Hill International
Annual Report 2012

Plain-text annual report

Hills Holdings Limited Registered Office 159 Port Road Hindmarsh, SA 5007 Telephone: (08) 8301 3200 Facsimile: (08) 8301 3290 Email: info@hillsholdings.com.au ABN 35 007 573 417 www.hillsholdings.com.au ANNUAL REPORT 2012 H i l l l i s H o d n g s L m i i t e d A n n u a l R e p o r t 2 0 1 2 Better lives. Better business. HILLS HOLDINGS LIMITED ABN 35 007 573 417 Annual report for the year ended 30 June 2012 Contents 02 Operating and financial review 04 Five year summary 05 Group profile 06 Electronics & communications 06 Lifestyle & sustainability 07 Building & industrial 08 Sustainability report 13 Board of directors 17 Senior leadership team 18 Directors’ report 35 Lead auditor’s independence declaration 37 Corporate governance statement 45 Financial statements 107 Directors’ declaration 108 Independent auditor’s report to the members 110 Shareholder Information Registered Office 159 Port Road Hindmarsh, SA 5007 Telephone: (08) 8301 3200 Facsimile: (08) 8301 3290 Email: info@hillsholdings.com.au Web: www.hillsholdings.com.au ABN 35 007 573 417 Location of Share Registry Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street Adelaide, SA 5000 Telephone (within Australia): 1300 556 161 Telephone (outside Australia): +61 3 9415 4000 Facsimile: (within Australia): 1300 534 987 Facsimile: (outside Australia): +61 3 9473 2408 Internet address: www.computershare.com.au Shareholder enquires/change of address Shareholders wishing to enquire about their shareholdings, dividends or change their address should contact the Company’s share registry. OPERATING AND FINANCIAL REVIEW THE HILLS GROUP OF COMPANIES RECORDED A NET PROFIT AFTER TAX ATTRIBUTABLE TO OWNERS OF $26.02M FOR THE YEAR ENDED 30 JUNE 2012. THE YEAR IN REVIEW Most businesses within the Hills’ Group of companies produced acceptable results in the year ended 30 June 2012 despite generally challenging trading conditions. All business segments produced improved results over the prior year. There were a number of highlights during the period including: • Further product developments in the Electronics and Communications Division around the Company’s own intellectual property • A growth in market share for Hills SVL • Further contract wins for Hills’ 50% owned subsidiary OptiComm • Reduced losses from Orrcon Steel • A very strong result from Hills’ Korvest subsidiary around buoyant infrastructure projects. Although there were a number of very positive developments as outlined above, activity in the building and construction sector continued to deteriorate during the year, which saw lower results from Fielders Australia. The Company strategy is to consistently grow shareholder value over time by investing in businesses that deliver superior service and innovative products and which are exposed to high growth markets. This approach is built on a commitment to diversification in order to mitigate the impacts of short term changes to individual markets and economies. As a result of this strategy, the focus for growth and acquisitions remains on the Electronics and Communications Division where higher returns are available. Vision and Values 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 profitable and growing businesses. The Company values can be summarised as follows: • Hills cares about its people, its customers and the environment • Hills is in many businesses but comes together as one team • Innovation is Hills past present and future – the life blood of the Company • Hills invests the best of its time and talent to deliver on its promises. Funding Hills net debt as at 30 June 2012 was $92.4M. Gearing, measured as debt to equity, stood at 23.0% at the end of the period. Since year end, Hills has announced that it has extended its banking facilities such that the earliest date for review of any of the debt facilities is August 2015. Hills continues to comfortably meet all of its banking covenants. 2 Hills Holdings Limited Annual Report for the year ended 30 June 2012 THE HILLS GROUP ALSO RECORDED MUCH IMPROVED CASH FLOW FROM OPERATIONS OF $52.7M AND MAINTAINED ITS ANNUAL DIVIDEND AT 10.0 CENTS PER SHARE. Dividends The Directors have announced an annual dividend of 10.0 cents per share. This dividend is fully franked and comprised an interim dividend of 5.0 cents per share paid in March 2012 and a final dividend of 5.0 cents per share to be paid in September 2012. 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 final dividends. On market share buy back Given Hills’ low levels of debt and the current share price being below the net asset backing, the Board has resolved to extend the on market buy back of its issued shares announced last year. The announcement of the buy back gives Hills the option to acquire up to 10% of the issued shares over the next 12 months and will be earning per share accretive and will not affect Hills existing dividend policy. Likely developments Whilst Hills has invested in a number of new products and opportunities and continues to look for suitable acquisitions in the electronics and communications market, the outlook for commercial building and the steel industry remains subdued. There is continuing fierce competition from growing imports in these markets. Hills has implemented a number of cost reduction initiatives over the course of the last year to ensure that businesses are structured in line with market conditions. In view of the above Hills is unable at this time to provide specific profit guidance for the year ending 30 June 2013. It is expected that the Company will be in a position to provide an update at its Annual General Meeting in November 2012. Hills Holdings Limited Annual Report for the year ended 30 June 2012 3 FIVE YEAR SUMMARY Total revenue Amount in $ millions Net profit after tax attributable to members¹ Amount in $ millions Earnings per share² Amount in cents Dividends per share Amount in cents 2012 $1082.3 2012 $26.0 2011 $1095.8 2011 $25.3 2010 $1156.3 2010 $40.2 2009 $1192.1 2009 $28.0 2008 $1184.7 2008 $48.0 2012 10.5c 2011 10.2c 2010 16.7c 2009 14.6c 2008 27.3c 2012 10.0c 2011 10.0c 2010 12.5c 2009 10.0c 2008 27.5c In thousands of AUD 2008 2009 2010 2011 2012 Total revenue 1,184,737 1,192,081 1,156,326 1,095,845 1,082,272 Net profit/(loss) after tax attributable to members 46,807 9,506 40,188 (74,955) 26,021 Net profit after tax attributable to members (before cash generating unit (CGU) impairment and closure costs)1 Net profit/(loss after tax and before non-controlling interests Depreciation, impairment and amortisation Net borrowing costs Shareholders’ equity Net profit/(loss) after tax attributable to members 48,036 28,052 40,188 25,287 26,021 52,360 21,784 14,374 15,655 23,107 12,531 43,095 23,913 3,409 408,219 402,535 496,499 (73,116) 126,471 4,026 402,307 28,822 21,100 5,753 400,963 – as a % of shareholders’ equity 11.5% 2.4% 8.4% (18.6%) 6.5% Net profit/(loss) after tax and before non-controlling interests – as a % of total revenue 4.4% 1.3% 3.7% (6.7%) 2.7% Earnings per share (cents) Earnings per share (before CGU impairment and closure costs) (cents)² Dividends per share (cents) 26.6 27.3 27.5 4.9 14.6 10.0 16.7 16.7 12.5 Employees at year end Shareholders at year end 3,140 23,841 2,608 23,716 2,832 23,449 (30.2) 10.2 10.0 2,804 22,199 10.5 10.5 10.0 2,642 20,644 1. Net profit after tax attributable to members before CGU impairment and closure costs for the year ended 30 June 2011 of $25.287 million is a non-IFRS measure which has been calculated as: loss for the year of ($74.955 million) adjusted for Orrcon and Team Poly impairment expense and closure costs of $100.242 million. Reconciliation is provided in note 5 of the financial statements. 2. Earnings per share before CGU impairment and closure costs for the year ended 30 June 2011 is a non-IFRS measure. A reconciliation is disclosed in note 24 of the financial statements. The non-IFRS measures used by the Company are relevant because they are consistent with measures used internally by management to assess the operating performance of the business. The non-IFRS measures have not been subject to audit or review. 4 Hills Holdings Limited Annual Report for the year ended 30 June 2012 GROUP PROFILE Electronics & Communications Lifestyle & Sustainability Building & Industrial (including Korvest) • Electronic security systems • Closed circuit television systems • Home and commercial automation and control systems • Professional audio products • Satellite dishes • Consumer electronic equipment • Fibre optic transmission solutions • Communications-related products and services • Domestic and commercial antennas • Master antenna television systems • Communications antennas • Amplifiers • Subscription TV installation services Revenue Amount in $ millions 2012 $337.1 2011 $317.4 2010 $349.5 2009 $336.0 2008 $312.3 EBIT Amount in $ millions 2012 $29.4 $29.4 2011 $28.0 2010 $32.5 2009 $30.9 2008 $38.1 • Indoor and outdoor clothes dryers • Laundry trolleys • Ironing boards • Barrier doors • Garden sprayers • Ladders • Rehabilitation and mobility products • Water storage solutions • Plumbing products • Structural, precision and large steel tubing • Metal roofing, flooring and fencing • Carports and shed systems • Steel door frames • Cable and pipe support systems • Walkway systems • Hot-dip galvanising Revenue Amount in $ millions 2012 $138.1 2011 $160.8 2010 $176.3 2009 $193.5 2008 $227.5 EBIT¹ Amount in $ millions 2012 2011 2010 $10.5 $9.7 $10.2 2009 ($3.1) 2008 $13.8 Revenue Amount in $ millions 2012 $606.3 2011 $616.8 2010 $629.7 2009 $661.7 2008 $643.0 EBIT¹ Amount in $ millions 2012 $5.1 2011 $3.2 2010 $26.4 2009 $31.8 2008 $35.4 1. Before CGU impairment and closure costs for the year ended 30 June 2011 as disclosed within the segment note (note 2) of the financial statements. Hills Holdings Limited Annual Report for the year ended 30 June 2012 5 ELECTRONICS AND COMMUNICATIONS The Electronics and Communications division comprises Hills Electronic Security, Hills SVL, Hills Antenna & TV Systems, Hills Signalmaster, 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. Hills Electronic Security • Hills Electronic Security comprises the market leading business operations of Pacific Communications, DAS and UHS. The business unit markets an extensive range of electronic security products ranging from simple domestic alarms to more complicated integrated surveillance and access control systems. The security market was affected during the period by a continuing reduction in capital expenditure from major corporates and governments. Despite this, volumes of products sold increased, however selling prices and margins were lower. • The division won a number of important contracts and launched the innovative TouchNav alarm panel during the period and was able to produce an improved result overall. Hills Sound Vision & Lighting (SVL) • Hills SVL is a leading provider of professional audio, lighting and control systems to a wide range of customers in Australia and New Zealand and to export markets. • Although parts of the SVL market were slow during the period the business produced an excellent result. • Hills SVL has taken on a number of new agencies and successfully completed the acquisition of certain assets and the operations of Herma Technologies Pty Ltd in February 2012. Hills Antenna and TV Systems • Hills Antenna and TV Systems provides a comprehensive range of reception and distribution equipment for wireless and both subscription and free-to-air television, along with a range of products for the distribution of internet protocol signals. • Demand for equipment for both free-to-air and satellite markets was steady during the period. The business commissioned its new antenna manufacturing plant which produces the highly efficient and robust range of TRU-SPEC and TRU-BAND antenna designed to meet the current and future demand arising from the switch off of the analogue television signal by the end of 2013. • The Exterity range of IP video distribution products won a number of contracts for entertainment and mining applications. Access Television Services, SignalMaster, TechLife • Access Television Services (ATS) in Australia and Signal Master in New Zealand provides subscription television installation services to AUSTAR and SKY TV respectively. Demand was not constant through the period which resulted in ATS experiencing some challenges and cost increases. • Techlife won a number of contracts to provide similar services to government and commercial customers although the financial performance has been below expectations. OptiComm/Cygnus • Hills has a strategy to continue to expand its exposure to communications markets. The 50% owned OptiComm business provides fibre to the node and fibre to the home in new housing developments. The 50% owned Cygnus Satellite business provides bandwidth to rural and remote markets in Australia. • Although both businesses are relatively small, they are growing in line with expectations and improved profits are expected from the Communications assets in the future. LIFESTYLE & SUSTAINABILITY The Lifestyle and Sustainability division comprises Hills Home and Hardware Product operations in Australia and New Zealand, the Hills Healthcare, Rehabilitation and Mobility business, LW Gemmell plumbing supplies and Team Poly. Home and Hardware Products • The results of the Hills traditional branded products business continued the steady improvement shown in previous years. • As a result of further changes in the Australian hardware industry certain listings of Bailey Ladders were lost during the year; however the Company has experienced increased market share in sprayers and clotheslines. • LW Gemmell provides speciality plumbing products to the building industry. Despite very subdued activity in the Australian building industry during the period a steady result was delivered by the LW Gemmell business. 6 Hills Holdings Limited Annual Report for the year ended 30 June 2012 OPERATING AND FINANCIAL REVIEWHills Healthcare Fielders Australia • Hills Healthcare is the leading manufacturer of rehabilitation, • The Fielders roll-forming roofing and flooring business is a market mobility and hospital equipment in Australia. leader in new and innovative products. • Results in this business were steady during the period due to • The decline in both domestic and commercial building activity the success of some innovative new products being launched, particularly a new bed offer for nursing homes. saw lower volumes of prices available to Fielders although market share was held nationally. • The deteriorating market conditions saw lower market margins and despite significant overhead reduction initiatives the result was disappointing. • Late in the year Fielders launched the innovative Aramax product which gives the opportunity for customers to design buildings with extremely long roof spans. The Aramax product can be run on Fielders mobile mills at customer sites giving great efficiencies in the erection of commercial buildings. Korvest • Hills holds 48.6% of Korvest which comprises the market leading Ezystrut cable and pipe support business, Korvest Galvanisers and Indax industry access equipment. The Korvest business recorded a very strong performance from its Ezystrut business and consequently delivered excellent results and was able to increase its profit and dividends to shareholders. • As Korvest is a separately listed public company further details are available from the Korvest website. Team Poly/Hills Eco • Hills operates a number of businesses in the eco and sustainability markets. Team Poly operates in the very competitive water tank industry which has been subject to intense competition. Despite the launch of a new product range and some success with the innovative Smart Bar range of frontal protection systems the results from Team Poly continue to be disappointing. BUILDING AND INDUSTRIAL The Building and Industrial Division comprises Orrcon Steel, Fielders Australia and Korvest. Orrcon Steel • Orrcon Steel is a leading manufacturer and distributor of steel tube and pipe in Australia. Orrcon specialises in the manufacture of precision tube, structural tube and rectangular sections and distributes a range of other steel products including oil, gas and water pipelines. • Whilst the results from Orrcon Steel were improved over the previous year and included the closure of the large pipe mill at Unanderra in September 2011, the business has not delivered a satisfactory return on the funds employed. • There have been ongoing changes to the structure at Orrcon Steel designed to meet the changing market conditions, however very low priced imported tubular products continue to set the price in this market, making profitability extremely difficult for Australian manufacturers. Hills Holdings Limited Annual Report for the year ended 30 June 2012 7 SUSTAINABILITY REPORT People Hills looks to operate its Electronics and Communications, Lifestyle and Sustainability and Building and Industrial businesses, in ways that are socially and environmentally responsible and designed to ensure long term sustainable outcomes, taking into consideration the different needs of our stakeholders. Hills’ sustainability efforts are centred around four key areas: • the importance of our people; • ensuring the health and safety of our workforce; • the impact on the environment in which we operate; and • the communities in which we operate. Corporate Responsibility Hills’ sustainability program aims are, in large part, based on acknowledging that Hills’ stakeholders expect it to operate in a manner that is both ethical and responsible. Hills’ Code of Conduct sets out those matters which Hills consider are necessary principles and standards of personal and corporate behaviour to ensure its ongoing success. Key aspects of the Code are: Attracting, developing and retaining the best people with values that are aligned to Hills is a key component of ensuring long term sustainable outcomes for the Hills’ business. As at 30 June 2012, Hills employed 2,642 staff in full-time, part-time and casual positions across Australia and New Zealand. A key human resource strategy for Hills is to maintain an environment where equality, fairness and respect for each other, Hills’ customers, suppliers and shareholders is simply the way things are done at Hills. In doing so Hills provides opportunities for all Hills’ people that enable them to grow and perform to their full potential – it is the Hills’ way of life. Hills’ Equity and Diversity Policy underpins this objective. Hills adopted its gender diversity and inclusion policy in the 2011 financial year to reflect Hills’ commitment to diversity and equitable dealings with all parties. Hills aims to meet its ongoing commitment to diversity by, among other things: • creating an environment where women can achieve their career aspirations and balance their personal responsibilities; • actively assisting women employees • compliance with laws, policies to achieve their full potential; and procedures; • integrity and equitable dealing with third parties; • behaviour in the work environment; • confidentiality and privacy; • conflicts of interest; • use of Company assets; • responsibility to Hills’ shareholders; and • conduct of the business in regard to the environment. Any breach of the Code is taken seriously. The Code provides that where a breach occurs, appropriate action will be taken that may result in termination of employment or legal action. • retaining Hills’ female talent and drawing leaders from the total talent pool to give Hills more strength and flexibility; and • establishing Hills as an employer of choice for women. Hills framework for ongoing diversity initiatives includes implementing actions that assist gender diversity across the organisation such as: • having managers participate in diversity awareness training; • establishing a specific site on the Hills Intranet that focuses on relevant topics for women; 8 Hills Holdings Limited Annual Report for the year ended 30 June 2012 • providing career management training for all high potential women; • a mentoring program for high potential women earmarked for senior leadership roles; and • creating networking opportunities for women at Hills to network with each other and with relevant networks outside Hills. Details of Hills’ achievements in addressing diversity targets are set out on page 39 in the Corporate Governance Statement. Hills recognises the importance of work-life balance and offers flexible work practices, where possible, to staff. Hills’ Flexibility at Work Policy offers a number of flexible working solutions that enable staff to balance personal and work commitments. Just as Hills considers that recruiting the best people into the business is integral to Hills success, so too is the ongoing learning and development of all staff. Hills recognises that having the skills to do the job well increases job satisfaction, productivity and improves retention so all staff have the opportunity to participate in a variety of learning and development activities, including participating in skills based, leadership and compliance training programs, traineeships, company funded tertiary studies, on line learning and on the job training. Hills’ performance management system has a strong emphasis on targeted personal and professional development, supporting all people to be the best they can be today and into the future. Because Hills’ values are important, they also form part of Hills’ performance management system and Hills’ people are recognised for demonstrating Hills’ values. SUSTAINABILITY REPORTHealth and safety The health and safety of Hills’ employees is a key priority and guides business decisions and actions. Hills’ primary strategic health and safety objective is to achieve Zero Harm. This year the Hills Group achieved: • 60% reduction in Lost Time Injury Frequency Rate (LTIFR); • 49% reduction in Medical Treatment Injury Frequency Rate (MTIFR); • 51% reduction in Total Recordable Injury Frequency Rate (TRIFR); • The set target of 25% reduction of TRIFR for the group (in fact achieved 51% reduction in the year); • A full review of Hills Health, Safety and Environmental (HSE) Management System in line with the new model Workplace Health and Safety Act and Regulations, which instigated a split of the HSE Management System to a Workplace Health and Safety (WHS) Management System, and also an Environmental Management System (EMS). This five step strategy seeks to: • integrate the Hills’ health and safety management systems; • achieve compliance against recognised health and safety standards consistently across the business; • implement a risk management based approach to health and safety management; • ensure there is a high degree of awareness and a culture of continuous improvement throughout the business; and • develop a customer driven health and safety culture in Hills. Hills’ WHS Management System policies and procedures reflect its commitment to providing a healthy, safe and friendly environment for its employees. There is a focus on hazard management and staff are widely consulted on health and safety matters. Staff and contractors are provided with the information necessary to perform their jobs safely. • developing standards in relation to its operations, products and services. Hills recognises the long-term importance of building a reputation as an environmentally responsible company. As a business, Hills is committed to reducing the impact of its operations on the environment and playing a part in influencing consumers and the broader supply chain. In view of this, Hills is building its capacity to monitor and address these risks across all aspects of its operations. Hills holds all required environmental licences for its manufacturing sites around Australia. No significant environmental incidents were reported over the 2011-12 financial year and Hills continued to meet or exceed the requirements specified in relevant licenses and authorisations. Hills has completed a review of its HSE management system with a goal to establish a dedicated Environmental Management System (EMS) during the financial year 2012-13. A Group EMS will assist Hills to identify, manage and reduce its impact on the environment and generate reports on environmental performance. It provides a systematic and methodical approach to planning, implementing and reviewing the Group’s response to those impacts. The National Greenhouse and Energy Reporting (NGER) Act requires the Group to report its annual greenhouse gas (GHG) emissions and energy use from facilities over which Hills has operational control. As a result, systems and processes for the collection and calculation of the data required have been established. Following review of an incident which occurred in late 2009, a Workplace Health and Safety Enforceable Undertaking was entered into by a Group subsidiary, Orrcon Operations Pty Ltd. and the Chief Executive, Department of Justice and Attorney General dated 2 February 2012. The Enforceable undertaking addresses concerns raised in the review. The Company has implemented the proposed changes. For those employees who do sustain injuries in the workplace, Hills provides an equitable claims management process and workplace rehabilitation program to ensure the earliest possible return to meaningful and productive work. Since the beginning of Hills Zero Harm Journey, there has been a 91% reduction in its Lost Time Injury Frequency Rate, and an 85% reduction in the Total Recordable Incident Frequency Rate. There are a number of business units that have been Lost Time Injury (LTI) and Medical Treatment Injury (MTI) free for over 12 months, and as such are well on the path to achieving Zero Harm. Finally, during the 2011-12 financial year Hills has set a new record – the longest recorded number of months without an LTI in the Group. At the close of the financial year, Hills had not recorded an LTI since mid-January 2012. Environment Hills cares for the environment and cultural heritage. Hills is committed to developing systems and processes that minimise any adverse environmental impacts by: • providing advice to its customers on the responsible use of its products; • complying with all relevant environmental laws, regulations and standards; and Hills Holdings Limited Annual Report for the year ended 30 June 2012 9 SUSTAINABILITY REPORT (CONTINUED) The Community Hills has a long established culture of encouraging staff participation in local community activities. This includes sponsorship of staff teams in local charitable events such as the “Walk to Cure Juvenile Diabetes”, donations of Hills’ products for fund raising events and charitable donations. Through the Hills Charity Support Scheme, Hills employee giving program, staff contributions are matched dollar for dollar by Hills, enabling donations in excess of $130,000 during the year to very worthy charities nationally. These donations included: • The purchase of air conditioning for Ronald McDonald’s main house in WA; • The purchase of dinghy covers for Sailability WA, which enables people with disabilities to experience sailing; • The makeover of the garden at Cara’s children’s respite facility at Ingle Farm in SA; • Funding for Girls on Track, a life skills program for young girls from vulnerable families in SA; • The purchase of a generator for Brothers in Arms, an organisation that works with homeless children in Vic; • The purchase of breast pumps for the Royal Women’s Hospital in Vic for use by women with premature babies; • The building of a sensory room and touch screen table top computer for the William Rose School for children with disabilities in NSW; and • The purchase of play equipment for the Camira and Bundaberg centres of the AEIOU Foundation, which works with young children with Autism Spectrum Disorder in Qld. Since the Scheme’s inception some 12 years ago, Hills, together with its people, have made donations in excess of $1,100,000. Environment (continued) During the financial year 2011-12, Hills submitted its first report under the NGER Act with data collected over the 2010-11 reporting period. The Group’s reported energy consumption was 253TJ of energy with total GHG emissions of 34,444 tonnes of Carbon Dioxide equivalent (tCO2-e). Projections made utilising data collected during the 2011-12 reporting period indicate that the Group will again trigger the legislated reporting threshold. Total energy consumption is estimated to be approximately 241TJ while total GHG emissions are approximately 28,594tCO2-e. This represents a 5 per cent reduction in total energy consumption and a 17 per cent reduction in greenhouse gas emissions over the financial year 2011-12. On 1 July 2012 the Australian Government introduced a price on carbon emissions that will be fixed at $23 per tonne and will rise at 2.5 per cent each year before transitioning to an emissions trading scheme on 1 July 2015. Liable entities will be required to report on their emissions (through the NGER Act) and surrender the number of carbon units which represents its total emissions to the Clean Energy Regulator or pay a charge. Hills is not a liable entity under the carbon pricing mechanism and is not required to purchase carbon units in relation to its total emissions despite reporting under the NGER Act. However, Hills does face potential cost increases that will be passed on from suppliers of resources, goods and services (e.g. fuel, electricity, gas and steel). Hills’ EMS will assist its businesses to mitigate the impact of the Carbon Pricing Mechanism by encouraging reductions in energy consumption and waste output. Hills is 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 impacts of packaging. Under the APC Hills has revised its five year action plan, which will enable the Group to undertake reviews of new and existing packaging and complete actions against core APC Key Performance Indicators. In the 2011-12 financial year Hills submitted its first annual report under the APC, which has been published on its website alongside the revised action plan and environmental policy. Hills remains compliant in relation to all APC requirements. 10 Hills Holdings Limited Annual Report for the year ended 30 June 2012 SUSTAINABILITY REPORTHILLS LOOKS TO OPERATE ITS ELECTRONICS AND COMMUNICATIONS, LIFESTYLE AND SUSTAINABILITY AND BUILDING AND INDUSTRIAL BUSINESSES, IN WAYS THAT ARE SOCIALLY AND ENVIRONMENTALLY RESPONSIBLE Hills Holdings Limited Annual Report for the year ended 30 June 2012 11 BUILDING AND INDUSTRIAL ELECTRONICS AND COMMUNICATIONS LIFESTYLE AND SUSTAINABILITY 12 Hills Holdings Limited Annual Report for the year ended 30 June 2012 BOARD OF DIRECTORS Jennifer Helen Hill-Ling LLB (Adel) FAICD Chairman Non-Independent Non-Executive Director Age 50 Edward (Ted) Pretty BA LLB (Hons). Group Managing Director (appointed 3 September 2012) Age 54 Graham Lloyd Twartz BA (Adel) DipAcc (Flinders) Group Managing Director (retired 2 September 2012) Age 55 Experience and expertise Experience and expertise Experience and expertise Appointed Director in August 1985. Appointed Deputy Chairman in June 2004. Appointed Chairman 28 October 2005. Jennifer Hill-Ling has extensive experience in corporate and commercial law, specialising in corporate and business structuring, mergers and acquisitions, joint ventures and related commercial transactions. She practiced law for some 25 years and was a senior partner in two Sydney law firms in that time. She is also currently a director of MS Limited, Hills Associates Limited and Hills Holdings NZ Limited and was formerly a director of Tower Trust Limited. She is a fellow of the Australian Institute of Company Directors. Other current listed company directorships None Former listed company directorships in last 3 years None Special responsibilities Chairman of the Board, Chairman of the Remuneration Committee, Member of the Nomination Committee. Interests in shares and options at the date of this report 15,832,484 ordinary shares in Hills Holdings Limited (including 1,188,918 shares owned by Hills Associates Limited and Poplar Pty Ltd (jointly held) and 14,450,548 shares owned by Hills Associates Limited of which JH Hill-Ling is a Director). Nil options over ordinary shares in Hills Holdings Limited. Appointed as Group Managing Director and Chief Executive Officer 3 September 2012. Appointed Director in July 1993. Appointed as Group Managing Director 1 July 2008. Graham Twartz is the Group Managing Director and Chief Executive Officer 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 field. Mr Twartz held senior management positions in diversified companies before joining Hills in 1993. He is currently a director of Hills Associates Limited and Hills Holdings NZ Limited. Other current listed company directorships Director of Korvest Ltd (since 1999). Former listed company directorships in last 3 years None. Special responsibilities Managing Director. Interests in shares and options at the date of this report 207,342 ordinary shares in Hills Holdings Limited and 29,115 ordinary shares in Korvest Ltd. 348,859 Performance rights over ordinary shares in Hills Holdings Limited. Mr Pretty is a leading business executive and director with significant experience particularly in telecommunications and information technology innovation and product development. He is Australian and New Zealand Advisory Chairman of Tech Mahindra and Mahindra Satyam (part of the Indian headquartered $14bn diversified Mahindra Group). He spent two years in the Middle East during his tenure at Gulf Finance House as its Group Chief Executive Officer. Prior to his time at Gulf Finance, Mr Pretty was Chairman of Fujitsu Australia Limited, Chairman of then ASX listed RP Data Limited, an Executive Director at Macquarie Capital Advisers and a member of the Visy Industries Advisory Board. Prior to those roles, he was an Executive at Telstra Corporation Limited, in a number of Group Managing Director positions including Technology Innovation and Product. Mr Pretty has also served as an adviser to and director of Optus Communications and Optus Vision and as a Partner at Media and Telecommunications Law Firm, Gilbert & Tobin prior to joining Telstra. Other current listed company directorships Non-Executive Director of NextDC Limited (since 2011). Former listed company directorships in last 3 years None Special responsibilities Managing Director. Interests in shares and options at the date of this report Nil ordinary shares in Hills Holdings Limited. Nil Performance rights over ordinary shares in Hills Holdings Limited. Hills Holdings Limited Annual Report for the year ended 30 June 2012 13 Fiona Rosalyn Vivienne Bennett BA (Hons) FCA FAICD FAIM Independent Non-Executive Director Age 56 Experience and expertise Appointed Director on 31 May 2010. Fiona Bennett is a Chartered Accountant with over 30 years' experience in business and financial management, corporate governance, risk management and audit. She has previously held senior executive positions at BHP Billiton Limited and Coles Group Limited and has been a Chief Financial Officer at several organisations in the health sector. Ms Bennett is a graduate of The Executive Program at the University of Virginia's Darden Graduate School and the AICD Company Directors' course. Other current listed company directorships Director of Boom Logistics Limited (since March 2010) Former listed company directorships in last 3 years None Special responsibilities Chairman of the Audit, Risk and Compliance Committee. Interests in shares and options at the date of this report Matthew Arnold Campbell Ian Elliot FAICD Independent Non-Executive Director Age 58 Independent Non-Executive Director Age 58 Experience and expertise Experience and expertise Appointed Director on 19 December 2011. Matthew Campbell has over thirty years’ experience with leading retailers and wholesalers within Australia and New Zealand. Appointments have included General Manager Merchandise with The Warehouse (New Zealand), executive roles with Rebel Sport (General Manager Merchandise, General Manager Retail and Executive Group General Manager of Supply Chain), Managing Director of Epic Records and Group General Manager of Brashs. Mr Campbell has specialist expertise in driving sustainable growth through development and execution of business strategy, cost productivity and business ‘turn around’ programs. Other current listed company directorships None Former listed company directorships in last 3 years None Special responsibilities Member of the Audit, Risk and Compliance Committee. Interests in shares and options at the date of this report Appointed Director in August 2003. Appointed Lead Independent Director in December 2011. Ian Elliot has spent 39 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 Institute of Company Directors and graduate of the Harvard Business School Advanced Management Program. In addition to his listed company directorships he was formerly Chairman of Zenith Media Pty Ltd, Cordiant Communications Group, Allied Brands Limited, Promentum Limited and Artist & Entertainment Group Limited and Chairman and Chief Executive Officer (CEO) of George Patterson Advertising and the National Australia Day Council. He is a current Director of the Australian Rugby League Commission. Other current listed company directorships Director of Salmat Limited (since 2005) Former listed company directorships in last 3 years None Special responsibilities Chairman of the Nomination Committee, Member of the Remuneration Committee. Interests in shares and options at the date of this report 6,235 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. 4,000 ordinary shares in Hills Holdings Limited. 1,000 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. 14 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Roger Baden Flynn BEng (Hons) MBA FIE (Aust) FAICD Independent Non-Executive Director Age 62 Experience and expertise Appointed Director in November 1999. Retired as Director 4 November 2011 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 Institute of Company Directors. Other current listed company directorships Executive Chairman of Coventry Group Limited (since 2001). Former listed company directorships in last 3 years None Special responsibilities None Interests in shares and options at the date of this report None David Moray Spence B Com Peter William Stancliffe BE (Civil) FAICD Independent Non-Executive Director Age 60 Independent Non-Executive Director Age 64 Experience and expertise Appointed Director on 1 September 2010. Experience and expertise Appointed Director in August 2003. Peter Stancliffe has over 40 years’ experience in the management of large industrial companies both in Australia and overseas and has held various senior management positions, including Chief Executive Officer. He has extensive experience in strategy development and a detailed knowledge of modern company management practices. Mr Stancliffe is a graduate of the MIT Senior Management Program and the AICD Company Directors’ Course. In addition to his listed company directorships he is a director of Harris Scarfe Pty Ltd. Other current listed company directorships Chairman of Korvest Ltd (since 2009). Director of Automotive Holdings Group Limited (since 2005). Former listed company directorships in last 3 years Former Chairman of View Resources Limited (from 2006 to 2009). Special responsibilities Member of the Nomination Committee. Interests 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. 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 Chief Financial Officer (CFO) of Freedom Furniture and OPSM, where he also assumed responsibility for manufacturing and logistics. He has been directly involved in many internet and communications companies including the building of Australia’s first and largest dial up ISP, OzEmail. Mr Spence was the chief executive officer of Unwired Australia until February 2010. He has been involved in a number of listed and non-listed boards including WebCentral, uuNet, Access1, Emitch, Commander Communications, Chaosmusic, ubowireless, Vividwireless and is a past chairman of the Internet Industry Association. He is currently a non-executive Director of AWA Limited and of PayPal Australia Pty Ltd. Other current listed company directorships Chairman of VOCUS Communications Ltd (since June 2010). Former listed company directorships in last 3 years None. Special responsibilities Member of the Audit, Risk and Compliance Committee, Member of the Remuneration Committee. Interests 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. Hills Holdings Limited Annual Report for the year ended 30 June 2012 15 HILLS IS IN MANY BUSINESSES BUT COMES TOGETHER AS ONE TEAM. HILLS INVESTS THE BEST OF ITS TIME AND TALENT TO DELIVER ON ITS PROMISES. 16 Hills Holdings Limited Annual Report for the year ended 30 June 2012 SENIOR LEADERSHIP TEAM Ted Pretty BA LLB (Hons) Group Managing Director Age: 54 Ted was appointed Group Managing Director and Chief Executive Officer on 3 September 2012. He is a leading business executive and director with significant experience particularly in telecommunications and information technology innovation and product development. He is a non Executive Director of Korvest Limited, NextDC Limited and Australian and New Zealand Advisory Chairman of Tech Mahindra and Mahindra Satyam (part of the Indian headquartered $14bn diversified Mahindra Group). He spent two years in the Middle East during his tenure at Gulf Finance House as its Group Chief Executive Officer. Prior to his time at Gulf Finance, Mr Pretty was Chairman of Fujitsu Australia Limited, Chairman of then ASX listed RP Data Limited, an Executive Director at Macquarie Capital Advisers and a member of the Visy Industries Advisory Board. Prior to those roles, he was an Executive at Telstra Corporation Limited, in a number of Group Managing Director positions including Technology Innovation and Product. Ted has also served as an adviser to and director of Optus Communications and Optus Vision and as a Partner at Media and Telecommunications Law Firm, Gilbert & Tobin prior to joining Telstra. Mike McKinstry B Econ and Marketing (Strathclyde, UK) Chief Operating Officer Age: 51 Mike joined the Group in May 2011 in his current role and is responsible for the businesses within the Building and Industrial and Lifestyle and Sustainability Divisions. Previously Mike was with the AMCOR group where he held positions as Group General Manager of both the Beverage Cans and Closures and Corrugated Box divisions. He is a former Managing Director of Alcoa Australia Rolled Products, and has held senior executive and operational positions in Australia and the USA with the PBR International brake products manufacturing and supplies group. Prior to coming to Australia he was for many years with the Rover Group motor vehicle conglomerate in the UK, culminating in his appointment as Director, Sales and Marketing Operations. Grant Logan B Commerce and Administration (VUW, NZ) CA (NZ) Chief Financial Officer Age: 60 Grant joined the Group in August 2011 as Chief Financial Officer. Previously Grant was the Chief Financial Officer and an executive director of Corporate Express. He was also a CFO with leading corporations including ASX-listed foods group, Goodman Fielder, Philips Electronics Australia/NZ and Bayer Australia, and has held numerous directorships with public and private companies. Grant is a former Chairman of the Electrical Lamp Manufacturing Association Ltd, Radio Rentals (SA) Pty Ltd, Philips Electronics Australia, Philips Electronics NZ, Atos Origin Pty Ltd and Blue Sky Designs. Steve Cope CEO – Electronics & Communications Age: 53 Steve joined the Company in April 2007 as Group General Manager, Electronics & Communications and is responsible for all of the diverse electronics businesses in the Hills portfolio. Steve has over 30 years experience in the management of large technology and contracting companies in Australia and overseas and has held various executive management positions. He has extensive experience in technology development and commercialisation strategy. He is a graduate of the University of Melbourne MBS LIB and MDP. Tony Sullivan B. E. (Civil) (Auckland, NZ) MBA (Cranfield School of Management, UK) Group General Manager Strategy Age: 59 Tony joined the Group in October 2010 and is responsible for Group strategy and portfolio management including acquisitions and divestments. Previously Tony was General Manager Strategy & Business Development at Alesco Corporation Limited, the Group Planning and Development Manager for the OPSM Group Limited and has also held positions across a number of companies and industries in growth and development roles including private equity. Rachel Rees B.Bus (Acc), Grad Dip CSA, MAICD, FCA, FTIA, FCIS, Company Secretary Age: 43 Rachel joined the Group in February 2012 and is responsible for all of the legal and compliance issues associated with Hills. Previously she was a Director and CFO/Company Secretary of Uranium One for seven years. She assisted the company in developing Australia’s fourth uranium mine, Honeymoon. Prior to working for Uranium One, Rachel was the Taxation Partner of a Chartered Accounting firm. She is the Chair – Institute of Chartered Company Secretaries – SA & NT State Council and is also a member of the South Australian Regional Council for the Institute of Chartered Accountants in Australia. Hills Holdings Limited Annual Report for the year ended 30 June 2012 17 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 2012, AND THE INDEPENDENT AUDITOR’S REPORT THEREON. Directors Company secretary 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 2012, and the numbers of meetings attended by each Director were: 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 Fiona Rosalyn Vivienne Bennett Ian Elliot David Moray Spence Peter William Stancliffe Matthew Arnold Campbell was appointed as a Director on 19 December 2011 and continues in office at the date of this report. Roger Baden Flynn was a Director from the beginning of the financial year until his retirement on 4 November 2011. Review of operations Refer Operating and Financial Review on pages 2 to 7. Information on Directors Refer to Board of Directors on pages 13 to 15. Rachel Rees, B.Bus (Acc), Grad Dip CSA, MAICD, FCA, FTIA, FCIS, was appointed to the position of Company Secretary on 1 February 2012. As Company Secretary, Rachel is responsible for all of the legal and compliance issues associated with Hills. Previously Ms Rees was a Director and CFO/Company Secretary of Uranium One for seven years. She assisted the company in developing Australia’s fourth uranium mine, Honeymoon. Prior to working for Uranium One, Ms Rees was the Taxation Partner of a Chartered Accounting firm. Ms Rees is the Chair – Institute of Chartered Company Secretaries – SA & NT State Council and is also a member of the South Australian Regional Council for the Institute of Chartered Accountants in Australia. David Lethbridge, LLB (Otago, NZ), Grad Dip ACG, FCIS, GAICD was appointed to the position of Company Secretary in January 2010 and held this position until 1 February 2012. 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. 18 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Annual Report for the year ended 30 June 2012 19 DIRECTORS’ REPORT Jennifer Helen Hill-Ling Graham Lloyd Twartz* Fiona Rosalyn Vivienne Bennett Matthew Arnold Campbell~ Ian Elliot Roger Baden Flynn^ David Moray Spence Peter William Stancliffe# Meetings of committees Full meetings of Directors A 16 16 16 7 14 7 15 16 B 16 16 16 7 16 7 16 16 Audit, Risk and Compliance B A – – 10 4 – – 10 6 – – 10 4 – – 10 6 Nomination Remuneration A 5 – – – 5 – – 5 B 5 – – – 5 – – 5 A 8 – – – 8 – 8 – B 8 – – – 8 – 8 – A = Number of meetings attended B = Number of meetings held during the time the Director held office or was a member of the committee during the year * = An executive Director ~ = Commenced as a Director on 19 December 2011 and commenced as a member of the Audit, Risk and Compliance Committee on 30 March 2012 ^ = Retired 4 November 2011 # = Resigned as a member of the Audit, Risk & Compliance Committee on 10 February 2012 Remuneration report-audited The Directors of Hills Holdings Limited present this Remuneration report for the Group for the year ended 30 June 2012. This Remuneration report forms part of the Directors’ report and has been prepared in accordance with section 300A 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 2012. Directors and other key management personnel disclosed in this report 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. The key management personnel of the Group includes the Directors as per pages 13 to 15 of the Directors’ report 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 Nonexecutive and executive directors – see pages 13 to 15 of the Directors’ report. Other key management personnel S Cope A Kachellek D Lethbridge G Logan M McKinstry A Muir R Rees T Sullivan Chief Executive Officer – Electronics and Communications Division Managing Director – Korvest Ltd Company Secretary (until 1 February 2012) Chief Financial Officer (from 8 August 2011) Chief Operating Officer Chief Financial Officer (until 7 July 2011) Company Secretary (from 1 February 2012) Group General Manager Strategy Changes since the end of the reporting period None 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 Committee Information 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.hillsholdings.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. 20 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Principles used to determine the nature and amount of remuneration (continued) The Committee’s responsibilities include developing, reviewing and making recommendations to the Board on: • the remuneration framework for the Non-Executive Directors and Board Committees; • the remuneration policy for the Managing Director and senior executives; and • remuneration incentive schemes for the Managing Director and senior executives. 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) Use of remuneration consultants During 2012, Hills’ Remuneration Committee employed the services of Godfrey Remuneration Group Pty Ltd to review its existing remuneration policies and to provide recommendations in respect of benchmarking salaries and executive short-term and long-term incentive plan design. These recommendations also covered the Group’s key management personnel. Under the terms of the engagement, Godfrey Remuneration Group provided remuneration recommendations as defined in section 9B of the Corporations Act 2001 and was paid $33,600 for these services. The following arrangements were made to ensure that the remuneration recommendations were free from undue influence: • Godfrey Remuneration Group was engaged by, and reported directly to, the Chairman of the Remuneration Committee. The agreement for the provision of remuneration consulting services was executed by the Chairman of the Remuneration Committee under delegated authority on behalf of the Board. • The report containing the remuneration recommendations was provided by Godfrey Remuneration Group directly to the Chairman of the Remuneration Committee; and • Godfrey Remuneration Group was permitted to speak to management throughout the engagement to understand Company processes, practices and other business issues and obtain management perspectives. However, Godfrey Remuneration Group was not permitted to provide any member of management with a copy of their draft or final report that contained the remuneration recommendations. DIRECTORS’ REPORT Remuneration report-audited (continued) As a consequence, the Board is satisfied that the recommendations were made free from undue influence from any members of the key management personnel. • Fixed remuneration, being base pay, superannuation and other benefits; • Short term incentives (STI) and • Long term incentives(LTI). (c) Voting and comments made at the Company’s 2011 Annual General Meeting Hills received more than 87% of "yes" votes cast on its Remuneration report for the 2011 financial year. (d) Executive remuneration 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: 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 set out in the table below. The weightings are calculated on the basis that the "at risk" components (STI and LTI) are at their maximum. Fixed STI LTI 45% 40% 15% Managing Director Other key management personnel (i)Market competitive and fair: Range 48% - 75% 17% - 45% 6% - 10% • 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: • Incentive plans and performance measures are aligned with Hills’ short and long term success. (e) Executive remuneration framework The executive remuneration framework has a mix of fixed and variable ("at risk") pay. It has three components: Average 62% 30% 8% (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 an Industrial and Service Market Comparator Group comprised of a group of ASX listed companies of similar size to HIlls in terms of market capitalisation and business characteristics and it also takes into account an individual’s responsibilities, performance, qualifications and experience. In some cases, experience, superior performance or strong market demands for specific job categories may justify above median fixed remuneration. Structured as a total employment cost package, the base pay may be delivered as a combination of cash and prescribed non-financial benefits at the executives' discretion. There are no guaranteed base pay increases included in any executives' contracts. The fixed component of remuneration for all continuing key management personnel is frozen at levels set in 2011, except where competitive market forces have forced a review or there has been a change in responsibilities. Retirement benefits comprise employer contributions to defined contribution superannuation funds. Hills Holdings Limited Annual Report for the year ended 30 June 2012 21 DIRECTORS’ REPORT Remuneration report-audited (continued) Principles used to determine the nature and amount of remuneration (continued) (ii) Short term incentives and increase shareholder value by providing rewards for achievement of business financial performance goals and individual performance goals which are focussed on non-financial performance. management personnel. KPIs generally include measures relating to the Group, the relevant business segment and the individual, and may include a mix of financial and non-financial performance measures. Hills’ executives all participate in an STI Plan which is designed to drive individual and team performance to deliver annual business plans Each year the Remuneration Committee recommends to the Board the key performance indicators (KPIs) for the key Features of all executives’ STI plans for FY 2012 are as follows: Frequency and timing Participation is determined on an annual basis with performance measured over the financial year ending 30 June. Financial measures used Non-financial measures Assessment of performance Service condition A principal focus of Hills is earnings before interest and tax (EBIT), net profit after tax (NPAT), returns on funds employed (ROFE) which measures effective utilisation of assets, earnings per share (EPS) and working capital. The measures used in the STI plan are: • for senior executive roles with corporate responsibility: a combination of ROFE, NPAT and working capital; • for senior executives with divisional responsibility: EBIT and ROFE; and • for the Managing Director: ROFE, NPAT and EPS. Non-financial measures vary with position and responsibility and are chosen because they are critical to Hills’ short term and long term success, and are aligned to the business plan. The measures typically cover areas including: • Safety; • Strategic outcomes; • Operational improvements; • Succession planning; • Diversity; • Restructuring and rationalisation; and • Other discretionary performance targets. At the end of the financial year each senior executive’s performance is assessed based on the actual performance of the Group and the relevant segment and individual performance overall and against KPIs set at the beginning of the financial year. The Managing Director makes recommendations in respect of each senior executive to the Remuneration Committee who in turn makes recommendations to the Board in relation to the payment of individual short term bonuses. 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 financial year. In terms of the targets set by the Board for FY 2012, 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 STI awarded in FY 2012 some of the financial targets set; • The Building and Industrial and Lifestyle and Sustainability divisions did not meet the financial targets set; • Certain strategy and succession planning targets were met; and • The Group’s safety targets were exceeded. (iii) Long term incentives (a) Long Term Incentive Plan (LTIP) In 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 specified performance conditions) (performance rights); 22 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Principles used to determine the nature and amount of remuneration (continued) • 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 dependent 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; • 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; Participation Executive participation is determined by the Board. DIRECTORS’ REPORT Remuneration report-audited (continued) • 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’ 2011 Annual General Meeting, shareholder approval was obtained for the Managing Director to be issued with 229,933 (at Hills 2010 Annual General Meeting: 118,926) performance rights under the LTIP. Following the approval given at the 2011 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 the following table and the table on page 30 of this Report. Performance conditions Performance measures The performance conditions attaching to the performance rights will be measured over a three year period commencing from 1 July 2011 (performance rights issued in the previous financial year are measured over the three year period commencing from 1 July 2010). If 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 Hills’ three year strategic and financial objectives and TSR measures growth in the price of Hills’ shares and dividends against the ASX 200 Industrial Accumulation Index. 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 Industrial Accumulation Index (Index) which is applicable to the other 50% of the performance rights. Performance testing The performance hurdles will be tested at 30 June 2014 (performance rights issued in the previous financial year will be tested at 30 June 2013). No further testing will occur. Vesting schedule The vesting schedule for the performance rights issued in the 2012 financial year is: EPS hurdle: • EPS compound annual growth rate of less than 15%, with a starting EPS of 19.2 cents – 0% vested • EPS compound annual growth rate of 15% or more, with a starting EPS of 19.2 cents – 25% vested • EPS compound annual growth rate of 20% or more, with a starting EPS of 20.0 cents – 50% vested TSR hurdle: • Hills’ TSR compound annual growth rate less than 20%, with a starting share price of $3.00 – 0% vested • Hills’ TSR compound annual growth rate of 20% or more, with a starting share price of $3.00 – 25% vested • Hills’ TSR compound annual growth rate of 25% or more, with a starting share price of $3.00 – 25% vested The vesting schedule for the performance rights issued in the 2011 financial year is: EPS hurdle: • EPS compound annual growth rate of less than 15% – 0% vested • EPS compound annual growth rate of 15% or more – 25% vested • EPS compound annual growth rate of 20% or more – 50% vested TSR hurdle: • Hills’ TSR less than Index – 0% vested • Hills’ TSR outperforms Index – 25% vested • Hills’ TSR outperforms Index by 15% or more – 25% vested Trading restrictions There are no restrictions on trading the performance shares once issued. Hills Holdings Limited Annual Report for the year ended 30 June 2012 23 DIRECTORS’ REPORT Remuneration report-audited (continued) Principles used to determine the nature and amount of remuneration (continued) (b) Prior long-term Incentive Plans Until the 2010 financial year, long term incentives were provided 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 entitled 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. In accordance with Hills’ Securities Trading Policy, participants in equity based remuneration plans are not permitted to enter into any transactions that would limit the economic risk of options or other unvested entitlements. (iv) 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 otherwise determined by the Directors. (v) Link between remuneration and Group performance 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 financial and non-financial. The key financial measures are NPAT, EBIT, ROFE and EPS, at a business unit and divisional level for some executives and at a Group level for other executives. The non-financial measures include safety, strategic outcomes, diversity, operational improvements, restructuring and rationalisation and other discretionary performance targets. In the financial year ended 30 June 2012 the Group performance improved on the prior year, with EBIT (before CGU impairment and closure costs in the year ended 30 June 2011) increasing 11% to $44.702 million¹ and net profit after tax (before CGU impairment and closure costs in the year ended 30 June 2011) increasing 6% to $28.822 million.2 In difficult trading conditions, some of the businesses within the Electronics and Communications division achieved their budget EBIT results. However, the Lifestyle and Sustainability division and the Building and Industrial division businesses of Orrcon and Fielders did not meet the EBIT thresholds set by the Board. As a consequence, STI payments related to financial measures were low. Non-financial STIs were achieved where executives achieved their strategic, operational or other discretionary targets. Pleasingly, and as reported elsewhere in this report, Hills continues to drive down the total reportable incident frequency rate (TRIFR) to 10.1, a 47% improvement on the prior year. Most executives achieved the safety component of their non-financial STI's. The following table summarises financial and share price information and safety performance over the last five years: Key financials Earnings before interest and tax (EBIT) ($’000) 1 Shareholders’ funds ($’000) Return on funds employed (ROFE) based on year end Funds Employed Net profit ($’000) 2 Net profit ($’000) Basic earnings per share (cents) 3 Dividends (cents) Share price ($) Safety (TRIFR) FY12 44,702 400,963 FY11 40,376 402,307 FY10 65,469 496,499 FY09 59,978 FY08 87,772 428,520 429,517 9.1% 8.2% 12.0% 10.3% 14.2% 28,822 28,822 10.5 10.0 1.06 10.1 27,126 (73,116) 10.2 10.0 1.20 19.8 43,095 43,095 16.7 12.5 2.15 34.7 34,201 15,655 14.6 10.0 1.57 41.4 53,589 52,360 27.3 27.5 3.34 65.1 1. EBIT before CGU impairment and closure costs in the year ended 30 June 2011 of $40.376M is a non-IFRS measure calculated as: EBIT loss for the year of $74.459M adjusted for Orrcon and Team Poly impairment and Orrcon closure costs of $114.839M. 2. Net profit after tax (NPAT) before CGU impairment and closure costs for the year ended 30 June 2011 of $27.126M is a non-IFRS measure calculated as: NPAT loss of $73.116M adjusted for Orrcon and Team Poly impairment and Orrcon closure costs of $100.242M. 3. Basic earnings per share before CGU impairment and closure costs for the year ended 30 June 2011 is a non-IFRS measure calculated using NPAT attributable to owners of $74.955M adjusted for Orrcon and Team Poly impairment and Orrcon closure costs of $100.242M. The non-IFRS measures used by the Company are relevant because they are consistent with measures used internally by management to assess the operating performance of the business. The non-IFRS measures have not been subject to audit or review. 24 Hills Holdings Limited Annual Report for the year ended 30 June 2012 DIRECTORS’ REPORT Remuneration report-audited (continued) Principles used to determine the nature and amount of remuneration (continued) (f) Non-executive Director remuneration Fees and payments to Non-Executive Directors reflect the demands which are made on, and the responsibilities of, the Directors. Non-Executive Directors’ fees and payments are reviewed annually by the Board. Non-Executive Directors do not receive performance based pay. The Board has also considered the advice of independent remuneration consultants to ensure Non-Executive Directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of Non-Executive Directors based on comparative roles in the external market. Directors’ fees The aggregate amount of remuneration paid to Non-Executive Directors is $1,200,000. 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 three 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. Ms J Hill-Ling is the only Director entitled to receive benefits on retirement under a scheme that has since been discontinued. Under the scheme, Ms J Hill-Ling is entitled to a maximum retirement benefit 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 benefit and the benefit multiple (up to a maximum of two times fees) remains fixed. The benefit is fully provided for in the financial statements. Hills Holdings Limited Annual Report for the year ended 30 June 2012 25 DIRECTORS’ REPORT Remuneration report-audited (continued) Details of remuneration Amounts of remuneration Details of the remuneration paid or payable to the Directors and the key management personnel of the Group (as defined in AASB 124 Related Party Disclosures) are set out in the following tables. Cash salary and fees $ 192,661 100,917 49,347 100,917 31,971 91,743 148,576 716,132 2012 Name Non-Executive Directors J Hill-Ling+ F Bennett M Campbell I Elliot R Flynn D Spence P Stancliffe* Subtotal Non-Executive Directors Executive Director G Twartz Other key management personnel (Group) S Cope A Kachellek D Lethbridge¹ G Logan² M McKinstry A Muir³ R Rees4 T Sullivan Total key management personnel compensation (Group) Short-term employee benefits Post - employment benefits Long - term benefits Share - based payments (D) Cash bonus (A) Other (B) Super annuation Long service leave (C) Perfor- mance rights & options Shares Total $ - - - - - - - - $ $ 5,600 - - - - - - 5,600 17,339 9,083 4,441 9,083 2,877 8,257 13,372 64,452 $ - - - - - - - - $ - - - - - - - - 803,211 40,000 67,230 46,789 34,656 13,822 321,101 250,005 131,462 358,451 430,214 6,189 95,566 284,307 75,252 138,622 10,000 37,500 20,000 - 5,000 - 3,884 350 12,314 1,409 14,753 2,169 7,301 - 28,952 33,472 11,832 32,309 38,719 557 8,601 25,588 20,920 26,033 - 824 1,358 10,560 213 1,755 2,513 41,168 628 279 418 - - 1,759 $ - - - - - - - - - 210 - - - - - - - $ 215,600 110,000 53,788 110,000 34,848 100,000 161,948 786,184 1,005,708 452,832 489,650 166,236 430,772 505,462 19,475 116,681 313,409 3,396,638 326,374 115,010 291,271 96,319 60,587 210 4,286,409 + J Hill-Ling remuneration includes a dividend of $5,600 (2011: $5,600) paid as a shareholder of Hills Associates Limited. * P Stancliffe remuneration includes Board fees from Korvest Ltd. 1. D Lethbridge ceased employment on 14 February 2012. 2. G Logan commenced employment on 8 August 2011. 3. A Muir ceased employment on 7 July 2011. 4. R Rees commenced employment on 1 February 2012. (A) The short-term incentive bonus is for performance during the respective financial year using the criteria set out above. (B) Other comprises dividends paid to shareholders of Hills Associates Limited, annual leave accrued in excess of annual leave taken in the year and payment in compensation for transferring from the Company's previous defined contribution scheme. (C) The long service leave component of remuneration represents the expense relating to the provision for long service leave calculated in accordance with accounting standard AASB 119 Employee Benefits. It does not represent cash payments or statutory obligations. (D) Share based payment remuneration comprises performance rights in the Long Term Incentive 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 lapsed during the current financial year as the conditions were not met. The ability to exercise the performance rights is conditional on the Group achieving certain performance hurdles. 26 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Details of remuneration (continued) The fair value of performance rights granted to the Managing Director and senior executives included above is described in the Long Term Incentives discussion below. Further details of performance rights granted during the year are set out below. DIRECTORS’ REPORT Remuneration report-audited (continued) $ - - - - - - - - - 999 999 599 599 - - - 999 999 - $ 215,600 105,834 110,000 100,000 81,349 83,334 160,484 856,601 1,023,279 395,621 420,029 92,642 297,667 362,973 260,175 37,000 389,262 424,649 232,472 2011 Name Non-Executive Directors J Hill-Ling+ F Bennett I Elliot R Flynn G Hill D Spence P Stancliffe* Subtotal Non-Executive Directors Executive Director G Twartz Cash salary and fees $ 192,661 97,095 100,917 91,743 74,632 76,453 147,233 780,734 Short-term employee benefits Post employment benefits Long term benefits Share based payments (D) Cash bonus (A) Other (B) Super annuation Long service leave Perfor- mance rights & options Shares Total $ - - - - - - - - $ $ 5,600 - - - - - - 5,600 17,339 8,739 9,083 8,257 6,717 6,881 13,251 70,267 $ - - - - - - - - $ - - - - - - - - 779,816 75,000 65,508 70,183 19,495 13,277 Other key management personnel (Group) L Andrewartha^ S Cope#^ D Edgecombe R Gros A Kachellek^ D Lethbridge M McKinstry K Middleton^ A Muir#^ T Sullivan 348,624 321,101 76,453 218,721 240,005 211,009 31,845 349,197 316,605 190,584 10,000 60,664 - 32,926 87,039 25,000 - 10,000 20,000 10,000 1,400 5,091 8,709 24,748 350 4,058 2,289 700 8,598 13,171 31,376 28,952 6,881 19,685 29,944 18,991 2,866 25,803 23,448 17,153 - - - - - - - - 54,587 - 3,222 3,222 - 988 5,635 1,117 - 2,563 412 1,564 Total key management personnel compensation (Group) Other Company and Group executives G Daher# R Meacham# A Oliver# 3,864,694 330,629 140,222 345,549 74,082 32,000 5,194 4,792,370 211,271 208,627 230,856 75,155 93,508 69,153 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 ^,# denotes one of the 5 highest paid executives of the Group(^) and/or Company (#), as required (prior to 1 July 2011) to be disclosed under the Corporations Act 2001. Hills Holdings Limited Annual Report for the year ended 30 June 2012 27 DIRECTORS’ REPORT Remuneration report-audited (continued) Details of remuneration (continued) The relative proportions of remuneration for the year ended 30 June 2012 as set out in the remuneration table above that are linked to performance and that are fixed are as follows: Name G Twartz Other key management personnel of Group S Cope A Kachellek D Lethbridge G Logan M McKinstry A Muir R Rees T Sullivan Fixed remuneration % At risk STI paid / payable % Value of performance rights / options as proportion of remuneration % 2012 94.6% 82.8% 63.3% 93.6% 91.2% 96.0% 100.0% 95.7% 99.4% 2012 4.0% 16.6% 28.3% 6.0% 8.7% 3.9% 0.0% 4.3% 0.0% 2012 1.4% 0.6% 8.4% 0.4% 0.1% 0.1% 0.0% 0.0% 0.6% The total potential and actual STI, and the proportion of actual STI compared to fixed remuneration are as follows: Name G Twartz Other key management personnel of Group S Cope A Kachellek D Lethbridge G Logan M McKinstry R Rees T Sullivan Service agreements Executives Potential STI $ Actual STI paid / payable $ Actual STI paid / payable as % of potential STI STI paid / payable as % of fixed remuneration 750,000 40,000 5.3% 325,000 138,622 55,000 200,000 200,000 115,000 70,000 75,252 138,622 10,000 37,500 20,000 5,000 - 23.2% 100.0% 18.2% 18.8% 10.0% 4.3% 0.0% 4.2% 20.1% 44.7% 6.4% 9.5% 4.1% 4.5% 0.0% The details of the contracts of Hills’ senior executives named in the remuneration tables (excluding the Managing Director) can be summarised as follows: • All executives have ongoing contracts of no fixed term; • The period of notice required to be given to terminate a contract varies depending upon an executive’s contract, with an executive’s period of notice to the Company ranging from three to six months, and the Company’s period of notice to an executive ranging from three to six months or payment in lieu of that notice; • Upon termination, executives are entitled to payment of annual and long service leave; • If an executive is retrenched, the executive is not entitled to contractual termination payments other than those generally applicable to all staff. Managing Director Graham Twartz was appointed as Managing Director effective 1 July 2008. The details of the Managing Director’s contract and the remuneration package for the financial year are as follows: 28 Hills Holdings Limited Annual Report for the year ended 30 June 2012 DIRECTORS’ REPORT Remuneration report-audited (continued) Service agreements (continued) The contract is for indefinite duration. Term 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 2012 of $850,000. An annual maximum STI opportunity of $750,000. Short-term incentive Long-term incentive The performance of the Managing Director against performance measures is assessed and the payment determined by the Board. An annual maximum LTI opportunity of $275,000, based upon the price of the shares on the date of issue of the rights. The details of the LTIP are set out in the discussion above. Share-based compensation Performance rights 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 4 Feb 2009 Performance rights 30 April 2011 Performance rights 19 Dec 2011 31 Jan 2012 30 June 2013 30 June 2014 31 Jan 2032 30 June 2013 30 June 2014 $3.01 $0.00 $0.00 Value per right / option at grant date $0.00 $0.905 $0.45 Performance achieved % Vested No n/a n/a 0% n/a n/a The maximum value of the performance rights represents their fair value as at their grant date, determined in accordance with AASB 2 Share Based Payment. The fair value for each performance rights hurdle was: EPS hurdle: $0.86 (2011: $1.19) TSR hurdle: $0.04 (2011: $0.62) The fair value at grant date is independently determined using a BlackScholes methodology for the non-market hurdles and a Monte Carlo valuation methodology for the market hurdles. Details of the assumptions underlying the valuation are set out in note 25 to the financial statements. No performance rights have been granted since the end of the financial year. The performance rights were provided at no cost to the recipients. All performance rights expire on the earlier of their expiry date or termination of the individual’s employment. The performance rights will vest on 30 June 2014 for the rights issued in the current financial year and on 30 June 2013 for the rights issued in the previous financial year. In addition to a continuing employment service condition, the ability for performance rights to vest is conditional on the Group achieving certain performance hurdles. Details of the performance criteria are included in the long-term incentives discussion above. The options issued in 2009 lapsed during the current financial year due to performance hurdles not being met. 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 the Company and each of the key management personnel of the Company and the Group are set out below. When vested, each performance right is convertible into one ordinary share of Hills Holdings Limited. Further information on the options is set out above and in note 25 to the financial statements. No performance rights or options vested during the financial year. Hills Holdings Limited Annual Report for the year ended 30 June 2012 29 DIRECTORS’ REPORT Remuneration report-audited (continued) Share-based compensation (continued) Name Directors of Hills Holdings Limited Number of performance rights granted during the year Fair value of performance rights at grant date calculated in accordance with AASB 2 Value of performance rights using the share price of $1.1960 * Number of performance rights / options lapsed / forfeited during the year Value at lapse / forfeit date ** G Twartz 229,933 $103,470 $275,000 100,000 $114,000 Other key management personnel of the Group S Cope D Lethbridge G Logan M McKinstry A Muir T Sullivan 41,806 20,903 41,806 62,709 - 29,264 $18,813 $9,406 $18,813 $28,219 $0 $13,169 $50,000 $25,000 $50,000 $75,000 $0 $35,000 60,000 31,714 - - 80,000 - $68,400 $34,251 $0 $0 $98,800 $0 * The share price used to calculate the number of performance rights issued to the Managing Director and Senior Executives was $1.1960, 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 2011. ** The value at lapse date of rights / options that were granted as part of remuneration and that were forfeited or 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. 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. Additional information Details of remuneration: Bonuses and share-based compensation benefits For each grant of rights included in the tables on pages 26-27 and 29-30, the percentage of the available grant that vested in the financial year, and the percentage that was forfeited because the person did not meet the service criteria is set out below. The performance rights / options vest after three years, provided the vesting conditions are met (see page 23 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 percentage (%) of rights / options forfeited in the year represents the reduction from the maximum number of rights / options available to vest due to the highest level performance criteria not being met as well as rights / options that have lapsed due to termination of employment. Name G Twartz S Cope D Lethbridge G Logan M McKinstry A Muir T Sullivan Share-based compensation benefits (rights / options) Financial year granted Vested % 2009 2011 2012 2009 2011 2012 2011 2012 2012 2012 2009 2011 2012 - - - - - - - - - - - - - Lapsed / forfeited % 100 - - 100 - - 100 100 - - 100 - - Financial years in which rights / options may vest 2012 2013 2014 2012 2013 2014 2013 2014 2014 2014 2012 2013 2014 Minimum total value of grant yet to vest $ - - - - - - - - - - - - - Maximum total value of grant yet to vest $ - 83,050 101,937 - 15,100 18,534 - - 18,534 27,801 - 10,569 12,974 30 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Principal activities The principal activities of the Group during the course of the year are outlined within the Review of Operations of the Group. DIRECTORS’ REPORT Objectives The Group’s objectives are to: • provide a safe, challenging and rewarding workplace; • deliver superior returns to shareholders; • increase earnings per share; • represent quality, reliable and value for money products; and • improve the retention rate of our outstanding people resources. In order to meet these objectives the following targets were set for the 2012 financial year and beyond: • increase revenue, operating activities, profits, earnings per share and return on funds employed; • reduce operating costs; • achieve strategic objectives; • continue to improve our safety performance; • continue to source cost effective supplies; and • further develop our employees. Dividends Dividends paid to members during the financial year were as follows: Final ordinary dividend for the year ended 30 June 2011 of 4.5 cents (year ended 30 June 2010: 5.5 cents) per fully paid share paid on 26 September 2011 (Year ended 30 June 2010: 26 September 2010) Interim ordinary dividend for the year ended 30 June 2012 of 5.0 cents (2011: 5.5 cents) per fully paid share paid on 30 March 2012 (2011: 21 March 2011) Consolidated 2012 $’000 11,190 12,293 23,483 2011 $’000 13,623 13,650 27,273 In addition to the above dividends, since the end of the financial year the Directors have recommended the payment of a final ordinary dividend of approximately $12.301 million (5.0 cents per fully paid share) to be paid on 26 September 2012 out of retained profits at 30 June 2012. The financial effect of these dividends has not been brought to account in the financial statements for the year ended 30 June 2012 and will be recognised in subsequent financial periods. For more information regarding dividends please refer to note 23 of the financial statements. 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 13 August 2012 the Company entered into an agreement to acquire the business of Lan 1. Completion is expected by 30 September 2012, subject to conditions precedent being satisfied. On 16 August 2012 the Company renewed its banking facilities jointly with Commonwealth Bank, National Australia Bank and Westpac Banking Corporation through a Common Deed. The total facility is $196 million, comprising Tranche A $81 million, expiring in 3 years (16 August 2015), Tranche B $69 million, expiring in 4 years (16 August 2016), and Tranche C $46 million, expiring in 3 years (16 August 2015), but subject to annual review. Tranches A and B comprise bank loans and Tranche C comprises bank guarantees, letters of credit and cash advances. Mr Twartz will retire as Chief Executive Officer and Managing Director on 2 September 2012 and will cease to be an employee on 30 November 2012. Mr Ted Pretty will commence as Chief Executive Officer and Managing Director on 3 September 2012. Apart from the matters noted above, there has not arisen in the interval between the end of the financial year and the date of this report any other item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. 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 report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. Environmental regulation Manufacturing The Group holds all required environmental licences for its manufacturing sites around Australia. No significant environmental incidents were reported over the 2012 financial year and the Group continued to meet or exceed the requirements specified in relevant licenses and authorisations. Greenhouse gas and energy data reporting requirements The National Greenhouse and Energy Reporting Act 2007 (NGER Act) requires the Group to report its annual greenhouse gas (GHG) emissions and energy use from Hills Holdings Limited Annual Report for the year ended 30 June 2012 31 DIRECTORS’ REPORT Environmental regulation (continued) facilities over which Hills has operational control. As a result, systems and processes for the collection and calculation of the data required have been established. During the 2012 financial year, Hills submitted its first report under the NGER Act with data collected over the 2010-11 reporting period. The Group’s reported energy consumption was 253TJ of energy with total GHG emissions of 34,444 tonnes of Carbon Dioxide equivalent (tCO2-e). Projections made utilising data collected during the 2011-12 reporting period indicate that the Group will again trigger the legislated reporting threshold. Total energy consumption is estimated to be approximately 241TJ while total GHG emissions are approximately 28,594tCO2-e. This represents a 5 per cent reduction in total energy consumption and a 17 per cent reduction in greenhouse gas emissions over the 2012 financial year. National Packaging Covenant Hills is 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 impacts of packaging. Under the APC Hills has revised its five year action plan, which will enable the Group to undertake reviews of new and existing packaging and complete actions against core Covenant KPIs. In the 2012 financial year Hills submitted its first annual report under the APC, which has been published on its website alongside the revised action plan and environmental policy. Hills remains compliant in relation to all Covenant requirements. Shares under performance rights / options Unissued ordinary shares of the Company under performance rights / option in accordance with accounting standards at the date of this report are as follows: 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. In 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. Date performance rights / options granted February 2001 February 2002 February 2003 February 2004 February 2005 April 2011 December 2011 Expiry date January 2023 January 2024 January 2025 January 2026 January 2027 June 2013 June 2014 Exercise price of shares Number under right / option $2.50 $2.90 $3.23 $3.66 $4.16 $ - $ - 50,000 53,000 80,000 115,000 185,000 198,929 405,518 1,087,447 Shares issued on the exercise of options During or since the end of the financial year, the Company has not issued ordinary shares as a result of the exercise of rights / options. Insurance of officers Since the end of the previous financial year the Company has paid insurance premiums in respect of Directors’ and officers’ liability and legal expenses’ insurance contracts, for current and former Directors and officers, including senior executives of the Company and Directors, senior executives and secretaries of its controlled entities. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. The Directors have not included details of the nature of the liabilities covered or the amount of the premiums paid in respect of the Directors’ and officers’ liability and legal expenses’ insurance contracts as such disclosure is prohibited under the terms of the contracts. Indemnification of officers The Company has agreed to indemnify the Directors and officers of the Company against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as Directors of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. 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. 32 Hills Holdings Limited Annual Report for the year ended 30 June 2012 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, Risk and Compliance Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the Audit, Risk and Compliance Committee to ensure they do not impact the impartiality and objectivity of the auditor; and 1. Audit services KPMG Australia: Audit and review of financial reports Overseas KPMG firms-audit and review of financial reports Total remuneration for audit services 2. Non-audit services Other assurance services KPMG Australia: Software implementation assurance services Forensic accounting services Other consulting services Total remuneration for other assurance services Taxation services KPMG Australia: Taxation and other services Overseas KPMG firms-taxation services Total remuneration for taxation services Total remuneration for non-audit services DIRECTORS’ REPORT • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. During the year the following fees were paid or payable for services provided by the auditor of the Group, its related practices and non- related audit firms: Consolidated 2011 $’000 498,500 31,768 530,268 - - - - 113,838 26,824 140,662 140,662 2012 $’000 492,000 32,909 524,909 76,257 46,179 40,504 162,940 141,015 14,316 155,331 318,271 Hills Holdings Limited Annual Report for the year ended 30 June 2012 33 DIRECTORS’ REPORT Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 35. 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. JH Hill-Ling Director GL Twartz Director Dated at Sydney this 31st day of August 2012 34 Hills Holdings Limited Annual Report for the year ended 30 June 2012 ABCD Lead Auditor’s Independence Declaration 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 belief, in relation to the audit for the financial year ended 30 June 2012 there have been: (i) (ii) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG N T Faulkner Partner Adelaide 31 August 2012 Hills Holdings Limited Annual Report for the year ended 30 June 2012 35 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative Liability limited by a scheme approved under (“KPMG International”), a Swiss entity. Professional Standards Legislation THIS REPORT SETS OUT HILLS HOLDINGS LIMITED’S (HILLS) ANNUAL STATEMENT ON ITS CORPORATE GOVERNANCE FRAMEWORK FOR THE YEAR ENDED 30 JUNE 2012. 36 Hills Holdings Limited Annual Report for the year ended 30 June 2012 CORPORATE GOVERNANCE STATEMENT The Board is 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) Corporate Governance Principles and Recommendations, 2nd Edition (Principles and 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 Principles and Recommendations. Full details of the location of the references in this statement which specifically sets out how Hills applies each Principle and Recommendation are contained in the corporate governance section within the Hills’ website which can be found at www. hillsholdings.com.au. This website also contains copies of the charters and policies referred to in this report. 1 Principle 1: Lay solid foundations for management and oversight 1.1 Role of the Board The Board’s role is to represent shareholders’ interests and it is accountable to them for creating and delivering value through effective governance of the Hills’ business. 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. By providing the overall strategic direction for Hills, the Board ensures that Hills’ activities comply with its constitution, and with all legal and regulatory requirements, and defines 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: • Strategy and Planning – reviewing and approving Hills’ business strategies and monitoring their implementation; • Oversight of management – the appointment, and if appropriate, the removal of the Managing Director, setting the Managing Director’s terms and conditions of employment, approving the remuneration policies and practices for all Hills’ employees, monitoring the performance of the Managing Director and reviewing on a regular basis executive succession planning; • Financial and Capital Management – reviewing and approving Hills’ annual and half yearly financial reports, monitoring Hills’ financial position on an ongoing basis, overseeing Hills’ accounting and financial systems, reviewing the progress of major capital expenditures and other significant corporate projects including any acquisitions or divestments, approving capital management decisions and the dividend policy; • Shareholders – overseeing effective communication with and reporting to shareholders; • Other stakeholders – overseeing and approving policies that govern the relationship with other stakeholders; • Ethics and sustainability – monitoring Hills’ culture and its ethics, overseeing and approving Hills’ Code of Conduct, enhancing and protecting the reputation of the Company and monitoring progress in achieving the Company’s objectives and compliance with its diversity policy; 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 financial goals, safety performance and business excellence. This performance assessment for senior executives was undertaken during the reporting period. 2 Principle 2: Structure the Board to add value 2.1 Board composition The Board charter states: • the Board will consist of a majority of Non- Executive independent Directors; and • the Chairman is a Non-Executive Director appointed by the Board. The lead independent Director will act in the Chairman’s place where the Chairman is unable to act, or it is otherwise not appropriate for the Chairman to act. 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, expertise and diversity 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: • is a substantial shareholder of Hills or an officer of, or otherwise associated directly with, a substantial shareholder of Hills; • is or has been employed in an executive capacity by Hills or any other Group member, within three years before commencing to serve on the Board; • within the last three years, has been a principal of a material professional adviser or a material consultant to Hills or any other Group member, or an employee materially associated with the service provided; • is a material supplier or customer of Hills or any other Group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; and • has a material contractual relationship with Hills or a controlled entity other than as a Director of the Group. In determining whether a relationship between a Director and Hills is considered to be material, the Board assesses a range of quantitative and qualitative matters including the proportion the transactions represent to both Hills and the Director and the value or strategic importance of the relationship to both Hills and the Director. Hills Holdings Limited Annual Report for the year ended 30 June 2012 37 CORPORATE GOVERNANCE STATEMENT 2 Principle 2: Structure the Board to add value (continued) 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, qualifications, term of office, relationships affecting their independence and their independent status are set out in the Directors' report under the heading "Information on Directors". At the date of signing the Directors' report, there is one executive Director and 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 Non-executive Directors 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 Independence The Chairman, Ms Jennifer Hill-Ling is not considered to be an independent Director. Hills considers this departure from ASXCGC Recommendation 2.2 appropriate however given: • The Hill-Ling family’s interest in Hills; and • Ms Hill-Ling’s considerable experience within Hills. The Chairman is responsible for leadership and effective performance of the Board. The Chairman is independent of the role of the Managing Director of Hills. strategies, operations and risk management policies. It 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 16 Board meetings and an additional corporate strategy workshop during the year. Five of these meetings were held at operational sites of Hills, some of 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 2012 and the number of meetings attended by each Director is disclosed on page 20 of the Annual Report. 2.9 Conflicts of interest Directors whose business dealings may conflict with the interests of Hills declare those interests in such dealings and take no part in decisions relating to them. 2.10 Independent 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. 2.11 Performance assessment 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 2.6 Term of office • the individual performance of the Chairman Hills’ constitution specifies that all Non- Executive Directors must retire from office no later than the third annual general meeting (AGM) following their last election. A Director may stand for re-election. 2.7 Induction The induction provided to new Directors and senior managers enables them to actively participate in Board decision-making as soon as possible. It ensures that they have a full understanding of Hills’ financial position, 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. 38 Hills Holdings Limited Annual Report for the year ended 30 June 2012 The results and action plans are documented and agreed. An assessment carried out in accordance with this process was undertaken during November 2011. Descriptions of the process for performance assessment for the Board and senior executives are available on the Company’s website. 2.12 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, Risk 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’ qualifications, skills and experience. Each standing committee is comprised of: • only Non-Executive Directors; and • at least three members, the majority of whom are independent. 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 specific 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. 2.13 Nomination committee The Nomination Committee consists of the following Non-Executive Directors (a majority of whom are independent): I Elliot (Chairman) J H Hill-Ling P Stancliffe Details of these Directors' attendance at Nomination Committee meetings are set out in the Directors' report on page 20 of the Annual Report. The Nomination Committee operates in accordance with its charter. The main responsibilities of the Committee are to assist and make recommendations to the Board on: CORPORATE GOVERNANCE STATEMENT 3.3 Whistle-blower Protection Policy Hills encourages its Directors, employees and contractors to report conduct that is dishonest, fraudulent, corrupt or illegal, endangers health and safety, is a suspected breach of Hills’ Code of Conduct or any Hills’ policy. Hills has adopted a whistle- blower protection policy to ensure concerns regarding unacceptable conduct can be raised on a confidential basis without fear of reprisal, dismissal or discriminatory conduct. 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’ Diversity Policy can be found on our 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. In 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 2 years as positions become vacant and appropriately skilled candidates are available. 2 Principle 2: Structure the Board to add value (continued) • Director selection and appointment practices; • Board composition and tenure; • succession 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 shortlist 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 recognises the advantages of Board renewal and succession planning. Notices of meetings for the election of Directors comply with the Principles and Recommendations. New Directors are provided with a letter of appointment setting out Hills’ expectations, their responsibilities, rights and the terms and conditions of their employment. All new Directors participate in a comprehensive, formal induction program which covers the operation of the Board, its committees and financial, strategic, operations and risk management issues. 3 Principle 3: Promote ethical and responsible decision making 3.1 Code of Conduct Hills has developed a Code of Conduct (the Code) which has been approved by the Board and applies to all Hills Directors, officers, employees, contractors, consultants and associates (collectively Hills’ Employees). The Code is regularly reviewed and updated as necessary to ensure it reflects the highest standards of behaviour and professionalism and the practices necessary to maintain confidence in Hills’ integrity and to take into account legal obligations and reasonable expectations of Hills’ stakeholders. In summary, the Code sets out the standards of behaviour Hills expects from Hills’ Employees and informs them of their responsibilities to Hills’ shareholders, customers, employees, suppliers and the broader community. From time to time the Internal Auditor may review and will report directly to the Audit, Risk and Compliance Committee on compliance with the Code and the trading policy. Upon receiving a complaint, the Chairman and Managing Director will determine who will investigate the matter. An internal report on the outcome of any such investigation, including recommendations, will be prepared by the authorised officer. These matters are reported to the Audit, Risk and Compliance Committee. 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 “blackout 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. Number of women in senior management positions Number of women in sales and marketing positions Number of women employees in the whole organisation Objective by 2014 Actual as at 2012 Number 95 191 552 % 20 25 20 Number 66 122 459 % 15.4 21.6 19.6* *The ongoing review and restructure of our organisation has resulted in the achievement of the percentage target for the overall number of women in our organisation in 12 months. This has been achieved because of improved retention and attraction of women combined with the reduction of employee numbers across the Group. A discussion of the gender diversity framework to support the diversity initiatives is set out in the Sustainability section of the Annual Report. Hills Holdings Limited Annual Report for the year ended 30 June 2012 39 CORPORATE GOVERNANCE STATEMENT 4 Principle 4: Safeguard integrity in financial reporting 4.1 Audit, Risk and Compliance Committee The Audit, Risk and Compliance Committee consists of the following Non-Executive Directors: F Bennett (Chairman) M Campbell D Spence Details of these Directors' qualifications and attendance at Audit, Risk and Compliance Committee meetings are set out in the Directors' report on pages 13-15 and 20 of the Annual Report. The majority of members of the Audit, Risk and Compliance Committee are financially literate and have an appropriate understanding of the industries in which the Group operates. The Audit, Risk and Compliance Committee operates in accordance with a charter. The role of the Committee is to assist the Board in: • Reviewing Hills’ financial statements and financial information distributed externally; • Monitoring the internal control framework, procedures that are designed to ensure compliance with statutory responsibilities and other external reporting requirements, the activities of internal audit, and the adequacy of Hills’ risk management framework; and • Liaison with the external auditor. In fulfilling its responsibilities, the Committee: • Receives regular reports from management, the internal auditor and the external auditors; • Regularly meets with the internal auditor and external auditors; • Reviews the processes the Managing Director and CFO have in place to support their certifications to the Board; • Reviews any significant disagreements between the auditors and management, irrespective of whether they have been resolved; • Meets separately with the external auditors and the internal auditor at least once a year without the presence of management; and • Provides the internal auditor and external auditors with a clear line of direct communication at any time to either the Chairman of the Audit, Risk and Compliance Committee or the Chairman of the Board. The Audit, Risk 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 External auditors Hills’ policy is to appoint external auditors who clearly demonstrate quality and independence. The performance of the external auditor is reviewed annually. KPMG is Hills’ current external auditor. It is KPMG's policy to rotate audit engagement partners on listed companies at least every five years. An analysis of fees paid to the external auditors, including a breakdown of fees for non-audit services, is provided in the Directors’ report and in note 36 to the financial statements. It is the policy of the external auditors to provide an annual declaration of their independence to the Board and the Audit, Risk 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 Principle 5: Make timely and balanced disclosures 5.1 Continuous disclosure Hills has a Communications and Market Disclosure Policy which is consistent with the continuous disclosure obligations under the Corporations Act and ASX Listing Rules. The Policy 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. The Company Secretary, in conjunction with the Managing Director is responsible for ensuring compliance with the continuous disclosure requirements in the ASX Listing Rules and has primary responsibility for communications with the ASX. Directors and staff are required to ensure that they are familiar with the Policy and report material information to the Company Secretary or Managing Director to allow a view to be formed as to whether the information requires disclosure. In addition, the Board is actively and regularly involved in discussing disclosure obligations in respect of all major matters that comes before it. Specific processes adopted by Hills in relation to its continuous disclosure responsibilities are as follows: • All information released to the ASX is posted on the Investor Information section of the Hills’ website as soon as practicable after release; • Communications with the media, share analysts and the market generally in relation to Hills’ activities will normally be undertaken only by the Chairman, the Managing Director or the Chief Financial Officer; • No media release of a material nature is to be issued unless it has first been sent to the ASX; and • Hills will ensure that when conducting analyst and investor briefings, no price- sensitive information will be disclosed at these briefings unless previously or simultaneously released to the market; questions relating to price-sensitive information not previously disclosed will not be answered and any inadvertent disclosure of price and sensitive information will be immediately released to the ASX and disclosed on the Hills website. 6 Principle 6: Respect the rights of shareholders 6.1 Shareholder communication The rights of Hills’ shareholders are set out in the constitution, legal and regulatory requirements. Hills’ Communication and Market Disclosure Policy allows shareholders to effectively exercise these rights through the provision of high quality, relevant and useful information in a timely manner. In this regard shareholders are informed about strategic objectives and major developments through: • ASX announcements; • Company publications including the Annual Report; • The Annual General Meeting; • The Company website (www.hillsholdings. com.au); and • The website of Hills’ share register, Computershare Investor Services Pty Limited, including a facility for shareholders to amend their particulars. Hills encourages shareholders to utilise its website as their primary tool to access shareholder information and disclosures. Shareholders are encouraged to make their views known to the Company and to directly raise matters of concern. Shareholders are encouraged to attend the Annual General Meeting and use this opportunity to ask questions. The Annual General Meeting remains the main opportunity for shareholders to comment and to question Hills’ Board and management. 40 Hills Holdings Limited Annual Report for the year ended 30 June 2012 CORPORATE GOVERNANCE STATEMENT 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" on pages 20 to 30. In accordance with Hills’ Securities Trading Policy, participants in equity-based remuneration plans are not permitted to enter into any transactions that would limit the economic risk of options or other unvested entitlements. Details of this policy can be found on Hills’ website. 9 ASX Corporate Governance Council Recommendations Checklist This table cross-references the Principles and Recommendations to the relevant sections of the Corporate Governance Statement and the Remuneration Report. 6 Principle 6: Respect the rights of shareholders (continued) The external auditor attends the Annual General Meeting and is available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. 7 Principle 7: Recognise and manage risk 7.1 Recognise and manage risk The Board, through the Audit, Risk and Compliance Committee, is responsible for ensuring there are adequate policies in relation to risk management compliance and internal control systems. In summary, Hills’ policies are designed to ensure strategic, operational, legal, reputation and financial risks are identified, assessed, effectively and efficiently managed and monitored to enable achievement of Hills’ business objectives. Considerable importance is placed on maintaining a strong control environment. There is an organisation structure with clearly drawn lines of accountability and delegation of authority. Detailed control procedures cover management accounting, financial reporting, project appraisal, environment, health and safety, IT security, compliance and other risk management issues. Internal audit carries out regular systematic monitoring of control activities and reports to both relevant business unit management and the Audit, Risk and Compliance Committee. 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, Risk 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, financial and compliance categories at the enterprise and at the business level. The Board and the Audit, Risk and Compliance Committee have received reports from the Risk Committee and management as to the effectiveness of the 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. 7.2 Corporate reporting In complying with ASXCGC Recommendation 7.3, the Board has received a declaration from the Managing Director and the Chief Financial Officer, that: • Hills’ financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Group and are in accordance with relevant accounting standards; and • 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 efficiently and effectively in all material respects in relation to financial reporting risks. 8 Principle 8: Remunerate fairly and responsibly 8.1 Remuneration Committee The Remuneration Committee consists of the following Non-Executive Directors (a majority of whom are independent): J H Hill-Ling (Chairman) I Elliot D Spence Details of these Directors' attendance at Remuneration Committee meetings are set out in the Directors' report on page 20 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, given the role the Chairman of the Board has in developing and 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 recommendations to the Board on the remuneration framework for the Chairman, the Board Committees, Non-Executive Directors, Hills’ remuneration and incentive policies and practices for the Hills Holdings Limited Annual Report for the year ended 30 June 2012 41 CORPORATE GOVERNANCE STATEMENT ASX Corporate Governance Council Recommendations Reference Comply Principle 1: Lay solid foundations for management and oversight 1.1 1.2 1.3 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. Companies should provide the information indicated in Guide to Reporting on Principle 1. Remuneration report 1.1, 1.2, Remuneration report 2.1, 2.2 2.5 2.5 2.12 2.10 2.1, 2.2, 2.3, 2.5, 2.9, 2.10, 2.11, 2.12 Principle 2: Structure the Board to add value 2.1 2.2 2.3 2.4 2.5 2.6 A majority of the Board should be independent Directors. The chairman should be an independent Director. The roles of chairman 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. Principle 3: Promote ethical and responsible decision-making 3.1 3.2 3.3 3.4 3.5 Companies should establish a code of conduct and disclose the code or summary of the code as to: • the practices necessary to maintain confidence in the company’s 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 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. Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the Board in accordance with the diversity policy and progress towards achieving them. 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. 3.1 3.4 3.4 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 4.3 4.4 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 chairman, who is not chairman 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. 4.1 4.1 4.1 4.1 42 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Y Y Y Y N Y Y Y Y Y Y Y Y Y Y Y Y Y CORPORATE GOVERNANCE STATEMENT ASX Corporate Governance Council Recommendations Reference Comply Principle 5: Make timely and balanced disclosure 5.1 5.2 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 6.1 6.2 Companies should design a communications policy for promoting 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. Principle 7: Recognise and manage risk 7.1 7.2 7.3 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. The Board should require management to design and implement 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 financial officer (or equivalent) that the declaration provided in accordance with section 295A 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. 5.1 5.1 6.1 6.1 7.1 7.1 7.2 7.4 Companies should provide the information indicated in Guide to Reporting on Principle 7. 7.1, 7.2 Principle 8: Remunerate fairly and responsibly 8.1 8.2 8.3 8.4 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 chairman; and • has at least three members. 8.1 8.1 Companies should clearly distinguish the structure of non-executive Directors’ remuneration from that of the executive Directors and senior executives. Remuneration report Companies should provide the information indicated in Guide to Reporting on Principle 8. 8.1, Remuneration report Y Y Y Y Y Y Y Y Y N Y Y Hills Holdings Limited Annual Report for the year ended 30 June 2012 43 44 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Contents 45 Financial statements 46 Consolidated income statement 47 Consolidated statement of comprehensive income 48 Consolidated statement of financial position 49 Consolidated statement of changes in equity 50 Consolidated statement of cash flows 51 Notes to the consolidated financial statements 107 Directors’ declaration 108 Independent auditor’s report to the members 110 Shareholder Information These financial statements are the consolidated financial 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. Its registered office 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 2-7, which is not part of these financial statements. The financial statements were authorised for issue by the Directors on 31 August 2012. The Directors have the power to amend and reissue the financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All press releases, financial reports and other information are available within Corporate Information on our website: www.hillsholdings.com.au. For queries in relation to our reporting please call +61 8 8301 3200 or e-mail info@hillsholdings.com.au. Hills Holdings Limited Annual Report for the year ended 30 June 2012 45 Hills Holdings Limited Consolidated income statement For the year ended 30 June 2012 Revenue from continuing operations Other income Expenses excluding finance costs Profit / (loss) before net finance expense and income tax Finance income Finance expenses Net finance expense Profit / (loss) before income tax Income tax (expense) / benefit Profit / (loss) for the year Profit / (loss) is attributable to: Owners of Hills Holdings Limited Non-controlling interests Profit / (loss) for the year Notes 3 4 5 5 6 Consolidated 2012 $’000 2011 $’000 1,082,272 1,095,845 2,614 1,156 1,084,886 1,097,001 (1,040,184) (1,171,464) 44,702 (74,463) 810 (6,563) (5,753) 1,974 (6,000) (4,026) 38,949 (78,489) (10,127) 5,373 28,822 (73,116) 26,021 2,801 28,822 (74,955) 1,839 (73,116) Cents Cents Earnings per share for profit / (loss) from continuing operations attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share 24 24 10.5 10.5 (30.2) (30.2) The above Consolidated income statement should be read in conjunction with the accompanying notes. 46 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Consolidated statement of comprehensive income For the year ended 30 June 2012 Notes 22 22 22 6 Consolidated 2012 $’000 2011 $’000 28,822 (73,116) (917) (2,295) 191 792 (2,229) 13,480 (1,484) (749) (3,512) 7,735 Profit / (loss) for the year Other comprehensive income / (loss) (Loss) / gain on revaluation of land and buildings Changes in the fair value of cash flow hedges Exchange differences on translation of foreign operations Income tax relating to components of other comprehensive income Other comprehensive (loss) / income for the year, net of tax Total comprehensive income / (loss) for the year 26,593 (65,381) Total comprehensive income / (loss) for the year is attributable to: Owners of Hills Holdings Limited Non-controlling interests Total comprehensive income / (loss) for the year 23,792 2,801 26,593 (67,686) 2,305 (65,381) The above Consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. Hills Holdings Limited Annual Report for the year ended 30 June 2012 47 Hills Holdings Limited Consolidated statement of financial position As at 30 June 2012 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax receivables Assets classified as held for sale Total current assets Non-current assets Investments Property, plant and equipment Deferred tax assets Intangible 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 financial instruments Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Notes Consolidated 2012 $’000 2011 $’000 7 8 9 6(f) 15 10 11 12 13 16 17 6(f) 18 14 19 20 14 21 22 24,638 177,482 165,287 5,692 373,099 - 7,158 184,042 167,999 - 359,199 2,702 373,099 361,901 2 188,027 21,905 65,444 275,378 2 197,040 31,485 49,213 277,740 648,477 639,641 87,725 1,333 - 33,239 606 98,671 6,833 242 30,963 520 122,903 137,229 115,677 4,828 4,106 124,611 247,514 91,479 6,570 2,056 100,105 237,334 400,963 402,307 303,805 43,203 35,896 306,790 57,245 21,504 382,904 385,539 18,059 400,963 16,768 402,307 Capital and reserves attributable to owners of Hills Holdings Limited Non-controlling interests Total equity The above Consolidated statement of financial position should be read in conjunction with the accompanying notes. 48 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Consolidated statement of changes in equity For the year ended 30 June 2012 Consolidated Attributable to owners of Hills Holdings Limited Contributed equity Reserves Retained earnings Total Notes $’000 $’000 $’000 $’000 Non- controlling interests $’000 Total equity $’000 Balance at 1 July 2010 306,595 47,899 126,107 480,601 15,898 496,499 Total comprehensive income for the year - 7,269 (74,955) (67,686) 2,305 (65,381) 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 interests 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 Balance at 30 June 2011 Balance at 1 July 2011 33 23 22 Contributions of equity, net of transaction costs and tax Buy-back of shares, net of tax Non-controlling interests in share capital issued by subsidiary Dividends provided for or paid Dividends paid to non-controlling interests in subsidiaries Employee share options – value of employee services Transfer from reserves Balance at 30 June 2012 21 21 22 23 22 - - (332) - - 34 - - (48) - - 89 195 - - - - - - 128 (3,113) - - - - - - - - 195 - - 750 195 750 (332) (811) (1,143) (27,273) (27,273) - (27,273) - (1,379) (1,379) 34 - 5 - 39 - 2,375 (2,375) 306,790 57,245 21,504 385,539 16,768 402,307 306,790 57,245 21,504 385,539 16,768 402,307 - - - 128 (3,113) - - 128 (3,113) (48) 118 70 (23,483) (23,483) - (23,483) - (1,698) (1,698) 89 - 70 - 159 - (11,854) 11,854 303,805 43,203 35,896 382,904 18,059 400,963 - - - - Total comprehensive income for the year - (2,229) 26,021 23,792 2,801 26,593 Transactions with owners in their capacity as owners: The above Consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Hills Holdings Limited Annual Report for the year ended 30 June 2012 49 Hills Holdings Limited Consolidated statement of cash flows For the year ended 30 June 2012 Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) 1,196,701 (1,132,491) 1,204,824 (1,170,304) Notes Consolidated 2012 $’000 2011 $’000 Cash generated from operations Interest received Interest paid Income 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 software development and other intangible assets Proceeds from sale of property, plant and equipment Proceeds from sale of assets classified as held for sale Rent received Net cash (outflow) from investing activities Cash flows from financing activities Payments for shares bought back 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 increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 32 31 11 13 21 23 Cash and cash equivalents at the end of the financial year 7 The above Consolidated statement of cash flows should be read in conjunction with the accompanying notes. 64,210 520 (6,426) (5,635) 52,669 (2,011) - (12,881) (16,066) 1,830 2,702 787 (25,639) (3,113) 25,000 - (1,066) - (23,483) (1,698) (4,360) 22,670 646 (11) 23,305 34,520 798 (5,960) (16,378) 12,980 - (1,143) (26,823) (293) 832 - 860 (26,567) - - (15,000) 1,976 300 (27,273) (1,379) (41,376) (54,963) 55,531 78 646 50 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements 30 June 2012 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for Hills 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 Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board, and the Corporations Act 2001. Hills Holdings Limited is a for-profit entity for the purpose of preparing the financial statements. These accounting policies have been consistently applied by each entity in the Group to all periods presented . (i) Compliance with IFRS The financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as issued by the international Accounting Standards Board (IASB). (ii) New and amended standards adopted by the Group None of the new standards and amendments to standards that are mandatory for the first time for the financial year beginning 1 July 2011 affected any of the amounts recognised in the current period or any prior period and are not likely to affect future periods. (iii) Early adoption of standards The Group has not elected to early adopt any accounting standards or amendments. (iv) Historical cost convention These financial statements have been prepared on the basis of historical costs, except for the following: • financial instruments at fair value through profit or loss are measured at fair value; and • land and buildings are measured at fair value. The methods used to measure fair values are discussed further in notes 1 (o), 1 (p), 11 and 30. (v) Critical accounting estimates The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in the following notes: • Note 31 – business combinations • Note 13 – measurement of the recoverable amounts of cash-generating units containing goodwill • Note 25 – measurement of share-based payments • Notes 18, 20 and 28 – provisions and contingencies • Note 14 – derivative financial instruments • Notes 11 and 13 – measurement of the useful lives of property, plant and equipment and intangible assets (vi) Changes to presentation During the current year the comparative information on inventory impairment losses was reallocated between impairment losses and inventory at cost to match the allocations made in the current financial year. (b) Parent entity financial information The financial information for the 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) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June 2012 and the results of all subsidiaries for the year then ended. Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(i)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the Consolidated income statement, Consolidated statement of comprehensive income, Consolidated statement of changes Hills Holdings Limited Annual Report for the year ended 30 June 2012 51 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 1 Summary of significant accounting policies (continued) (c) Principles of consolidation (continued) in equity and Consolidated statement of financial position respectively. (ii) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of Hills Holdings Limited. When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is re- measured to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. If the ownership interest in a jointly-controlled entity or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. (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. (e) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is 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 translated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. (iii) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; • income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and • all resulting exchange differences are recognised in other comprehensive income. (f) Revenue recognition Revenue is recognised for the major business activities as follows: (i) Sale of goods Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. (ii) Services Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to estimates of work performed. 52 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 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. In 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. In 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 29). 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. (i) Business combinations 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 fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any 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. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interests in the acquiree either at fair value or at the non-controlling interests’s proportionate share of the acquiree’s net identifiable assets. 1 Summary of significant accounting policies (continued) (f) Revenue recognition (continued) (iii) Rental income Rental income from investment property is recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. (iv) Dividends Dividends are recognised as revenue when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profits. However, the investment may need to be tested for impairment as a consequence, refer note 1(n). (g) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, 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 Hills Holdings Limited Annual Report for the year ended 30 June 2012 53 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 1 Summary of significant accounting policies (continued) (i) Business combinations (continued) The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Contingent consideration is classified as a financial liability. Amounts are subsequently re-measured to fair value with changes in fair value recognised in profit or loss. (j) Impairment of non-financial assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (k) Cash and cash equivalents For the purpose of presentation in the Consolidated statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts and at call borrowings. Bank overdrafts and at call borrowings are shown within borrowings in current liabilities in the Consolidated statement of financial position. 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 difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the impairment loss is recognised in profit or loss. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against expenses in profit or loss. (m) Inventories Raw materials and stores, work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Cost includes the transfer from equity of any gains/losses on qualifying cash flow hedges relating to purchases of raw material. Costs are assigned to individual items of inventory on the basis of weighted average costs or the first-in-first-out principle. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. (n) Investments and other financial assets Classification (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. The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the investments were acquired. 54 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 1 Summary of significant accounting policies (continued) (n) Investments and other financial assets (continued) Management determines the classification of its investments at initial recognition. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held-for-trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are classified as held-for- trading unless they are designated as hedges. Assets in this category are classified as current and non-current assets on the basis of the maturity of the underlying derivative. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are included in current assets – trade and other receivables (note 8) in the Consolidated statement of financial position. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Measurement (o) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured 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 22. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. The fair value of forward exchange contracts is based on their listed market price, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk free interest rate (based on government bonds). The fair value of interest rate swaps is determined by discounting estimated future cash flows based on the terms and maturity of each contract and using market rates at the measurement date. Loans and receivables are measured at amortised cost using the effective interest method. (i) Cash flow hedge Details on how the fair value of financial instruments is determined are disclosed in note 1(o). Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is evidence of impairment for any of the Group’s financial assets carried at amortised cost, the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred. The cash flows are discounted at the financial asset’s original effective interest rate. The loss is recognised in profit or loss. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and within the hedging reserve in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in profit or loss within ‘finance income’ or ‘finance costs’. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in profit or loss within ‘sales’. Hills Holdings Limited Annual Report for the year ended 30 June 2012 55 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 1 Summary of significant accounting policies (continued) (o) Derivatives and hedging activities (continued) However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed assets) the gains and losses previously deferred in equity are reclassified from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in profit or loss as cost of goods sold in the case of inventory, or as depreciation or impairment in the case of fixed assets. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss. (ii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss. (p) Property, plant and equipment Land and buildings are shown at fair value less subsequent depreciation for buildings. Land and buildings are independently valued at least every four years on the basis of open market values, and in the intervening years are valued by the Directors based on the most recent independent valuation combined with current market information. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. 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. 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. Increases in the carrying amounts arising on revaluation of land and buildings are recognised, net of tax, in other comprehensive income and accumulated in reserves in equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first recognised in other comprehensive income to the extent of the remaining surplus attributable to the asset; all other decreases are charged to profit or loss. 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 2012 0.75% 5.00% to 40.00% 20.00% to 66.67% 2011 0.75% 5.00% to 40.00% 20.00% to 66.67% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(j)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts included in other reserves in respect of those assets to the asset realisation reserve. Amounts transferred to the asset realisation reserve may subsequently be transferred to retained earnings. (q) Intangible assets (i) 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. 56 Hills Holdings Limited Annual Report for the year ended 30 June 2012 1 Summary of significant accounting policies (continued) (q) Intangible assets (continued) Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash- generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. (ii) Patents and Trademarks Patents and trademarks have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of patents and trademarks over their estimated useful lives, which vary from 10 to 20 years. (iii) IT development and software Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software and systems. Costs capitalised include external direct costs of materials and service and direct payroll and payroll related costs of employees’ time spent on the project. IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where the Group has an intention and ability to use the asset. (iv) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be measured reliably. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life, which is estimated to be 5 to 20 years. Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 (v) Fair values 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 sale Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. 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 benefits and financial 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. Interest 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 financial 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. (t) 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 Hills Holdings Limited Annual Report for the year ended 30 June 2012 57 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 1 Summary of significant accounting policies (continued) (t) Borrowings (continued) 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. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (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-tax 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. (v) Employee benefits (i) Wages and salaries, and annual leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. The obligations are presented as current liabilities in the Consolidated statement of financial position if the Group does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. (iii) Retirement benefit obligations A defined contribution plan is a post employment benefit plan which receives fixed contributions from Group entities and the Group’s legal or constructive obligation is limited to these contributions. Contributions to defined contribution plans are recognised as an expense as they become payable. (iv) Share-based payments Share-based compensation benefits are provided to employees via the Long Term Incentive Share Plan (previously the Executive Share Option Plan) and the Employee Share Plan. Information relating to these schemes is set out in note 25. Long Term Incentive Plan The Long Term Incentive 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 Incentive Share Plan / Executive Share Option Plan is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the 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 rights / 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 rights / options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. No change is made for changes in market conditions. 58 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 1 Summary of significant accounting policies (continued) (z) Earnings per share (i) Basic earnings per share (v) Employee benefits (continued) Basic earnings per share is calculated by dividing: Employee Share Bonus Plan The Employee Share Bonus Plan allows Group employees to acquire shares of the Company. Up to $1,000 per year in shares is allotted to employees who have served a qualifying period. The fair value of shares issued is recognised as an employee expense with a corresponding increase in equity. The fair value of the shares granted is measured using a present value method based upon independent advice. (v) Profit-sharing and bonus plans A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably, or where there is past practice that has created a constructive obligation. (w) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. If the entity reacquires its own equity instruments, for example as the result of a share buy-back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. (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. (y) Finance income and expense Finance income comprises interest income on funds invested, fair value gains on interest rate swap contracts not accounted for using hedge accounting and the ineffective portion of cash flow hedges relating to interest rate swaps. Interest income is recognised as it accrues in profit or loss. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, fair value losses on interest rate swap contracts not accounted for using hedge accounting and the ineffective portion of cash flow hedges relating to interest rate swaps. Borrowing costs are recognised in profit or loss using the effective interest method. • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares; • by the weighted average number of ordinary shares outstanding during the financial year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares; and • the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (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. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the Consolidated statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (ab) Rounding of amounts The Group is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (ac) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2012 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below. (i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Hills Holdings Limited Annual Report for the year ended 30 June 2012 59 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 1 Summary of significant accounting policies (continued) (ac) New accounting standards and interpretations (continued) Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2015) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities and is likely to affect the Group’s accounting for its financial assets and financial liabilities. The standard is not applicable until 1 January 2015 but is available for early adoption. The Group has not yet decided when to adopt AASB 9 and has not yet determined the potential effect of the standard. (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) In August 2011, the AASB issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures. AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 12 Consolidation – Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. There is also new guidance on participating and protective rights and on agent/principal relationships. While the Group does not expect the new standard to have a significant impact on its composition, it has yet to perform a detailed analysis of the new guidance in the context of its various investees that may or may not be controlled under the new rules. AASB 11 introduces a principles based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. Based on the assessment of rights and obligations, a joint arrangement will be classified as either a joint operation or a joint venture. Joint ventures are accounted for using the equity method, and the choice to proportionately consolidate will no longer be permitted. Parties to a joint operation will account for their share of revenues, expenses, assets and liabilities in much the same way as under the previous standard. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. The Group does not expect the new standard to have a material impact on the amounts recognised in the financial statements. AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 127 and AASB 128. Application of this standard by the Group will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Group’s investments. The Group does not expect to adopt the new standards before their operative date. They would therefore be first applied in the financial statements for the annual reporting period ending 30 June 2014. (iii) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Group does not use fair value measurements extensively. It is therefore unlikely that the new rules will have a significant impact on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the consolidated financial statements. The Group does not intend to adopt the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 30 June 2014. (iv) Revised AASB 119 Employee Benefits, AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) and AASB 2011-11 Amendments to AASB 119 (September 2011) arising from Reduced Disclosure Requirements (effective 1 January 2013) In September 2011, the AASB released a revised standard on accounting for employee benefits. It requires the recognition of all remeasurements of defined benefit liabilities/assets immediately in other comprehensive income and the calculation of a net interest expense or income by applying the discount rate to the net defined benefit liability or asset. This replaces the expected return on plan assets that is currently included in profit or loss. The standard also introduces a number of additional disclosures for defined benefit liabilities/assets and could affect the timing of the recognition of termination benefits. Since the Group does not have any defined benefit obligations, the amendments will not have any impact on the Group’s financial statements. The Group intends to adopt the new standard from 1 July 2013. (v) AASB 2011-9 Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income (effective 1 July 2012) 60 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 1 Summary of significant accounting policies (continued) (ac) New accounting standards and interpretations (continued) In September 2011, the AASB made an amendment to AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. It will not affect the measurement of any of the items recognised in the Consolidated statement of financial position or the profit or loss in the current period. The Group intends to adopt the new standard from 1 July 2012. (vi) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective 1 July 2013) In July 2011 the AASB decided to remove the individual key management personnel (KMP) disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act 2001. While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. The amendments apply from 1 July 2013 and cannot be adopted early. The Corporations Act requirements in relation to remuneration reports will remain unchanged for now, but these requirements are currently subject to review and may also be revised in the near future. There are no other standards that are not yet effective and that are expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. 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, fibre optic transmission solutions, communications related products and services, domestic and commercial antennas, master antenna television systems, communications antennas, amplifiers, and subscription TV installation services. Lifestyle & Sustainability Includes indoor and 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, and plumbing products. Building & Industrial Comprises the Fielders Steel Roofing and Orrcon Steel businesses and includes structural, precision and large steel tubing, steel doorframes, roll formed metal building products, carports and shed systems. Korvest Comprises the business of Korvest Ltd and includes electrical and cable support systems, pipe support systems, walkway systems, steel fabrication, associated metal treatment and galvanising services. The Group principally considers the businesses from a products and services perspective. The Electronics & Communications division is managed separately by a divisional CEO and the Lifestyle & Sustainability division is managed by the Chief Operating Officer. 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 & Industrial division comprises the operations of Orrcon, Fielders and Korvest. The Group considers these businesses to be separate operating segments. However, for the purposes of disclosure under AASB 8 Operating Segments, the Orrcon and Fielders businesses meet the aggregation criteria of the Standard because of similarities of products, markets, distribution and regulatory environments. However, Korvest does not meet the aggregation criteria, and as a consequence is reported separately. Although the Group’s divisions are managed on a products and services basis they operate in two main geographical areas: Australia Comprises manufacturing facilities and sales offices and customers in all states and territories. Overseas Comprises sales offices and customers in New Zealand and customers in Europe, Middle East, South Africa and North America. Hills Holdings Limited Annual Report for the year ended 30 June 2012 61 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 2 Segment information (continued) (b) Segment information provided to the Group Managing Director 2012 Total segment revenue Intersegment revenue Revenue from external customers Segment EBIT Depreciation and amortisation Total segment assets Total assets includes: Additions to noncurrent assets (other than financial assets and deferred tax) Electronics & Communications $’000 Lifestyle & Sustainability $’000 Building & Industrial $’000 537,439 (3,401) Korvest Ltd Total $’000 $’000 72,323 1,106,402 (102) (24,917) 138,810 (695) 138,115 534,038 72,221 1,081,485 10,473 3,871 (2,791) 10,095 7,925 1,542 45,008 19,235 106,107 255,170 40,813 550,867 357,830 (20,719) 337,111 29,401 3,727 148,777 5,418 2,549 8,263 1,801 18,031 Total segment liabilities 44,595 16,263 46,860 7,062 114,780 2011 Electronics & Communications Lifestyle & Sustainability Building & Industrial Korvest Ltd Total Total segment revenue Intersegment revenue Revenue from external customers Segment EBIT Depreciation and amortisation Total segment assets Total assets includes: Additions to noncurrent assets (other than financial assets and deferred tax) Total segment liabilities $’000 340,675 (23,296) 317,379 28,027 3,339 142,608 5,175 37,846 $’000 161,440 (680) 160,760 9,697 4,995 $’000 553,242 (3,622) 549,620 (2,402) 11,769 $’000 $’000 67,383 1,122,740 (157) (27,755) 67,226 1,094,985 5,556 1,278 40,878 21,381 107,815 277,649 42,434 570,506 4,396 11,215 2,040 22,826 19,900 57,047 8,974 123,767 (c) Notes to, and forming part of, the segment information (i) Accounting policies Segment revenues, expenses, assets and liabilities are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Segment assets include all assets used by a segment and consist primarily of receivables, inventories, property, plant and equipment and goodwill and other intangible assets, net of related provisions. Segment assets do not include income taxes. Segment revenues, expenses and results include transfers between segments. Such transfers are priced on a “cost plus” basis and are eliminated on consolidation. (ii) Segment revenue Segment revenue reconciles to total revenue from continuing operations as follows: Total segment revenue Intersegment eliminations Other revenue Total revenue from continuing operations (note 3) 62 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Consolidated 2012 $’000 1,106,402 (24,917) 787 1,082,272 2011 $’000 1,122,740 (27,755) 860 1,095,845 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 2 Segment information (continued) (c) Notes to, and forming part of, the segment information (continued) The Group is domiciled in Australia. The amount of its revenue from external customers in Australia is $1,039.758 million (2011: $1,050.138 million), and the total of revenue from external customers in other countries is $41.727 million (2011: $44.847 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. (iii) Segment EBIT The Group Managing Director assesses the performance of the operating segments based on a measure of adjusted EBIT. This measurement basis excludes the effects of non-recurring expenditure from the operating segments such as restructuring costs and goodwill impairments when the impairment is the result of an isolated, non-recurring event. Interest income and expenditure are not allocated to segments, as this type of activity is driven by the central treasury function, which manages the cash position of the Group. Segment EBIT reconciles to profit / (loss) before income tax as follows: Segment EBIT Interest revenue Interest expense Fair value profit on interest rate swaps and forward exchange contracts Goodwill impairment Impairment of other assets Closure costs Other Profit / (loss) before income tax (iv) Segment assets Consolidated 2011 $’000 40,878 798 (5,960) 1,136 (66,182) (43,694) (4,963) (502) (78,489) 2012 $’000 45,008 520 (6,426) 153 - - - (306) 38,949 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 Current tax receivables Deferred tax assets Investments Corporate assets Total assets as per the Consolidated statement of financial position Consolidated 2011 $’000 570,506 7,158 - 31,485 2 30,490 639,641 2012 $’000 550,867 24,638 5,692 21,905 2 45,373 648,477 The total of non-current assets other than financial instruments and deferred tax assets located in Australia is $246.620 million (2011: $238.629 million), and the total of these non-current assets located in other countries is $6.851 million (2011: $7.624 million). Segment assets are allocated to countries based on where the assets are located. (v) Segment liabilities The amounts provided to the Group Managing Director with respect to total liabilities are measured in a manner consistent with that of the financial statements. These liabilities are allocated based on the operations of the segment. Hills Holdings Limited Annual Report for the year ended 30 June 2012 63 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 2 Segment information (continued) (c) Notes to, and forming part of, the segment information (continued) The Group’s borrowings and derivative financial instruments are not considered to be segment liabilities but rather managed by the treasury function. Reportable segments’ liabilities are reconciled to total liabilities as follows: Segment liabilities Tax liabilities (including GST payable) Borrowings Derivative financial instruments Corporate liabilities Total liabilities as per the Consolidated statement of financial position 3 Revenue Revenue from continuing operations Sales revenue Sale of goods Services Other revenue Rents and sublease rentals 4 Other income Net gain on disposal of property, plant and equipment Other income Consolidated 2011 $’000 123,767 4,916 98,312 2,576 7,763 237,334 2012 $’000 114,780 5,116 117,010 4,712 5,896 247,514 Consolidated 2012 $’000 2011 $’000 1,014,121 67,364 1,081,485 787 1,082,272 2012 $’000 560 2,054 2,614 1,033,517 61,468 1,094,985 860 1,095,845 Consolidated 2011 $’000 106 1,050 1,156 64 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 Consolidated 5 Expenses Classification of expenses by function Cost of goods sold Cost of services provided Other expenses from ordinary activities: Distribution expenses Sales and marketing expenses Administration expenses Other expenses Profit / (loss) 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 Interest and finance charges paid/payable Ineffective portion of changes in fair value of cash flow hedges Finance income Interest income Fair value gains on derivatives Net finance costs expensed Rental expense relating to operating leases Minimum lease payments Net foreign exchange losses Research and development Impairment of financial and other assets Plant and equipment Inventories Receivables Intangible assets 2012 $’000 689,764 60,591 90,372 136,713 62,744 - 1,040,184 1,911 18,008 19,919 1,141 40 1,181 21,100 186,459 16,266 16,742 264 219,731 6,426 137 6,563 (520) (290) (810) 5,753 27,240 35 123 - (2,030) 2,069 - 2011 $’000 714,556 54,331 89,409 135,022 63,307 114,839 1,171,464 1,769 20,112 21,881 1,158 40 1,198 23,079 192,454 16,238 17,292 479 226,463 5,960 40 6,000 (798) (1,176) (1,974) 4,026 25,191 29 446 37,210 3,783 1,635 66,182 Hills Holdings Limited Annual Report for the year ended 30 June 2012 65 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 5 Expenses (continued) Profit / (loss) after tax for the prior year included the following items that were significant because of their nature or size: (a) Impairment of Orrcon plant and equipment (recognised within Other expenses) Less: Applicable income tax benefit (b) Impairment of Orrcon inventory (recognised within Other expenses) Less: Applicable income tax benefit (c) Impairment of Orrcon goodwill (recognised within Other expenses) Less: Applicable income tax benefit (d) Impairment of Team Poly plant and equipment (recognised within Other expenses) Less: Applicable income tax benefit (e) Impairment of Team Poly goodwill (recognised within Other expenses) Less: Applicable income tax benefit (f) Closure costs (recognised within Other Expenses) Less: Applicable income tax benefit Total cash generating unit impairment and closure costs Less: Applicable income tax benefit Consolidated 2012 $’000 - - - - - - - - - - - - - - - - - - - - - 2011 $’000 34,622 (10,387) 24,235 7,324 (2,197) 5,127 49,590 - 49,590 1,748 (524) 1,224 16,592 - 16,592 4,963 (1,489) 3,474 114,839 (14,597) 100,242 Commentary on impairment recorded in year ended 30 June 2011: As a result of poor trading conditions during the previous financial year at Orrcon and Team Poly and the decision to close Orrcon’s Unanderra operations, the Group undertook a comprehensive review of the carrying values of the assets including the goodwill of Orrcon and Team Poly. This 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 $1.748 million. The after tax impact of these impairments was $96.768 million in the previous financial year. Additionally, costs associated with the closure totalling $4.963 million were recognised in the financial statements at 30 June 2011. The after tax impact of these costs was $3.474 million in the financial year ended 30 June 2011. Further details on the impairment of Orrcon plant and equipment and Team Poly plant and equipment in the previous financial year are disclosed in note 11. Further details on the impairment of Orrcon goodwill and Team Poly goodwill in the previous financial year and the update for the current financial year are disclosed in note 13. 66 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 6 Income tax expense Consolidated (a) Income tax expense / (benefit): Current tax Deferred tax Adjustments for current and deferred tax of prior periods Deferred income tax expense / (revenue) included in income tax expense comprises: Decrease / (increase) in deferred tax assets (note 12) (b) Numerical reconciliation of income tax expense / (benefit) to prima facie tax payable Profit / (loss) from continuing operations before income tax expense / (benefit) Tax at the Australian tax rate of 30% (2011: 30%) Tax effect of amounts which are not deductible / (taxable) in calculating taxable income: Goodwill impairment Impairment of other assets Non deductible expenses Research and Development allowances Difference in overseas tax rates Adjustments for current tax of prior periods Tax losses not recognised Total income tax expense / (benefit) (c) Amounts recognised directly in equity 2012 $’000 1,946 10,433 (2,252) 10,127 10,433 10,433 38,949 11,685 - - 646 (30) (53) (2,252) 131 10,127 2011 $’000 8,389 (11,406) (2,356) (5,373) (11,406) (11,406) (78,489) (23,547) 19,855 252 249 (90) 28 (2,356) 236 (5,373) 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) (d) Tax expense / (income) relating to items of other comprehensive income (61) 180 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: Losses / (gains) on revaluation of land and buildings (note 12) Cash flow hedges (notes 12, 22) (e) Tax losses Unused capital tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 30% (103) (689) (792) 41,320 12,396 3,957 (445) 3,512 41,320 12,396 The tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future capital gains will be available against which the Group can utilise the benefits from these items. Revenue tax losses for which no deferred tax asset has been recognised total $4.929 million (2011: $2.417 million). The potential deferred tax asset not recognised totals $1.479 million (2011: $0.725 million). Revenue tax losses for which a deferred tax asset has been recognised total $2.868 million (2011: $nil). (f) Current tax assets and liabilities The current tax asset for the Group of $5.692 million (2011: liability of $0.242 million) represents the amount of income taxes receivable (2011: payable) in respect of current and prior financial periods. Hills Holdings Limited Annual Report for the year ended 30 June 2012 67 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 6 Income tax expense (continued) (g) Tax consolidation legislation The Company and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The accounting policy in relation to this legislation is set out in note 1(g). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Hills Holdings Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate the Company for any current tax payable assumed and are compensated by the Company for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the Company under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable / payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables and eliminated on consolidation. 7 Current assets – Cash and cash equivalents Cash at bank and in hand Deposits at call Consolidated 2012 $’000 12,983 11,655 24,638 2011 $’000 6,396 762 7,158 (a) Reconciliation to cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the Consolidated statement of cash flows as follows: Balances as above Bank overdrafts (note 17) Borrowings at call (note 17) Balances per Consolidated statement of cash flows (b) Risk exposure Consolidated 2011 $’000 7,158 (1,512) (5,000) 646 2012 $’000 24,638 (1,333) - 23,305 The Group’s exposure to interest rate risk is discussed in note 30. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents mentioned above. (c) Fair value The carrying amount for cash and cash equivalents equals the fair value. 68 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 8 Current assets – Trade and other receivables Net trade receivables Trade receivables Provision for impairment of receivables Net other receivables Other receivables Prepayments (a) Impaired trade receivables The ageing of the Group’s trade receivables at the reporting date is as follows: Not past due Past due 0–30 days Past due 31– 90 days Past due more than 90 days Movements in the provision for impairment of receivables are as follows: At 1 July Provision for impairment recognised during the year Receivables written off during the year as uncollectible At 30 June Consolidated 2011 $’000 180,445 (9,180) 171,265 10,888 1,889 184,042 Consolidated 2011 $’000 96,409 55,728 18,673 9,635 180,445 Consolidated 2011 $’000 (9,418) (1,635) 1,873 (9,180) 2012 $’000 176,309 (6,770) 169,539 5,667 2,276 177,482 2012 $’000 87,839 59,346 16,737 12,387 176,309 2012 $’000 (9,180) (2,069) 4,479 (6,770) 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 $6.770 million (2011: $9.180 million) relates to receivables past due more than 30 days, based upon a case by case assessment. Receivables past due between 0 and 30 days are not considered impaired. (b) Foreign exchange and interest rate risk Information about the Group’s exposure to foreign currency risk and interest rate risk in relation to trade and other receivables is provided in note 30. (c) Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. The fair value of securities held for certain trade receivables is insignificant as is the fair value of any collateral sold or repledged. Refer to note 30 for more information on the risk management policy of the Group and the credit quality of the Group’s trade receivables. Hills Holdings Limited Annual Report for the year ended 30 June 2012 69 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 9 Current assets – Inventories Consolidated 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 10 Non-current assets – Investments Other listed securities Equity securities These financial assets are carried at cost. 11 Non-current assets – Property, plant and equipment 2012 $’000 39,815 (574) 39,241 6,064 - 6,064 129,188 (9,206) 119,982 165,287 2012 $’000 2 2011 $’000 46,524 (881) 45,643 6,577 - 6,577 133,277 (17,498) 115,779 167,999 Consolidated Consolidated At 1 July 2010 Cost or fair value Accumulated depreciation and impairment Net book amount Year ended 30 June 2011 Opening net book amount Exchange differences Revaluation to fair value Additions Disposals Transfers to assets held-for-sale Depreciation charge Impairment charge recognised in profit or loss Closing net book amount At 30 June 2011 Cost or fair value Accumulated depreciation and impairment Net book amount Land–Fair Value Buildings –Fair Value $’000 $’000 Plant and equipment–Cost and Fair Value $’000 44,294 - 44,294 44,294 (201) 10,333 - - - - - 54,426 54,426 - 54,426 54,072 (4,465) 49,607 49,607 (172) 3,147 1,663 (20) - (1,769) - 52,456 57,838 (5,382) 52,456 258,663 (132,906) 125,757 125,757 (29) - 25,160 (706) (2,702) (20,112) (37,210) 90,158 230,248 (140,090) 90,158 70 Hills Holdings Limited Annual Report for the year ended 30 June 2012 2011 $’000 2 Total $’000 357,029 (137,371) 219,658 219,658 (402) 13,480 26,823 (726) (2,702) (21,881) (37,210) 197,040 342,512 (145,472) 197,040 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 11 Non-current assets – Property, plant and equipment (continued) Consolidated Year ended 30 June 2012 Opening net book amount Exchange differences Revaluation to fair value Acquisition through business combinations Additions Disposals Depreciation charge Closing net book amount At 30 June 2012 Cost or fair value Accumulated depreciation and impairment Net book amount (a) Assets in the course of construction Land–Fair Value Buildings –Fair Value $’000 $’000 Plant and equipment–Cost and Fair Value $’000 54,426 60 (548) - - - - 53,938 53,938 - 53,938 52,456 39 (369) - 2,138 (464) (1,911) 51,889 58,741 (6,852) 51,889 90,158 9 - 104 10,743 (806) (18,008) 82,200 234,205 (152,005) 82,200 Total $’000 197,040 108 (917) 104 12,881 (1,270) (19,919) 188,027 346,884 (158,857) 188,027 The carrying amounts of the assets disclosed above include the following expenditure recognised in relation to property, plant and equipment which is in the course of construction: Property, furniture, fittings, plant and equipment Total assets in the course of construction Consolidated 2012 $’000 6,878 6,878 2011 $’000 15,732 15,732 (b) Valuations of land and buildings 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. Fair value at 30 June 2012 for land and buildings in Australia is based on a Directors’ valuation of the assets at that date. This is based upon an independent valuation of all freehold land and buildings dated May 2011 and updated based upon the Directors’ assessments of changes in market conditions affecting the components of those valuations. The 2011 valuations were based on independent assessments by a member of the Australian Property Institute as at 31 May 2011. Fair value at 30 June 2012 for land and buildings in New Zealand is based upon an independent valuation. In the current and previous financial year the revaluation (deficit) / surplus net of applicable deferred income taxes was (debited) / credited to the asset revaluation reserve in shareholders’ equity. (c) Impairment loss recorded in year ended 30 June 2011 The impairment loss in the previous financial year 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. Hills Holdings Limited Annual Report for the year ended 30 June 2012 71 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 12 Non-current assets – Deferred tax assets Consolidated The balance comprises temporary differences attributable to: Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Tax losses Other items Net deferred tax assets 2012 $’000 (2,136) 2,086 10,965 2,030 1,265 1,455 1,100 1,384 2,868 888 21,905 2011 $’000 5,368 4,869 10,737 2,811 1,218 2,201 2,293 1,303 - 685 31,485 Movements – Consolidated Balance at 1 July 2010 Recognised in profit or loss Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Other items $’000 (1,921) 4,614 10,865 2,543 1,218 2,238 1,576 1,233 1,405 23,771 $’000 11,246 255 (128) 268 - (37) 717 (375) (540) 11,406 Movements – Consolidated Balance at 1 July 2011 Recognised in profit or loss Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Tax loss carry-forwards recognised Other items $’000 5,368 4,869 10,737 2,811 1,218 2,201 2,293 1,303 - 685 31,485 $’000 (7,607) (2,783) 228 (781) 47 (746) (1,193) (608) 2,868 142 (10,433) Recognised in other comprehensive income $’000 (3,957) - - - - - - 445 - (3,512) Recognised in other comprehensive income $’000 103 - - - - - - 689 - - 792 Recognised in equity Balance at 30 June 2011 $’000 - - - - - - - - (180) (180) $’000 5,368 4,869 10,737 2,811 1,218 2,201 2,293 1,303 685 31,485 Recognised in equity Balance at 30 June 2012 $’000 - - - - - - - - - 61 61 $’000 (2,136) 2,086 10,965 2,030 1,265 1,455 1,100 1,384 2,868 888 21,905 72 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 13 Non-current assets – Intangible assets Consolidated At 1 July 2010 Cost Accumulated amortisation and impairment Net book amount Year ended 30 June 2011 Opening net book amount Additions Impairment charge ** Amortisation charge ** Closing net book amount At 30 June 2011 Cost Accumulated amortisation and impairment Net book amount Year ended 30 June 2012 Opening net book amount Additions Acquisitions through business combinations Amortisation charge ** Derecognised on disposal Closing net book amount At 30 June 2012 Cost Accumulated amortisation and impairment Net book amount Development costs Goodwill $’000 $’000 Patents, trademarks and other rights $’000 Software * Total $’000 $’000 200 (40) 160 160 - - (40) 120 200 (80) 120 120 1,100 - (40) - 1,180 1,300 (120) 1,180 122,461 (11,043) 111,418 111,418 - (66,182) - 45,236 122,461 (77,225) 45,236 45,236 - 1,316 - - 46,552 121,858 (75,306) 46,552 5,957 (1,235) 4,722 4,722 293 - (1,158) 3,857 6,250 (2,393) 3,857 3,857 4 57 (1,141) (27) 2,750 6,267 (3,517) 2,750 - - - - - - - - - - - - 14,962 - - - 14,962 14,962 - 14,962 128,618 (12,318) 116,300 116,300 293 (66,182) (1,198) 49,213 128,911 (79,698) 49,213 49,213 16,066 1,373 (1,181) (27) 65,444 144,387 (78,943) 65,444 * Software includes capitalised development costs being an internally generated intangible asset. ** The amortisation and impairment charges are recognised in expenses in the Consolidated income statement. Hills Holdings Limited Annual Report for the year ended 30 June 2012 73 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 13 Non-current assets – Intangible assets (continued) (a) Impairment tests for goodwill During the year ended 30 June 2012 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. During the previous financial year the Group determined that there was 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). The aggregate carrying amounts of goodwill allocated to each cash generating unit, analysed at a segment level, are as follows: Cash generating unit Building and Industrial $’000 Electronics and Communications $’000 Lifestyle and Sustainability $’000 2012 Hills SVL Hills Healthcare LW Gemmell Fielders Orrcon Opticomm UHS Team Poly 2011 Hills SVL Hills Healthcare LW Gemmell Fielders Orrcon Opticomm UHS Team Poly - - - 7,789 - - - - 7,789 - - - 7,789 - - - - 7,789 17,553 - - - - 754 5,293 - 23,600 16,237 - - - - 754 5,293 - 22,284 - 11,839 3,324 - - - - - 15,163 - 11,839 3,324 - - - - - 15,163 Total $’000 17,553 11,839 3,324 7,789 - 754 5,293 - 46,552 16,237 11,839 3,324 7,789 - 754 5,293 - 45,236 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: • A pre-tax discount rate of between 13.7% and 14.91% (2011: 13.19% and 14.91%), 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. • 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. (b) Impact of possible changes in key assumptions for the current year assessment With the exception of the Fielders, Orrcon and Team Poly cash generating units, a reasonably possible change in the key assumptions above would not have resulted in the carrying amount of assets allocated to the cash generating unit exceeding the recoverable amount for any of the Group’s cash generating units. • A terminal value has been determined at the end of the five year strategic plan using a growth rate of 2.5%-3.0% (2011: 2.5%-3.0%), which is no greater than the long term average growth rate for the market to which the asset is dedicated. The Fielders cash generating unit’s recoverable amount (which exceeds its carrying value in use by approximately $11.080 million 2011: $16.535 million)) is sensitive to a possible change in EBIT. The business is forecasting for EBIT to return to 2005 levels by the end of the five year model period. 74 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 In the previous financial year, 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%. Cash flow projections were based on Board agreed forecasts with key assumptions for future years relating to sales, gross margins and expenses. Sales were 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 were based on past experience. The Team Poly cash generating unit recoverable amount is sensitive to a possible change in EBIT. The Team Poly business was forecasting average annualised EBIT growth of 3%-3.5% per annum over the five year model period. A terminal value was determined at the end of the five year strategic plan using a growth rate of 3%, which was no greater than the long term average growth rate for the market to which the assets were dedicated. Based on this assessment assets were impaired by $16.592 million and in accordance with Accounting Standards the impairment was allocated against goodwill. 13 Non-current assets – Intangible assets (continued) A decrease in forecast annual EBIT across the five year forecast period of 12% (2011: 15%) could result in an impairment. The Orrcon cash generating unit’s recoverable amount (which exceeds its carrying value in use by approximately $14.974 million (2011: impairment of $49.590 million recorded)) is sensitive to a possible change in EBIT. A decrease in forecast annual EBIT across the five year forecast period of 13% (2011: nil) could result in an impairment. The Team Poly cash generating unit’s recoverable amount (which exceeds its carrying value in use by approximately $9.563 million (2011: impairment of $16.592 million recorded)) is sensitive to a possible change in EBIT. A decrease in forecast annual EBIT across the five year forecast period of 34% (2011: nil) could result in an impairment. (c) Impairment charge recorded in the year ended 30 June 2011 In the previous financial year, the recoverable amount of the Orrcon cash generating unit was estimated based on its value in use for the Orrcon business. The estimate of value in use was determined using a pre-tax discount rate of 13.19%. Cash flow projections were based on Board agreed forecasts with key assumptions for future years relating to sales, gross margins and expenses. Sales were 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 were based on past experience. The Orrcon cash generating unit recoverable amount is sensitive to a possible change in EBIT. The Orrcon business was forecasting annualised EBIT growth of 2%-3% per annum over the five year model period. A terminal value was determined at the end of the five year strategic plan using a growth rate of 2.5%, which was no greater than the long term average growth rate for the market to which the assets are dedicated. Based on this assessment assets were impaired by $49.590 million and in accordance with Accounting Standards the impairment was allocated against goodwill. Hills Holdings Limited Annual Report for the year ended 30 June 2012 75 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 14 Derivative financial instruments Current liabilities Interest rate swaps – cash flow hedges (i) Forward foreign exchange contracts – cash flow hedges (ii) Forward foreign exchange contracts – held for trading (iii) Total current derivative financial instrument liabilities Noncurrent liabilities Interest rate swaps – cash flow hedges (i) Total non – current derivative financial instrument liabilities Total derivative financial instrument liabilities The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group’s financial risk management policies (refer to note 30). (i) Interest rate swap contracts – cash flow hedges Bank loans of the Group at 30 June 2012 bear an average variable interest rate of 3.8% (2011: 5.0%). It is the Group’s policy to manage exposure to increasing interest rates by hedging a proportion of the Group’s exposure to variable rate bank loans. Accordingly, the Group has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. Interest rate swaps in place at 30 June 2012 cover approximately 57% (2011: 83%) of the loan principal outstanding and are taken out with terms of between three and seven years. The fixed interest rates average 6.0% (2011: 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. In the year ended 30 June 2012 a loss of $137,000 was reclassified into profit or loss (2011: $40,000) and included in finance cost due to hedge ineffectiveness in the current or prior year and a gain of $290,000 was reclassified into profit or loss (2011: $1,176,000) 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. In order to protect against exchange rate movements, the Group has entered into forward exchange contracts to purchase US dollars. These contracts are hedging highly probable forecasted purchases for approximately the next two to three months. 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 Consolidated statement of financial position by removing the related amount from other comprehensive income. Consolidated 2011 $’000 8 410 102 520 2,056 2,056 2,576 2012 $’000 - 507 99 606 4,106 4,106 4,712 During the year ended 30 June 2012 a gain of $3,000 was recognised in profit or loss for the ineffective portion of these hedging contracts (2011: $8,000). (iii) Forward foreign exchange contracts and interest rate swaps – held for trading Group subsidiaries have entered into forward 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 30 for details. However, they are accounted for as held for trading. (a) Risk exposures and fair value measurements Information 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 30. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of derivative financial assets mentioned above. 76 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 15 Non-current assets classified as held for sale Plant and equipment Consolidated 2012 $’000 - 2011 $’000 2,702 In the previous financial year and as part of the restructuring of Orrcon, in May 2011 the Directors decided to close certain operations and assets previously used in manufacturing were classified as held for sale. An active programme of marketing and selling the assets was initiated and the asset was sold during the current financial year. The assets were presented within total assets of the Building and Industrial segment in note 2. The losses on measuring the assets at fair value less costs to sell were presented within “impairment of property, plant and equipment” in note 5 and disclosed within note 11. 16 Current liabilities – Trade and other payables Consolidated Trade payables Other trade payables and accrued expenses (a) Risk exposure Information about the Group’s exposure to foreign exchange risk is provided in note 30. 17 Current liabilities – Borrowings Bank overdrafts** Short term money market Other loans Total current borrowings ** Further information on the bank overdrafts and bills payable are set out in note 19. (a) Security and fair value disclosures 2012 $’000 51,129 36,596 87,725 2012 $’000 1,333 - - 1,333 2011 $’000 54,162 45,509 98,671 2011 $’000 1,512 5,000 321 6,833 Consolidated Information about the security relating to each of the secured liabilities and the fair value of each of the borrowings is provided in note 19. (b) Risk exposures Details of the Group’s exposure to risks arising from current and non-current borrowings are set out in note 30. 18 Current liabilities – Provisions Employee benefits Outstanding claims Other provisions Information on non-current provisions is set out in note 20. Consolidated 2011 $’000 27,046 3,339 578 30,963 2012 $’000 29,160 3,538 541 33,239 Hills Holdings Limited Annual Report for the year ended 30 June 2012 77 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 18 Current liabilities – Provisions (continued) 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 provisions 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: 2012 Current & non–current Carrying amount at start of year Charged/(credited) to profit or loss / retained earnings – additional provisions recognised Amounts used during the year Carrying amount at end of year 2011 Current & non–current Carrying amount at start of year Charged/(credited) to profit or loss / retained earnings – additional provisions recognised – reductions from remeasurement or settlement without cost Amounts used during the year Carrying amount at end of year 19 Non-current liabilities – Borrowings Unsecured Bills payable Other loans Loans from non–controlling interests Total unsecured non–current borrowings Total non–current borrowings (a) Bank loans and bank overdraft Bank overdrafts Provision for dividend $’000 Outstanding claims $’000 Other Provisions $’000 - 23,483 (23,483) - - 27,273 3,339 199 - 3,538 5,701 - - (2,362) (27,273) - - 3,339 911 367 (84) 1,194 692 269 - (50) 911 Total $’000 4,250 24,049 (23,567) 4,732 6,393 27,542 (2,362) (27,323) 4,250 Consolidated 2011 $’000 90,000 1,458 21 91,479 91,479 2012 $’000 115,000 556 121 115,677 115,677 Bank overdrafts are denominated in both AUD and NZD. The bank overdraft of a controlled entity is secured by a guarantee from the Company. Interest on bank overdrafts is charged at prevailing market rates. The bank overdrafts are payable on demand and are subject to annual review. The Company and a number of its subsidiaries have a net bank overdraft facility of $1,000,000 (2011: $1,000,000), the Company’s New Zealand subsidiary has a separate bank overdraft facility of $1,762,000 (2011: $1,737,000) and a partially owned subsidiary has a bank overdraft facility of $500,000 (2011: $1,700,000). 78 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 19 Non-current liabilities – Borrowings (continued) Unsecured bank loans The Group has a number of multi-option facilities with its bankers. Generally, these facilities can be utilised for a combination of bank loans, guarantees and standby letters of credit. Bank loans are denominated in both 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 its ownership interest. An assessment of the contractual maturities of financial liabilities is provided in note 30. Subsequent to the end of the financial year, the Group has renewed its banking facilities jointly with Commonwealth Bank, National Australia Bank and Westpac Banking Corporation through a Common Deed. The total facility is $196 million, comprising Tranche A $81 million, expiring in 3 years (16 August 2015), Tranche B $69 million, expiring in 4 years (16 August 2016), and Tranche C $46 million, expiring in 3 years (16 August 2015), but subject to annual review. Tranches A and B comprise bank loans and Tranche C comprises bank guarantees, letters of credit and cash advances. Standby letter of credit The standby letter of credit facility forms part of the multi-option facilities negotiated with the Group’s bankers. Short term money market Borrowings on the short-term money market are denominated in $AUD. Interest on the borrowings is charged at the prevailing market rates. (b) Financing arrangements The Group had access to the following undrawn borrowing facilities at the reporting date: Consolidated 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 leters of credit Short term money market 2012 $’000 3,262 185,031 19,955 5,000 213,248 1,333 115,000 19,955 - 136,288 1,929 70,031 - 5,000 76,960 2011 $’000 4,437 207,088 10,869 5,000 227,394 1,512 90,000 10,439 5,000 106,951 2,925 117,088 430 - 120,443 Hills Holdings Limited Annual Report for the year ended 30 June 2012 79 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 19 Non-current liabilities – Borrowings (continued) (c) Fair value The carrying amounts and fair values of borrowings at the end of reporting period are: Consolidated Non-traded financial liabilities Bank overdrafts Short term money market Bills payable Other loans (d) Risk exposures 2012 Carrying amount $’000 1,333 - 115,000 677 117,010 Fair value $’000 1,333 - 115,000 677 117,010 2011 Carrying amount $’000 1,512 5,000 90,000 1,800 98,312 Fair value $’000 1,512 5,000 90,000 1,800 98,312 Information about the Group’s exposure to interest rate and foreign exchange risk is provided in note 30. For an analysis of the sensitivity of borrowings to interest rate risk and foreign exchange risk refer to note 30. 20 Non-current liabilities – Provisions Employee benefits Other provisions Movements in provisions are set out in note 18. 21 Contributed equity (a) Share capital Ordinary shares fully paid (b) Movements in ordinary share capital: Consolidated 2012 $’000 4,175 653 4,828 2011 $’000 6,237 333 6,570 2012 Shares ’000 2011 Shares ’000 2012 2011 $’000 $’000 246,017 248,636 303,805 306,790 Details Number of shares ’000 Date 1 July 2010 Opening balance Issued under the Employee Share Bonus Plan Movement in deferred tax asset relating to transaction costs arising on share issue 247,697 939 - 248,636 248,636 283 (2,902) - 246,017 $’000 306,595 375 (180) 306,790 306,790 67 (3,113) 61 303,805 30 June 2011 Balance 1 July 2011 Opening balance Issued under the Employee Share Bonus Plan Share buy–back Movement in deferred tax asset relating to transaction costs arising on share issue 30 June 2012 Balance 80 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 21 Contributed equity (continued) (c) Ordinary shares 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 Investment Plan and the Share Investment Plan did not operate in respect of dividends issued during the financial year. (e) Employee share scheme The Company made two issues of ordinary shares under the Employee Share Bonus Plan during the year. All employees meeting the service criteria were eligible to participate in the issue. The shares are issued at market value. (f) Executive Shares, Performance Rights and Options Information relating to the Long Term Incentive 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 financial year, is set out in note 25. (g) Share buy-back On 23 August 2011 the Company announced an on-market buy-back giving the Company the option to acquire up to 10% of its issued ordinary shares. The buy-back was for ongoing capital management purposes and was to take place over the twelve months from the date of the announcement. Between that date and 16 December 2011 the Company bought back 2.902 million shares at an average price of $1.07 per share, with prices ranging from $0.98 to $1.155 per share. The total cost of $3.113 million, including transaction costs of $12,000, was deducted from shareholders equity. The Directors subsequently resolved to suspend the share buy-back. On 13 August 2012, the Directors resolved to extend the on-market buy-back by a further twelve months. (h) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the gearing ratio in conjunction with its review of the Group’s banking covenants. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings as shown in the Consolidated statement of financial position less cash and cash equivalents. Total capital is equity as shown in the Consolidated statement of financial position (including non-controlling interests). During 2012, the Group’s strategy, which was unchanged from 2011, was to maintain a target gearing ratio less than 45%. The gearing ratios at 30 June 2012 and 30 June 2011 were as follows: Total borrowings Less: cash and cash equivalents Net debt Total equity Gearing ratio Consolidated 2011 $’000 98,312 (7,158) 91,154 402,307 22.7% 2012 $’000 117,010 (24,638) 92,372 400,963 23.0% Hills Holdings Limited Annual Report for the year ended 30 June 2012 81 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 22 Reserves (a) Other reserves Asset revaluation reserve Hedging reserve – cash flow hedges Asset realisation reserve Foreign currency translation reserve Equity compensation reserve Non-controlling interests acquisition reserve Movements: Asset revaluation reserve Balance 1 July Revaluation–gross Deferred tax Transfer from retained earnings Balance 30 June Hedging reserve – cash flow hedges Balance 1 July Revaluation–gross Deferred tax Balance 30 June Asset realisation reserve Balance 1 July Transfer to retained earnings Balance 30 June Foreign currency translation reserve Balance 1 July Currency translation differences arising during the year Disposal of foreign subsidiary Transfer from retained earnings Balance 30 June Equity compensation reserve Balance 1 July Long Term Incentive 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 change in Group shareholding Balance 30 June Consolidated 2011 $’000 47,041 (1,304) 11,854 (2,212) 647 1,219 57,245 35,634 12,814 (3,757) 2,350 47,041 (265) (1,484) 445 (1,304) 12,019 (165) 11,854 (1,653) (722) (27) 190 (2,212) 613 34 647 1,551 (332) 1,219 2012 $’000 46,227 (2,910) - (2,021) 736 1,171 43,203 47,041 (917) 103 - 46,227 (1,304) (2,295) 689 (2,910) 11,854 (11,854) - (2,212) 191 - - (2,021) 647 89 736 1,219 (48) 1,171 82 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 22 Reserves (continued) (b) Nature and purpose of other reserves (i) Asset revaluation reserve The asset revaluation reserve is used to record increments and decrements on the revaluation of property, plant and equipment, as described in note 1(p). (ii) Hedging reserve – cash flow hedges The hedging reserve is used to record changes in the fair value of derivative financial instruments designated in a cash flow hedge relationship that are recognised in other comprehensive income, as described in note 1(o). Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. (iii) Asset realisation reserve Where a revalued asset is sold, that portion of the asset revaluation reserve 23 Dividends that relates to that asset is transferred to the asset realisation reserve upon settlement. Amounts transferred to the asset realisation reserve may subsequently be transferred to retained earnings. During the financial year the Board resolved to transfer the balance of the asset realisation reserve to retained earnings. (iv) Foreign currency translation reserve Exchange differences arising on translation of the financial statements of a foreign controlled entity are recognised in other comprehensive income as described in note 1(e) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. (v) Equity compensation reserve The equity compensation reserve represents the value of 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. Consolidated 2012 $’000 2011 $’000 Final ordinary dividend for the year ended 30 June 2011 of 4.5 cents (year ended 30 June 2010: 5.5 cents) per fully paid share paid on 26 September 2011 (Year ended 30 June 2010: 27 September 2010) Fully franked based on tax paid @ 30% 11,190 13,623 Interim ordinary dividend for the year ended 30 June 2012 of 5.0 cents (2011: 5.5 cents) per fully paid share paid on 30 March 2012 (2011: 21 March 2011) Fully franked based on tax paid @ 30% Total dividends provided for or paid 12,293 23,483 13,650 27,273 (a) Dividends and share reinvestment plan The Dividend Investment Plan and Share Investment Plan will not operate in respect of the proposed final dividend. (b) Dividends not recognised at the end of the reporting period In addition to the above dividends, since the end of the financial year the Directors have recommended the payment of a final dividend of 5.0 cents per fully paid ordinary share (2011: 4.5 cents) fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 26 September 2012 out of retained profits at 30 June 2012, but not recognised as a liability at year end, is Consolidated 2012 $’000 2011 $’000 12,301 11,189 Hills Holdings Limited Annual Report for the year ended 30 June 2012 83 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 23 Dividends (continued) (c) Franked dividends The franked portions of the final dividends recommended after 30 June 2012 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 2013. Franking credits available for subsequent financial years based on a tax rate of 30% (2011: 30%) 2012 $’000 17,405 2011 $’000 32,713 The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: (a) (b) (c) franking credits that will arise from the payment of the amount of the provision for income tax; franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the Company if distributable profits of subsidiaries were paid as dividends. The impact on the franking account of the dividend recommended by the Directors since 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 $5.272 million (2011: $4.795 million). 24 Earnings per share Consolidated (a) Basic earnings per share From profit / (loss) from continuing operations attributable to the ordinary equity holders of the Company From profit from continuing operations before CGU impairment and closure costs attributable to the ordinary equity holders of the Company (b) Diluted earnings per share From profit / (loss) from continuing operations attributable to the ordinary equity holders of the Company From profit before CGU impairment and closure costs attributable to the ordinary equity holders of the Company 2012 Cents 10.5 10.5 10.5 10.5 2012 $’000 Consolidated 2011 Cents (30.2) 10.2 (30.2) 10.2 2011 $’000 (c) Reconciliations of earnings used in calculating earnings per share Basic earnings per share Profit / (loss) attributable to the ordinary equity holders of the Company used in calculating basic earnings per share Diluted earnings per share 26,021 (74,955) Profit / (loss) attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share 26,021 (74,955) Basic earnings per share before CGU impairment and closure costs Profit / (loss) attributable to the ordinary equity holders of the Company used in calculating basic earnings per share Adjusted for CGU impairment and closure costs: Impairment of Orrcon plant and equipment Impairment of Orrcon inventory Impairment of Orrcon goodwill Impairment of Team Poly plant and equipment Impairment of Team Poly goodwill Closure costs 26,021 (74,955) - - - - - - 24,235 5,127 49,590 1,224 16,592 3,474 25,287 Profit attributable to the ordinary equity holders of the Company before CGU impairment and closure costs used in calculating basic earnings per share 26,021 84 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 24 Earnings per share (continued) (d) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Consolidated 2012 Number ’000 2011 Number ’000 246,764 248,171 Effect of share options and rights on issue 285 - Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 247,049 248,171 The 483,000 share options granted between 2003 and 2007 are not included in the calculation of diluted earnings per share because they are antidilutive for the year ended 30 June 2012. These options could potentially dilute basic earnings per share in the future. 25 Share-based payments (a) Executive share plan In 2010 the Group established the Hills Holdings Limited Long Term Incentive Share Plan (LTIP). The Plan is designed to provide long term incentives to eligible senior employees in the Group 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. If 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 20-year loans are treated as part of the options to purchase shares, until the loan is extinguished at which point the shares are recognised. Details of the performance rights and options under the current and previous scheme are as follows: Grant Date / Exercise date Consolidated 2012 Current Plan LTIP April 2011 / June 2013 Dec 2011 / June 2014 Previous Plan ESOP Feb 2001 / Jan 2003 Feb 2002 / Jan 2004 Feb 2003 / Jan 2005 Feb 2004 / Jan 2006 Feb 2005 / Jan 2007 Feb 2009 / Jan 2012 Total Expiry date Exercise price Balance at start of the year Granted during the year Exercised during the year Number Number Number Forfeited / lapsed during the year Number Balance at end of the year Number June 2013 June 2014 Jan 2023 Jan 2024 Jan 2025 Jan 2026 Jan 2027 Jan 2032 $0.00 $0.00 $2.50 $2.90 $3.23 $3.66 $4.16 $3.01 209,740 - - 426,421 50,000 53,000 80,000 125,000 195,000 415,000 - - - - - - 1,127,740 426,421 - - - - - - - - - (10,811) (20,903) 198,929 405,518 - - - (10,000) (10,000) (415,000) 50,000 53,000 80,000 115,000 185,000 - (466,714) 1,087,447 Weighted average exercise price (ESOP) $3.33 $0.00 $0.00 $3.05 $3.58 Hills Holdings Limited Annual Report for the year ended 30 June 2012 85 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 25 Share-based payments (continued) Grant Date / Exercise Date Consolidated 2011 Current Plan LTIP April 2011 / June 2013 Previous Plan ESOP Feb 2001 / Jan 2003 Feb 2002 / Jan 2004 Feb 2003 / Jan 2005 Feb 2004 / Jan 2006 Feb 2005 / Jan 2007 Feb 2008 / Jan 2011 Feb 2009 / Jan 2012 Total Expiry date Exercise price Balance at start of the year Granted during the year Exercised during the year Number Number Number Forfeited / lapsed during the year Number Balance at end of the year Number June 2013 $0.00 - 209,740 Jan 2023 Jan 2024 Jan 2025 Jan 2026 Jan 2027 Jan 2031 Jan 2032 $2.50 $2.90 $3.23 $3.66 $4.16 $5.49 $3.01 50,000 53,000 80,000 135,000 205,000 445,000 525,000 - - - - - - - 1,493,000 209,740 - - - - - - - - - - 209,740 - - - (10,000) (10,000) (445,000) (110,000) 50,000 53,000 80,000 125,000 195,000 - 415,000 (575,000) 1,127,740 Weighted average exercise price (ESOP) $3.96 $0.00 $0.00 $4.96 $3.33 Details of options under the ESOP outstanding under accounting standards are as follows: Grant Date Consolidated – 2012 February 2001 February 2002 February 2003 February 2004 February 2005 February 2009 Total Consolidated – 2011 February 2001 February 2002 February 2003 February 2004 February 2005 February 2008 February 2009 Total Options granted Number Outstanding at balance date AIFRS Number Outstanding at balance date ASX Number 195,000 245,000 280,000 370,000 460,000 535,000 2,085,000 195,000 245,000 280,000 370,000 460,000 625,000 535,000 2,710,000 50,000 53,000 80,000 115,000 185,000 - 483,000 50,000 53,000 80,000 125,000 195,000 - 415,000 918,000 - - - - - - - - - - - - - 415,000 415,000 Fair value of Performance Rights granted The share price used to calculate the number of performance rights issued to the Managing Director and Senior Executives was $1.1960 (2011: $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 2011 (2011: 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 2012 was 45.0 cents (2011: 90.5 cents) per performance right. The fair value at grant date is independently determined using a Black-Scholes methodology for the non-market hurdles and a Monte Carlo valuation methodology for the market hurdles, that take 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 and the risk free interest rate for the term of the performance rights. 86 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 25 Share-based payments (continued) The model inputs for the valuation of performance rights in accordance with AASB 2 Share Based Payment for performance rights granted during the year ended 30 June 2012 included: (a) (b) (c) (d) (e) (f) (g) (h) exercise price: $0.00 (2011: $0.00) vesting period: 3 years (2011: 3 years) grant date (for Accounting Standards): 19 December 2011 (2011: 28 April 2011) expiry date: 30 June 2014 (2011: 30 June 2013) share price at grant date: $1.11 (2011: $1.53) expected price volatility of the Company’s shares: 40% (2011: 35%) expected dividend yield: 9.0% (2011: 8.7%) risk-free interest rate: 3.01% (2011: 5.01%) (b) Employee share bonus 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 otherwise determined by the Directors. Number of shares issued under the plan to participating employees on 30 September 2011 (2011: 22 September 2010) Number of shares issued under the plan to participating employees on 26 March 2012 (2011: 29 March 2011) Consolidated 2012 Number ’000 2011 Number ’000 153 151 304 457 462 919 Each participant was issued with 100 shares in each tranche, (2011: shares worth $1,000 in total for the financial year) based on the weighted average market price of $1.09 (March 2012 issue) and $1.01 (September 2011 issue) (2011: $1.52 (March 2011 issue) and $2.34 (September 2010 issue)). (c) 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: Performance rights / options issued under the Long Term Incentive Plan / Executive Share Option Plan Shares issued under Employee Share Bonus Plan 26 Key management personnel disclosures (a) Directors Consolidated 2011 $’000 53 425 478 2012 $’000 170 119 289 The following persons were Directors of Hills Holdings Limited during the financial year and unless otherwise indicated were Directors for the entire period: (i) Chairman – Non-Executive Jennifer Helen Hill-Ling (ii) Executive Directors Graham Lloyd Twartz (Group Managing Director) Hills Holdings Limited Annual Report for the year ended 30 June 2012 87 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 26 Key management personnel disclosures (continued) (iii) Non-Executive Directors Fiona Rosalyn Vivienne Bennett Matthew Arnold Campbell (appointed 19 December 2011) Ian Elliot Roger Baden Flynn (retired 4 November 2011) David Moray Spence 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 financial year and unless otherwise indicated were key management personnel for the entire period: Name S Cope D Lethbridge A Kachellek G Logan M McKinstry A Muir R Rees T Sullivan Position Employer / Division Chief Executive Officer – Electronics & Communications Division Hills Holdings Limited / Electronics and Communications Company Secretary (until 1 February 2012) Hills Holdings Limited Managing Director Korvest Ltd Chief Financial Officer (from 8 August 2011) Hills Holdings Limited Chief Operating Officer Hills Holdings Limited Chief Financial Officer (until 7 July 2011) Hills Holdings Limited Company Secretary (from 1 February 2012) Hills Holdings Limited Group General Manager Strategy Hills Holdings Limited All of the above persons were key management persons throughout the year ended 30 June 2012, except for G Logan, who commenced employment with the Group on 8 August 2011, R Rees, who commenced employment with the Group on 1 February 2012, A Muir, who resigned from the Group with effect from 7 July 2011 and D Lethbridge, who resigned from the Group with effect from 14 February 2011. All of the above persons were also key management persons during the year ended 30 June 2011, 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, G Logan and R Rees. In addition, following a restructure, L Andrewartha and K Middleton, who were key management personnel during the year ended 30 June 2011 are not key management personnel for the year ended 30 June 2012. (c) Key management personnel compensation The key management personnel (KMP) compensation included in ‘personnel expenses’ in note 5 is: Short-term employee benefits (fixed and STI remuneration) Post-employment benefits (superannuation) Long-term benefits (accrued long service leave) Share-based payments (LTI expense and employee share bonus plan expense) 2012 $’000 3,838,022 291,271 96,319 60,797 4,286,409 Consolidated 2011 $’000 4,335,545 345,549 74,082 37,194 4,792,370 Information regarding individual Directors’ and Executives’ compensation and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 are provided in the Remuneration report on pages 20 to 30. 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. 88 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 26 Key management personnel disclosures (continued) (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 25 and in the Remuneration report on pages 29 to 30. Name Number of Rights granted during the year Number of Rights / options vested during the year 2012 2011 2012 2011 Directors of Hills Holdings Limited GL Twartz 229,933 118,926 Other key management personnel of the Group L Andrewartha S Cope D Lethbridge G Logan M McKinstry K Middleton T Sullivan - 41,806 20,903 41,806 62,709 - 29,264 21,623 21,623 10,811 - - 21,623 15,134 - - - - - - - - - - - - - - - - No Rights or options were held by key management person related entities. (ii) Rights and options provided as remuneration and shares issued 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 22 to 24 and 29 to 30. (iii) Rights / option holdings The numbers of rights / options over ordinary shares in the Company held during the financial year by each Director of the Company and other key management personnel of the Group, including their personally related parties, are set out below. 2012 Name Directors of Hills Holdings Limited G Twartz Other key management personnel of the Group S Cope D Lethbridge G Logan M McKinstry A Muir T Sullivan Balance at start of the year Granted as compen- sation Exercised Rights / options lapsed / forfeited Balance at end of the year Vested and exercisable Unvested 421,926 229,933 81,623 10,811 - - 80,000 15,134 41,806 20,903 41,806 62,709 - 29,264 - - - - - - - (100,000) 551,859 203,000 348,859 (60,000) (31,714) - - (80,000) - 63,429 - 41,806 62,709 - 44,398 - - - - - - 63,429 - 41,806 62,709 - 44,398 Hills Holdings Limited Annual Report for the year ended 30 June 2012 89 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 26 Key management personnel disclosures (continued) 2011 Name Balance at start of the year Granted as compen- sation Exercised Options lapsed / forfeited Balance at end of the year Vested and exercisable Unvested Directors of Hills Holdings Limited G Twartz Other key management personnel of the Group L Andrewartha S Cope D Edgecombe R Gros D Lethbridge K Middleton A Muir T Sullivan 363,000 118,926 180,000 120,000 25,000 120,000 - 45,000 105,000 - 21,623 21,623 - - 10,811 21,623 - 15,134 - - - - - - - - - (60,000) 421,926 203,000 218,926 (60,000) (60,000) (25,000) (120,000) - (20,000) (25,000) - 141,623 81,623 - - 10,811 46,623 80,000 15,134 60,000 - - - - - - - 81,623 81,623 - - 10,811 46,623 80,000 15,134 (iv) 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 International Financial Reporting Standards, until the loan is extinguished at which point the shares are recognised. Share disclosures for JH Hill-Ling includes 1,188,918 (2011: 1,188,918) shares owned by Hills Associates Limited & Poplar Pty Ltd (jointly held) and 14,450,548 (2011: 13,455,689) shares owned by Hills Associates Limited, of which J H Hill-Ling is a Director. Other changes during the year for JH Hill-Ling comprises the acquisition of 994,859 shares in Hills Holdings Limited by Hills Associates Limited. In the previous financial year other changes for JH Hill-Ling were as 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 beneficial 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 R Flynn comprises the removal of the disclosure of his shareholdings in the Company, as R Flynn ceased to be a Director of the Company on 4 November 2011. In the previous financial year other changes during the year for G Hill comprised the removal of the disclosure of his shareholdings in the Company, as G Hill ceased to be a Director of the Company on 24 April 2011. 90 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 26 Key management personnel disclosures (continued) 2012 Name Directors of Hills Holdings Limited Ordinary shares J Hill-Ling G Twartz F Bennett M Campbell I Elliot R Flynn D Spence P Stancliffe Other key management personnel of the Group Ordinary shares S Cope A Muir 2011 Name Directors of Hills Holdings Limited Ordinary shares J Hill-Ling G Twartz F Bennett I Elliot R Flynn G Hill D Spence P Stancliffe Other key management personnel of the Group Ordinary shares L Andrewartha S Cope D Edgecombe R Gros K Middleton A Muir Balance at the start of the year Granted during reporting year as compensation Received during the year on the exercise of options Other changes during the year Balance at the end of the year 14,817,671 4,342 4,000 - 6,235 35,665 19,000 19,104 - - - - - - - - 978 5,278 200 - - - - - - - - - - - Balance at the start of the year Granted during reporting year as compensation Received during the year on the exercise of options 994,859 - - 1,000 - (35,665) - - 15,812,530 4,342 4,000 1,000 6,235 - 19,000 19,104 - (5,278) Other changes during the year 1,178 - Balance at the end of the year 16,512,469 9,036 4,000 6,235 35,665 92,505 - 19,104 1,228 459 2,690 4,047 2,790 4,759 - - - - - - - - 519 519 256 256 519 519 - - - - - - - - - - - - - - (1,694,798) (4,694) - - - (92,505) 19,000 - 14,817,671 4,342 4,000 6,235 35,665 - 19,000 19,104 - - (2,946) (4,303) - - 1,747 978 - - 3,309 5,278 Hills Holdings Limited Annual Report for the year ended 30 June 2012 91 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 26 Key management personnel disclosures (continued) (e) Loans to key management personnel There were no loans outstanding at the reporting date to key management personnel and their related parties. Option loans are not recognised as loans as they are included in the fair value of the options as required by IFRS. (f) Other transactions with key management personnel A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. Alfred Health, an entity associated with F Bennett, has purchased goods during the year from the Hills Group. Amounts were billed and payable under normal commercial terms and conditions. The total amount recognised as an expense during the year was $30,977 (2011: $nil). 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 (2011: $nil). From time to time, key management personnel of the Company or its controlled entities, or their related entities, may purchase goods from the Group. These purchases are on the same terms and conditions as those entered into by other Group employees or customers and are trivial or domestic in nature. 27 Related party transactions (a) Parent entities The parent entity within the Group and the ultimate parent entity is Hills Holdings Limited. (b) Subsidiaries (e) Loans to/from related parties Interests in subsidiaries are set out in note 33. (c) Key management personnel Disclosures relating to key management personnel are set out in note 26. (d) Transactions with other related parties The following transactions occurred with related parties: Subsidiaries All transactions with partly owned controlled entities are on normal commercial terms and conditions. Transactions with controlled entities are determined on a cost basis. Sales of goods and services within the Group, that eliminated with cost of goods sold and services provided amounted to $24.917 million (2011: $27.755 million). Loans and borrowings with Australian wholly owned controlled entities are interest free and payable on demand while loans to or from non-wholly owned subsidiaries are charged interest at rates no more favourable than current market rates. Inter-entity interest paid and received during the year was $ 0.410 million (2011: $0.431 million). 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 $2.278 million (2011: $2.234 million). Group entities charge an administration fee for services rendered which during the year was $14.277 million (2011: $11.967 million). Inter entity dividends paid and received during the year amounted to $16.168 million (2011: $13.236 million). Other related parties Contributions to superannuation funds on behalf of employees are disclosed in note 5. Subsidiaries Group entity trading transactions and borrowings result in balances arising in respect of current and non-current assets and liabilities. At 30 June 2012 the Group current assets and liabilities that were eliminated were $265.682 million (2011: $258.907 million) and the Group non-current assets and liabilities that were eliminated were $0.336 million (2011: $0.426 million). Other related parties Loans (from) Hills Associates Limited amounted to ($0.665 million) (2011: ($0.993 million)). 28 Contingent liabilities (a) Contingent liabilities The Group had contingent liabilities at 30 June 2012 in respect of: (i) Claims Responding to a request from the Environmental 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 or remediation cannot be reliably estimated and no provision has been made. (ii) Guarantees (a) (b) (c) Letters of credit established in favour of suppliers / creditors amounting to $19.955 million (2011: $10.439 million). Bank guarantees in favour of customers and suppliers amounting to $16.953 million (2011: $19.302 million). Performance guarantees have been given to a customer of a partially owned subsidiary. Should that subsidiary fail to perform under the contracts, the Company will assume responsibility for performance of current work-in-progress. 92 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 28 Contingent liabilities (continued) The Group has various commercial legal claims common to businesses of its type which constitute contingent liabilities, no one of which is material to the Group’s financial 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 sacrifice of economic benefits will be required. (b) Contingent assets There are no contingent assets where the probability of future receipts is not considered remote. 29 Commitments (a) Capital commitments Capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows: Property, plant and equipment Payable: Within one year Consolidated 2012 $’000 2011 $’000 4,866 12,938 (b) Lease commitments: Group as lessee The Group leases a number of warehouse and factory facilities under operating leases. The leases run for a period ranging from 1 to 15 years with the majority running for a period of 5 years, with an option to renew the lease after that date. Lease payments are increased each renewal period to reflect market rentals. Some leases provide for additional rent payments that are based on changes in the consumer price index, local capital city consumer price indices or a fixed percentage. 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 $’000 25,557 61,249 37,429 124,235 2012 $’000 24,865 60,972 29,410 115,247 (c) Lease commitments: where a Group Company is the lessor The future minimum lease payments receivable under non-cancellable operating leases are as follows: Within one year Consolidated 2012 $’000 187 2011 $’000 143 Hills Holdings Limited Annual Report for the year ended 30 June 2012 93 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 30 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. Derivatives are exclusively used for risk minimisation purposes, ie not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and aging analysis for credit risk. Risk management is carried out by a central treasury department (Treasury) under policies approved by the Board of Directors. Treasury identifies, evaluates and minimises financial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. The Group holds the following financial instruments: Consolidated Financial assets Cash and cash equivalents Trade and other receivables Investments Financial liabilities Trade and other payables Borrowings Derivative financial instruments (a) Market risk (i) Foreign exchange risk 2012 $’000 24,638 175,206 2 199,846 87,725 117,010 4,712 209,447 2011 $’000 7,158 182,153 2 189,313 98,671 98,312 2,576 199,559 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: Trade receivables Cash at bank Trade payables Forward exchange contracts – buy foreign currency (cash flow hedges) USD $’000 1,419 331 (23,672) (47,060) Forward exchange contracts–buy foreign currency (FVTPL) (4,327) 30 June 2012 30 June 2011 NZD $’000 - - (211) - - euro ’000 - - (226) JPY ’000 - - (22,867) - - - - USD $’000 1,052 35 (12,933) (31,514) (1,096) NZD $’000 - 3 (181) - - euro ’000 - - (103) JPY ’000 - - (66,574) - - - - 94 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 30 Financial risk management (continued) Group sensitivity Based on the financial instruments held at 30 June 2012, had the Australian dollar weakened / strengthened by 10% against other currencies with all other variables held constant, the Group’s pre-tax profit for the year would have been $1,880,000 lower / $1,537,000 higher (2011: $1,202,000 lower / $977,000 higher), mainly as a result of foreign exchange gains / losses on translation of US dollar denominated financial assets and liabilities as detailed in the above table. Profit is more sensitive to movements in the Australian dollar / US dollar exchange rates in 2012 than 2011 because of the increased amount of US dollar denominated trade creditors. Other components of equity would have been $5,125,000 higher / $4,193,000 lower (2011: $2,856,000 higher / $3,077,000 lower) had the Australian dollar weakened / strengthened by 10% against the US dollar, arising from forward foreign exchange contracts designated as cash flow hedges. (ii) Price risk The Group has no material financial exposure to other market price risk as it is not exposed to equity securities price risk. The Group does not enter into commodity contracts other than to meet the Group’s expected usage requirements. (iii) Cash flow and fair value interest rate risk The Group’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Group policy is to maintain approximately 50% to 75% of its borrowings at fixed rate using interest rate swaps to achieve this when necessary. During 2012 and 2011, the Group’s borrowings at variable rate were denominated in Australian Dollars and NZ Dollars. The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional principal amounts. At the end of the reporting period the interest rate profile 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 Interest rate swaps (notional principal amount) An analysis by maturities is provided in (c) below. Sensitivity 30 June 2012 30 June 2011 Weighted average interest rate % 3.8 % 3.2 % 2.6 % 6.0 % Balance $’000 (116,333) 24,638 (556) 65,000 Weighted average interest rate % 5.3% 4.3% 3.9% 6.2% Balance $’000 (96,512) 7,158 (1,281) 75,000 At 30 June 2012, if interest rates had increased by 100 basis points or decreased by 100 basis points from the year end rates with all other variables held constant, pre-tax profit for the year would have been $1,159,000 higher / $925,000 lower (2011: $946,000 higher / $1,839,000 lower), mainly as a result of lower interest income from cash and cash equivalents and higher interest expense from borrowings. Other components of equity would have been $1,300,000 higher / $1,586,000 lower (2011: $1,733,000 higher / $909,000 lower) mainly as a result of a decrease in the fair value of the cash flow hedges of borrowings. (iv) Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk and foreign exchange risk. Hills Holdings Limited Annual Report for the year ended 30 June 2012 95 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 30 Financial risk management (continued) Consolidated 2012 Financial assets Cash and cash equivalents Trade and other receivables Total increase/ (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 Interest rate risk -100bps +100bps Foreign exchange risk +10% -10% Amount $’000 Profit Equity $’000 $’000 Profit Equity $’000 $’000 Profit Equity $’000 $’000 Profit Equity $’000 $’000 24,638 175,206 (4,613) (99) 239 - 239 - - (87,725) (117,010) - (1,164) - - - (239) - (239) - - - 39 164 203 - - - (32) (134) (166) - - - (1,586) 234 1,300 - 5,125 (1) (4,193) - - - - - 1,164 - - - 595 (2,678) - - - - (487) 2,191 - - - - (1,164) (1,586) 1,398 1,300 (2,083) 5,125 1,703 (4,193) Total increase/ (decrease) (925) (1,586) 1,159 1,300 (1,880) 5,125 1,537 (4,193) Consolidated 2011 Financial assets Cash and cash equivalents Trade and other receivables Total increase/(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 Interest rate risk Foreign exchange risk -100bps +100bps -10% +10% Amount $’000 Profit Equity $’000 $’000 Profit Equity $’000 $’000 Profit Equity $’000 $’000 Profit Equity $’000 $’000 7,158 182,153 19 - 19 - - - (19) - (19) - - - 5 110 115 - - - (4) (90) (94) - - - (2,474) (931) (909) 38 1,733 (1) 2,856 (6) (3,077) (102) - (98,671) (98,312) - (927) - - - - - 927 - - - 158 (1,474) - - - - (129) 1,206 - - - - (1,858) (909) 965 1,733 (1,317) 2,856 1,071 (3,077) Total increase/ (decrease) (1,839) (909) 946 1,733 (1,202) 2,856 977 (3,077) (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, 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. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or incorporated legal entity, whether they are a wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity and existence of previous financial difficulties. 96 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 30 Financial risk management (continued) In most cases goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a priority claim. 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 specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. The 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 financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Due to the dynamic and diversified nature of the underlying businesses, Group Treasury aims at maintaining flexibility in funding by keeping committed credit lines available with a variety of counterparties. Surplus funds are generally only invested in instruments that are tradeable in highly liquid markets. At 30 June 2012 the Group had multi- option financing facilities totalling $220.0 million (2011: $225.0 million) of which $65.0 million had been approved until 1 July 2013, a further $75.0 million had been approved until 30 July 2013 and the remainder of the facility had been approved until 30 November 2013. For more information, including details of banking facilities renewed since the end of the financial year please refer to note 19 (unsecured bank loans and standby letters of credit). Maturities of financial liabilities The tables below analyse the Group’s financial liabilities including derivative financial instruments into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. For interest rate swaps the cash flows have been estimated using forward interest rates applicable at the reporting date. Contractual maturities of financial liabilities Less than 6 months 6 – 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total contractual cash flows Consolidated at 30 June 2012 $’000 $’000 $’000 $’000 $’000 $’000 Carrying Amount (assets)/ liabilities $’000 Non-derivatives Non-interest bearing Variable rate Fixed rate 87,725 3,553 212 - 2,185 212 - 115,969 177 Total non-derivatives 91,490 2,397 116,146 - - - - 121 - - 121 87,846 121,707 601 87,846 116,333 556 210,154 204,735 Derivatives Net settled (interest rate swaps and forward exchange contracts) 1,376 997 1,773 959 - 5,105 4,712 Consolidated at 30 June 2011 $’000 $’000 $’000 $’000 $’000 $’000 Less than 6 months 6 – 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total contractual cash flows Carrying Amount (assets)/ liabilities $’000 Non-derivatives Non-interest bearing Variable rate Fixed rate 98,671 - - - 519 99,190 99,190 8,935 2,256 48,781 45,188 620 212 425 177 - - 105,160 96,512 1,434 1,281 Total non-derivatives 108,226 2,468 49,206 45,365 519 205,784 196,983 Derivatives Net settled (interest rate swaps and forward exchange contracts) 781 343 624 463 - 2,211 2,576 Hills Holdings Limited Annual Report for the year ended 30 June 2012 97 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 30 Financial risk management (continued) (d) Fair value measurements Fair value measurement hierarchy AASB 7 Financial Instruments: Disclosures requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities; (b) 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 (c) 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 2012 and 30 June 2011: At 30 June 2012 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities At 30 June 2011 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 - - - - Level 1 $’000 - - - - - - 4,712 4,712 Level 2 $’000 - - 2,576 2,576 - - - - Level 3 $’000 - - - - Total $’000 - - 4,712 4,712 Total $’000 - - 2,576 2,576 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 specific estimates. All significant inputs required to fair value derivatives used for hedging are observable, and hence the instruments are included in level 2. There have been no movements between levels during the year ended 30 June 2012. 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. 98 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 31 Business combination Current Period (a) Summary of acquisition On 1 February 2012 the Group acquired certain assets of the operations of Herma Technologies Pty Ltd. The acquired business contributed revenues of $1.628 million and net profit of $0.074 million to the Group for the period from 1 February 2012 to 30 June 2012. If the acquisition had occurred on 1 July 2011, consolidated revenue and consolidated profit for the year ended 30 June 2012 would have been $1,084.550 million and $28.925 million respectively. These amounts have been calculated using the Group’s accounting policies. Details of the purchase consideration and the net assets and liabilities acquired are as follows: Purchase consideration (refer to (c) below): Cash paid Direct costs relating to the acquisition Total purchase consideration Fair value of net identifiable assets acquired (refer to (b) below) Goodwill (refer to (b) below and note 13) (b) Assets and liabilities acquired The assets and liabilities recognised as a result of the acquisition are as follows: Inventories Property, plant and equipment Other assets Intangible assets: patents and trademarks Provision for employee benefits Net identifiable assets acquired Add: goodwill Net assets acquired $’000 2,068 (57) 2,011 695 1,316 Fair value $’000 575 104 27 57 (68) 695 1,316 2,011 The goodwill is attributable to the synergies expected to arise following the Group’s acquisition, including the extension of the range of products offered by Hills SVL. (c) Purchase consideration – cash outflow Outflow of cash to acquire business operation: Cash consideration Outflow of cash investing activities Acquisition-related costs Consolidated 2012 $’000 2,011 2,011 2011 $’000 - - Acquisition-related costs of $57,000 are included in expenses in profit or loss and in operating cash flows in the Consolidated statement of cash flows. Prior Period There were no acquisitions of subsidiaries or business operations in the previous financial year. Hills Holdings Limited Annual Report for the year ended 30 June 2012 99 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 32 Reconciliation of profit / (loss) after income tax to net cash inflow from operating activities Consolidated Profit / (loss) for the year Depreciation and amortisation Impairment of goodwill Gain on repayment of government loans at net present value Non-cash employee benefits expense-share-based payments Net (gain) loss on sale of non-current assets Fair value (gain) loss on derivatives Foreign currency translation reserve recycled through profit or loss on disposal of subsidiary Impairment of trade receivables Impairment of inventories Impairment of property, plant and equipment Rent received Amounts set aside to provisions Change in operating assets and liabilities, net of effects from purchase of controlled entities and business operations: Decrease / (increase) in trade and other receivables Decrease in inventories Decrease / (increase) in deferred tax assets (Decrease) in trade and other creditors (Decrease) in provision for income taxes payable (Decrease) in other provisions Net cash inflow from operating activities 2012 $’000 28,822 21,100 - (386) 289 (533) (161) - 2,069 (2,030) - (787) 16,562 4,632 5,371 10,427 (10,667) (5,935) (16,104) 52,669 2011 $’000 (73,116) 23,079 66,182 - 478 (106) (1,054) (27) 1,635 3,783 37,210 (860) 13,726 (103) 9,508 (10,884) (29,648) (10,883) (15,940) 12,980 100 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 33 Subsidiaries and transactions with non-controlling interests (a) Investments in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following principal subsidiaries in accordance with the accounting policy described in note 1(c). Name of entity Country of incorporation Class of shares Equity holding 2012 % 2011 % Hills Finance Pty Ltd Hills Industries NZ Limited Korvest Limited (i) (note (b)) Hills Hoists Pty Ltd Bailey Aluminium Products Pty Ltd Hills Industries Pty Ltd (formerly ACN 000 195 951 Pty Ltd and formerly Triton Manufacturing & Design Co Pty Ltd) ACN 089 622 622 Pty Ltd (formerly Triton Workshop Systems (UK) Pty Ltd) Australia New Zealand Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Australia Ordinary Australia Ordinary Woodroffe Industries Pty Ltd Fielders Australia Pty Ltd Fielders Mobile Mill Pty Ltd Zen 99 Pty Ltd Orrcon Holdings Pty Ltd Orrcon Operations Pty Ltd Orrcon Tubing Pty Ltd Access Television Services Pty Ltd Techlife Solutions Pty Ltd (shelved) Audio Telex Communications Pty Ltd Crestron Control Solutions Pty Ltd Team Poly Pty Ltd KDB Engineering Pty Ltd Kerry Equipment (Aust) Pty Ltd Step Electronics 2005 Pty Ltd (i) Greenwattle Investments Pty Ltd Access Scaffolding (Aust) Pty Ltd Greenwattle Equipment Pty Ltd ACN 095 224 034 Pty Ltd (formerly Alquip (Holdings) Pty Ltd) ACN 009 696 084 Pty Ltd (formerly Alquip Pty Ltd) Hills Nominees Pty Ltd DAS Security Wholesalers Pty Ltd Pacific Communications Pty Ltd Pacom Security Pty Ltd CBS Hardware Pty Ltd Step Electronics Pty Ltd Opticomm Co Pty Ltd (i) UHS Systems Pty Ltd UHS Pty Ltd Cygnus Satellite Pty Ltd (i) Names inset indicate shares held by the company immediately above the inset. Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 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 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 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 (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. Hills Holdings Limited Annual Report for the year ended 30 June 2012 101 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 33 Subsidiaries and transactions with non-controlling interests (continued) (b) Transactions with non-controlling interests During the year Korvest made two issues of shares to its employees under its employee share plan. These issues had the effect of diluting the Company’s shareholding in Korvest. The shares were issued for no consideration. In the previous financial year, on 23 August 2010, the Group increased its share-holding in Korvest Ltd from 45.9% to 48.8% through an on market acquisition of 250,000 shares at $4.56. The total consideration paid was $1.143 million. 2012 $’000 (48) - (48) Carrying amount of non-controlling interests diluted / acquired Consideration paid to non-controlling interests Impact of dilution / excess consideration paid recognised in the transactions with non-controlling interests reserve within equity 34 Parent entity financial information (a) Summary financial information The individual financial statements for the Company show the following aggregate amounts: 2011 $’000 811 (1,143) (332) 2011 $’000 340,124 272,425 612,549 137,846 98,641 236,487 376,062 Company 2012 $’000 343,821 285,059 628,880 120,825 121,339 242,164 386,716 303,805 306,790 45,034 (2,910) - 643 40,144 386,716 38,706 37,099 45,034 (1,303) 1,855 620 23,066 376,062 32,020 38,497 Statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders’ equity Contributed equity Reserves Asset revaluation reserve Hedging reserve-cash flow hedges Asset realisation reserve Equity compensation reserve Retained earnings Total shareholders’ equity Profit or loss for the year Total comprehensive income 102 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 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 2012 and a Consolidated statement of financial position as at 30 June 2012 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. 34 Parent entity financial information (continued) (b) Guarantees entered into by the Company Bank guarantees given by the Company in favour of customers and suppliers amounted to $8.696 million (2011: $8.723 million). 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 $241.339 million (2011: $260.277 million). No material deficiency in net tangible assets exists in these companies at reporting date with net tangible assets amounting to $288.815 million (2011: $296.171 million). (c) Contingent liabilities of the Company The parent entity had a contingent liability in respect of claims, as disclosed in note 28. 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 2012, the Company had contractual commitments for the acquisition of property, plant or equipment totalling $3.030 million (2011: $8.479 million). 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 98/1418 (as amended) dated 13 August 1998, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and 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 the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are: Hills Finance Pty Ltd Hills Hoists Pty Ltd Bailey Aluminium Products Pty Ltd KDB Engineering Pty Ltd Kerry Equipment (Aust) Pty Ltd Woodroffe Industries Pty Ltd Hills Industries Pty Ltd (Formerly ACN 000 195 951 Pty Ltd and formerly Triton Manufacturing & Design Co Pty Ltd) Orrcon Operations Pty Ltd Orrcon Holdings Pty Ltd Greenwattle Investments Pty Ltd (Alquip) Audio Telex Communications Pty Ltd Team Poly Pty Ltd Fielders Australia Pty Ltd Access Television Services Pty Ltd All of the subsidiaries except KDB Engineering Pty Ltd, Kerry Equipment (Aust) Pty Ltd, Orrcon Operations Pty Ltd, Orrcon Holdings Pty Ltd, Greenwattle Investments Pty Ltd, Audio Telex Communications Pty Ltd, Team Poly Pty Ltd, Fielders Australia Pty Ltd and Access Television Services Pty Ltd became a party to the deed on 15 April 2004 by virtue of a Deed of Assumption. KDB Engineering Pty Ltd, Kerry Equipment (Aust) Pty Ltd, Orrcon Holdings Pty Ltd and Orrcon Operations Pty Ltd became parties to the deed on 23 June 2006, by virtue of a Deed of Assumption. Greenwattle Investments Pty Ltd (Alquip) and Audio Telex Communications Pty Ltd became parties to the deed on 25 June 2007. Team Poly Pty Ltd became a party to Hills Holdings Limited Annual Report for the year ended 30 June 2012 103 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 35 Deed of cross guarantee (continued) (a) Consolidated income statement, Consolidated statement of comprehensive income and summary of movements in consolidated retained earnings Consolidated income statement Revenue from continuing operations Other income Finance costs Other expenses Profit / (loss) before income tax Income tax (expense) / benefit Profit / (loss) for the year Consolidated statement of comprehensive income Profit / (loss) for the year Other comprehensive income Gain on revaluation of land and buildings Changes in the fair value of cash flow hedges Income tax relating to components of other comprehensive income Other comprehensive (loss) / income for the year, net of tax Total comprehensive income / (loss) for the year Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year Profit / (loss) for the year Transfers from / (to) reserves Dividends provided for or paid Retained earnings at the end of the financial year 2012 $’000 967,166 4,853 (5,835) (934,545) 31,639 (7,009) 24,630 2011 $’000 993,991 2,873 (3,964) (1,074,017) (81,117) 7,543 (73,574) 24,630 (73,574) - (2,296) 689 (1,607) 23,023 23 24,630 11,757 (23,483) 12,927 12,250 (1,484) (3,230) 7,536 (66,038) 101,403 (73,574) (533) (27,273) 23 104 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 35 Deed of cross guarantee (continued) (b) Consolidated statement of financial position Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax receivables Assets classified as held–for–sale Total current assets Non-current assets Investments Property, plant and equipment Deferred tax assets Intangible 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 financial instruments Total non–current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity 2012 $’000 16,448 177,426 149,625 6,984 - 350,483 12,453 162,605 23,429 48,469 246,956 597,439 79,351 7,138 - 32,419 507 119,415 115,557 2,261 4,106 121,924 241,339 356,100 303,805 39,368 12,927 356,100 2011 $’000 2,669 210,750 154,093 - 2,702 370,214 12,453 171,307 33,322 32,503 249,585 619,799 118,040 13,467 104 29,023 418 161,052 91,458 5,711 2,056 99,225 260,277 359,522 306,790 52,709 23 359,522 Hills Holdings Limited Annual Report for the year ended 30 June 2012 105 Hills Holdings Limited Notes to the consolidated financial statements (continued) 30 June 2012 36 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the Company, its related practices and non-related audit firms: (a) Audit services KPMG Australia: Audit and review of financial reports Overseas KPMG Firms: Audit and review of financial reports Total remuneration for audit and other assurance services (b) Non-audit services (i) Other assurance services: Software implementation assurance services Forensic accounting services Other consulting services (ii) Taxation services: Taxation and other services (iii) Overseas KPMG Firms: Taxation services Total remuneration for non-audit services Consolidated 2012 $ 2011 $ 492,000 488,500 32,909 524,909 76,257 46,179 40,504 31,768 520,268 - - 141,015 113,838 14,316 318,271 26,824 140,662 37 Events occurring after the reporting period On 13 August 2012 the Company entered into an agreement to acquire the business of Lan 1. Completion is expected by 30 September 2012, subject to conditions precedent being satisfied. On 16 August 2012 the Company renewed its banking facilities jointly with Commonwealth Bank, National Australia Bank and Westpac Banking Corporation through a Common Deed. The total facility is $196 million, comprising Tranche A $81 million, expiring in 3 years (16 August 2015), Tranche B $69 million, expiring in 4 years (16 August 2016), and Tranche C $46 million, expiring in 3 years (16 August 2015), but subject to annual review. Tranches A and B comprise bank loans and Tranche C comprises bank guarantees, letters of credit and cash advances. Mr Twartz will retire as Chief Executive Officer and Managing Director on 2 September 2012 and will cease to be an employee on 30 November 2012. Mr Ted Pretty will commence as Chief Executive Officer and Managing Director on 3 September 2012. Apart from the matters 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. 106 Hills Holdings Limited Annual Report for the year ended 30 June 2012 Hills Holdings Limited Directors’ declaration 30 June 2012 In the opinion of the Director’s of Hills Holdings Limited (the Company): (a) the consolidated financial statements and notes set out on pages 45 to 106 and the Remuneration report on pages 20 to 30 in the Directors’ report are in accordance with the Corporations Act 2001, including: (i) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (ii) giving a true and fair view of the Group’s financial position as at 30 June 2012 and of its performance for the financial year ended on that date; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and (c) 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 98/1418. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the chief executive officer and the chief financial officer required by Section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. GL Twartz Director Dated at Sydney this 31st day of August 2012. Hills Holdings Limited Annual Report for the year ended 30 June 2012 107 ABCD 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 2012, 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 37 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal 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 responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal 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 of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation 108 Hills Holdings Limited Annual Report for the year ended 30 June 2012 ABCD Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of the Group is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 30 June 2012 and of its performance for the year ended on that date; and 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 20 to 30 of the Directors’ report for the year ended 30 June 2012. The Directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Hills Holdings Limited for the year ended 30 June 2012, complies with Section 300A of the Corporations Act 2001. KPMG N T Faulkner Partner Adelaide 31 August 2012 Hills Holdings Limited Annual Report for the year ended 30 June 2012 109 Hills Holdings Limited Shareholder information 30 June 2012 The shareholder information set out below was applicable as at 21 August 2012. 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 4,492 8,626 4,120 3,234 83 20,555 - - - 3 2 5 There were 470 holders of less than a marketable parcel of ordinary shares. B. Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities are listed below: Name RBC Investor Services Australia Nominees Pty Limited (PI POOLED A/C) Poplar Pty Limited Hills Associates Limited National Nominees Limited JP Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited Jacaranda Pastoral Pty Ltd UBS Nominees Pty Ltd Citicorp Nominees Pty Limited BNP Paribas Noms Pty Ltd (Master Cust DRP) Donald Cant Pty Ltd Colleen Sims Nominees Pty Ltd RBC Dexia Investor Services Australia Nominees Pty Limited (PIIC A/C) Gwynvill Trading Pty Limited Hills Associates Limited & Poplar Pty Ltd Queensland Investment Corporation Tamarisk Pty Ltd Portman Trading Pty Ltd Mr Clifford Christian Dahl Mr John Gassner + Mr Nathan Rothchild Ordinary shares Number held Percentage of issued shares 21,469,533 20,286,335 14,450,548 13,463,688 10,049,135 7,303,273 5,968,699 4,281,294 3,496,185 2,774,189 1,979,060 1,694,798 1,373,574 1,260,000 1,188,918 948,393 603,865 580,000 383,000 375,751 8.71 8.23 5.86 5.46 4.08 2.96 2.42 1.74 1.42 1.13 0.80 0.69 0.56 0.51 0.48 0.38 0.24 0.24 0.16 0.15 113,930,238 46.22 110 Hills Holdings Limited Annual Report for the year ended 30 June 2012 C. Substantial holders Substantial holders in the Company are set out below: Name Perpetual Limited Poplar Pty Limited 1, 2 Hills Associates Limited 2 Hills Holdings Limited Shareholder information 30 June 2012 Ordinary shares Number held Percentage of issued shares 29,652,196 21,475,253 14,450,548 12.03 8.71 5.86 1 The total number of shares held includes the joint shareholding held by Poplar Pty Ltd and Hills Associates Limited. 2 In addition, various other minor parties associated with Poplar Pty Ltd and Hills Associates Limited hold a further 0.4% of issued shares. 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. Rights / Options No voting rights. E. On-market buy-back Details of the on-market buy-back are disclosed in note 21. F. Direct payment to shareholder accounts Dividends may be paid directly to bank, building society or credit union accounts in Australia. Payments are electronically credited on the dividend date and confirmed by mailed payment advice. Shareholders who want their dividends paid this way should advise the Company’s share register in writing. G. Securities Exchange The Company is listed on the Australian Securities Exchange. The Home exchange is Adelaide. H. Other information Hills Holdings Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. I. Offices and Officers Company Secretary Ms Rachel Rees Principal Registered Office 159 Port Road Hindmarsh, SA 5007 Telephone: (08) 8301 3200 Facsimile: (08) 8301 3290 Web: www.hillsholdings.com.au Locations of Share Registries Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street Adelaide, SA 5000 Telephone (within Australia): 1300 556 161 Telephone (outside Australia): +61 3 9415 4000 Facsimile (within Australia): 1300 534 987 Facsimile (outside Australia): +61 3 9473 2408 Internet address: www.computershare.com.au Hills Holdings Limited Annual Report for the year ended 30 June 2012 111 This page is blank intentionally Hills Holdings Limited Registered Office 159 Port Road Hindmarsh, SA 5007 Telephone: (08) 8301 3200 Facsimile: (08) 8301 3290 Email: info@hillsholdings.com.au ABN 35 007 573 417 www.hillsholdings.com.au ANNUAL REPORT 2012 H i l l i l s H o d n g s L m i i t e d A n n u a l R e p o r t 2 0 1 2 Better lives. Better business. 

Continue reading text version or see original annual report in PDF format above