Hills' EPS which is applicable to 50% of the Performance Rights; (b) the TSR hurdle - the TSR performance achieved by Hills in comparison to the TSR of the ASX 200 lndustrial Accumulation lndex (lndex) which is applicable to the other 50% of the Performance Rights. The peformance hurdles will be tested at 30 June 2013. No further testing will occur. EPS compound annual growth rate of less than 15o/o - 0o/o vested EPS compound annual growth rate of 15% or more - 25% vested EPS compound annual growth rale of 20o/o or more - 50% vested EPS Hurdle: o o o TSR Hurdle: o Hills TSR less than lndex - 0% vested o Hills TSR outperforms lndex - 25% vested o Hills TSR outperforms lndex by 15% or more - 25% vested Trading Restrictions There are no restrictions on trading the Performance Shares once issued. (b) Prior long-term Incentive Plans 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 Hills'TSR 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. ln relation to the flnancial 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. -80- Hills Holdings Limited Directors' report 30 June 2011 (continued) Remuneration report - audited (continued) Principles used to determine the nature and amount of remuneration (continued) ln 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 up to $1 ,000 of Hills' ordinary shares for no consideration. Shares are allotted under the plan in two tranches, (usually in March/April and 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, or as othen¡rise determined by the Directors. Link between remuneration and Group pertormance A key underlying principle of the executive reward strategy is that remuneration should be linked to performance. As discussed earlier, STI payments are based on a variety of performance conditions, both flnancial and non financial. The key financial measures are EBIT, ROFE and EPS, at a business unit and divisional level for some executives and at a Group level for other executives. The non fìnancial measures include safety, strategic outcomes, operational improvements, restructuring and rationalisation and other discretionary performance targets. ln the financial year ended 30 June 201 1 the Group performance declined on the prior year, with EBIT (before unusual / significant items) decreasing 38% to $40.376 million and net profit after tax (before unusual / signiflcant items) decreasing 37% to $27 .126 million. ln difficult trading conditions, some of the businesses within the Electronics and Communications and Lifestyle and Sustainability divisions achieved their budget EBIT results. However, the Building and lndustrial division businesses of Orrcon and Fielders did not meet the EBIT thresholds set by the Board. Accordingly, the executives of those businesses (Messrs Andrewartha and Middleton) did not qualify for a financial STI payment. As a consequence, STI payments related to financial measures were overall lower than the previous year. Non fìnancial STls were achieved where executives achieved their strategic, operational or other discretionary targets. Pleasingly, and as reported elsewhere in this report, Hills continues to drive down the total reportable incident frequency rate flRIFR) to 'l 9.8, a 43% improvement on the prior year. Accordingly, all executives achieved the safety component of their non fìnancial STI's. The following table summarises fìnancial and share price information and safety performance over the last flve years: Key financials FY1 1 FYlO FYO9 FYOS FYOT Earnings before interest and tax (EBIT) ($'000) before unusual / significant items Shareholders' funds ($'0OO¡ Return on funds employed (ROFE) based on year end Funds Employed Net profit before unusual / signifìcant items ($'OOO¡ Net profit after unusual / signifìcant items ($'000) Basic earnings per share before unusual / significant items (cents) Dividends (cents) Share price ($) Safety IRIFR) 40,376 65,469 59,978 87,772 82,273 402,307 496,499 428,520 429,517 348,764 8.2o/o 12.O% 10.3o/o 14.2o/o 16.6% 27,126 (73,116) 10.2 10.0 1.20 '19.8 43,095 43,095 16.7 34,201 15,655 14.6 53,589 52,360 27.3 52,042 52,042 27.6 12.5 2.15 34.7 10.0 1.57 41.4 27.5 3.34 65.1 27.5 5.33 71.6 -81- Hills Holdings Limited Directors' report 30 June 201 I (continued) Remuneration report - audited (continued) Principles used úo determine the nature and amount of remuneration (continued) (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 At Hills' 2010 Annual General meeting shareholders approved an increase in the aggregate amount of remuneration paid to non-executive Directors to $1,200,000. This increase was considered necessary in order to pay the retirement benefit to Mr G Hill and to allow Hills to continue to pay fees to non-executive Directors at an appropriate market rate in the future. Non executive Directors who chair a committee receive an additional $10,000 per annum. Directors' fees were not increased during the period and have been frozen for the past two years. The following fees have applied: Base fees Chairman Other non-executive Directors Additional fees Committee - Chairman Current fees $200,000 $100,000 $10,000 Retirement allowances for non-executive Directors Superannuation contributions required under the Australian superannuation guarantee legislation are made and are deducted from the Directors' overall fee entitlements. With the retirement of Mr G Hill on 24 April 2011, Ms J Hill-Ling is the remaining Director entitled to receive benefìts on retirement under a scheme that has since been discontinued. Under the scheme, Ms J Hill-Ling is entitled to a maximum retirement benefìt of twice her annual Directors' fees (calculated as an average of her 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 beneflt and the benefit multiple (up to a maximum of two times fees) remains fìxed. Upon retirement, Mr G Hill was paid $187,000 in accordance with the retirement scheme. This benefìt was fully provided for in previous years fìnancial statements and the benefit for Ms J Hill-Ling is also fully provided for in the financial statements. D eta i I s of re m u nerati o n 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. -82- Name Non-executive Directors J Hill-Ling+ F Bennett I Elliot R Flynn G Hill* D Spence P Stancliffe* 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^ M McKinstry K Middleton^ A Muir#^ T Sullivan Total key management personnel compensation lGrnunì Other Gompany and Group executives G Daher # R Meacham # A Oliver # Remuneration report - audited (continued) Details of remu neration (continued) Amounts of remuneration (continued) 2011 Short-term employee benefits POSt- employ- ment benefits çasn salary and fees ç Cash bonus (A) s Non monetary benefits ß Other s Super- annuation s 192,661 97,095 100,917 91 ,743 74,632 76,453 147,233 780.734 5,600 '17,339 8,739 9,083 8,257 6,717 6,881 13,251 5.600 70.267 Hills Holdings Limited Directors' report 30 June 201 1 (continued) Long- term benefits Long servrce leave $ Share- based payments (B) Henorm- lnce rights & options s Shares s Total $ 215,600 '105,834 1 10,000 100,000 81,349 83,334 160 484 856.601 779,816 75,000 65,508 70, I 83 19,495 13,277 1,023,279 348,624 321,101 76,453 218,721 211,009 240,005 31,845 349,197 3r 6,605 190,584 10,000 60,664 32,926 25,000 87,039 10,000 20,000 10,000 1,400 5,091 8,709 24,748 4,058 350 2,289 700 8,598 13,171 31,376 28,952 6,881 19,685 18,991 29,944 2,866 25,803 23,448 17 153 54,587 3,222 3,222 988 1,117 5,635 2,563 412 1 564 999 999 599 un: 999 999 395,621 420,029 92,642 297,667 260,175 362,973 37,000 389,262 424,645 232 472 3.864.694 330.629 140.222 345.549 74.082 32,000 5.194 4.792.370 211,271 208,627 230 856 75,1 55 93,508 69,1 53 6,650 5,646 16.694 21,960 18,829 20,779 3 500 3 546 3 917 329 412 412 999 999 999 319,864 331,567 342,810 (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 Performance Rights in the Long Term lncentive Plan, options in the former Executive Share Option Plan and shares under the Employee Share Plan. Performance Rights were granted to various executives during the year. No options were granted during the year. Options granted in 2009 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 Performance Rights and 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 Performance Rights granted to the Managing Director and senior executives included above is described in the Long Term lncentives discussion below. 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 134 of the lncome 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 Performance Rights granted during the year are set out below. -83- Hills Holdings Limited Directors' report 30 June 201 I (continued) Remuneration report - audited (continued) Details of remuneration (continued) Amounts of remuneration (continued) ^ 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 Coryorations Acf 2001. * P Stancliffe remuneration includes Board fees from Korvest Ltd and G Hill remuneration in the previous financial year included Board fees from Fielders Australia Pty Ltd (Chairman untilApril20l0). + J Hill-Ling remuneration includes a dividend of $5,600 (2010: $5,600) paid as a shareholder of Hills Associates Limited. 2010 Shortterm employee benefits Name Non-executive Directors J Hill-Ling+ I Elliot R Flynn G Hiil- P Stancliffe* F Bennett Sub-total non-executive Directors Executive Director G Twartz Other key management personnel (Qroup) L Andrewartha" S Cope^# D Edgecombe R Gros#^ D Lethbridge A Kachellek K Middleton^ A Muir# Total key management personnel compensation lGrouoì Other Company and Group executives G Daher# A Oliver#^ Cash salary and fees $ Cash bonus (A) $ Non monetary benefits $ 192,661 100,917 91,743 199,743 150,917 I 009 743.990 Other $ 5,600 Post- employ- ment benefits Super- annuation s Long- term benefits Long servrce leave $ 17,339 9,083 8,257 8,257 13,583 72'l 5,600 57,240 Share-based payments (B) Options s Shares $ Total $ 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 /,-q7 1,400 1,400 350 1,400 350 700 1 400 33,356 33,399 21,468 30,183 8,6s0 25,587 33,413 2q ?Aq 3,399 1,976 1,976 5,635 659 '1 060 999 999 999 999 998 999 qqq 422,456 397,683 266,375 377,386 112,248 320,813 408,282 350 903 3.573.2't3 519.539 13.113 28.609 344.880 18.349 't8.'t04 7.991 4.523.798 197,693 227.581 73,843 1 11.'150 3,150 15.849 23,733 28.295 3,269 3.640 659 1.890 999 999 303,346 389 404 -84- Hills Holdings Limited Directors' report 30 June 201 1 (continued) Remuneration report - audited (continued) Deta i ls of rem u neration (conti n u ed) Amou nts of re m u n e rati on (conti n u ed) The relative proportions of remuneration for the year ended 30 June 201 1 (30 June 2010) as set out above that are linked to performance and that are fixed are as follows: Name Paid / payable Fixed remuneration % Executive Directors of Hills Holdinqs Limited G Twartz Other kev management personnel of Group L Andrewartha S Cope D Edgecombe R Gros D Lethbridge A Kachellek M McKinstry K Middleton A Muir T Sullivan Other Companv and Group executives G Daher R Meacham A Oliver 201'l 91% 97% 85% 100o/o 89% 90% 74% '100% 97% 95% 95% 76% 72% 80% 2010 80% 89% 85% 98% 85% 100% 79% -% 89% 93o/o -o/o 76% o/_ 7 1o/o Paid / payable At risk -STl % 2011 2010 9o/o 3% 1s% of 'l'l% 10% 26% ot -fo 3% 5% 5% 24% 28% 20% 2jo/o 11% 15o/o 2o/o 15% -o/o 21o/o -o/o 1 1o/o 7% -% 24o/o -o/o 29o/o Service agreements Executives Value of Performance Rights / options as proportion of remuneration 7o 2010 2011 '1.51% 0.33% 0.81% 0.77% ol-to 0.33% 0.43% '|'.55% ot-to 0.66% 0.10% 0.67% 0.10o/o 0.12% 0.12o/o 0.81% 0.50% -% 0.53% -o/o 1.760/o -/o 0.16% 0.30% -% 0.22% -% O.49o/o The details of the contracts of Hills' senior executives named in the remuneration tables (excluding the Managing Director) can be summarised as follows: . . 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; All executives have ongoing contracts of no fixed term; . . Upon termination, executives are entitled to payment of annual and long service leave; and lf 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 fìnancial year are as follows: Term The contract is for indefìnite duration. The contract can be terminated by the Company or the Managing Director giving three month's notice to the other. Fixed remuneration The Managing Director has received an annual base salary, inclusive of superannuation, for the year ended 30 June 201 1 of $850,000. Short-term incentive An annual maximum STI opportunity of $375,000. The performance of the Managing Director against performance measures is assessed and the payment determined by the Board. -85- Hills Holdings Limited Directors' report 30 June 2011 (continued) Remuneration report - audited (continued) Share-öased compensati on Performance Rþhfs and Options The terms and conditions of each grant of Performance Rights under the LTIP and options under the Executive Share Option Plan affecting remuneration in the current or a future reporting period are as follows: Grant date Date exercisable / vested Expiry date Exercise price Options 28 Feb 2008 31 Jan2011 31 Jan 2031 31 Jan2012 31 Jan2032 Options 4 Feb 2009 Performance Rights 30 April 2011 30 June 2013 30 June 201 3 $- $0.905 Value per option / Right at qrant date $0.19 $- $5.49 $3.01 Performance achieved of fo Vested No nla nla Oo/o nla nla The maximum value of the Performance Rights represents their fair value as at their grant date, determined in accordance with AASB 2 Share Eased Payment. The fair value for each hurdle in the Performance Rights was: . . EPS hurdle: $1 .19 TSR hurdle: $0.62 Monte Carlo simulation was used to determine the value of the Performance Rights granted. Details of the assumptions underlying the valuation are set out in note 26 to the fìnancial statements. No Performance Rights have been granted since the end of the fìnancial year. The Performance Rights were provided at no cost to the recipients. All Performance Rights and options expire on the earlier of their expiry date or termination of the individual's employment. The Performance Rights will vest on 30 June 2013 and 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. ln addition to a continuing employment service condition, the ability for Performance Rights to vest or 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 Performance Rights and options over ordinary shares in the Company provided as remuneration to each Director of Hills Holdings Limited and each of the key management personnel of the Company and the Group are set out below. When vested or exercisable, each Performance Right or option is convertible into one ordinary share of Hills Holdings Limited. Further information on the options is set out above and in note 26 to the financial statements. No Performance Rights or options vested during the financial year. -86- Remuneration report - audited (continued) Share-þased compensation (continued) Number of Performance Rights granted during the vear 1 18.926 21,623 21,623 Name Directors of Hills Holdinqs Limited G Twartz Other kev manaqement personnel of the Group L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge K Middleton M McKinstry A Muir T Sullivan Other Group and Comoanv executives G Daher R Meacham A Oliver 10,811 21,623 15_134 Hills Holdings Limited Directors' report 30 June 2011 (continued) Fair value of Performance Rights at grant date calculated in accordance with AASB 2 Value of Performance Rights using the share price of 82.3',t237', Number of Performance Rights / options lapsed / forfeited during the veer $107.628 $275,000 60,000 $50,000 $50,000 $- $- $- $25,000 $50,000 $- $- $35,000 $19,569 $19,569 $- $- $- $9,784 $19,569 $- $- $13,696 $- $- $- 60,000 60,000 25,000 120,000 20,000 25,000 20,000 25,000 25,000 Value at lapse / forfeit date $- $- $- $- $- $- $- $- $- $- $- $- $- $- * The share price used to calculate the number of Performance Rights issued to the Managing Director and Senior Executives was $2.31237, being the volume weighted average price of the Company's shares for the ten trading days commencing on the day after the announcement of the Company's full year fìnancial results for the year ended 30 June 2010. 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. Additi on al i nformation Details of remuneration: Bonuses and share-based compensation benefits For each cash bonus and grant of rights included in the tables on pages 83 - 84 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 Performance Rights / options vest after three years, provided the vesting conditions are met (see pages 79 - 80 and 86 above). No Performance Rights / options will vest if the conditions are not satisfied, hence the minimum value of the Performance Rights / options yet to vest is $nil. The maximum value of the Performance Rights / options yet to vest has been determined as the amount of the grant date fair value of the Performance Rights / 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 not being met as well as options that have lapsed due to termination of employment. The bonus percentages comprise the percentage of the available bonus that was paid / payable in relation to the fìnancial year, and the percentage that was forfeited because the person did not meet the performance criteria. -87- Hills Holdings Limited Directors'report 30 June 201 1 (continued) Remuneration report - audited (continued) Share-based co m pen sati o n (co nti n u ed) Details of remuneration: Bonuses and share-based compensation benefits (continued) STI Share-based compensation benefits (Rights / options) Name G Twartz Paid / Payable 2011 of fo 20% Forfeited 2011 ol to 80% L Andrewartha 7o/o 93o/o S Cope 46% 54% D Edoecombe - R Gros A Kachellek D Lethbridqe K Middleton A Muir T Sullivan G Daher R Meacham A Oliver -% 25% 100% 45% 10% -% 75% -% 55o/o 9Oo/o 20% 80% 14% 100% 100% 100% 860/o -o/o -% -% Year granted Vested of to Lapsed / Forfeited ot fo Financial years ir which Rights / options may vesf Minimum lotal value of grant ¡et to vesl s Maximum lotal value of grant yet to vest $ 2008 2009 2011 2008 2009 2011 2008 2009 2011 2009 2008 2009 2011 2008 2009 2011 2008 2009 2011 2008 2009 2008 2009 2008 2009 100 100 100 100 100 100 100 100 100 100 100 2011 2012 2013 2011 2012 2013 2011 2012 2013 2012 2011 2012 2013 2011 2012 2013 2011 2012 2013 2011 2012 2011 2012 2011 2012 95,339 17,334 17.334 8.667 17.334 12j32 * D Edgecombe's total remuneration did not include an STI component. Säare-öased compensation: Pertormance Rights / Options The movement during the reporting period, by value, of Performance Rights / 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. -88- Remuneration report - audited (continued) Share-öased com pe n sati o n (conti n u ed) Name G Twartz L Andrewartha S Cope D Edgecombe R Gros A Kachellek D Lethbridge K Middleton M McKinstry A Muir T Sullivan G Daher R Meacham A Oliver Hills Holdings Limited Directors' report 30 June 2011 (continued) B Value at exercise date $ A Performance Rights value at grant date $ 107,628 19,569 19,569 9,784 19,569 13,696 c Options value at lapse / forfeit date $ 111,600 111,600 111,600 46,500 223,200 37,200 46,500 A = The value at grant date calculated in accordance with AASB 2 Share-based Payment of rights granted during the year as part of remuneration. B = The value at exercise date of Performance Rights / 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 Performance Rights / options were exercised after deducting the price paid to exercise the option. No Performance Rights / options were exercised in the current year. C = The value at lapse date of Performance Rights / 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 Performance Rights / options that lapsed/forfeited during the year represents the benefìt forgone and is calculated at the date the Performance Rights / options lapsed using the method described in B above assuming the performance criteria had been achieved. The 2008 options lapsed during the year. There were no Performance Rights 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: r ¡ . o . provide a safe, challenging and rewarding workplace; deliver superior returns to shareholders; increase earnings per share; rêpresent quality, reliable and value for money products; and improve the retention rate of our outstanding people resources. ln order to meet these objectives the following targets were set for the 2011 financial year and beyond: . r o o o o 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. -89- Dividends - Hills Holdings Limited Dividends paid to members during the financial year were as follows: Final ordinary dividend for the year ended 30 June 2010 of 5.5 cents (year ended 30 June 2009: 2.0 cents) per fully paid share paid on 27 September 2010 (year ended 30 June 2009:23 November 2009) Final dividend foregone for Share lnvestment Plan lnterim ordinary dividend for the year ended 30 June 201 1 of 5.5 cents (2010: 7.0 cents) per fully paid share paid on 21 March 2011 (2010:3 March 20'10) Hills Holdings Limited Directors' report 30 June 2011 (continued) 2011 $'000 2010 $'000 13,623 13.650 27.273 4,917 (713) 17 ,319 21,523 ln 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 $1 1,189,000 (4.5 cents per fully paid share) to be paid on 26 September 2011 out of retained profìts at 30 June 201 1. The financial effect of these dividends has not been brought to account in the fìnancial statements for the year ended 30 June 201'l and will be recognised in subsequent flnancial periods. For more information regarding dividends please refer to note 24. Significant changes in the state of affairs Significant changes in the state of affairs of the Group during the financial year are set out in the Review of Operations section of the Directors' report. Matters subsequent to the end of the financial year On 23 August 201 1 the Company announced an on-market buy-back which will give Hills the option to acquire up to 10% of its issued ordinary shares. The buy-back is for ongoing capital management purposes and will take place over the twelve months from the date of the announcement. Apart from the matter noted above, there has not arisen in the interval between the end of the fìnancial 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 f nancial report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. Envi ronmental regulation Manufacturing The Group holds or is in the process of obtaining or renewing all required environmental licences for its manufacturing sites around Australia. Greenhouse gas and energy data reporting requirements The Group is subject to the reporting requirements of the National Greenhouse and Energy Reporting Act 2007. fhe National Greenhouse and Energy Repofting Act 2007 requires the Group to report its annual greenhouse gas emissions and energy use. Hills has implemented systems and processes for the collection and calculation of the data required. Hills triggered the corporate energy consumption threshold legislated under the National Greenhouse and Energy Reporting Act 2007 for the year ended 30 June 201 1 and will submit its initial report to the Greenhouse and Energy Data Offìcer in October 2011. -90- Hills Holdings Limited Directors' report 30 June 201 1 (continued) Environmental regulation (continued) National Packaging Covenant During September 2010, Hills became a signatory to the Australian Packaging Covenant (APC), which is the successor to the National Packaging Covenant (NPC). The APC is a voluntary initiative, by Government and industry, to reduce the environmental effects of packaging. Hills is working towards key performance indicators set in a fìve year action plan aimed at optimising packaging design, recovery, recycling and product stewardship. Share Rights / options granted to Directors and the most highly remunerated officers Directors G Twartz, Group Managing Director Other executives of Hills Holdings Limited S Cope, CEO - Electronics and Communications D Lethbridge - Company Secretary T Sullivan - Group General Manager Strategy Other executives of the Group L Andrewartha, Managing Director - Orrcon Operations Pty Ltd K Middleton, CEO- Fielders Australia Pty Ltd Performance Rights granted 1 18.926 118.926 21,623 10,81 I 15,134 47.568 21,623 21.623 43.246 No Performance Rights have been granted since the end of the fìnancial year. Shares under Rights / options Unissued ordinary shares of the Company under Rights / option in accordance with accounting standards at the date of this report are as follows: Date Rights / options granted Expiry date Exercise price of Number under Rights / option shares February 2001 February 2002 February 2003 February 2004 February 2005 February 2009 April 2011 January 2023 January 2024 January 2025 January 2026 January 2027 January 2032 June 2013 $2.50 $2.90 $3.23 $3.66 $4.1 6 $3.01 $- 50,000 53,000 80,000 125,000 195,000 415,000 209.740 1.127.740 No Rights / option holder has any right under the Rights / options to participate in any other share issue of the Group or any other entity. All Rights / options expire on the earlier of their expiry date or termination of the employee's employment. ln addition, the ability to exercise the Rights / options is conditional on the Group achieving certain performance hurdles. Further details are included in the Remuneration report. Shares issued on the exercise of Rights / options During or since the end of the flnancial year, the Company has not issued ordinary shares as a result of the exercise of Rights / options. -91- Hills Holdings Limited Directors' report 30 June 201 I (continued) lnsurance 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 offìcers, 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 offìcers in their capacity as offìcers 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. lt 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 I ndem nification of officers The Company has agreed to indemnifo 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 Corpo rations 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 Coryorations Act 2001 lor the following reasons: o ¡ 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 norìê of the services undermine the general principles relating to auditor independence as set out in APES 1 10 Code of Ethics forProfessional Accountants. -92- 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 fìrms: Hills Holdings Limited Directors' report 30 June 201 I (continued) 1. Audit services KPMG Australia: Audit and review of fìnancial reports Overseas KPMG firms - audit and review of financial reports Total remuneration for audit seruices 2. Non-audit services Taxation services KPMG Australia: Taxation and other services Overseas KPMG firms - taxation services Total remuneratíon for taxation seryices Auditor's independence declaration Consolidated 20'l'l $ 2010 $ 488,500 450,000 3t,768 31,905 s20.268 481,905 113,838 26.824 140.662 126,354 10.542 136.896 A copy of the auditor's independence declaration as required under section 307C of the Coryorations Act 2001 is set out on page 105. 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. Dated at Adelaide this 11th day of September 2O11 -93- Hills Holdings Limited Corporate governance statement 30 June 2011 Corporate governance statement This report sets out Hills Holdings Limited's (Hills) annual statement on its corporate governance framework for the year ended 30 June 201 1. Hills and the Board are committed to achieving and demonstrating the highest standards of corporate governance. The Board considers that Hills' corporate governance framework and practices continue to comply with the requirements of the ASX Corporate Governance Council's (ASXCGC) Principles of Good Corporate Governance Principles 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 which specifically sefs ouf how Hills applies each ASXCGC Principle and Recommendation are contained in the corporate govemance secfion within the Hills website which can be found at vvvvw.hillsholdings.com.au. Ifls websife also contains copies of the chañers and policies referred to in this repoft. 1 Principle 1: Lay solid foundations for management and oversight 1.1 Role of the Board 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 defìne 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. 1.2 Responsibilities of the Board The responsibilities of the Board include: ¡ . o o o o r 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 flnancial reports, monitoring Hills'flnancial 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 Hills' 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 fìnancial goals, safety performance and business excellence. This performance assessment for senior executives was undertaken during the reporting period. -94- Hills Holdings Limited Corporate governance statement 30 June 201 1 (continued) 2 Principle 2: Structure the Board to add value 2.1 Board composition The Board charter states: o . the Board will consist of a majority of non-executive independent Directors; and the Chairman is a non-executive Director appointed by the Board. The Board seeks to ensure that it has, at any point in time, a board of Directors with an appropriate range of skills, experience, expertise and who have an understanding and competence to deal with current and emerging issues in Hills' business. Hills' succession plans are designed to maintain that appropriate balance of skills, experience and expertise on the Board. 2.2 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: r . o ¡ o is a substantial shareholder of Hills or an officer of, or othenryise 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 offìcer of or othenivise 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 ln 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. The Board regularly assesses the independence of each Director in light of the interests disclosed by them. Each Director is required to provide the Board with all relevant information for this purpose. 2.3 Board members Details of the members of the Board, their experience, expertise, qualiflcations, term of offìce, relationships affecting their independence and their independent status are set out in the Directors' report under the heading "lnformation on Directors". At the date of signing the Directors' report, there is one executive Director and six non-executive Directors, five of whom have no relationships adversely affecting independence and so are deemed independent under the principles set out above. 2. 4 N on-ex ec utive D i recto rs The six non-executive Directors meet regularly during the year, prior to the commencement of scheduled Board meetings without the presence of management, to discuss the operation of the Board and a range of other matters. Relevant matters arising from these meetings are shared with the Managing Director. 2.5 Chairman and Managing Director The Chairman, Ms Jennifer Hill-Ling is not considered to be an independent Director. Hills considers this departure from ASXCGC Recommendalion 2.2 appropriate however g iven : ¡ . Ms Hill-Ling's considerable experience within Hills. The Hill-Ling family's interest in Hills; and The Chairman is responsible for the leadership and effective performance of the Board. The Chairman is independent of the role of the Managing Director of Hills. 2.6 Term of office Hills' constitution specifìes 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. -95- Hills Holdings Limited Corporate governance statement 30 June 201 1 (continued) 2 Principle 2: Structure the Board to add value (continued) 2.7 lnduction The induction provided to new Directors and senior managers enables them to actively participate in Board decision-making as soon as possible lt ensures that they have a full understanding of Hills' fìnancial position, strategies, operations and risk management policies. lt also explains the respective rights, duties, responsibilities and roles of the Board and senior executives and Hills' meeting arrangements 2.8 Commitment The Board held 18 Board meetings and an additional corporate strategy workshop during the year. Seven of these meetings were held at operational sites of Hills which included a tour of the facilities and presentations from local management as part of the meeting. The number of meetings of the Company's Board of Directors and of each Board Committee held during the year ended 30 June 201 1 and the number of meetings attended by each Director is disclosed on page 75 of the Annual Report. 2.9 lndependent professional advice Board Committees have the appropriate resources to discharge their duties and responsibilities, including authority to engage counsel, accountants or other experts as it considers appropriate. Following consultation with the Chairman, Directors are entitled to seek independent professional advice at Hills' expense. Generally, this advice is available to all Directors. 2. 1 0 P e rfo rmance assessmenf The Board undertakes a regular annual assessment of its collective performance and that of individual Directors and its Committees. The Board performance evaluation process is conducted by way of questionnaires to effectively review: . the performance of the Board and each of its Committees against the requirements of their respective charters; and ¡ the individual performance of the Chairman and each Director. Management are invited to contribute to this appraisal process. The questionnaires are completed by each Director. The reports on the Board and Committee performance are provided to all Directors and discussed by the Board. The report on the Chairman's performance is discussed with the Chairman of the Nomination Committee. The Chairman of the Board meets with each Director to discuss his/her individual assessment. From time to time the Board engages external consultants to assist in this process. The results and action plans are documented and agreed. An assessment carried out in accordance with this process was undertaken during November 20'l 0. Descriptions of the process for performance assessment for the Board and senior executives are available on the Company's website. 2.11 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. Currently the Board has three standing committees; these are the Nomination, Remuneration and Audit and Compliance Committees. The committees operate principally in a review or advisory capacity. 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. All matters determined by committees are submitted to the full Board as recommendations for Board decisions. Membership of the committees is based on Directors' qualifìcations, skills and experience. Each standing committee is comprised of: . ¡ at least three members, the majority of whom are independent. only non-executive Directors; and All Directors are entitled to attend meetings of the standing committees. Minutes of committee meetings are tabled at the subsequent Board meeting. Additional requirements for specifìc reporting by the committees to the Board are addressed in the charter of the individual committees. Ad hoc committees are convened to consider matters of special importance or to exercise the delegated authority of the Board. -96- Hills Holdings Limited Corporate governance statement 30 June 201 1 (continued) 2 Principle 2: Structure the Board to add value (continued) 2. 1 2 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 P Stancliffe Details of these Directors' attendance at Nomination Committee meetings are set out in the Directors' report on page 75 of the Annual Report. The Nomination Committee operates in accordance with its cha¡ter. The main responsibilities of the Committee are to assist and make recommendations to the Board on: r r ¡ o Director selection and appointment practices; Board composition and tenure; succ€ssion planning for the Board, and Hills' diversity obligations. When a new Director is to be appointed, the Committee reviews the range of skills, diversity, 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 fìnancial, strategic, operations and risk management issues. 3 Principle 3: Promote ethical and responsible decision making 3.1 Code ofconduct 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. ln 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. 3.2 Security Trading Policy Hills has adopted a securities trading policy 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. The policy is aligned to recent amendments to the ASX Listing Rules on trading policies. 3. 3 Wh istl e bl ower P rote cti on Pol i cy 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. -97- Hills Holdings Limited Corporate governance statement 30 June 201 I (continued) 3 Principle 3: Promote ethical and responsible decision making (continued) 3.4 Diversity Policy Hills is committed to creating a diverse workplace that is fair and flexible, promotes personal and professional growth and enables employees to enhance their contribution to Hills by drawing from their different backgrounds, beliefs and experiences. Hills has developed a diversity policy, a copy of which can be found on Hills' website. The policy provides guidance for the development and implementation of relevant plans, programs and initiatives to recognise and promote gender workforce diversity across all areas of Hills' businesses. The Hills Board is responsible for setting specific gender diversity objectives and a range of metrics designed to measure the achievement of those objectives. The Board and the Nomination Committee are responsible for assessing, on an annual basis, the objectives and the progress of the achievement against Hills' gender diversity objectives. ln accordance with this policy and the ASX Corporate Governance Principles, the Board has established the following objectives in relation to gender diversity. The aim is to achieve these objectives over the coming 3 years as positions become vacant and appropriately skilled candidates are available. Number of women in senior management positions Number of women in sales and marketing positions Number of women employees in the whole orga nisation ' Objective % 20 Number 95 191 Ãr 552 25 20 Actual Number 6g 137 461 % 14.4 j7.g 16'7 A discussion of the gender diversity framework to support the diversity initiatives is set out in the Sustainability section of the Concise Annual Report. 4 Principle 4: Safeguard integrity in financial reporting 4.1 Audit and Compliance Commiftee The Audit and Compliance Committee consists of the following non-executive Directors: F Bennett (Chair) D Spence P Stancliffe Details of these Directors' qualifications and attendance at Audit and Compliance Committee meetings are set out in the Directors'report on pages 72 -75 oÍ the Annual Report. 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 its charter. The role of the Committee is to assist the Board in: o ¡ 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 Reviewing Hills'financial statements and financial information distributed externally; ¡ Liaison with the external auditor. -98- Hills Holdings Limited Corporate governance statement 30 June 201 I (continued) 4 Principle 4: Safeguard integrity in financial reporting (continued) ln fulfilling its responsibilities, the Committee: o o . ¡ . r 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; and 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. 4.2 Extemal 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. lt 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 37 to the fìnancial statements. lt 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. 5 Principles 5 and 6: Make timely and balanced disclosures and respect the rights of shareholders 5.1 Continuous drsc/osure and shareholder communication Hills has a Communications 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 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. The website also enables users to provide feedback and has an option for shareholders to register their email address for direct email updates on Company matters. 6 Principle 7: Recognise and manage risk 6.1 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. ln summary, Hills' policies are designed to ensure strategic, operational, legal, reputation and financial risks are identifìed, assessed, effectively and effìciently 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, lT security, compliance and other risk management issues. lnternal audit carries out regular systematic monitoring of control activities and reports to both relevant business unit management and the Audit and Compliance Committee. _oo_ Hills Holdings Limited Corporate governance statement 30 June 201 1 (continued) Principle 7: Recognise and manage risk (continued) Hills' Risk Committee consisting of the Managing Director, senior executives from the executive management group and a non executive Director assists and makes 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. Risks are considered under strategic, operational, fìnancial and compliance categories at the enterprise and at the business level. 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. During the year the Board; . Reviewed the framework and methodology for risk identification and the degree of risk Hills is willing to accept; and . Considered Hills'strategic objectives in the context of the enterprise risks. 6.2 Co rporate reporting ln complying with ASXCGC Recommendation 7.3, the Board has received a declaration from the Managing Director, who, for the purposes of Section 295A of lhe Coryorations Act 2001 , has performed the chief executive function and for the period from 8 July 201 1, the chief fìnancial officer function, that: . o 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 That the above statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board and that Hills' risk management and internal compliance and control is operating effìciently and effectively in all material respects in relation to financial reporting rísks. 7 Principle 8: Remunerate fairly and responsibly 7.1 Remuneration Committee The Remuneration Committee consists of the following non-executive Directors (a majority of whom are independent): J H Hill-Ling (Chair) I Elliot D Spence Details of these Directors'attendance at Remuneration Committee meetings are set out in the Directors' Report on page 75 of the Annual Report. The current Chairman of the Committee, Ms Jennifer Hill-Ling is not considered to be an independent Director. Hills considers this departure from ASXCGC Recommendation 8.2 appropriate however given the role the Chairman of the Board has in developing and the leading the implementation of the remuneration strategy and framework for Hills. The Remuneration Committee operates in accordance with its charter. The Remuneration Committee is responsible for developing and making recommendation to the Board on remuneration for the Chairman, the Board Committees, non executive Directors, 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". ln 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. Details of this policy can be found on Hills' website. -100- Hills Holdings Limited Corporate governance statement 30 June 201 I (continued) I ASX Corporate Governance Council Recommendations Checklist This table cross-references the ASXCGC Recommendations to the relevant sections of the Corporate Governance Statement and the Remuneration report. ASX Corporate Governance Council Recommendations Reference Comply Principle 1: Lay solid foundations for management and oversight 11 12 13 Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions. 1.1 , 1.2 Companies should disclose the process for evaluating the performance of senior executives. Remuneration Y report Companies should provide the information indicated in Guide to Reporting on Principle 1. 1.1 , 1.2, Remuneration report Principle 2: Structure the Board to add value 21 2.2 24 2.5 26 A majority of the Board should be independent Directors. 2.1,2.2 The chair should be an independent Director. The roles of chair and chief executive officer should not be exercised by the same individual. The Board should establish a Nomination Committee. Companies should disclose the process for evaluating the performance of the Board, its Committees and individual Directors. Companies should provide the information indicated in Guide to Reporting on Principle 2. 25 2.5 2.12 210 2.1 ,2.2,2.3, 2.5,2.9,2.10, 2.11,2.12 Y Principle 3: 31 Promote ethical and responsible decision-making Companies should establish a code of conduct and disclose the code or summary of the code as to: . the practices necessary to maintain confìdence in the company's 3.1 integrity; . the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders; and . the responsibility and accountability of individuals for reporting 32 33 and investigating reports of unethical practices. Companies should establish a policy concerning diversity and disclose the policy or summary of that policy. The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity and for the Board to assess annually both the objectives and progress in achieving them. 3.4 Companies should disclose in each annual report the measurable 3.4 objectives for achieving gender diversity set by the Board in accordance with the diversity policy and progress towards achieving them. -101- ASX Corporate Governance Council Recommendations Reference Comply Hills Holdings Limited Corporate governance statement 30 June 2011 (continued) 34 35 Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the Board. 3.4 Companies should provide the information indicated in Guide to Reporting on Principle 3. 3.1 ,3.4 Principle 4: Safeguard integrity in financial reporting 4.1 4.2 43 44 The Board should establish an Audit Committee. The Audit Committee should be structured so that it: . consists only of non-executive Directors; . consists of a majority of independent Directors; . is chaired by an independent chair, who is not chair of the Board; . has at least three members. The Audit Committee should have a formal charter. Companies should provide the information indicated in Guide to Reporting on principle 4. Principle 5: Make timely and balanced disclosure 5.1 52 Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. Companies should provide the information indicated in Guide to Reporting on Principle 5. Principle 6: Respect the rights of shareholders 41 41 4.1 4.1 5.1 5.1 6.1 62 Companies should design a communications policy for promoting 5.1 effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. Companies should provide the information indicated in Guide to Reporting on Principle 6. 5.1 -102- Hills Holdings Limited Corporate governance statement 30 June 201 I (continued) ASX Corporate Governance Council Recommendations Reference Comply Principle 7: Recognise and manage risk 71 72 73 74 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. 6.1 The Board should require management to design and implement 6.'l the risk management and internal control systems to manage the company's material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the company's management of its material business risks. The Board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief fìnancial offlcer (or equivalent) that the declaration provided in accordance with section 2954 of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. 6.2 Companies should provide the information indicated in Guide to Reporting on Principle 7. 6.1 ,6.2 Principle 8: Remunerate fairly and responsibly 81 82 83 84 The Board should establish a remuneration committee The remuneration committee should be structured so that it: . consists of a majority of independent Directors; . is chaired by an independent chair; and . has at least three members. 71 7.1 Companies should clearly distinguish the structure of non-executive Remuneration Y Directors' remuneration from that of the executive Directors and senior executives. report Companies should provide the information indicated in Guide to Reporting on Principle 8. 7.1 , Remuneration report -1 03- Hills Holdings Limited Di rectors' declaration 30 June 2011 ln the opinion of the Directors' of Hills Holdings Limited (the Company): (a) the consolidated financial statements and notes set out on pages 2lo 67 and the Remuneration report in the Directors' report, set out on pages 76 to 89, are in accordance with lhe Corporations Act 2001, including: (¡) complying with Australian Accounting Standards (including the Australian Accounting lnterpretations) and lhe Coryorations Regulations 2001; and (b) (c) (ii) giving a true and fair view of the Group's financial position as at 30 June 201 1 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 35 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 9811418 Note 1(a) confìrms that the fìnancial statements also comply with lnternational Financial Reporting Standards as issued by the lnternational Accounting Standards Board. The Directors have been given the declaration required by Section 2954 of the Corporations Act 2001 for the financial year ended 30 June 201 1, from the chief executive offìcer, who has performed the chief executive function and for the period from 8 July 2011 , the chief financial officer function. This declaration is made in accordance with a resolution of the Directors. Dated at Adelaide this 11th day of September 2011 -104- Lead Auditor's Independence Declsration under Section 307C of the Corporations Act 2001 To:the Directors of Hills Holdings Limited I declare that, to the best of my knowledge and beliet in relation to the audit for the financial year ended 30 June 201 1 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions ofany applicable code ofprofessional conduct in relation to the audit. //aç KPMG Partner Adelaide l1 September 2011 KPMG, an Australian partnership and a member firm of the KPMG network of independent member fìrms affìliated with KPMG lnternational Cooperative ("KPMG lnternatìonal"), a Swiss entity 105 Independent auditor's report to the members of Hills Holdings Limited Report on the financial report 'We have audited the accompanying financial report of Hills Holdings Limited (the 'Company'), which comprises the consolidated statement of financial position as at 30 June 2011, and consolidated income statement and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, Notes 1 to 38 comprising a summary of signihcant accounting policies and other explanatory information and the Directors' declaration of the Group comprising the Company and the entities it controlled at the year's end or from time to time during the financial year. Directors ' responsibility for the financial report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the Directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In Note 1(a), the Directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor's respons ibility Our responsibility is to express an opinion on the financial report based on our audit. conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. 'We An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgernent, including the assessment of the risks of rnaterial misstatement of the fìnancial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness ofaccounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financialrepoft. lùy'e performed the procedures to assess whether in all material respects the financial leporl presents fairly, in accordance with lhe Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group's financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG, an Australian partnershìp and a member firm of the KPMG network of independent member fìrms aff iliated with KPMG lnternational Cooperative 106 ("KPMG lnternational"), a Swiss entity Independence In conducting our audit, we have complied with the independence requirements of the Corporations Acr 2001. Auditor's opinion In our opinion: (a) the financial repoft of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group's financial position as at 30 June 20 I I and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1(a). Report on the remuneration report We have audited the remuneration report included in pages 76 to 89 of the Directors' report for the year ended 30 June 201 I . The Directors of the Comp any are responsible for the preparation and presentation of the remuneration report in accordance with Section 3004 of the Corporations Act 2001 . Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor's opinion In our opinion, the remuneration report of Hills Holdings Limited for the year ended 30 June 2011, complies with Section 3004 of the Corporations Act 2001. /luf KPMG Faulkner Adelaide 1 1 September 2011 107 Hills Holdings Limited Shareholder information 30 June 201 I The shareholder information set out below was applicable as at 25 August 2011. A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Holding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Ordinary shares Shares Rights/Options 4,902 9J22 4,525 3,402 þ There were 2,41 t holders of less than a marketable parcel of ordinary shares. B. Equity security holders Twenty largest quoted equity secuity holders The names of the twenty largest holders of quoted equity securities are listed below: Name Ordinary shares RBC Dexia lnvestor Services Australia Nominees Pty Limited (PIPOOLED A/C) Poplar Pty Limited Hills Associates Limited JP Morgan Nominees Australia Limited National Nominees Limited Jacaranda Pastoral Pty Ltd HSBC Custody Nominees (Australia) Limited UBS Nominees Pty Ltd Citicorp Nominees Pty Limited Cogent Nominees Pty Limited Milton Corporation Ltd Queensland lnvestment Corporation Donald Cant Pty Ltd Colleen Sims Nominees Pty Ltd Gwynvill Trading Pty Limited RBC Dexia lnvestor Services Australia Nominees Pty Limited (PllC A/C) Hills Associates Limited & Poplar Pty Ltd Warbont Nominees Pty Ltd (Accumulation Entrepot A/C) JP Morgan Nominees Australia Limited (Cash lncome A/C) AMP Life Limited Percentage of Number held issued shares 9.06 8.14 5.40 3.92 3.01 2.40 2.13 1.88 1.44 1.07 1.01 0.93 0.79 0.68 0.56 0.53 0.48 0.44 0.44 0.37 22,581,156 20,286,335 13,455,689 9,774,212 7,510,239 5,968,699 5,308,789 4,671,979 3,577,667 2,658,851 2,520,299 2,313,056 1,979,060 1,694,798 1,400,000 1,297,293 1,188,918 1,103,958 1,088,099 932.871 111,311,968 44.68 C. Substantialholders Substantial holders in the Company are set out below: Name RBC Dexia lnvestor Services Australia Nominees Pty Limited (PIPOOLED A/C) Poplar Pty Limited Hills Associates Limited Ordinary shares Percentage of Number held issued shares 9.06% 8.14% 5.400/o 22,581,156 20,286,335 13,455,689 -1 08- 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. Hills Holdings Limited Shareholder information 30 June 2011 (continued) E. F. G. H. l. Options No voting rights. On-market buy-back An on-market buy-back was announced on 23 August 2011, as disclosed in note 38 to the financial statements. 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. Securities Exchange The Company is listed on the Australian Securities Exchange. The Home exchange is Adelaide. Other information Hills Holdings Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. Offices and Officers Company Secretary Mr David Lethbridge Registered Office 159 Port Road Hindmarsh SA 5007 Telephone: (08) 8301 3200 Facsimile: (08) 8301 3290 Web: www. h il lshold ings.com. au Location of Share Registry Computershare Investor Services Pty Limited Level 5, 1 15 Grenfell Street Adelaide, SA 5000 Telephone (within Australia): 1300 556 161 Telephone (outside Australia): +61 3 9415 4000 Facsimile (within Australia): 1300 534 987 Facsimile (outside Australia): +61 3 9473 2408 I nternet address: www.computershare.com.au -1 09- 

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