Hills Holdings Limited Annual report 30 June 2013 Hills Holdings Limited Annual report 30 June 2013 contents Shareholders’ letter Directors’ report Auditor’s Independence Declaration Corporate governance statement Financial statements Independent auditor’s report to the members Shareholder information 4 6 33 34 37 116 118 ABN 35 007 573 417 Hills Holdings Limited Annual Report for the year ended 30 June 2013 3 HLS0339_ Annual Report_v16.indd 3 18/09/13 2:40 PM investors for $26.166 million ($6.50 per share) and this was applied to reduce corporate debt. Orrcon and Fielders were restructured to return the businesses to profitability and were treated as ‘assets held for sale’. The Company has also sold its stakes in the manufacturing of rehabilitation, mobility and hospital equipment (Hills Healthcare Equipment) and Bailey Ladders. New strategy During the year we also advised you that we would be reviewing our strategy and business model to look at the future and we outlined this at our EGM in April of this year. The Company announced a new strategy which will see Hills as an integrated solutions company. It will concentrate on opportunities in technology and communications, where higher returns are available. It will at the same time retain Hills’ brand connection with the home and other trusted environments such as educational institutions, government and enterprises. It will focus on delivering a number of superior services and innovative products in various higher growth markets and segments. Hills will no longer pursue its investment company role and diversification strategy. Review of year At our AGM in November 2012, we advised that due to a steeper than anticipated decline in construction activity, volumes and margins, primarily across our manufacturing businesses, our results in the first quarter had been much weaker than expected this financial year. During that period and into the second and third quarters the high Australian dollar and low levels of construction activity made for very difficult market conditions across our manufacturing businesses. As you would expect, we firstly focused on operational performance improvement initiatives and cost reductions to ensure a stronger balance sheet, low debt levels and solid cash flow. This was achieved with stronger cash flows from operations of $81.380 million and a low level of gearing (measured as net debt ÷ net debt plus equity) at 1.4%. Secondly, we announced we would be taking some substantial restructuring and impairment charges, booking gains and losses on disposal of businesses and other associated impairments at 30 June. The total net charges for the year before tax were $154.578 million, the majority of which were non–cash in nature and will not affect continuing businesses. Thirdly, we made the decision to divest non– core assets, in particular our industrial assets including Korvest, Orrcon and Fielders. Hills sold its holding in Korvest in February 2013 to a variety of professional and institutional Dear Shareholders Financial year 2013 has been a year of significant change for Hills. Our Group Managing Director, Ted Pretty, joined the Company in September 2012. Since then, Ted and his new team have made significant progress on the restructure, transformation and renewal of the Company with the objective of moving from a large diversified group heavily exposed to the manufacturing and steel sectors, towards a 'one Hills' company focused on innovation and the provision of integrated solutions mainly in the technology and communications sector. We have appreciated your support during this period. Results The Hills Group of companies recorded a net loss after tax attributable to owners of $(94.125 million) for the year ended 30 June 2013. This loss reflects the after tax impact of impairment and restructuring costs, fair value adjustments associated with classifying assets as ‘held for sale’ and other associated gains or losses on the disposal of businesses which we previously advised to the market. The Company’s underlying FY2013 result was a profit of $19.201 million before CGU impairments, restructuring and other costs and adjustments referred to above, totalling $113.326 million after tax (note that this is a non–IFRS measure and is not subject to audit or review). These trading results were achieved in very challenging market conditions. The Hills Group recorded significantly improved net cash flow from operations of $81.380 million and net debt was $3.982 million at 30 June 2013. 4 HLS0339_ Annual Report_v16.indd 4 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Shareholders’ letter In setting this new strategy, the Hills Board outlined its aspirational settings to be achieved by FY2016 including: • 75% of revenues from technologies and communications; • 20–25% of revenues from services; • Sustained earnings growth; and • Return of funds employed of ROFE of 13–15%. The Board is committed to this direction. Subsequent events Hills announced on 19 August 2013 that it had signed interdependent agreements to sell its steel assets, Fielders and Orrcon, to Bluescope Steel Limited. The transactions are subject to customary terms and conditions precedent including ACCC approval. Completion of the transaction is targeted to occur by the end of December 2013. Dividend payments The Board declared a fully franked dividend of 3.25 cents per share which will be paid on 27 September 2013 to registered shareholders as at 20 September 2013. The Board also reconfirms its intention to target on an annual basis a dividend payout ratio of 50%–75% of underlying profits attributable to owners on a fully franked basis. Given our strong balance sheet, we continued to suspend our Dividend Reinvestment Plan and Share Investment Plans. On–market buyback Your Board is of the opinion that the current share price does not reflect the underlying value of our assets, our business capability and our strong capital position. On 6 August 2013 we announced our intention to refresh our ability to undertake an on–market buyback. The extension of the buyback provides Hills with the option to acquire shares up to 10 percent (10%) of the issued capital during the next 12 months. This buyback will be earnings per share accretive and will not affect the existing dividend policy. It is our intention to build sustainable earnings growth for the medium to longer term. It is the decisions we make now that will best position Hills as markets recover and we are confident we have the appropriate strategy, focus and management team to deliver this. Outlook We note the Reserve Bank’s recent observation that growth of economic activity is likely to remain below trend into 2014. However, Hills is well positioned. We enter 2014 with little net debt and expect to build positive momentum over the coming year. Our path to earnings growth is now clearer and we remain committed to delivering sustainable earnings growth and optimising shareholder value as the implementation of the new Hills vision continues. On behalf of the Board and management we take the opportunity of thanking you, the shareholders, for your support during the year and assure you of our dedication to position the Company for growth and the delivery of superior returns and to improve the prospects and performance of your Company. Yours sincerely Jennifer Hill–Ling Ted Pretty HLS0339_ Annual Report_v16.indd 5 5 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Shareholders’ letter continued 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 2013, and the independent auditor’s report thereon. Directors The following persons were Directors of the Company during the whole of the financial year and up to the date of this report: Jennifer Helen Hill–Ling Fiona Rosalyn Vivienne Bennett Ian Elliot David Moray Spence Peter William Stancliffe Edward Noel (Ted) Pretty was appointed as Group Managing Director and Chief Executive Officer on 3 September 2012 and continues in office at the date of this report. Review of operations Overview The Hills Group of companies recorded a net loss after tax attributable to owners of $(94.125 million) for year ended 30 June 2013. This loss reflects the after tax impact of impairment and restructuring costs, fair value adjustments associated with classifying assets as ‘held for sale’ and other associated gains or losses on the disposal of businesses. The Company’s underlying FY2013 result was a profit of $19.201 million (before CGU impairment, restructuring and closure costs and other associated impairments totalling $113.326 million after tax). Note that this is a non–IFRS measure and is not subject to audit or review, but is relevant because it is a measure used internally by management to assess the operating performance of the business. These trading results were achieved in very challenging market conditions and the effects of a poor building and construction sector. Graham Lloyd Twartz was a Director from the beginning of the financial year until his retirement on 2 September 2012. The Hills Group recorded significantly improved net cash–flow from operations of $81.380 million ended 30 June 2013. Matthew Arnold Campbell was a Director at the start of the financial year and resigned on 31 May 2013 to take an Executive Director position in the Company. The year in review In October 2012, Hills advised the market that the Company’s first quarter trading results were being impacted by a slowing in the economy and the effects of the building and construction downturn. This saw lower results from Fielders Australia as well as flow on impacts in other businesses also leveraged to the construction and building cycle. In November 2012, Hills announced its intention to restructure the Group with its key focus on significant cost out and supply chain transformation, working capital, the exit of certain products and businesses, reduction in the number of premises occupied and reduction in staffing levels. The Company also announced it would be taking significant impairments and restructuring charges at the half and full year. Impairment and restructuring charges as at 30 June 2013 were $154.578 million ($113.326 million after tax). As a result of the restructure a number of very positive achievements have been made including: • Early signs of a positive impact from cost reductions; • Significant release of working capital; • Solid progress on asset and business divestments; and • Significant reduction of net debt. In respect of the period to 30 June 2013, the Company achieved an underlying NPAT result slightly higher than market consensus. New strategy In March 2013, the Company announced a new strategy which will see Hills as an integrated solutions company. It will concentrate on opportunities in technology and communications, where higher returns are available. It will at the same time retain Hills’ brand connection with the home and other trusted environments such as educational institutions, government and large, small and medium enterprises. It will focus on delivering a number of superior services and innovative products in various higher growth markets and segments. Hills will no longer pursue its investment company and diversification strategy. 6 HLS0339_ Annual Report_v16.indd 6 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Directors’ report Review of operations continued In setting this new strategy, the Company outlined its aspirational settings to be achieved by FY2016 including: • Be true – act with honesty and integrity with everyone. And above all, stand by your word. • 75% of revenues from technology and communications; • 20 – 25% of revenues from services; • Sustained EPS growth; and • Return on funds employed of 13 – 15% Vision and values Hills is an integrated solutions company. It will concentrate on opportunities in technology and communications. The Company’s aim is to focus on delivering superior service and innovative products in trusted environments such as the home, to governments and to business and enterprises. Hills values are: • Be open – to new ideas, be innovative and experiment, listen to others, embrace different ways of doing things and always ask if it can be done better. • Be accountable – to customers, shareholders and each other, commit to seeing things through, spend every dollar as if they were your own. • Be safe – work safely and considerately, think ahead, act with awareness. • Grow – as a person, have ambition and help to grow the business to deliver sustained earnings to shareholders. Debt and funding Hills’ net debt as at 30 June 2013 was $4.0 million (2012: $92.4 million). Gearing, measured as net debt to net debt plus equity, stood at 1.4% (2012: 18.7%) at the end of the period. The earliest date for review of any of the Company’s bank and debt facilities is August 2015. Hills continues to comfortably meet all of its banking covenants. Dividends The Board declared a fully franked dividend of 3.25 cents per share which will be paid on 27 September 2013 to registered holders as at 20 September 2013. The Board also reconfirms its intention to target on an annual basis a dividend payout ratio of 50%–75% of profits on a fully franked basis. Given Hills’ strong Balance Sheet position, the dividend reinvestment plans remain suspended. On–market share buyback Given Hills’ low levels of debt, the Board has resolved to refresh the on–market buyback of its issued shares announced last year. The announcement of the buyback gives Hills the option to acquire up to 10% of the issued shares over the next 12 months, will be earnings per share accretive and will not affect Hills’ existing dividend policy. Likely developments In line with the Reserve Bank’s recent observation that growth of economic activity is likely to remain below trend into 2014, Hills is very well positioned for growth. The Company enters 2014 with very low net debt and expects to build positive momentum over the coming year. Hills will continue to implement its restructure and transformation initiatives during the forthcoming year to ensure that its operations are competitive and structured in line with expected market conditions. In view of the above, Hills is unable at this time to provide specific profit guidance for the year ending 30 June 2014. It is expected that the Company will be in a position to provide an update at its Annual General Meeting in November 2013. HLS0339_ Annual Report_v16.indd 7 7 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Electronics (Technology) & Communications The Electronics & Communications division continues to produce the highest profit margins and return on assets employed within any of the Hills segments. This segment operates in two sub–groupings called Technologies (Hills Electronic Security, Lan1, Hills SVL, Hills Antenna & TV Systems, Hills Signalmaster,) and Communications (Access Television Services, Techlife, Step Electronics, UHS (held for sale), OptiComm and Cygnus Satellite). Hills Electronic Security • Hills Electronic Security comprises the business operations of Pacific Communications (Pacom), Lan1 and DAS. 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 acquisition of Lan1 has proven to be a success, with the unit exceeding its targets. The Pacom business security unit was again challenged during the period by continuing deferred capital expenditure from governments and major corporates. Nonetheless, it produced a credible result. The domestic alarm market is now commoditising with selling prices and margins remaining lower than trend due to increased competition. • Lan1 secured a number of contracts for WiMax rollouts in Australia, Tonga and Vanuatu. • DAS secured contracts for upgrades with Victoria Police for 363 Police stations’ security, with the NSW and Victorian Education Departments and Queensland Correction. • Pacom also secured certain key mining and construction projects. 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. • During the period the business produced an excellent result largely based on good contracts for Creston automation products. Key projects include Fiona Stanley Hospital W.A. and Melbourne Exhibition and Convention Centre. • Hills SVL’s acquisition of certain assets and the operations of Herma Technologies has proven to be successful with the business meeting internal return hurdles. 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. SignalMaster NZ secured a contract with Go Digital for the Targeted Assistance Package providing the supply of equipment, installation and after sales support as various regions switch over to digital broadcast. Antenna secured a contract with Royal Randwick Racecourse (Australian Turf Club) allowing IPTV to 600 outlets (TV/computer) across the venue. • STEP Electronics has won a multi–million dollar Federal Government contract to service overseas agencies. The four–year contract is for the design, supply and installation of the Department of Foreign Affairs and Trade’s (DFAT) bandwidth efficient global satellite network for 51 Australian Embassies and other overseas offices. • Demand for free to air and satellite equipment remained steady. Access Television Services, Signal Master, 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 losses. In addition, Foxtel acquired AUSTAR and advised ATS that the contract for installation services would not be renewed. This has resulted in a restructuring of ATS. • Hills is reviewing the future of its Techlife business in light of the potential or otherwise to secure contracts to provide similar services to government and commercial customers. OptiComm/Cygnus • Hills has a strategy to continue to expand its exposure to communications markets but is assessing the business model to do so. • The 50% owned OptiComm business provides fibre to the node and fibre to the home in new housing developments. Hills has commenced assessing the future potential of this business in light of mooted changes to the NBN structure if a change of Government occurs. • The 50% owned Cygnus Satellite business provides bandwidth to rural and remote markets in Australia. Cygnus has extended its distribution relationship through Telstra Corporation Limited at lower but still attractive margins. Performance in the period was strong. Cygnus provides Telstra with the Iterra IP Satellite Communication service for Telstra’s remote resource industry customers. Sales revenues for these satellite products grew significantly in FY2013. 8 HLS0339_ Annual Report_v16.indd 8 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report Lifestyle & Sustainability The Lifestyle and Sustainability division comprises Hills Home and Hardware Products operations in Australia and New Zealand. It also compromises the Hills Healthcare, Rehabilitation and Mobility business (now sold), LW Gemmell plumbing supplies (currently under a sales process) and Team Poly (now restructured as Hills Polymers). Home & Hardware Products • The results of the Hills traditional branded products business in sprayers and clotheslines experienced uneven performance and a decline in share during the period due to poor marketing and supply chain practices. This has been under review and an action plan developed for recovery. • Product releases during the year included the expansion of the Garden Product range; re–establishment of our Hills brand in the UK after an absence of seven years, opened channels into five new regions – Malaysia, Thailand, Indonesia, India and Myanmar. • Consistent with its decision to focus the Company on core business, Hills has sold the Bailey Ladders business and plant to Werner Co. • LW Gemmell provides speciality plumbing products to the building industry. This business has faced ongoing softness in the building and construction market during the period. It is now considered a non–core asset. It is the intention to sell this business. Hills Healthcare • Hills Healthcare was a manufacturer of rehabilitation, mobility and hospital equipment in Australia. In January 2013 this business was sold to Anacacia Capital and is now known as KCare. • Results in this business were unsteady during the first half of the period due to increasing import competition. Team Poly/Hills Eco • Hills has exited Team Poly by selling its tanks business which operated in a highly competitive market with low barriers to entry. However, the crushing plant was retained under the name Hills Polymers and this unit now delivers a modest profit. Despite some success with the innovative Smart Bar range of frontal protection systems, the results from Team Poly during the relevant period were disappointing. Building & Industrial The Building & 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. The results from Orrcon Steel substantially improved over the previous year with a good focus on working capital efficiency and through securing recurring pipeline project contract work. Key contracts for major pipeline work were secured and delivered in the year including with Santos. • There have been ongoing changes and efficiency measures to the structure at Orrcon Steel designed to meet the changing market conditions including low priced imported products which continue to present a challenge. • This business is a now an ‘asset held for sale’. Fielders • The Fielders roll forming roofing and flooring business is a market leader in new and innovative products. During the period, the business secured a number of major projects for its Aramax Free Span, KingFlor® and KingKlip® Free Form and Fielders Cantilevered Shelters & Walkways products. However, the decline in both domestic and commercial building activity saw lower volumes and prices available to Fielders although market share was held nationally. • Hills undertook significant restructuring of the business in late 2012 including the closure of its loss–making Queensland operation and the merger of its Regency Park SA operations into the nearby Mile End facility. This has driven efficiencies and returned the business to a profit in the second half of the period. • Fielders has retained its mobile mills capabilities for use at customer sites giving great efficiencies in the erection of commercial buildings. • This business is a now an ‘asset held for sale’. Korvest • Hills formerly held 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 steady performance in the first half of the year. • As part of its new strategy, Hills sold its holding in Korvest in February 2013 to a variety of professional and institutional investors for $26 million ($6.50 per share) and this was applied to reduce corporate debt. As Korvest is a separately listed public company, further details are available from the Korvest website. Subsequent events Hills announced on 19 August 2013 that it had signed interdependent agreements to sell its steel assets, Fielders and Orrcon, to Bluescope Steel Limited. The transactions are subject to customary terms and conditions precedent including ACCC approval. Completion of the transactions is targeted to occur by the end of December 2013. See note 35 for further information. HLS0339_ Annual Report_v16.indd 9 9 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ reportReview of operationscontinued Directors’ report Information on directors Fiona Rosalyn Vivienne Bennett BA (Hons) FCA FAICD FAIM. Independent Non–Executive Director Age 57. 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). Director of Beach Energy Limited (since November 2012). Former listed company directorships in the last three years None. Special responsibilities Chairman of the Audit, Risk and Compliance Committee. Interests in shares and options at the date of this report 4,000 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. Jennifer Helen Hill–Ling LLB (Adel) FAICD. Chairman, Non–Independent Non–Executive Director Age 51. Edward Noel Pretty BA LLB (Hons). Group Managing Director and Chief Executive Officer Age 55. 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 practised 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 Hills Associates Limited and Hills Holdings NZ Limited and was formerly a director of Tower Trust Limited and MS Limited. She is a fellow of the Australian Institute of Company Directors. Other current listed company directorships None. Former listed company directorships in the last three years None. Special responsibilities Chairman of the Board, member of the Remuneration Committee, member of the Nomination Committee. Interests in shares and options at the date of this report 17,251,423 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. Experience and expertise Appointed as Group Managing Director and Chief Executive Officer 3 September 2012. 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 $14 billion 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 the ASX listed RP Data Limited, and 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 advisor 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 Next DC Limited (since 2011). Former listed company directorships in the last three years None. Special responsibilities Managing Director. Interests in shares and options at the date of this report 250,000 ordinary shares in Hills Holdings Limited. Nil performance rights over ordinary shares in Hills Holdings Limited. 10 HLS0339_ Annual Report_v16.indd 10 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Directors’ report Information on directors continued Ian Elliot FAICD. Independent Non–Executive Director Age 59. David Moray Spence B Com. Independent Non–Executive Director Age 61. Peter William Stancliffe BE (Civil) FAICD. Independent Non–Executive Director Age 65. Experience and expertise 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 Director of 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 the last three 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 51,735 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. Experience and expertise Appointed Director on 1 September 2010. Experience and expertise Appointed Director in August 2003. 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. 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. Other current listed company directorships Chairman of Korvest Ltd (since 2009). Director of Automotive Holdings Group Limited (since 2005). Former listed company directorships in the last three years None. Special responsibilities Member of the Nomination Committee, member of the Audit, Risk and Compliance Committee. Interests in shares and options at the date of this report 50,000 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. 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 VOCUS Communications 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 the last three years None. Special responsibilities Chairman of the Remuneration Committee, member of the Audit, Risk and Compliance Committee. Interests in shares and options at the date of this report 150,000 ordinary shares in Hills Holdings Limited. Nil options over ordinary shares in Hills Holdings Limited. HLS0339_ Annual Report_v16.indd 11 11 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Directors’ report Information on directors Company Secretary Matthew Arnold Campbell. Former Non–Independent Executive Director Age 59. Graham Lloyd Twartz BA (Adel) DipAcc (Flinders). Former Group Managing Director Age 56. Experience and expertise Appointed Director in July 1993. Appointed as Group Managing Director 1 July 2008. Retired as Director 2 September 2012. Graham Twartz was the Group Managing Director and Chief Executive Officer and was responsible for Group operations. He was formerly the Finance Director and Company Secretary. Mr Twartz held senior management positions in diversified companies before joining Hills in 1993. Other current listed company directorships None. Former listed company directorships in the last three years Director of Korvest Ltd (from 1999 until 2 September 2012). Special responsibilities None. Experience and expertise Appointed Director on 19 December 2011. Resigned as Director on 31 May 2013. Matthew Campbell has over 30 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 the last three years None. Special responsibilities None. Gai Stephens BEC, LLB, LLM, GAICD, FCA, FTIA, FCIS. Director Corporate Services/ Company Secretary Experience and expertise Ms Stephens was appointed to the `position of Director Corporate Services on 14 November 2012 and Company Secretary on 18 December 2012. As Company Secretary, Ms Stephens is responsible for all of the legal and compliance issues associated with Hills. Previously she held the position of Company Secretary and General Counsel at Luxottica (formerly OPSM Group) for 20 years from 1992 until 2012. During her time at Luxottica, Ms Stephens was responsible for all legal and compliance issues. She was instrumental in numerous acquisitions ranging from single store to multi–store acquisitions and participated in global acquisitions. In her roles at OPSM and Luxottica, some of Ms Stephens’ key responsibilities were intellectual property maintenance, tax structuring, acquisitions and disposals, risk management, Company Secretarial and all corporate legal matters. Rachel Rees, B.Bus (Acc), Grad Dip CSA, MAICD, FCA, FTIA, FCIS, was appointed to the position of Company Secretary on 1 February 2012 and held this position until 18 December 2012. 12 HLS0339_ Annual Report_v16.indd 12 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Company Secretary Directors’ report 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 2013, and the numbers of meetings attended by each Director were: Full Meetings of Directors Audit, Risk and Compliance Nomination Renumeration Meetings of Committees JH Hill–Ling EN Pretty~ FRV Bennett I Elliot DM Spence PW Stancliffe MA Campbell^ GL Twartz* A 22 18 22 19 19 22 19 4 B 22 18 22 22 22 22 19 4 A = Number of meetings attended A – – 7 – 6 2 3 – B – – 7 – 7 3 4 – A 5 – – 5 – 5 – – B 5 – – 5 – 5 – – A 8 – – 7 8 – – – B 8 – – 8 8 – – – B = Number of meetings held during the time the Director held office or was a member of the committee during the period * = Retired as Executive Director 2 September 2012 ~ = Commenced as Group Managing Director and Chief Executive Officer on 3 September 2012 ^ = Retired as Director 31 May 2013 – now fully employed by Hills Holdings Limited HLS0339_ Annual Report_v16.indd 13 13 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Directors’ report Remuneration report audited Introduction from the Chairman of the Remuneration Committee Dear Shareholder After a very tough start to the year, we embarked on a period of significant business transformation during the second half of the year following the appointment of a new CEO Ted Pretty and a much changed management team. A lot was achieved during the last six months of the 2013 year which has enabled us to again align our 2014 remuneration policy so that it supports the broader change in the business and provides clear alignment of Senior Executive remuneration with delivery of improved returns to the shareholder and a stronger business for future years. A year of transformation During the mid part of the year, the Company put in place a new Senior Executive structure made up of existing and newly appointed executives, developed a strategic plan for the transformation and commenced the process. The Remuneration Committee is aware that these executives have worked extremely hard to largely complete the transition by end of June and to correctly position the Company for the 2014 year and our future. We have asked them to implement a new unified culture, centralise operations, divest and acquire businesses, all the time operating in a very difficult economy. Despite this we have been able to obtain the services of some great new executives, and together with our loyal Hills employees they have delivered on a significant restructuring and transformation agenda. The revised 2013 financial outcomes, which were advised to the market in July 2013, have been substantially achieved. The Board has engaged the Godfrey Remuneration Group to provide comparative data for the Senior Executive roles in the Hills Group. The data has confirmed that executive remuneration for Hills is competitive and reflects the levels required to attract and retain highly experienced executives, required to re–establish shareholder value through a time of significant transformation. In considering the remuneration of individual Senior Executives, the Board takes into account the particular skills and experience that they bring and how they may influence the successful transition of Hills. 14 2014 focus on delivering outcomes Our path to earnings growth is now a lot clearer. We remain committed to achieving outcomes that are in the best interest of our shareholders who have seen Hills weather the manufacturing decline in Australia, the high Australian Dollar and the significant impairment cost in achieving our transformation. We also remain committed to delivering sustainable earnings growth and optimising shareholder value as the implementation of the new Hills vision continues. Our Short Term Incentive Program for 2014 is geared 80% towards delivering financial outcomes and 20% towards non–financial, strategic goals. On behalf of the Board I invite you to review the following Remuneration report. David Spence Chairman Remuneration Committee 2013 remuneration outcomes The Board is cognisant that executive remuneration is an issue of significant and sustained interest for shareholders, which is rightly so. We are pleased to report that the majority of executives achieved most of their transformational goals and financial targets during the second half of the year. It has been a tough trading environment but our loyal staff together with the new executives have pulled through and delivered the result you have today. The tables that follow explain the remuneration outcomes for 2013 which are a mixture of goals set a year ago and the shorter term transitional goals set at the mid year for some of the new executives. Future remuneration strategies The Board reviews the Hills remuneration policy and practices annually. As part of the transformation of the Company, the Board is moving to simplify the remuneration policy and ensure strong alignment to the transformation strategic plan with an ongoing focus on improving performance and shareholder returns. We will reward true outcomes in alignment with our strategic plan and the focus on improving shareholder returns as we transition industry segment. The long–term incentive scheme that has been in place for the last couple of years no longer reflects the new positioning of Hills, nor would it reward any new Senior Executives. It is therefore necessary to outline a new set of long–term incentives, as well as short–term incentives, that align with our goals. Total shareholder returns (TSR) is not a measure we will use during the transformation process as it is difficult to set true comparable measures whilst we undergo a large transformation. Our focus over the next few years is to drive the growth of earnings per share (EPS) in alignment with our strategic vision. Our future remuneration strategies will continue to be transparent and fair. HLS0339_ Annual Report_v16.indd 14 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Directors’ report Remuneration report audited continued 1. Overview In alignment with the transformation strategy for Hills, FY2013 has seen a number of significant changes which have impacted Company remuneration arrangements, policy and practice: • There have been significant changes to the Senior Executive team including the appointment of Ted Pretty as the new Managing Director and Chief Executive Officer (CEO). • David Spence appointed Chairman of the Remuneration Committee. • There has been a comprehensive review of Board policies and the Board Charter. • The Remuneration Policy has been updated with a new Short Term Incentive arrangement to align to 2014 transformation goals. • The Board is currently finalising a long– term incentive plan for the CEO. Further details of these changes are provided in this report. The Directors of Hills Holdings Limited (Hills or the Group) present the Hills 2013 Remuneration Report. The Remuneration Report forms part of the Directors’ Report and has been prepared in accordance with section 300A of the Corporations Act 2001 (Cth) (the Act). The information provided in this report has been audited as required by section 308(3C) of the Act. For the purposes of section 250R(2) of the Act, the Hills Remuneration Report for FY2012 was adopted without question or comment with Hills receiving more than 91.8% of “yes” votes cast on the report. The Remuneration Report provides a summary of Hills Remuneration Policy and practice for FY2013 as they relate to the Hills Key Management Personnel, and covers: 1. Overview 2. Remuneration Governance 3. Key Management Personnel 4. Executive Remuneration Strategy 5. Executive Remuneration Framework 6. Relationship between remuneration and Group performance 7. Executive Remuneration Outcomes 8. Executive Contracts 9. Non–Executive Director Remuneration 10. Remuneration Tables 2. Remuneration Governance The Remuneration Committee The Remuneration Committee (Committee) is responsible for reviewing the Remuneration Policy, processes, incentive schemes and performance of the CEO and Senior Executives. The Committee provides recommendations to the Board on the direction and strategies for Director and the Senior Executive remuneration and benefits, reward and recognition and succession planning. In making its decisions, the Committee considers advice from the CEO, other members of management and external advisors, as well as feedback received from investors and shareholders. Further information on the Committee’s role, responsibilities and membership is contained in the Corporate Governance Statement included in the Annual Report. The Committee’s Charter is available on Hills’ website, and is reviewed annually. The Board also reviews Hills’ Remuneration Policy and practices annually to assess their effectiveness in achieving the Board’s objectives. External advice Where appropriate, the Committee seeks and considers input from external remuneration advisors. In FY2013, the Committee obtained relevant benchmarking data and recommendations of a general nature from Godfrey Remuneration Group Pty Ltd (‘Godfrey’) to assist it in its review of Senior Executive remuneration. The appointment terms identify that when providing benchmarking data to Hills, Godfrey report to the Board via the Committee Chairman. The Board is satisfied that the governance arrangements it has established enable Godfrey to deliver the remuneration data free from undue influence. HLS0339_ Annual Report_v16.indd 15 15 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 3. Key Management Personnel Hills Non–Executive Directors, the Managing Director and those executives that have the authority and responsibility for planning, directing and controlling the activities of Hills are included for the purposes of remuneration reporting. As a result, in addition to the Non–Executive Directors listed on page 6 of the Directors’ Report, the following Senior Executives are regarded as the Key Management Personnel (KMP) of Hills for FY2013: EN Pretty Managing Director and Chief Executive Officer Commenced 3 September 2012. G Logan Chief Financial Officer Commenced 8 August 2011. M Campbell Executive Director, Hills Home Living Commenced as a Non–Executive Director on 19 December 2011. Engaged as a Contractor in a senior executive role on 11 January 2013 until 31 May 2013 when he resigned as a Non–Executive Director and a Contractor. Engaged as an employee on 3 June 2013. L Francis B Newton G Stephens M McKinstry G Twartz S Cope Executive Director, Hills Communications Executive Director, Hills Technologies Commenced 11 March 2013. Commenced 4 March 2013. Director Corporate Services and Company Secretary Commenced 15 November 2012. Chief Operations Officer, Building & Industrial Managing Director CEO Electronics & Communications Division Commenced 6 June 2011. Will cease on 30 August 2013 Ceased as Managing Director effective 2 September 2012. (1) Ceased effective 1 June 2013. R Rees Company Secretary Resigned from role of Company Secretary on 18 December 2012. Ceased effective 21 December 2012. A Sullivan A Kachellek Group General Manager Strategy Ceased effective 21 December 2012. Managing Director, Korvest Ltd Remains as Managing Director of Korvest but ceased being part of the Hills Group on sale of Korvest on 19 February 2013. (1) G Twartz ceased as Managing Director on 2 September 2012, and served out a period of notice exiting Hills on 30 November 2012. This Report incorporates the disclosure requirements of accounting standard AASB 124 Related Party Disclosures, as well as those prescribed by the Act. Details of equity holdings, loans and other transactions with respect to KMP are disclosed in note 24 of the financial statements. The information provided in this Report has been audited as required by section 308(3C) of the Act. No payments were made to the KMP before taking office. 16 HLS0339_ Annual Report_v16.indd 16 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report Competitive • Remuneration position at the appropriate level relative to the market to be competitive and attract, retain and reward employees Equitable and Motivational • Employees in similar roles, making similar contributions, with similar performance, receive similar rewards • Motivates employees to deliver business results • Differentiates, but is fair and equitable in its application • The employee’s particular skills and experience Linked to Performance • Directly links individual and company performance to remuneration outcomes • Employees understand what results need to be achieved • Provides an integrated remuneration and performance system framework Aligned • Align remuneration and incentive outcomes with business goals and results • Support the delivery of the transformation business strategy • Withstand external scrutiny Straightforward • Understood by all stakeholders and employees 4. Executive Remuneration Strategy Background Aligned with the transformation of the business, there has been a period of transition in the Senior Executive team with the exit of a number of Senior Executives including the former MD, and the appointment of a new CEO and four new Senior Executives. The Board considers that the leadership transition is instrumental to the successful transformation of Hills from a large diversified group with a focus on the manufacturing and steel sectors, to a company with a strategic focus on innovation and service in the technology sector. The transition to a company with a stronger alignment to the technology sector necessitates the repositioning of Hills remuneration strategy. For FY2014 the Board has moved to simplify the Remuneration Policy and ensure strong alignment to the transformation strategic plan with an ongoing focus on improving performance and shareholder returns. Remuneration Strategy Hills remunerates its people fairly and responsibly. The objectives of the Senior Executive remuneration strategy are to attract and retain talent, motivate and reward outstanding performance and align Senior Executive and shareholder interests. In a time of significant business transformation, achieving the “one” Hills vision requires a remuneration strategy that balances short– term operational earnings and returns with longer term value through underlying earnings growth. The key principles on which the Hills remuneration strategy is based are: HLS0339_ Annual Report_v16.indd 17 17 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ reportRemuneration report auditedcontinued 5. Executive Remuneration Framework The Executive remuneration framework consists of the following components: Fixed Remuneration Performance Related Remuneration Base Pay Superannuation Other benefits Short Term Incentive Plan (STIP) Long Term Incentive Plan (LTIP) The above components remain appropriate during the transformation program. The Board considers a combination of a fixed and a performance related remuneration structure provides Senior Executives with a tangible incentive to meet Hills’ objectives, as well as aligning the success and profitability of Hills with the interests of shareholders. The Committee reviews the competitiveness and appropriateness of Hills Remuneration Policy on an annual basis. Individual Senior Executives have different proportions of remuneration that are fixed versus variable. The relative weightings of the three remuneration components for the Senior Executive for FY2013, based on the roles they perform, 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 Remuneration Fixed remuneration is determined by individual performance and is made up of base salary and superannuation. In June 2013, the Committee sought remuneration data from Godfrey, benchmarked against ASX companies of a similar market capitalisation and sector, with consideration applied to specific roles in companies in the Industrial & Services sector, with a particular focus on the Technology sub–sector. The Godfrey advice indicated that the Hills executive group was placed well in the market and was generally accepted against market practice except for a few key roles. Remuneration for these roles was necessary to attract particular individuals to these positions. Short Term Incentive The STI is an at risk component of remuneration rewarding performance against the achievement of key performance indicators which are set annually. This element of remuneration is considered to be an effective tool in promoting the interests of Hills and its shareholders, and aligning Senior Executive reward with the achievement of Hills’ transformation goals. CEO Other Executive/KMP – Range – Average Fixed 55% STI 45% LTI (1) 0%(2) 50% – 70% 20% – 50% 0% – 17%(3) 64% 32% 4% (1) There was no LTI equity allocation during FY2013 (2) The Board is currently finalising a LTIP for the CEO. See LTI section on page 20. (3) G Logan participated in a cash based LTIP during FY2013 as detailed below. FY2013 – Short Term Incentive Senior Executives have different STI targets as a percentage of their Fixed Remuneration depending on their role. In FY2013, due to the substantial change being driven through Hills under the transformation program, and the engagement of a number of new Senior Executives, the focus of the STIP was on the setting of, and achievement against, specific individual short–term restructuring and transformation goals. These goals were considered by the Board to be the key drivers of improved performance for the future. Based on the achievement of these goals, and individual objectives and behaviours, an STI allocation was made as described later in this Report. In determining the STI allocations, the Board also took into account the overall performance for the financial year against the revised transformation objectives for Hills. FY2014 – Short Term Incentive Plan (STIP) The FY2014 STIP will align Senior Executive remuneration with Hills’ business objectives to drive momentum in financial outcomes with specific focus on EBIT, Working Capital and individual goals. In order to drive performance and improve morale, we are trialling half yearly STIP payments, relating to the achievement of quarterly financial goals. Senior Executives have been set challenging but attainable targets for FY2014 that are directly linked to delivering against business goals. The FY2014 STIP will be: • measured quarterly and paid at the half year (February) and full year (August); and • based on financial performance (80%) and individual annual non–financial (20%) measures. 18 HLS0339_ Annual Report_v16.indd 18 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report The following provides the structure of the STIP for FY2014: Business Unit Senior Executives Corporate Senior Executives 50% 30% – – 20% 100% Corporate – EBIT/NPAT – Working Capital Business Unit – EBIT – Working Capital Individual TOTAL 30% 15% 20% 15% 20% 100% The FY2014 STIP provides a balance between linking a significant proportion of the potential reward to achieving financial results, while maintaining a focus on key individual non–financial initiatives which are important to the transformation of Hills. The measurement and payment structure is focused on driving strong performance progressively through the year, reinforced by the potential to receive payments at the half and full year. At the end the first half and full year of FY2014, the Board will assess performance against the set targets and determine the quantum of any payment for the period. New Senior Executives may be eligible to participate in the FY2014 STIP on a pro rata basis. The following table summarises what will happen to potential FY2014 STIP payments should a Senior Executive cease employment with Hills: Resignation and Retirement Any entitlement to payment is subject to the participant being employed by Hills at the time of payment. Company initiated termination Summary Dismissal Any entitlement to a payment will be for completed quarters, with no pro rata for partly completed quarters. The calculation of an entitlement will be based on actual results for the quarter and paid on the scheduled date in February or August. If summarily dismissed, a participant will forfeit all rights to any payments under FY2014 STIP which have not already been made. HLS0339_ Annual Report_v16.indd 19 19 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ reportRemuneration report auditedcontinued 6. Relationship between remuneration and Group performance A key underlying principle of the Senior Executive remuneration strategy is that remuneration must be linked to the performance of Hills. The following table is a summary of financial and share price information and safety performance over the last five years: Future Long Term Incentive In FY2014 Hills plans to introduce a new LTIP which will be put to shareholders at the AGM to be held in November 2013. Share Trading Policy 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. In addition, KMP are prohibited from trading in Hills securities for specific periods prior to the announcement of the half year and full year results. The Share Trading Policy may be viewed on Hills Corporate Governance webpage. 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. For FY2013 there was a single grant in September 2012 of 100 shares to one eligible employee who was a KMP (S Cope). The shares issued under the Plan cannot be sold until seven years after issue. The value of shares granted is the value of the allotment divided by the weighted average price at which the Group’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. The employee shares were valued using a third party valuation methodology. CEO Short Term Incentive Plan The CEO has a similarly structured STI plan to the existing senior executives that has a number of measures encompassing NPAT, EBIT, Working Capital and other additional measures focused on the ongoing performance and transformation of the business. Long Term Incentive In 2010, consistent with Hills’ remuneration strategy of rewarding Senior Executives for performance against business plans, and longer term shareholder returns to a level that is appropriate for the results delivered, Hills established a LTIP. The aim of the LTIP was to incentivise Senior Executives by aligning their long–term reward with the interests of shareholders. The LTIP provides that, based on specified performance conditions being achieved, eligible employees may be offered shares in Hills (to be held on trust) or performance rights. In FY2011 and FY2012 grants of performance rights were made under this LTIP. However, all remaining performance rights allocated under this LTIP have lapsed due to non–achievement of the hurdles, termination of employment of participants, or the participants electing to lapse their entitlements. Long Term Incentive – FY2013 In FY2013, no grant was made under the LTIP. A LTIP for the CEO was originally included on the agenda of the 2012 AGM, however, this agenda item was withdrawn prior to the meeting. This was due to the difficulty in setting meaningful long–term hurdles at that early stage in the transformation process. 20 HLS0339_ Annual Report_v16.indd 20 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report 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 ($’000) Basic earnings per share (cents) 3 Dividends (cents) Share price ($) as at 30 June Safety (TRIFR) FY2013 33,138 FY12 44,702 FY11 40,376 FY10 65,469 FY09 59,978 271,018 400,963 402,307 496,499 428,520 11.9% 19,201 (91,387) 7.8 5.0 $1.01 5.8 9.1% 28,822 28,822 10.5 10.0 $1.06 10.1 8.2% 27,126 (73,116) 10.2 10.0 $1.20 19.8 12.0% 43,095 43,095 16.7 12.5 $2.15 34.7 10.3% 34,201 15,655 14.6 10.0 $1.57 41.4 1.EBIT before CGU impairment, restructure and closure costs and other associated impairments offset by profit on sale of businesses in the year ended 30 June 2013 of $33.138 million is a non–IFRS measure calculated as: EBIT loss of the year of $36.957 million and EBIT loss attributed to discontinued operations of $84.483 million adjusted for CGU impairment, restructure and closure costs and other associated impairments offset by profit on sale of businesses of $154.578M. 2.Net profit after tax (NPAT) attributable to owners before CGU impairment, restructure and closure costs and other associated impairments offset by profit on sale of businesses in the year ended 30 June 2013 of $19.201 million is a non–IFRS measure calculated as: NPAT loss attributable to owners of $94.125 million adjusted for CGU impairment, restructure and closure costs and other associated impairments offset by profit on sale of businesses of $113.326 million. 3.Basic earnings per share before CGU impairment, restructure and closure costs and other associated impairments offset by profit on sale of businesses in the year ended 30 June 2013 is a non–IFRS measure calculated using NPAT loss attributable to owners of $94.125 million adjusted for CGU impairment, restructure and closure costs and other associated impairments offset by profit on sale of businesses of $113.326M. The non–IFRS measures used by the Company are relevant because they are consistent with measures used internally by management to assess the operating perfomance of the business. The non–IFRS measures have not been subject to audit or review. HLS0339_ Annual Report_v16.indd 21 21 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ reportRemuneration report auditedcontinued 7. Executive Remuneration Outcomes The following provides details of FY2013 remuneration outcomes for Senior Executives employed at 30 June 2013. Short Term Incentive For FY2013, the average percentage STIP payment to the Senior Executives was 87%. In FY2013 the Board determined that the most important outcome to be delivered upon was the restructuring and transformation of the Company to set the foundation for the delivery of financial performance in FY2014 and beyond. As such, the key drivers of the STIP results for FY2013 were the delivery of financial results in accordance with revised expectations, while at the same time incurring significant transformation costs and achieving major milestones through the transformation process during the year. The Board assessed the performance of the CEO and each Senior Executive against their individual restructuring and transformation objectives in determining payments for the year. Where individuals commenced part way through the year, payments were adjusted on a pro rata basis. Long Term Incentive In FY2013, two Senior Executives held equity in the LTIP which was granted in FY2011 and FY2012. These Senior Executives chose to waive their remaining rights under the LTIP for no consideration effective 28 June 2013. No allocation was made under the LTIP during FY2013. There are no further outstanding performance rights or options which have been granted to executives under the LTIP as they have now all lapsed. CFO LTIP Outcome FY2013 Mr Logan will be granted the full amount of his LTIP for the 2013 financial year: • Performance Component – an amount of $75,000; and • Retention Component – an amount of $75,000. Payments of both components will occur in 2015. See page 23 for details. Senior Management remuneration mix The following table shows the proportion weighting of each element of remuneration for each of the Senior Executives employed at the end of FY2013 based on maximum potential outcome: Name Fixed remuneration (%) Maximum Short Term Incentive (%) Maximum Long–term Incentive (%) FY2013 FY2012 FY2013 FY2012 FY2013 FY2012 EN Pretty G Logan 55% 63% M McKinstry 70% M Campbell 67% L Francis B Newton 67% 50% G Stephens 70% – 64% 63% – – – – 45% 20% 30% 33% 33% 50% 30% – 29% 27% – – – – – 17% – – – – – – 7% 10% – – – – 22 HLS0339_ Annual Report_v16.indd 22 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report 8. Executive Contracts Senior Executives (other than the CEO) The remuneration and other terms of employment for the Senior Executive team are covered in their individual employment contracts. Terms are summarised as follows: • There is no guaranteed base pay increase included in any Senior Executives contract and no contract is for a fixed term. • The contracts may be terminated by either party on notice (ranging from three to six months). • If a Senior Executive is retrenched there is no entitlement to contractual termination payments except in the contracts of McKinstry and Logan, where termination on grounds of redundancy includes a combined total of redundancy pay and notice of six months (McKinstry) and four months (Logan). • In the instance of serious misconduct, Hills may terminate employment at any time. The Senior Executive will only receive payment to the date of termination and any statutory entitlements. • Retirement benefits comprise employer contributions to defined contribution superannuation funds. CEO & Managing Director (CEO) Mr Pretty was appointed CEO on 3 September 2012. The following provides details of his contract terms and remuneration: Term The contract is for an initial period of one year and then will continue thereafter until terminated in accordance with the terms of the contract. Fixed Remuneration For FY2013 the CEO received Fixed Remuneration of $900,000 pro rata for his period of employment during the year. Short Term Incentive An annual STI opportunity of $750,000. The Board assesses the performance of the CEO against performance measures to determine the level of STI payment. Long Term Incentive A new LTIP is to be put to shareholders at the November AGM. Termination After completion of the initial contract term, the CEO’s employment may be terminated by Hills by giving six months’ notice where such notice is provided within the twelve month period following the initial term and with twelve months’ notice thereafter. Mr Pretty may terminate his employment at any time after the initial period by giving Hills six months written notice. Retirement Benefits Provided by providing employer contributions to a defined contribution superannuation fund. Chief Financial Officer (CFO) In FY2013 the terms of employment of the CFO, Mr Grant Logan, were amended to include a cash based LTIP in place of the FY2014 LTIP and any other LTIP in which other Senior Executives participate. No grants were made to Mr Logan under any plan in existence prior to these amendments. Mr Logan has been offered this plan in recognition of his knowledge of Hills and the critical role that he performs in supporting the transformation of Hills and driving future financial performance. Given the short duration of the LTIP and Mr Logan’s anticipated retirement in 2015 a cash based LTIP was considered most appropriate. The LTIP has two components: • Performance Component: A potential payment of $75,000 per annum up to and including FY2015. Actual entitlement will be assessed against the same KPIs as those set by the Board for the CEO. • Retention Component: An amount of $75,000 per annum for each of the three years up to and including FY2015. Any payment under this LTIP is subject to the CFO being employed by Hills on the date of the announcement of the Company results for FY2015. Participation in this plan is in place of any other LTIP equity plan that may be offered to other Senior Executives. HLS0339_ Annual Report_v16.indd 23 23 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ reportRemuneration report auditedcontinued Board Fees Chairman Directors Pre – 1 June 2013 From – 1 June 2013 Pre – 1 June 2013 From – 1 June 2013 Board $200,000 $200,000 $100,000 $100,000 Committee Fees Audit, Risk & Compliance $10,000 $20,000 Committee Chair Committee Member Nil Nil Nil $10,000 Nil Nil 10. Remuneration Tables Details of the remuneration paid or payable to the Key Management Personnel (KMP), which includes Directors and Senior Executives of Hills (as defined in AASB 124 Related Party Disclosures) are set out in the following table. Remuneration $10,000 Nomination $10,000 Nil Nil Retirement allowance for Non–Executive Directors 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) with a vesting period of eight years, which has been achieved. 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. 9. Non–Executive Director Remuneration Approach to setting Non–Executive Director fees The Committee reviews Non–Executive Director remuneration arrangements annually, and submits its recommendations to the Board for review and approval. The Board may also consider the advice of independent remuneration consultants to ensure that Non–Executive Directors’ fees and payments are appropriate and in line with the market. Maximum aggregate fee pool Non–Executive Directors are paid fees from a maximum aggregate fee pool of $1.2 million. The aggregate fee pool and the Directors’ fees have remained unchanged since FY2011. Fees and payments to Non–Executive Directors reflect the demands which are made on, and the responsibilities of the Directors. Non–Executive Directors receive fixed annual fees comprising a Board fee and Committee Chair fee as applicable. No incentive based payments are made to Non–Executive Directors. Non–Executive Directors (excluding the Chairman) who chair a committee receive an additional $10,000 per annum. The Chairman’s fees are determined independently to the fees of Non–Executive Directors based on comparative roles in the external market. The Chairman’s remuneration is inclusive of additional yearly fees for chairing Board committees. While there has been no increase in the Board Fees, the Board has approved an increase in the fees for the Chairman and members of the Audit, Risk and Compliance Committee effective from 1 June 2013 in recognition of the increased workload with transformation and restructuring. The following table provides a summary of Non–Executive Director annual fees (including superannuation contributions): 24 HLS0339_ Annual Report_v16.indd 24 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report 2013 Short–term employee benefits Post employment benefits Long–term benefits Share based payments (D) Cash salary and fees $ Cash bonus (A) $ Other (B) $ Super annuation $ LSL & Cash based LTIP (C) $ Termination benefits $ Performance rights $ Shares $ Total $ Name Non–Executive Directors J Hill–Ling F Bennett M Campbell (1) I Elliot D Spence P Stancliffe (2) Subtotal Non–Executive Directors Executive Directors E Pretty (3) M Campbell (4) G Twartz (5) S Cope (6) G Logan (7) M McKinstry L Francis B Newton (8) G Stephens R Rees (9) T Sullivan (10) A Kachellek (11) Total Key Management Personnel compensation (Group) Other Key Management Personnel (Group) 191,132 102,446 49,694 100,917 94,801 128,564 667,554 – – – – – – – 713,206 618,500 273,517 137,208 414,512 – – – 477,435 175,000 415,147 79,510 105,759 154,882 113,207 146,789 188,982 50,000 43,000 64,000 75,000 – 15,000 35,094 – – – – – – – 17,268 2,816 51,917 22,794 14,680 15,289 5,106 58,113 7,033 1,903 2,088 – 17,202 9,220 4,472 9,083 8,532 11,571 60,080 31,193 6,483 15,848 20,936 22,592 23,349 7,174 9,536 13,966 15,473 14,796 17,222 – – – – – – – 909 – 3,881 – – – – – – – – – – – 306,412 152,366 – 108 216 210 – – – – – – – – 58,715 105,505 – – – – – – – – – – – 139 557 836 – – – – – – – – – – – – – – – – 208,334 111,666 54,166 110,000 103,333 140,135 727,634 1,381,076 282,816 208,854 16 764,809 – – – – – – – – 842,630 504,621 134,898 237,624 251,091 189,298 284,178 241,298 3,887,708 1,075,594 199,007 258,648 157,690 470,632 1,532 16 6,050,827 (1) M Campbell commenced as a Non–Executive Director on 19 December 2011; was engaged as a Contractor in a senior executive role on 11 January 2013 until 31 May 2013 when he resigned as a Director of the Board. (2) P Stancliffe remuneration includes Board fees from Korvest Ltd until the sale of Korvest on 19 February 2013. (3) EN Pretty was appointed MD & CEO 3 September 2012. (4) M Campbell commenced as a Non–Executive Director on 19 December 2011; was engaged as a Contractor in a senior executive role on 11 January 2013 until 31 May 2013 when he resigned as a Non–Executive Director and a Contractor; and was engaged as an employee on 3 June 2013. (5) G Twartz ceased as MD on 2 September 2012. For the period between 3 September 2012 and 30 November 2012 when he ceased to be an employee of Hills, G Twartz was not classified as a KMP. However, during this period he was paid $205,812 while he served the balance of his notice period. (6) S Cope ceased 1 June 2013. Includes contract redundancy benefit ($66,412) and payments made during restraint period ($240,000). (7) G Logan remuneration includes a value of the cash based LTIP. No payment has been made under this plan, with the potential payment deferred until after FY2015, dependent on employment. (8) “Other” includes a payment to B Newton of $50,000 on his commencement with Hills. This amount was deducted from his STIP payment for FY2013. (9) R Rees resigned from role of Company Secretary on 18 December 2012 and ceased employment with Hills on 21 December 2012. Entire termination benefit is payment in lieu of notice. (10) T Sullivan ceased employment 21 December 2012. Entire termination benefit is payment in lieu of notice. (11) A Kachellek remains Managing Director of Korvest but ceased being a KMP of Hills on sale of Hills interest in Korvest on 19 February 2013. (A) The short–term incentive bonus is for performance during the respective financial year using the criteria set out above. (B) Other comprises annual leave accrued in excess of annual leave taken in the year, payment made on commencement of employment and payment in compensation for transferring from the Company’s previous defined contribution scheme. (C) The long–term benefits remuneration comprises the long service leave component of remuneration and 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. Long–term benefits also comprises the annualised value of a cash based long–term incentive which is subject to future service conditions. (D) Share based payment remuneration comprises performance rights in the Long Term Incentive Plan and shares under the Employee Share Plan. HLS0339_ Annual Report_v16.indd 25 25 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ reportRemuneration report auditedcontinued 2012 Short–term employee benefits Post employment benefits Long–term benefits Share based payments (D) Cash salary and fees $ Cash bonus (A) $ Other (B) $ Super annuation $ LSL (C) $ Performance rights $ Shares $ Total $ 192,661 100,917 49,347 100,917 31,971 91,743 148,576 716,132 – – – – – – – – 5,600 17,339 – – – – – – 9,083 4,441 9,083 2,877 8,257 13,372 5,600 64,452 – – – – – – – – – – – – – – – – G Twartz + 803,211 40,000 67,230 46,789 34,656 13,822 Other Key Management Personnel (Group) 321,101 358,451 430,214 131,462 6,189 95,566 284,307 250,005 75,252 37,500 20,000 10,000 – 5,000 – 138,622 3,884 1,409 14,753 12,314 2,169 7,301 – 350 28,952 32,309 38,719 11,832 557 8,601 25,588 33,472 20,920 824 1,358 – 10,560 213 1,755 26,033 2,513 210 279 418 628 – – 1,759 41,168 – – – – – – – – – – – – – – – – 215,600 110,000 53,788 110,000 34,848 100,000 161,948 786,184 1,005,708 452,832 430,772 505,462 166,236 19,475 116,681 313,409 489,650 Name Non–Executive Directors J Hill–Ling + F Bennett M Campbell I Elliot R Flynn D Spence P Stancliffe * Subtotal Non–Executive Directors Executive Directors S Cope + G Logan 1 M McKinstry D Lethbridge 4 A Muir 2 R Rees 5 T Sullivan 6 A Kachellek 3 Total Key Management Personnel Compensation (Group) 3,396,638 326,374 115,010 291,271 96,319 60,587 210 4,286,409 + J Hill–Ling and G Twartz remuneration includes a dividend of $5,600 and S Cope remuneration includes a dividend of $1,400 paid as shareholders of Hills Associates Limited. 2 A Muir Chief Financial Officer ceased employment on 7 July 2011. 5 R Rees, Company Secretary commenced employment * P Stancliffe remuneration includes Board fees from Korvest Ltd. on 1 February 2012. 1 G Logan Chief Financial Officer commenced employment 6 Group General Manager Strategy on 8 August 2011. 4 D Lethbridge, Company Secretary ceased employment on 14 February 2012. 3 Managing Director Korvest 26 HLS0339_ Annual Report_v16.indd 26 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report In FY2013 the Board determined that the most important outcome to be delivered upon was the restructuring and transformation of the Company to set the foundation for the delivery of financial performance in FY2014 and beyond. As such, the key drivers of the STIP results for FY2013 were the delivery of financial results in accordance with revised expectations, while at the same time incurring significant transformation costs, and achieving major milestones through the transformation process during the year. The Board assessed the performance of the CEO and each Senior Executive against their individual objectives and the overall performance of Hills in determining payments for FY2013. Where individuals commenced part way through the year, payments were adjusted on a pro rata basis. The total potential and actual STI are as follows: Full Year Potential STI Pro rata Potential STI Actual STI paid/ payable $ 750,000 618,500 618,500 175,000 175,000 175,000 200,000 200,000 50,000 Name E Pretty* G Logan M McKinstry L Francis* 140,000 B Newton* 350,000 G Stephens* M Campbell G Twartz S Cope 120,000 – – – 43,000 64,000 75,000 43,000 64,000 75,000 – – – – – – Actual STI paid/ payable as % of Full Year potential STI Actual STI paid/ payable as % of Pro rata potential STI STI paid/ payable as % of fixed remunera- tion 82% 100% 25% 31% 18% 63% – – – 100% 100% 25% 100% 100% 100% – – – 87% 37% 12% 54% 61% 48% – – – * Pretty, Francis, Newton and Stephens joined Hills during the 2012/13 financial year, and therefore have less than 12 months’ service. STI payments and targets have been pro–rated accordingly. The proportion of actual STI and LTI compared to fixed remuneration as a proportion of remuneration is as follows: Name E Pretty M Campbell G Logan M McKinstry L Francis B Newton G Stephens G Twartz S Cope Fixed Remuneration % At Risk/STI Paid Payable % Value of Performance Rights/Options/Cash LTI as a proportion % 54.6% 100.0% 63.0% 89.8% 66.8% 64.3% 69.2% 100.0% 100.0% 45.4% 0.0% 20.0% 10.2% 33.2% 35.7% 30.8% 0.0% 0.0% 0.0% 0.0% 17.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% HLS0339_ Annual Report_v16.indd 27 27 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ reportRemuneration report auditedcontinued Details of share based compensation and bonuses (i) Performance rights The terms and conditions of each grant of performance rights under the LTIP affecting remuneration in the current or a future reporting period are as follows: Grant date 30 April 2011 19 Dec 2011 Date exercisable/ vested Expiry date Exercise price Value per right at grant date Performance achieved 30 June 2013 30 June 2013 30 June 2014 30 June 2014 $0.00 $0.00 $0.905 $0.450 Nil Nil % Vested 0% 0% All performance rights held by Senior Executives, that had not previously vested, either lapsed on termination of employment of the participating executive, or the participating executive elected to lapse their entitlement to the performance rights during FY2013 and they were cancelled for no consideration on 28 June 2013. 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: $n/a (2012: $0.86) • TSR hurdle: $n/a (2012: $0.04) 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. Details of the assumptions underlying the valuation are set out in note 23 to the financial statements. No performance rights were granted during FY2013 and none have been granted since the end of the financial year. No terms of equity settled share based payment transactions (including options and rights granted as compensation to a KMP) 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 Hills provided as remuneration to each KMP 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 23 to the financial statements. No performance rights vested during FY2013. 28 HLS0339_ Annual Report_v16.indd 28 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report Number of performance rights granted during the year Fair value of performance rights at grant date calculated in accordance with AASB 2 Number of options vested during the period Number of performance rights/ options lapsed/ cancelled/forfeited during the year Value at lapse/ cancellation/forfeit date (1) – – – – – – – – – – – 25,000 – – – 41,806 526,859 63,429 62,709 44,398 42,224 629,596 65,966 63,336 37,738 Name G Logan G Twartz (2) S Cope M McKinstry T Sullivan (1) 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. (2) G Twartz exercised 25,000 options under the previous executive share option plan. In a previous financial year the conditions for exercise of options had been met and the shares then issued were being acquired via a non–recourse loan from the Company. For Accounting Standards purposes shares subject to a non–recourse loan are treated as options until the loan is extinguished, at which point the shares are recognised. This occurred in FY2013. 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 KMP. 25,000 shares which had previously been issued and were subject to a non–recourse loan (so were considered options under Accounting Standards) were exercised during the period by G Twartz. For Accounting Standards this was accounted for as the exercise of options. The value at the exercise date of options that were granted as part of remuneration and were exercised during the period was $30,100. Share based compensation benefits For each grant of rights included in the tables on pages 25 to 27 and 28 to 29, 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 are set out below. The performance rights vest after three years, provided the vesting conditions are met (see page above). No performance rights did vest as the conditions are not satisfied, hence the minimum value of the performance rights yet to vest is $nil. The percentage of rights forfeited in the year represents the reduction from the maximum number of rights available to vest due to the highest level performance criteria not being met, rights which current executives elected to lapse, as well as rights that have lapsed due to termination of employment. Name G Logan G Twartz G Twartz S Cope S Cope M McKinstry T Sullivan T Sullivan Financial year granted 2012 2011 2012 2011 2012 2012 2011 2012 Number granted 41,806 118,926 229,933 21,623 41,806 62,709 15,134 29,264 Value per share Vested in current year Number vested Financial years on which rights originally may vest Forfeited/ Cancelled/ Lapsed Maximum value yet to vest 0.450 0.905 0.450 0.905 0.450 0.450 0.905 0.450 0% 0% 0% 0% 0% 0% 0% 0% – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 2014 2013 2014 2013 2014 2014 2013 2014 – – – – – – – – 29 HLS0339_ Annual Report_v16.indd 29 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ reportRemuneration report auditedcontinued Principal activities The principal activities of Hills during the course of the year are outlined within the Review of Operations. Hills 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 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 2012 of 5.0 cents (year ended 30 June 2011: 4.5 cents) per fully paid ordinary share paid on 26 September 2012 (26 September 2011) Interim ordinary dividend ended 30 June 2013 of 0.0 cents (2012: 5.0 cents per fully paid share paid on 30 March 2012) 2013 $’000 2012 $’000 12,298 11,190 – 12,293 12,298 23,483 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 $8.011 million (3.25 cents per fully paid share) to be paid on 27 September 2013 out of profits for the year ending 30 June 2014 to shareholders on the register as at 20 September 2013. The financial effect of these dividends has not been brought to account in the financial statements ended 30 June 2013 and will be recognised in subsequent financial periods. For more information regarding dividends please refer to note 21 of the financial statements. Significant changes in the state of affairs Significant changes in the state of affairs of Hills 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 Hills announced on 19 August 2013 that it had signed interdependent agreements to sell its steel assets, Fielders and Orrcon, to Bluescope Steel Limited. The transactions are subject to customary terms and conditions precedent including ACCC approval. Completion of the transactions is targeted to occur by the end of December 2013. See note 35 for further information. 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. 30 HLS0339_ Annual Report_v16.indd 30 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Directors’ report 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. Directors’ report continued 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 Hills Group of Companies, 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. Likely developments and expected results of operations For likely developments please refer to the Review of Operations section of the Directors’ report. Environmental regulation Manufacturing Hills holds all required environmental licences, registrations and permits for its manufacturing sites around Australia. No significant environmental incidents were reported over the 2012–13 financial year and Hills continued to meet or exceed the requirements specified in relevant licences and authorisations. Greenhouse gas and energy data reporting requirements The National Greenhouse and Energy Reporting Act 2007 (NGER Act) requires Hills 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 required data have been established. Hills first triggered the NGER reporting threshold based on its total corporate group energy consumption during the 2010–11 financial year and has since submitted two annual reports to the Clean Energy Regulator. Hills will not trigger the reporting threshold of 200TJ for the 2012–13 financial year. National Packaging Covenant The Australian Packaging Covenant (APC) is a voluntary initiative by Government and industry to reduce the environmental impact of packaging. Hills became a signatory to the APC in 2010 and has established a five year action plan aimed at optimising packaging design, material recovery, recycling and product stewardship. Hills have been formally recognised as the highest performing signatory in the ‘Hardware and Homewares – large company’ category following the submission of its second annual report during March 2013. HLS0339_ Annual Report_v16.indd 31 31 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Directors’ report 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 Hills are important. Details of the amounts paid or payable to the auditor of Hills, 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 • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. Non–audit fees increased due to significant additional work performed in relation to the Company’s restructure and transformation. Non–audit fees will return to normal levels in the next financial year. During the year the following fees were paid or payable for services provided by the auditor of Hills, its related practices and non–related audit firms: 32 Consolidated 2013 $ 2012 $ Audit services KPMG: KPMG Australia – audit and review of financial statements Overseas KPMG firms – audit and review of financial statements Total remuneration for audit services 520,000 492,000 32,610 32,909 552,610 524,909 Taxation services KPMG: KPMG Australia – taxation and other services Overseas KPMG firms – taxation services Total remuneration for taxation services Other services KPMG: Financial advisory services Software implementation assurance services Forensic accounting services Other consulting services Total remuneration for other services Total remuneration for audit and non–audit services 79,641 141,015 8,772 14,316 88,413 155,331 296,516 12,316 – 65,310 – 76,257 46,179 40,504 374,142 162,940 1,015,165 843,180 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 33. 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. Jennifer Helen Hill–Ling Director Edward Noel Pretty Director Adelaide 20 August 2013 HLS0339_ Annual Report_v16.indd 32 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 HLS0339_ Annual Report_v16.indd 33 33 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Corporate governance statement This report sets out Hills Holdings Limited’s (Hills) annual statement on its corporate governance framework for year ended 30 June 2013 and should be read in conjunction with the Directors’ Report and Remuneration Report at pages 6 to 32 of the Annual Report. The Board considers that Hills’ corporate governance framework and practices continue to comply with the requirements of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, 2nd Edition (Principles and Recommendations) and meet the interests of shareholders. Principle 1: Lay solid foundations for management and oversight The Board has adopted a formal Board Charter which sets out the roles, responsibilities, structure and composition of the Board of Directors of Hills. The matters which require approval by the Board are included. A copy of the Board Charter is available on the Corporate Governance section of the Hills website (‘the Hills website’). 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. A summary of duties for the Chairman and the Group Managing Director are reviewed and agreed by the Board. The Board has delegated to the Group Managing Director the authority to manage the day–to–day affairs of Hills. Hills has comprehensive performance guidelines in place. For the period, each Senior Executive has had their performance assessed against clearly defined objectives and measures developed through the overall process of performance management. Principle 2: Structure the Board to add value Ms Jennifer Hill–Ling holds the position of Chairman and is responsible for the leadership and effective performance of the Board. Given the depth of her Company experience and her industry standing she is considered to be excellently placed to serve as Chairman, notwithstanding that pursuant to the ASX recommendation she is not considered an ‘independent’ Chairman. The Board is composed of four additional Non–Executive Directors and one Executive– Director. The Board regularly assesses the independence of each Non–Executive Director and considers the remaining Non– Executive Directors to be independent. Mr Ian Elliot is the Lead Independent Director. The Non–Executive Directors regularly meet without the Group Managing Director, who is an Executive Director, or other management present. The Chairman is independent of the role of the Group Managing Director of Hills. For these reasons the ASX recommendation for an independent Chairman has not been adopted. Hills does not consider length of tenure a relevant disqualifying matter for independence and values the experience gained by the Directors in serving on the Board. The Board has established a Nominations Committee which consists of a majority of independent Non–Executive Directors including Mr Ian Elliot as the Committee Chairman. Details of other members of the Committee are provided in the Directors’ Report. A copy of the Committee’s Charter is available on the Hills website. The Board’s policy for the nomination and appointment of Directors is to fulfil its responsibilities to shareholders having regard to the law and high standards of governance by ensuring that the Board is comprised of individuals with an appropriate range of skills, experience, expertise, and that the Board benefits from diversity of gender. Pages 10 to 12 of the Annual Report sets out the qualifications, expertise and experience of each Director and their period in office. There is a procedure in place which provides for Directors to take independent advice at the expense of the entity. On an annual basis the Board conducts a review of Board, Committee and individual member performance along with a review of Director independence. The Process for the Evaluation of Board Performance is available on the Hills website. 34 HLS0339_ Annual Report_v16.indd 34 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Corporate governance statement continued Principle 3: Promote ethical and responsible decision making The Hills Code of Conduct (the Code) provides guidance on what is acceptable behaviour, requiring all Directors, managers and employees to maintain the highest standards of integrity and honesty. Hills expects its Directors, management and staff to report conduct that is dishonest, fraudulent, corrupt or illegal, endangers health and safety, or is a suspected breach of the Code or any Hills policy. Hills has adopted a whistleblower protection policy to ensure concerns regarding unacceptable conduct can be raised on a confidential basis without fear of reprisal, dismissal or discriminatory conduct. Hills has adopted a policy with respect to trading in Hills shares by Directors, management and staff in compliance with the ASX Listing Rules requirements. 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. The Board has adopted a diversity policy which requires the setting of specific gender diversity objectives and a range of metrics designed to measure the achievement of those objectives. These objectives and metrics are assessed annually by the Board and the Nomination Committee. The Board established a set of gender diversity objectives with the aim of achieving the objectives over a period of two years. Previously, these objectives were provided as absolute numbers as well as percentages. During FY2013, due to the major business transformation of Hills which is underway, the FY2014 ‘numbers’ (but not ‘percentage’ targets) were adjusted to reflect the current structure of Hills. Given this, the table below provides details of the percentage targets only. In addition to the above, two of five (40%) Non–Executive Directors are women. Number of women in management positions (including Board members) Number of women in sales and marketing positions Number of women employees in the organisation Objective % Actual at 2013 % 20 25 20 15.5 17.2 18.5 Hills is committed to achievement of these objectives in the year ahead, and will focus on increasing opportunities for women within Hills. The Code and other Policies referenced above are regularly reviewed and copies are available on Hills website. Principle 4: Safeguard integrity in financial reporting Hills is committed to maintaining a transparent system for auditing and reporting of Hills financial performance. The Board has established an Audit, Risk and Compliance Committee which performs a central function in achieving this goal. The Chairman of the Committee is Ms Fiona Bennett and all members of the Committee are independent, Non–Executive Directors. The composition and structure of the Committee and membership attendance at meetings of the Committee are set out in the Directors’ Report. The Committee has the opportunity to meet with the external auditors without management present as required. A copy of the Committee’s Charter and the procedure for the appointment of external auditors are available on the Hills website. HLS0339_ Annual Report_v16.indd 35 35 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Corporate governance statement continued Principle 5: Make timely and balanced disclosures Hills has established, and complies with the Communication and Market Disclosure Policy to ensure the market is informed of matters in compliance with the ASX Listing Rules disclosure requirements. A copy of the policy is available on the Hills website. Principle 6: Respect the rights of shareholders Hills provides its shareholders with high quality, relevant, factual and useful information in a timely manner and encourages shareholders to access this information primarily from the Hills website. Shareholders are encouraged to make their views known to Hills and to directly raise matters of concern. The Annual General Meeting remains the main opportunity for shareholders to comment and to question the Hills Board and management, and shareholders are encouraged to attend. Principle 7: Recognise and manage risk Hills has established policies for the oversight of material business risks. These policies are designed to ensure that strategic, operational, compliance, reputation and financial risks are identified, assessed, effectively and efficiently managed and monitored to enable achievement of Hills business objectives. The Board has directed management to design, assess, monitor and review the risk management and internal control framework in place to manage risks. Detailed control procedures cover management accounting, financial reporting, project appraisal, environment, health and safety, IT security, compliance and other risk management issues. The Board requires management to provide reports during the financial year as to effective management of material business risks. During the financial year, the Audit Risk and Compliance Committee, the Board and relevant management were provided with reports on material risks, including an assessment of the inherent risks, and the effectiveness of controls in place to manage such risks where possible. The CEO and the Chief Financial Officer have provided the Board with a written declaration in accordance with s295A of the Corporations Act that the full year financial statements are founded on a sound system of risk management and internal control, which implements the policies adopted by the Board, and that Hills’ risk management and internal control systems are operating efficiently and effectively in all material respects in relation to financial reporting risks. Principle 8: Remunerate fairly and responsibly The Remuneration Report at pages 14 to 29 details Hills’ remuneration policy and practices for Non–Executive Directors and Senior Executives. The Board has established a Remuneration Committee whose primary responsibility is to consider remuneration strategy and policy and to make recommendations to the Board that are in the best interests of Hills and its shareholders. The Remuneration Committee operates in accordance with its charter, which is available on the Hills website. The Committee monitors recruitment and development policies which encourage workplace diversity across individual characteristics, backgrounds and skill levels. The composition and structure of the Committee and membership attendance at meetings of the Committee are set out in the Directors’ Report. The current Chairman of the Committee is Mr David Spence who is an independent Director. Details of other members of the Committee are provided in the Directors’ Report. Further information on Directors’ and executives’ remuneration, including principles used to determine remuneration, is set out in the Directors’ Report on pages 14 to 29. Full details of the location of the references in this statement which set out how Hills applies each Principle and Recommendation, and copies of the Charters and Policies referenced above, are contained under ’Corporate Governance’ on the Hills website. 36 HLS0339_ Annual Report_v16.indd 36 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Hills Holdings Limited ABN 35 007 573 417 Annual Report 30 June 2013 contents Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' declaration Independent auditor's report to the members 38 39 40 41 42 43 115 116 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 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 6 to 9, which is not part of these financial statements. The financial statements were authorised for issue by the Directors on 20 August 2013. The Directors have the power to amend and reissue the financial statements. Through the use of the internet, the Company has ensured that its corporate reporting is timely and complete. All press releases, financial reports and other information are available within Corporate Information on the Company website: www.hillsholdings.com.au For queries in relation to corporate reporting please call +61 8 8301 3200 or email info@hillsholdings.com.au 37 HLS0339_ Annual Report_v16.indd 37 18/09/13 2:46 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statements Consolidated income statement Revenue from continuing operations Other income Expenses excluding finance costs (Loss)/profit before net finance expense and income tax Finance income Finance expenses Net finance expense (Loss)/profit before income tax Income tax benefit/(expense) from continuing operations (Loss)/profit from continuing operations (Loss)/profit from discontinued operations (Loss)/profit for the year (Loss)/profit is attributable to: Owners of Hills Holdings Limited Non–controlling interests Earnings per share for (loss)/profit from continuing operations attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share Earnings per share for (loss)/profit attributable to the ordinary equity holders of the Company: Basic earnings per share (cents) Diluted earnings per share (cents) The above Consolidated income statement should be read in conjunction with the accompanying notes. Consolidated 2013 $’000 492,520 15,030 507,550 (544,507) (36,957) 857 (3,902) (3,045) (40,002) 11,073 (28,929) (62,458) (91,387) (94,125) 2,738 (91,387) 2012 $’000 473,942 2,220 476,162 (435,646) 40,516 609 (6,563) (5,954) 34,562 (8,511) 26,051 2,771 28,822 26,021 2,801 28,822 Cents Cents (12.9) (12.9) (38.2) (38.2) 9.4 9.4 10.5 10.5 Notes 3 4 5 5 6 7 22 22 22 22 38 HLS0339_ Annual Report_v16.indd 38 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Consolidated statement of comprehensive income (Loss)/profit for the year Other comprehensive income Items that may reclassified to profit or loss Changes in the fair value of cash flow hedges Exchange differences on translation of foreign operations Income tax relating to these items Other comprehensive income/(loss) for the year that may be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss (Loss) on revaluation of land and buildings Income tax relating to these items Other comprehensive (loss) for the year that will not be reclassified to profit or loss, net of tax Other comprehensive (loss)/income for the year, net of tax Total comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year is attributable to: Owners of Hills Holdings Limited Non–controlling interests Total comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year attributable to owners of Hills Holdings Limited arises from: Continuing operations Discontinued operations The above Consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. Notes Consolidated 2013 $’000 (91,387) 2012 $’000 28,822 20 20 6 20 6 2,162 978 (649) 2,491 (12,595) 4,231 (8,364) (5,873) (97,260) (99,998) 2,738 (97,260) (37,540) (62,458) (99,998) (2,295) 191 689 (1,415) (917) 103 (814) (2,229) 26,593 23,792 2,801 26,593 21,021 2,771 23,792 HLS0339_ Annual Report_v16.indd 39 39 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Consolidated statement of financial position ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Current tax receivables Assets classified as held for sale Total current assets Non–current assets Investments Property, plant and equipment Intangible assets Deferred tax assets Total non–current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Provisions Derivative financial instruments Liabilities directly associated with assets classified as held for sale Total current liabilities Non–current liabilities Borrowings Provisions Derivative financial instruments Total non–current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves (Accumulated losses)/retained earnings 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. 40 Consolidated 2013 $’000 2012 $’000 Notes 8 9 10 15 6 7 11 12 13 14 16 17 18 15 7 17 18 15 19 20 61,480 84,694 42,470 703 6 146,075 335,428 2 78,748 44,784 60,395 183,929 519,357 56,818 141 34,611 631 75,854 168,055 65,321 12,514 2,449 80,284 248,339 271,018 303,890 32,589 (66,359) 270,120 898 271,018 24,638 177,482 165,287 – 5,692 – 373,099 2 188,027 65,444 21,905 275,378 648,477 87,725 1,333 33,239 606 – 122,903 115,677 4,828 4,106 124,611 247,514 400,963 303,805 43,203 35,896 382,904 18,059 400,963 HLS0339_ Annual Report_v16.indd 40 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Consolidated statement of changes in equity Consolidated entity Balance at 1 July 2011 Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs and tax Buyback of shares, net of tax Transactions with non–controlling interests 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 Balance at 1 July 2012 Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs and tax Dividends paid to non–controlling interests in subsidiaries Dividends provided for or paid Employee share options – value of employee services Transfer from reserves Disposal of subsidiary Balance at 30 June 2013 Contributed equity $’000 Notes Attributable to owners of Hills Holding Limited Retained earnings/ (accumulated losses) $’000 Non– controlling interests $’000 Total $’000 Total equity $’000 21,504 385,539 16,768 402,307 26,021 23,792 2,801 26,593 Reserves $’000 57,245 (2,229) – – (48) – – 89 – – – 128 (3,113) (48) – – 118 128 (3,113) 70 (23,483) (23,483) – (23,483) – – – 89 – (1,698) (1,698) 70 – 159 – (11,854) 11,854 306,790 – 128 (3,113) – – – – – (2,985) (11,813) (11,629) (26,427) (1,510) (27,937) 303,805 303,805 – 85 – – – – – 85 303,890 43,203 43,203 (5,873) – – – 46 (4,168) (619) (4,741) 32,589 35,896 382,904 18,059 400,963 35,896 382,904 18,059 400,963 (94,125) (99,998) 2,738 (97,260) – – 85 – – 85 (1,342) (1,342) (12,298) (12,298) – 4,168 46 – – 33 – (12,298) 79 – – (619) (18,590) (19,209) (8,130) (12,786) (19,899) (32,685) (66,359) 270,120 898 271,018 19 19 21 20 20 19 21 20 20 The above Consolidated statement of changes in equity should be read in conjunction with the accompanying notes. HLS0339_ Annual Report_v16.indd 41 41 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Consolidated statement of cash flows 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) Interest received Interest paid Income taxes refunded/(paid) Net cash inflow from operating activities Cash flows from investing activities Payments for acquisition of business operations, net of cash acquired Payments for property, plant and equipment Payments for software development and other intangible assets Proceeds from sale of assets classified as held for sale Rent received Proceeds from sale of patents and trademarks Proceeds from sale of businesses, net of cash disposed Proceeds from sale of property, plant and equipment Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds from borrowings Payments for shares bought back Repayment of borrowings Dividends paid to Company’s shareholders Dividends paid to non–controlling interests in subsidiaries Loans (paid to)/received from other entities Net cash (outflow) from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year The above Consolidated statement of cash flows should be read in conjunction with the accompanying notes. Consolidated 2013 $’000 2012 $’000 Notes 1,128,303 1,196,701 (1,048,699) (1,132,491) 79,604 808 (3,902) 4,870 81,380 (5,160) (10,828) (12,007) – 790 145 38,383 9,064 20,387 – – (50,218) (12,298) (1,342) – (63,858) 37,909 23,305 266 61,480 64,210 520 (6,426) (5,635) 52,669 (2,011) (12,881) (16,066) 2,702 787 – – 1,830 (25,639) 25,000 (3,113) – (23,483) (1,698) (1,066) (4,360) 22,670 646 (11) 23,305 33 29 12 21 8 42 HLS0339_ Annual Report_v16.indd 42 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 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), 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 2012 affected any of the amounts recognised in the current period or any prior period and are not likely to affect future periods. However, amendments made to AASB 101 Presentation of Financial Statements effective 1 July 2012 now require the statement of comprehensive income to show the items of comprehensive income grouped into those that are not permitted to be reclassified to profit or loss in a future period and those that may have to be reclassified if certain conditions are met. (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 (derivatives) 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), 12 and 28. (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 7 – assets and disposal groups held for sale and discontinued operations • notes 12 and 13 – valuation of land and buildings and measurement of the useful lives of property, plant and equipment and intangible assets • note 13 – measurement of the recoverable amounts of cash generating units containing goodwill • note 15 – derivative financial instruments • notes 18 and 26 – provisions and contingencies • note 23 – measurement of share based payments • note 29 – business combinations (b) Parent entity financial information The financial information for the parent entity, Hills Holdings Limited, disclosed in note 31 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 2013 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 HLS0339_ Annual Report_v16.indd 43 43 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements income, Consolidated statement of changes in equity and Consolidated statement of financial position respectively. assessing the performance of the operating segments, has been identified as the Group Managing Director. (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 remeasured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes 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 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. (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). 44 HLS0339_ Annual Report_v16.indd 44 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 1 Summary of significant accounting policies continued (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 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. 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. (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 27). 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 interest in the acquiree either at fair value or at the non–controlling interest’s proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred 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 remeasured to fair value with changes in fair value recognised in profit or loss. HLS0339_ Annual Report_v16.indd 45 45 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements (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. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price 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. (j) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value–in–use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash–generating units). Non–financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. (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. (l) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due for settlement within 30 to 90 days. They are presented as current assets unless collection is not expected for more than 12 months after the reporting date. 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. 46 HLS0339_ Annual Report_v16.indd 46 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 1 Summary of significant accounting policies continued (n) Investments and other financial assets Classification The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the investments were acquired. 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 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 Loans and receivables are measured at amortised cost using the effective interest method. Details on how the fair value of financial instruments is determined are disclosed in note 28. 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 measured at amortised cost, the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred. The cash flows are discounted at the financial asset’s original effective interest rate. The loss is recognised in profit or loss. (o) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 15. Movements in the hedging reserve in shareholder’s equity are shown in note 20. 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. Trading derivatives are classified as a current asset or liability. 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. (i) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and within the hedging reserve in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in profit or loss within ‘finance income’ or ‘finance costs’. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in profit or loss within ‘sales’. However, when the forecast transaction that is hedged results in the recognition of a non–financial asset (for example, inventory or plant and equipment) the gains and losses previously deferred in equity are reclassified from equity and included in the initial measurement of the cost of the asset. HLS0339_ Annual Report_v16.indd 47 47 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 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 plant and equipment. 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 48 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 (current and comparative periods): Buildings Plant and equipment Leasehold improvements 0.75% 5.0% to 40.0% 20.0% to 66.67% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. 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 the 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 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. 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, identified according to operating segments (note 2). HLS0339_ Annual Report_v16.indd 48 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 1 Summary of significant accounting policies continued (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 licences 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. Amortisation is calculated on a straight–line basis over periods generally ranging from 3 to 10 years. 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. (v) Fair value 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 and discontinued operations 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. A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co–ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the Consolidated income statement. (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 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. HLS0339_ Annual Report_v16.indd 49 49 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 The valuation method takes into account the exercise price of the performance right, the life of the performance right, 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. Non–market vesting conditions are included in assumptions about the number of rights 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 that are expected to vest based on the non–market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. No change is made for changes in market conditions. Employee Share Bonus Plan The Employee Share Bonus Plan allows Group employees to acquire shares of the Company. Up to $1,000 per year in shares is allotted to employees who have served a qualifying period. The fair value of shares issued is recognised as an employee expense with a corresponding increase in equity. The fair value of the shares granted is measured using a present value method based upon independent advice. (v) Profit–sharing and bonus plans A liability is recognised for the amount expected to be paid under short–term cash bonus or profit–sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably, or where there is past practice that has created a constructive obligation. (u) Provisions Provisions for legal claims, service warranties and make good obligations 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. Warranty provisions are recognised when the underlying products or services are sold. Restructuring provisions are recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or been announced publicly. 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 the 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) Short–term obligations 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) Other long–term employee benefit obligations The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in 50 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 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 and the Employee Share Plan. Information relating to these schemes is set out in note 23. 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 granted under the Long Term Incentive Share 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 granted, measured at the grant date, which includes any market performance conditions and the impact of any non–vesting conditions but includes the probability of meeting any service and non–market performance vesting conditions. HLS0339_ Annual Report_v16.indd 50 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statements (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 Company reacquires its own equity instruments, for example as the result of a share buyback, 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) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares, by • the weighted average number of ordinary shares outstanding during the financial year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and • the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (z) 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. (aa) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. (ab) 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. (ac) 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. (ad) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2013 reporting periods and have not yet been applied in the financial statements. 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, AASB 2010–7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) and AASB 2012–6 Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transition Disclosures (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. HLS0339_ Annual Report_v16.indd 51 51 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statementsi Summary of significant accounting policiescontinued Notes to the consolidated financial statements 1 Summary of significant accounting policies 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 new standard will not have any 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 will adopt the new standards from their operative date. They will therefore be applied in the financial statements for the annual reporting period ending 30 June 2014. (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements, AASB 128 Investments in Associates and Joint Ventures, AASB 2011–7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards and AASB 2012–10 Amendments to Australian Accounting Standards – Transition Guidance and Other Amendments (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 power, rights and 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. The new standard will not have any impact on the composition of the Group. (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) 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. 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. 52 HLS0339_ Annual Report_v16.indd 52 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 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, The Middle East, South Africa and North America. Notes to the consolidated financial statements 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 (until sale of the Bailey Ladders business on 28 June 2013), ironing boards, laundry trolleys, security doors, garden sprayers, rehabilitation and mobility products (until sale of Hills Healthcare Equipment business on 31 January 2013), water tanks (until sale of the water tanks business on 31 March 2013) and other rotationally moulded products, solar hot water products (closed during the financial year), 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 Comprised the business of Korvest Ltd (until sale of the Group’s interest in Korvest Ltd on 19 February 2013) and included 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 was managed separately by a divisional CEO (until 28 February 2013) and is now managed by the Director of Hills Technologies and the Director of Hills Communications, and the Lifestyle & Sustainability division is managed by the Executive Director HHP. 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 comprised 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 did not meet the aggregation criteria, and as a consequence is reported separately. HLS0339_ Annual Report_v16.indd 53 53 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements (b) Segment information 2013 Total segment revenue Inter–segment revenue Total segment revenue Segment EBIT Depreciation and amortisation Total segment assets Total assets includes: Electronics & Communications $’000 Lifestyle & Sustainability $’000 Building & Industrial $’000 376,081 116,722 – 376,081 27,723 3,615 164,087 – 116,722 1,345 2,839 48,171 489,409 (982) 488,427 1,800 6,275 128,838 Additions to non–current assets (other than financial assets and deferred tax) 2,453 2,626 2,123 Total segment liabilities 70,041 23,953 57,042 2012 Total segment revenue Inter–segment revenue Revenue from external customers Segment EBIT Depreciation and amortisation Total segment assets Total assets includes: Additions to non–current assets (other than financial assets and deferred tax) Electronics & Communications $’000 Lifestyle & Sustainability $’000 Building & Industrial $’000 337,111 138,115 – 337,111 29,401 3,727 148,777 – 138,115 10,473 3,871 106,107 536,007 (1,969) 534,038 (2,791) 10,095 255,170 5,418 2,549 8,263 Total segment liabilities 44,595 16,263 46,860 Korvest Ltd $’000 36,508 (91) 36,417 2,748 929 – 704 – Korvest Ltd $’000 72,323 (102) 72,221 7,925 1,542 40,813 1,801 7,062 Total $’000 1,018,720 (1,073) 1,017,647 33,616 13,658 341,096 7,906 151,036 Total $’000 1,083,556 (2,071) 1,081,485 45,008 19,235 550,867 18,031 114,780 54 HLS0339_ Annual Report_v16.indd 54 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 2 Segment information continued (c) Other segment information (i) Segment revenue Sales between segments are priced on a “cost plus” basis and are eliminated on consolidation. The revenue from external parties reported to the Group Managing Director is measured in a manner consistent with that in the Consolidated income statement. Segment revenue reconciles to total revenue from continuing operations as follows: Total segment revenue Intersegment eliminations Other revenue Less discontinued operations revenue Total revenue from continuing operations (note 3) Consolidated 2013 $’000 2012 $’000 1,018,720 1,083,556 (1,073) (2,071) 790 787 (525,917) (608,330) 492,520 473,942 The Group is domiciled in Australia. The amount of its revenue (including revenue from discontinued operations) from external customers in Australia is $975.467 million (2012: $1,039.758 million), and the total of revenue from external customers in other countries is $42.180 million (2012: $41.727 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. (ii) 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 (loss)/profit before income tax as follows: Segment EBIT Interest revenue Finance costs Fair value profit on interest rate swaps and forward exchange contracts Other Restructure and impairment costs Gains on sale of businesses Consolidated 2013 $’000 2012 $’000 33,616 45,008 703 319 (3,902) (6,426) 154 (218) (168,040) 13,462 153 (104) – – Less discontinued operations profit before tax and restructuring costs (13,559) (4,388) Add back restructuring and impairment costs relating to discontinued operations 97,782 – (Loss)/profit before income tax from continuing operations (40,002) 34,562 HLS0339_ Annual Report_v16.indd 55 55 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 2 Segment information (iii) Segment assets The amounts provided to the Group Managing Director with respect to total assets are measured in a manner consistent with that of the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. Reportable segments’ assets are reconciled to total assets as follows: Segment assets Cash Current tax receivables Deferred tax assets Investments Derivative financial instruments Corporate assets Consolidated 2013 $’000 2012 $’000 341,096 550,867 61,480 24,638 6 5,692 60,395 21,905 2 703 2 – 55,675 45,373 Total assets as per the Consolidated statement of financial position 519,357 648,477 The total of non–current assets other than financial instruments and deferred tax assets located in Australia is $126.679 million (2012: $246.620 million), and the total of these non– current assets located in other countries is $0.462 million (2012: $6.851 million). Segment assets are allocated to countries based on where the assets are located. Additions to non–current assets (other than financial assets and deferred tax) for the Group totalled $22.835 million (2012: $28.947 million). This comprised $7.906 million (2012: $18.031 million) allocated to segments and $14.929 million (2012: $10.916 million) not allocated to segments and corporate additions. Depreciation and amortisation expense for the Group totalled $15.577 million (2012: $21.100 million). This comprised $13.658 million (2012: $19.235 million) allocated to segments and $1.919 million (2012: $1.865 million) related to corporate assets. (iv) 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. Reportable segments’ liabilities are reconciled to total liabilities as follows: Segment liabilities Unallocated: Tax liabilities (including GST payable) Borrowings Derivative financial instruments Corporate liabilities Consolidated 2013 $’000 2012 $’000 151,036 114,780 5,129 5,116 65,462 117,010 3,080 23,632 4,712 5,896 Total liabilities as per the Consolidated statement of financial position 248,339 247,514 56 HLS0339_ Annual Report_v16.indd 56 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 3 Revenue 4 Other income 3 Revenue Revenue from continuing operations Sales revenue Sale of goods Services Other revenue Rents and sub–lease rentals From discontinued operations (note 7) Revenue – sales 4 Other income Net gain on disposal of property, plant and equipment Net gain on disposal of businesses Other income Consolidated 2013 $’000 2012 $’000 422,046 405,791 69,684 67,364 491,730 473,155 790 787 492,520 473,942 525,917 608,330 Consolidated 2013 $’000 127 13,462 1,441 15,030 2012 $’000 238 – 1,982 2,220 HLS0339_ Annual Report_v16.indd 57 57 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 5 Expenses Cost of goods sold Cost of services provided Other expenses from ordinary activities: Distribution expenses Sales and marketing expenses Administration expenses Other expenses Transfer to discontinued operations (Loss)/profit before income tax includes the following specific expenses: Depreciation Buildings Plant and equipment Total depreciation Amortisation Patents and trademarks Software Development costs Total amortisation Total depreciation and amortisation Employee benefits expenses Wages and salaries Defined contribution superannuation expense Other employee benefit expenses Equity settled share based payment transactions Total employee benefits expenses Consolidated 2013 $’000 2012 $’000 655,931 689,764 57,594 60,591 81,906 90,372 119,829 136,713 71,549 62,744 168,040 – (610,342) (604,538) 544,507 435,646 1,471 1,911 12,791 18,008 14,262 19,919 978 34 303 1,141 – 40 1,315 1,181 15,577 21,100 166,250 186,459 14,682 16,266 15,694 16,742 167 264 196,793 219,731 58 HLS0339_ Annual Report_v16.indd 58 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 5 Expenses continued Finance costs Interest and finance charges paid/payable for financial liabilities not at fair value through profit or loss 3,902 6,426 Consolidated 2013 $’000 2012 $’000 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 Research and development Impairment of financial and other assets Plant and equipment Inventories Receivables Intangible assets Total impairment losses – other assets Significant items (Loss)/profit after tax for year includes the following items that are significant because of their nature or size: (a) Fielders impairment, restructuring and closure costs Less: Applicable income tax benefit (b) Orrcon impairment, restructuring and closure costs Less: Applicable income tax benefit (c) Team Poly impairment, restructuring and closure costs Less: Applicable income tax benefit (d) Healthcare impairment Less: Applicable income tax benefit – 3,902 (703) (154) (857) 137 6,563 (319) (290) (609) 3,045 5,954 26,369 27,240 230 123 53,806 31,886 4,546 33,306 123,544 – (2,030) 2,069 – 39 49,492 (10,842) 38,650 57,034 (15,163) 41,871 9,313 (2,794) 6,519 7,671 (222) 7,449 – – – – – – – – – – – – HLS0339_ Annual Report_v16.indd 59 59 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements Consolidated 2013 $’000 2012 $’000 Significant items continued (e) Antenna impairment, restructuring and closure costs Less: Applicable income tax benefit (f) Home and Hardware impairment, restructuring and closure costs Less: Applicable income tax benefit (g) Hills Solar impairment, restructuring and closure costs Less: Applicable income tax benefit (h) Group impairment, restructuring and closure costs, net of gains on sale of businesses Less: Applicable income tax benefit Total cash generating unit impairment, restructure and closure costs and other associated impairments net of gains on disposal of businesses Less: Applicable income tax benefit 6,298 (1,889) 4,409 3,853 (1,156) 2,697 3,252 (976) 2,276 17,665 (8,210) 9,455 154,578 (41,252) 113,326 – – – – – – – – – – – – – – – Significant items discussion The significant items at 30 June 2013, disclosed within Other expenses, and within note 7 for discontinued operations, are set out in the table to the left and detailed below. During the financial year the Group undertook a comprehensive review of all operations, including a review of the carrying value of assets and goodwill. Through the second half of the financial year the Group also commenced various transformation initiatives and sold the Korvest, Healthcare and Bailey businesses. This resulted in total impairment, restructuring and closure costs (net of gains on sale of businesses) of $154.578 million as detailed in the table to the left. The after tax impact is $113.326 million. The details of the restructuring were announced on 1 November 2012 with further updates provided following the release of the 31 December 2012 half–year results and at subsequent points during the financial year via releases on the ASX. Where impairments of assets were determined on a fair value less costs to sell basis, fair values were determined using the best market information available. Total impairment, restructuring and closure costs (net of gains on sale of businesses) of $154.578 million, comprised goodwill impairment $16.719 million, plant and equipment and other intangibles impairment $71.647 million, inventory $31.658 million, other assets $3.510 million, redundancies $12.201 million, onerous lease and make good $19.880 million, warranty $3.501 million and other costs of $8.924 million. Gains on sale of businesses were $13.462 million. 60 HLS0339_ Annual Report_v16.indd 60 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 5 Expenses continued Fielders Fielders impairment, restructuring and closure costs relate to the closure, consolidation or downsizing of underperforming operations and other general restructuring and redundancy costs. This resulted in total impairment of assets (plant and equipment $1.806 million, inventories $2.843 million and other assets $0.933 million) of $5.582 million, recognition of onerous lease provisions of $5.830 million, redundancy costs of $3.074 million and other general restructuring costs of $3.555 million. The impairment of specific plant and equipment was determined on a fair value less costs to sell basis. At 30 June 2013, Fielders is a disposal group and has been classified as a discontinued operation with its assets classified as held for sale – refer note 7. Accordingly, Fielders assets have been classified on the basis of fair value less costs to sell. The recoverable amount of the cash– generating unit was estimated based on its fair value less costs to sell. Based on this, goodwill of $7.789 million was impaired. The remaining assets were impaired by a further $23.662 million. Fielders forms part of the Building & Industrial segment. Orrcon Orrcon impairment, restructuring and closure costs relate to the exit of certain assets, closure of underperforming branches and other general restructuring and redundancy costs. This resulted in total impairment of assets (plant and equipment $9.009 million and inventories and spare parts $1.747 million) of $10.756 million, recognition of onerous lease provisions of $6.630 million, redundancy costs of $0.670 million and other general restructuring costs of $0.450 million. The impairment of specific plant and equipment was determined on a fair value less costs to sell basis. At 30 June 2013, Orrcon is a disposal group and has been classified as a discontinued operation with its assets classified as held for sale – refer note 7. Accordingly, Orrcon assets have been classified on the basis of fair value less costs to sell. This resulted in an impairment of assets of $38.528 million. Orrcon forms part of the Building & Industrial segment. Hills Polymers (formerly Team Poly) Team Poly impairment, restructuring and closure costs relate to the sale of its tank business. This resulted in total impairment of assets (plant and equipment $3.468 million, inventories $2.755 million and other assets $0.278 million) on a fair value less costs to sell basis of $6.501 million, recognition of onerous lease provisions of $0.768 million, redundancy costs of $0.182 million and other general restructuring costs of $1.862 million. Hills Polymers forms part of the Lifestyle & Sustainability segment. Healthcare The Healthcare business was sold effective 31 January 2013. The recoverable amount of the assets of the CGU were assessed on a fair value less costs to sell basis, resulting in specific asset impairments and restructure costs of $0.741 million and general impairment of assets of $6.930 million. In accordance with Accounting Standards the general impairment was allocated against goodwill. Healthcare formed part of the Lifestyle and Sustainability segment. Antenna Antenna restructuring and closure costs related to the restructuring and closure of underperforming operations. This resulted in total impairment of assets (plant and equipment $1.605 million, inventories $0.155 million and other assets $0.055 million) of $1.815 million, recognition of onerous lease provisions of $0.574 million, redundancy costs of $2.230 million and other general restructuring and closure costs of $1.679 million. Antenna forms part of the Electronics & Communications segment. Home & Hardware Home & Hardware impairment, restructuring and closure costs related to the closure of underperforming operations, consolidation of certain operations and specific asset impairments. This resulted in total impairment of assets (plant and equipment $0.371 million, inventories $1.271 million and other assets $0.451 million) of $2.093 million, recognition of onerous lease provisions of $0.941 million, redundancy costs of $0.795 million and other general restructuring costs of $0.024 million. Home & Hardware forms part of the Lifestyle & Sustainability segment. Hills Solar Hills Solar impairment, restructuring and closure costs related to the closure of this business. This resulted in total impairment of assets (plant and equipment $0.059 million, inventories $1.201 million and other assets $0.231 million) on a fair value less costs to sell basis of $1.491 million, recognition of redundancy costs of $0.175 million and other general restructuring costs of $1.586 million. The impairment of specific plant and equipment was determined on the basis of an exit from this business. Hills Solar forms part of the Lifestyle & Sustainability segment. Group impairment and restructuring costs Group impairment and restructuring costs totalled $31.128 million and related to transformation initiatives, corporate restructuring and specific asset impairments. This was offset by gains on sale of businesses of $13.462 million. Costs arising from transformation initiatives and corporate restructuring totalled $20.053 million and comprised impairment of assets (plant and equipment $1.646 million and inventories $4.667 million) of $6.313 million, onerous lease provisions of $5.125 million, redundancy costs of $4.988 million and other restructuring costs of $3.627 million. HLS0339_ Annual Report_v16.indd 61 61 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 5 Expenses 6 Income tax expense 5 Expenses continued Additionally, specific asset impairments totalled $11.075 million and related to: • impairment of software development costs of $6.588 million. Following the Group–wide review and restructuring, it was identified that certain software costs capitalised within intangible assets would have no future benefit to the Group and in accordance with Accounting Standards these costs were impaired. • impairment of plant and equipment of $0.727 million arising from sale and leaseback of assets. • revaluation decrement on land and buildings of $0.578 million. At 31 December 2012, the Group’s land and buildings were revalued to fair value (refer note 12). The revaluation decrement on one property exceeded the previous revaluation surplus carried in the asset revaluation reserve. In accordance with Accounting Standards, the excess of the decrement over the previous revaluation reserve surplus was charged to profit or loss. 6 Income tax expense (a) Income tax (benefit)/expense Current tax Deferred tax Adjustments for current and deferred tax of prior periods Income tax (benefit)/expense is attributable to: (Loss)/profit from continuing operations (Loss)/profit from discontinued operations Aggregate income tax (benefit)/expense Consolidated 2013 $’000 1,135 (33,872) (101) (32,838) 2012 $’000 1,946 10,433 (2,252) 10,127 (11,073) (21,765) 8,511 1,616 (32,838) 10,127 (b) Numerical reconciliation of income tax (benefit)/expense to prima facie tax payable (Loss)/profit from continuing operations before income tax (benefit)/expense (40,002) 38,949 (Loss)/profit from discontinuing operations before income tax (benefit)/expense Tax at the Australian tax rate of 30.0% (2012: 30.0%) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Goodwill impairment Non–deductible expenses (84,223) (124,225) (37,267) – 38,949 11,685 5,016 767 (261) (1,185) 528 3,616 – 646 (30) – – – (28,786) 12,301 (45) (101) (3,906) – (53) (2,252) – 131 (32,838) 10,127 • decrement on land and buildings Research and development allowances subsequently reclassified as held for sale of $1.182 million. The decrement on one property reclassified as held for sale exceeded the previous revaluation surplus carried in the asset revaluation reserve. In accordance with Accounting Standards, the excess of the decrement over the previous revaluation reserve surplus was charged to profit or loss. Gains on sale of businesses Impairment of land and buildings Derecognition of deferred tax assets on provisions associated with assets held for sale Difference in overseas tax rates Adjustments for current tax of prior periods Previously unrecognised capital losses • impairment of goodwill in relation to Tax losses not recognised business reclassified as held for sale of $2.000 million – refer to further discussion in note 13. Total income tax (benefit)/expense 62 HLS0339_ Annual Report_v16.indd 62 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 6 Income tax expense continued Consolidated 2013 $’000 2012 $’000 (c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity: Net deferred tax – debited/(credited) directly to equity – (61) (d) Tax (benefit)/expense relating to items of other comprehensive income Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss but directly debited or credited to other comprehensive income: (Losses)/gains on revaluation of land and buildings Gains/(losses) on cash flow hedges (e) Tax losses Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 30.0% (4,231) 649 (3,582) (103) (689) (792) 24,138 7,241 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. (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). Revenue tax losses for which no deferred tax asset has been recognised total $0.943 million (2012: $4.929 million). The potential deferred tax asset not recognised totals $0.283 million (2012: $1.479 million). Revenue tax losses for which a deferred tax asset has been recognised total $4.705 million (2012: $2.868 million). (f) Current tax assets and liabilities The current tax asset for the Group of $0.006 million (2012: $5.692 million) represents the amount of income taxes receivable in respect of current and prior financial periods. 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. HLS0339_ Annual Report_v16.indd 63 63 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 7 Assets and liabilities classified as held for sale and discontinued operations The significant operations of Fielders Australia Pty Ltd (Fielders) and Orrcon Operations Pty Ltd (Orrcon) are presented as disposal groups held for sale and as discontinued operations, and the operations of LW Gemmell and UHS are presented as disposal groups held for sale, following the decision of the Directors, in the second half of the financial year ended 30 June 2013, to sell these businesses. Efforts to sell the disposal groups have commenced and sales are expected to be completed within the next twelve months. Refer also to note 35 for details of the sale of Orrcon and Fielders subsequent to 30 June 2013. The assets of Fielders and Orrcon are presented within the total assets of the Building and Industrial segment in note 2. The assets of LW Gemmell are presented within the total assets of the Lifestyle and Sustainability segment in note 2. The assets of UHS are presented within the total assets of the Electronics and Communications segment in note 2. Certain land and buildings have been classified as held for sale at 30 June 2013. These assets are being actively marketed for sale and the sales are expected to be completed within the next twelve months. (a) Assets classified as held for sale Disposal group held for sale (discontinued operation – see (c) below) Trade and other receivables Inventories Property, plant and equipment Goodwill Total assets of disposal group held for sale Non–current assets held for sale Land and buildings Total assets classified as held for sale (b) Liabilities directly associated with assets classified as held for sale Disposal group held for sale (discontinued operation – see (c) below) Trade and other payables Provisions Consolidated 2013 $’000 2012 $’000 70,827 56,771 234 6,875 134,707 11,368 146,075 – – – – – – – Consolidated 2013 $’000 2012 $’000 49,911 25,943 75,854 – – – (ii) Financial performance and cash flow information Korvest, Fielders and Orrcon were not discontinued operations as at 30 June 2012 and the comparative consolidated income statement and consolidated statement of comprehensive income has been re–presented to show the discontinued operations separately from continuing operations. The financial performance and cash flow information presented are for the period to 19 February 2013 (Korvest) and year ended 30 June 2013 (Fielders and Orrcon) (2013 column) and the year ended 30 June 2012. (c) Discontinued operations (i) Description Korvest Ltd On 19 February 2013, the Group announced that it had sold its shares in Korvest Ltd. Korvest Ltd is reported in these financial statements as a discontinued operation. Financial information relating to the discontinued operation for the previous financial year and the period to the date of disposal is set out below. Fielders and Orrcon As set out in (a) above, the Group has announced its intention to sell the operations of Fielders and Orrcon. Accordingly they are reported in these financial statements as discontinued operations. Financial information relating to the discontinued operations for the previous financial year and the current financial year is set out below. 64 HLS0339_ Annual Report_v16.indd 64 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 7 Assets and liabilities classified as held for sale and discontinued operations continued Revenue (note 3) Expenses Other income Finance income (Loss)/profit before income tax Income tax (benefit)/expense (Loss)/profit after income tax of discontinued operation Net cash inflow from operating activities Net cash inflow/(outflow) from investing activities Net cash (outflow) from financing activities Consolidated 2013 $’000 2012 $’000 525,917 608,330 (610,342) (604,538) 96 106 395 201 (84,223) 4,388 21,765 (1,617) (62,458) 2,771 31,547 (1,839) 13,892 (6,032) (9,604) (10,298) Net increase in cash generated by the discontinued operations 20,104 (2,438) An after tax impairment loss of $21.273 million on the remeasurement of the disposal groups to the lower of their carrying amounts and fair value less costs to sell has been included in Loss from discontinued operations in the consolidated income statement (see note 5). There are no cumulative income or expenses included in other comprehensive income relating to the disposal groups. (iii) Details of the sale of Korvest Ltd Effect of the disposal on the financial position of the Group: Consideration received or receivable: Cash Carrying amount of net assets sold Gain on sale before income tax Income tax expense Gain on sale after income tax Consolidated 2013 $’000 2012 $’000 26,166 (16,655) 9,511 – 9,511 – – – – – HLS0339_ Annual Report_v16.indd 65 65 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 7 Assets and liabilities classified as held for sale and discontinued operations There was no income tax expense in relation to the disposal of Korvest as a result of the Group utilising carry forward capital losses that had not been recognised. The carrying amounts of assets and liabilities as at the date of sale (19 February 2013) were: Cash and cash equivalents Trade and other receivables Inventories Property, plant and equipment Tax assets Total assets Trade and other payables Provisions Tax liabilities Total liabilities Net assets 19 February 2013 $’000 6,120 11,137 8,742 17,082 1,167 44,248 (3,674) (2,291) (2,392) (8,357) 35,891 The Group’s share of the net assets of Korvest Ltd was $16.655 million. (d) Disposal of businesses During the financial year the Group sold the Healthcare and Bailey businesses. These businesses have not been reclassified as discontinued operations as they were not significant separate major lines of business. Details of the sales are set out below. (i) Healthcare On 31 January 2013 the Company sold its Hills Healthcare Equipment division for net consideration of $9.815 million. The carrying amount of the net assets was $9.728 million and the gain on sale was $0.087 million. (ii) Bailey On 28 June 2013 the Company sold its Bailey Ladders division for net consideration of $8.522 million. The carrying amount of the net assets was $4.658 million and the gain on sale was $3.864 million. 66 HLS0339_ Annual Report_v16.indd 66 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 8 Current assets – Cash and cash equivalents Cash at bank and in hand Deposits at call Consolidated 2013 $’000 45,407 16,073 61,480 2012 $’000 12,983 11,655 24,638 (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 Balances per Consolidated statement of cash flows Consolidated 2013 $’000 61,480 – 61,480 2012 $’000 24,638 (1,333) 23,305 (b) Risk exposure The Group’s exposure to interest rate risk is discussed in note 28. 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 its fair value. HLS0339_ Annual Report_v16.indd 67 67 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 (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 28. (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 28 for more information on the risk management policy of the Group and the credit quality of the Group’s trade receivables. Notes to the consolidated financial statements 9 Current assets – Trade and other receivables Trade receivables Provision for impairment of receivables (a) Other receivables Prepayments Consolidated 2013 $’000 2012 $’000 82,951 176,309 (3,332) (6,770) 79,619 169,539 3,409 1,666 5,667 2,276 84,694 177,482 (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 Decrease on business disposal Transferred to held for sale At 30 June Consolidated 2013 $’000 48,234 20,498 9,697 4,522 2012 $’000 87,839 59,346 16,737 12,387 82,951 176,309 Consolidated 2013 $’000 6,770 4,546 (2,507) (1,182) (4,295) 3,332 2012 $’000 9,180 2,069 (4,479) – – 6,770 Based on low 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 $3.332 million (2012: $6.770 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. 68 HLS0339_ Annual Report_v16.indd 68 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 10 Current assets – Inventories 11 Non–current assets – Investments 10 Current assets – Inventories Raw materials and stores Work in progress Finished goods Consolidated 2013 $’000 3,280 1,591 2012 $’000 39,241 6,064 37,599 119,982 42,470 165,287 (a) Inventory expense Write–downs of inventories to net present value recognised as an expense during the year ended 30 June 2013 amounted to $31.886 million (2012: $3.758 million). The expense has been included in cost of sales ($0.228 million) and other expenses or expenses of discontinued operations ($31.658 million). In 2012 the expense was included in cost of sales. 11 Non–current assets – Investments Equity securities Consolidated 2013 $’000 2 2012 $’000 2 HLS0339_ Annual Report_v16.indd 69 69 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 12 Non–current assets – Property, plant and equipment Consolidated entity At 1 July 2011 Cost or fair value Accumulated depreciation Net book amount 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 Net book amount Consolidated entity Year ended 30 June 2013 Opening net book amount Exchange differences Revaluation to fair value Acquisition through business combinations Additions Disposals Assets included in a disposal group classified as held for sale and other disposals Depreciation charge Impairment loss Closing net book amount At 30 June 2013 Cost Land $’000 Buildings $’000 Plant and equipment $’000 Total $’000 54,426 57,838 230,248 342,512 – (5,382) (140,090) (145,472) 54,426 52,456 90,158 197,040 54,426 52,456 90,158 197,040 60 (548) – – – – 39 (369) – 2,138 (464) 9 – 104 108 (917) 104 10,743 12,881 (806) (1,270) (1,911) (18,008) (19,919) 53,938 51,889 82,200 188,027 53,938 58,741 234,205 346,884 – (6,852) (152,005) (158,857) 53,938 51,889 82,200 188,027 Land $’000 Buildings $’000 Plant and equipment $’000 Total $’000 53,938 51,889 82,200 188,027 98 45 (3,530) (9,065) – – – 38 – 4 181 (12,595) 4 3,962 6,866 10,828 (3,694) (1,791) (3,437) (8,922) (7,847) (9,071) (13,789) (30,707) – (1,471) (12,791) (14,262) (1,760) (2,951) (49,095) (53,806) 37,205 31,547 9,996 78,748 37,783 34,974 77,045 149,802 Accumulated depreciation and impairment (578) (3,427) (67,049) (71,054) Net book amount 37,205 31,547 9,996 78,748 70 HLS0339_ Annual Report_v16.indd 70 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 12 Non–current assets – Property, plant and equipment continued (a) Assets in the course of construction The carrying amounts of the assets disclosed above include the following expenditure recognised in relation to property, plant and equipment which is in the course of construction: Property, furniture, fittings, plant and equipment Consolidated 2013 $’000 113 2012 $’000 6,878 (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. During the current financial year, valuations were undertaken for land and buildings based on independent assessments by a member of the Australian Property Institute as at 31 December 2012. The revaluation decrement recorded at that time of $7,959,000 was credited to the asset revaluation reserve in shareholders’ equity. The revaluation decrement of $578,000 on one property exceeded the previous revaluation surplus carried in the asset revaluation reserve and was charged to profit or loss. At 30 June 2013, the Directors considered the fair value of land and buildings in accordance with the December 2012 valuation and subsequent market assessments and the asset class was revalued. This resulted in a further revaluation decrement of $3.918 million, which was credited to the asset revaluation reserve in shareholders’ equity. The revaluation decrement exceeded the revaluation surplus by $1.182 million and this amount was charged to profit or loss. As a result of the Group’s restructuring, a property was transferred to held for sale. (c) Impairment losses Property, plant and equipment impairment losses recorded in the year ended 30 June 2013 are discussed in note 5. HLS0339_ Annual Report_v16.indd 71 71 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 13 Non–current assets – Intangible assets At 1 July 2011 Cost Accumulation amortisation and impairment Net book amount Year ended 30 June 2012 Opening net book amount Additions Acquisition of business Amortisation charge Derecognised on disposal Closing net book amount At 30 June 2013 Cost Accumulation amortisation and impairment Net book amount Year ended 30 June 2013 Opening net book amount Additions Acquisition of business Amortisation charge Impairment charge Derecognised on disposal Derecognised on transfer to assets held for sale Closing net book amount At 30 June 2013 Cost Accumulated amortisation Net book amount Patents, trademarks and other rights $’000 Software* $’000 Development costs $’000 Goodwill $’000 122,461 (77,225) 45,236 45,236 – 1,316 – – 46,552 121,858 (75,306) 46,552 6,250 (2,393) 3,857 3,857 4 57 (1,141) (27) 2,750 6,267 (3,517) 2,750 46,552 2,750 – 14,342 – (16,719) (4,909) (6,617) 32,649 107,336 (74,687) 32,649 2 – (978) – (721) (14) 1,039 3,355 (2,316) 1,039 Total $’000 128,911 (79,698) 49,213 49,213 16,066 1,373 (1,181) (27) 65,444 144,387 (78,943) 65,444 65,444 12,007 14,459 (1,315) (33,306) (5,630) (6,875) 44,784 138,586 (93,802) 44,784 – – – – 14,962 – – – 200 (80) 120 120 1,100 – (40) – 14,962 1,180 14,962 – 14,962 14,962 12,005 117 (34) (16,587) – – 10,463 27,095 (16,632) 10,463 1,300 (120) 1,180 1,180 – – (303) – – (244) 633 800 (167) 633 * Software includes capitalised development costs being an internally generated intangible asset. Borrowing costs capitalised during the year were $0.872 million. 72 HLS0339_ Annual Report_v16.indd 72 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 13 Non–current assets – Intangible assets continued (a) Impairment tests for goodwill During the year ended 30 June 2013, the Group recognised an impairment of goodwill in relation to the Fielders and Healthcare cash generating units (CGUs). During the year ended 30 June 2012, 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. 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: 2013 Hills SVL OptiComm Lan 1 2012 Hills SVL Hills Healthcare LW Gemmell Fielders OptiComm UHS Building and Industrial $’000 Electronics and Communications $’000 Lifestyle and Sustainability $’000 – – – – 17,553 754 14,342 32,649 – – – – Building and Industrial $’000 Electronics and Communications $’000 Lifestyle and Sustainability $’000 – – – 7,789 – – 7,789 17,553 – – – 754 5,293 23,600 – 11,839 3,324 – – – 15,163 Total $’000 17,553 754 14,342 32,649 Total $’000 17,553 11,839 3,324 7,789 754 5,293 46,552 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 terminal value has been determined at the end of the five year strategic plan using a growth rate of 3.0% (2012: 2.5% – 3.0%), which is no greater than the long–term average growth rate for the market to which the asset is dedicated. • cash flow projections have been based on the coming year’s budget and Board agreed forecasts with key assumptions for the five year forecast period relating to sales, gross margins and expenses. Sales are based on management assessments with allowances for future growth based upon assessments of growth rates in the markets to which the assets belong. Gross margins and expense levels are based on past experience. • a pre–tax discount rate of 14.91% (2012: 13.7% 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. (b) Impairment charge As set out in note 5, during the year ended 30 June 2013, the goodwill totalling $16.719 million was impaired, predominantly in relation to Fielders and Healthcare. Further explanation is provided in that note. Following the sale of Healthcare effective 31 January 2013, the remaining Healthcare goodwill was derecognised. (c) Impact of possible changes in key assumptions A reasonably possible change in any of the key assumptions would not cause the carrying amount of the CGUs to exceed their recoverable amount. HLS0339_ Annual Report_v16.indd 73 73 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 14 Non–current assets – Deferred tax assets The balance comprises temporary differences attributable to: Property, plant and equipment 18,022 (2,136) Consolidated 2013 $’000 2012 $’000 7,389 5,430 2,313 1,228 10,754 4,029 599 5,551 4,980 100 2,086 10,965 2,030 1,265 1,455 1,100 1,384 2,868 – 888 60,395 21,905 Balance at 1 July $’000 Recognised in profit or loss $’000 5,368 4,869 10,737 2,811 1,218 2,201 2,293 1,303 – 685 (7,607) (2,783) 228 (781) 47 (746) (1,193) (608) 2,868 142 31,485 (10,433) Recognised in other comprehensive income $’000 103 – – – – – – 689 – – 792 Recognised in equity $’000 Balance at 30 June $’000 – – – – – – – – – 61 61 (2,136) 2,086 10,965 2,030 1,265 1,455 1,100 1,384 2,868 888 21,905 Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Tax losses Software Other Movements 2012 Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Tax losses Other items 74 HLS0339_ Annual Report_v16.indd 74 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 14 Non–current assets – Deferred tax assets continued Movements 2013 Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Tax losses Software Other items Balance at 1 July $’000 Recognised in profit or loss $’000 (2,136) 2,086 10,965 2,030 1,265 1,455 1,100 1,384 2,868 – 888 13,842 5,349 (4,984) 625 (37) 9,409 2,929 (136) 2,683 4,980 (788) Recognised in other comprehensive income $’000 4,231 – – – – – – (649) – – – 21,905 33,872 3,582 Recognised in equity $’000 Acquisition/ disposal of business/ subsidiary $’000 Balance at 30 June $’000 – – – – – – – – – – – – 2,085 18,022 (46) (551) (342) – (110) – – – – – 7,389 5,430 2,313 1,228 10,754 4,029 599 5,551 4,980 100 1,036 60,395 HLS0339_ Annual Report_v16.indd 75 75 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 15 Derivative financial instruments Current assets Forward foreign exchange contracts – cash flow hedges Total current derivative financial instrument assets Current liabilities Interest rate swap contracts – cash flow hedges Forward foreign exchange contracts – cash flow hedges Forward foreign exchange contracts – held for trading Total current derivative financial instrument liabilities Non–current liabilities Interest rate swap contracts – cash flow hedges Total non–current derivative financial instrument liabilities Total derivative financial instrument liabilities Consolidated 2013 $’000 2012 $’000 703 703 551 – 80 631 – – – 507 99 606 2,449 2,449 4,106 4,106 (2,377) (4,712) 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 28). (a) Instruments used by the Group (i) Interest rate swap contracts – cash flow hedges Bank loans to the Group at 30 June 2013 bear an average variable interest rate of 2.9% (2012: 3.8%). 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 2013 cover approximately 100% (2012: 57%) of the loan principal outstanding and are taken out with terms of between three and seven years. The fixed interest rates average 6.0% (2012: 6.0%). 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 2013 a profit of $49,000 was reclassified into profit or loss (2012: loss of $137,000) and included in finance cost due to hedge ineffectiveness in the current or prior year and a gain of $105,000 was reclassified into profit or loss (2012: $290,000) to offset net interest expense paid. (ii) Forward exchange contracts – cash flow hedges The Group purchases goods and materials from overseas, principally in US dollars. In order to protect against exchange rate movements, the Group has entered into forward exchange contracts to purchase US dollars. These contracts are hedging highly probable forecasted purchases for approximately the next two to three months. 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. During the year ended 30 June 2013 a gain of $1,000 was recognised in profit or loss for the ineffective portion of these hedging contracts (2012: $3,000). (iii) Forward exchange contracts – 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 28 for details. However, they are accounted for as held for trading. (b) 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 28. 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 HLS0339_ Annual Report_v16.indd 76 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 16 Current liabilities – Trade and other payables 17 Borrowings 16 Current liabilities – Trade and other payables Trade payables Other trade payables and accrued expenses Consolidated 2013 $’000 19,091 37,727 56,818 2012 $’000 51,129 36,596 87,725 (a) Risk exposure Information about the Group’s exposure to foreign exchange risk is provided in note 28. 17 Borrowings Secured Bank overdrafts Total secured borrowings Unsecured Other loans Bills payable Total unsecured borrowings Total borrowings Consolidated 2013 2012 Current $’000 Non–current $’000 Total $’000 Current $’000 Non–current $’000 – – 141 – 141 141 – – 321 65,000 65,321 65,321 – – 462 65,000 65,462 65,462 1,333 1,333 – – – 1,333 Total $’000 1,333 1,333 – – 677 115,000 115,677 115,677 677 115,000 115,677 117,010 HLS0339_ Annual Report_v16.indd 77 77 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 17 Borrowings (a) Bank loans and bank overdraft Bank overdrafts 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 million (2012: $1.000 million); the Company’s New Zealand subsidiary has a separate bank overdraft facility of $1.895 million (2012: $1.762 million); and a partially owned subsidiary has a bank overdraft facility of $0.500 million (2012: $0.500 million). Unsecured bank loans The Group has 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 two years (16 August 2015), Tranche B $69 million, expiring in three years (16 August 2016), and Tranche C $46 million, expiring in two years (but subject to annual review) (16 August 2015). Tranches A and B comprise bank loans and Tranche C comprises bank guarantees, letters of credit and cash advances. 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 28. Standby letter of credit The standby letter of credit facility forms part of the 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) Fair value The carrying amounts and fair values of borrowings at the end of the reporting period are: 2013 2012 Carrying amount $’000 Fair value $’000 Carrying amount $’000 Fair value $’000 – 65,000 462 65,462 – 65,000 462 65,462 1,333 115,000 677 117,010 1,333 115,000 677 117,010 Consolidated entity On–balance sheet Non–traded financial liabilities Bank overdrafts Bill payable Other loans (c) Risk exposures Information about the Group’s exposure to interest rate and foreign exchange risk is provided in note 28. 78 HLS0339_ Annual Report_v16.indd 78 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 18 Provisions Employee benefits Outstanding claims Restructuring costs Contingent consideration Other provisions (a) Description of provisions 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. 2013 Current $’000 Non–current $’000 11,511 4,069 13,708 4,657 666 34,611 2,023 1,330 2,589 5,950 622 12,514 Consolidated Total $’000 13,534 5,399 16,297 10,607 1,288 47,125 2012 Current $’000 Non–current $’000 29,160 3,538 – – 541 33,239 4,175 – – – 653 4,828 Total $’000 33,335 3,538 – – 1,194 38,067 Restructuring costs The restructuring costs provision comprises onerous lease costs, redundancy costs and other costs of closing and restructuring businesses. For further detail, see note 5. Contingent consideration The contingent consideration provision relates to the acquisition of Lan1 Pty Ltd. For further detail, see note 29. Other provisions Other provisions comprise mainly provisions for site restoration. HLS0339_ Annual Report_v16.indd 79 79 18/09/13 2:40 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 18 Provisions (b) Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: 2012 Carrying amount at the start of the year Charged/(credited) to profit or loss – additional provisions recognised Amounts used during the year Carrying amount at end of year Outstanding claims $’000 3,339 199 – Other $’000 911 367 (84) Total $’000 4,250 566 (84) 3,538 1,194 4,732 2013 Carrying amount at the start of the year Charged/(credited) to profit or loss – additional provisions recognised Amounts used during the year Transferred to liabilities associated with assets held for sale Decrease through disposal of business Carrying amount at end of year Outstanding claims $’000 Restructuring costs $’000 Contingent consideration $’000 3,538 4,742 (2,601) (280) – 5,399 – 41,749 (12,667) (12,785) – – 10,607 – – – 16,297 10,607 Other $’000 1,194 490 (63) – (333) 1,288 Total $’000 4,732 57,588 (15,331) (13,065) (333) 33,591 80 HLS0339_ Annual Report_v16.indd 80 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 19 Contributed equity (a) Share capital Ordinary shares – fully paid 246,220 246,017 303,890 303,805 2013 Shares ‘000 2012 Shares ‘000 2013 $‘000 2012 $‘000 (b) Movements in ordinary share capital Date 1 July 2011 Details Opening balance Issued under the employee share bonus scheme Share buyback Movement in deferred tax asset relating to transaction costs arising on share issue Closing balance 1 July 2012 Opening balance Exercise of executive share options Issued under the employee share bonus scheme Closing balance Number of shares ’000 248,636 283 (2,902) $’000 306,790 67 (3,113) – 61 246,017 303,805 246,017 303,805 61 142 62 23 246,220 303,890 HLS0339_ Annual Report_v16.indd 81 81 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 19 Contributed equity (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. The Company does not have a limited amount of authorised capital. (d) Dividend reinvestment 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 one issue 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 were 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 23. (g) Share buyback On 23 August 2011 the Company announced an on–market buyback giving the Company the option to acquire up to 10% of its issued ordinary shares. The buyback was for ongoing capital management purposes and was to take place over the twelve months from the date of the announcement. In the previous financial year, 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. On 13 August 2012 the Directors resolved to extend the on–market buyback by a further twelve months. No shares have been bought back during the current financial year. On 6 August 2013 the Directors resolved to extend the on–market buyback 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. Total borrowings Less: cash and cash equivalents Net debt Total equity Gearing ratio 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 net debt plus 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 2013, the Group’s strategy, which was unchanged from 2012, was to maintain a target gearing ratio (calculated as net debt divided by net debt plus equity) of less than 40%. The gearing ratios at 30 June 2013 and 30 June 2012 were as follows: Notes 17 8 Consolidated 2013 $’000 2012 $’000 65,462 117,010 (61,480) (24,638) 3,982 92,372 271,018 400,963 1.4% 18.7% 82 HLS0339_ Annual Report_v16.indd 82 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 20 Reserves (a) Reserves Asset revaluation reserve Hedging reserve – cash flow hedges Equity compensation reserve Non–controlling interests acquisition reserve Foreign currency translation reserve Movements: Asset revaluation reserve Opening balance Revaluation – gross Deferred tax Reserves reduction on disposal of subsidiary Transfer to retained earnings Balance 30 June Asset realisation reserve Opening balance Transfer (to) retained earnings Balance 30 June Hedging reserve cash flow hedges Opening balance Revaluation – gross Deferred tax Balance 30 June Equity compensation reserve Opening balance Employee share plan expense Reserves reduction on disposal of subsidiary Balance 30 June Non–controlling interests acquisition reserve Opening balance Adjustment to non–controlling interest upon change in Group shareholding Balance 30 June Consolidated 2013 $’000 2012 $’000 Notes 32,820 (1,397) 658 1,551 (1,043) 32,589 46,227 (2,910) 736 1,171 (2,021) 43,203 46,227 47,041 12 (12,595) 4,231 (875) (4,168) 32,820 (917) 103 – – 46,227 – – – 11,854 (11,854) – (2,910) 2,162 (649) (1,304) (2,295) 689 (1,397) (2,910) 6, 14 736 46 (124) 658 1,171 380 1,551 647 89 – 736 1,219 (48) 1,171 HLS0339_ Annual Report_v16.indd 83 83 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 20 Reserves Foreign currency translation reserve Opening balance Currency translation differences arising during the year Balance 30 June Notes Consolidated 2013 $’000 2012 $’000 (2,021) (2,212) 978 191 (1,043) (2,021) (b) Nature and purpose of 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) Asset realisation reserve Where a revalued asset is sold, that portion of the asset revaluation reserve that relates to that asset is transferred to the asset realisation reserve upon settlement. Amounts transferred to the asset realisation reserve may subsequently be transferred to retained earnings. During the previous financial year the Board resolved to transfer the balance of the asset realisation reserve to retained earnings. This reserve will no longer be used. (iii) 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. (iv) 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. (v) 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. (vi) Foreign currency translation 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. 84 HLS0339_ Annual Report_v16.indd 84 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 21 Dividends (a) Ordinary shares Final dividend for the year ended 30 June 2012 of 4.5 cents (2011: 4.5 cents) per fully paid share paid on 26 September 2012 (year ended 30 June 2011: 26 September 2011) Fully franked based on tax paid at 30% Interim dividend ended 30 June 2013 of 0.0 cents (2012: 5.0 cents) per fully paid share paid on (2012: 30 March 2012) Fully franked based on tax paid at 30.0% Total dividends provided for or paid (b) Dividends not recognised at the end of the reporting period In addition to the above dividends, since year end the Directors have recommended the payment of a final dividend of 3.25 cents per fully paid ordinary share (2012: 5.0 cents), fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 27 September 2013, but not recognised as a liability at year end, is $8.0 million. The Dividend Investment Plan and Share Investment Plan will not operate in respect of the proposed final dividend. Consolidated 2013 $’000 2012 $’000 12,298 11,190 – 12,298 12,293 23,483 Consolidated 2013 $’000 8,011 2012 $’000 12,301 (c) Franked dividends The franked portions of the final dividends recommended after 30 June 2013 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ended 30 June 2014. Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2012: 30.0%) Consolidated 2013 $’000 7,011 2012 $’000 17,405 The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the Company if distributable profits of subsidiaries were paid as dividends. The impact on the franking account of the dividend recommended by the Directors since 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 $3.433 million (2012: $5.272 million). HLS0339_ Annual Report_v16.indd 85 85 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 22 Earnings per share (a) Basic earnings per share From (loss)/profit from continuing operations attributable to the ordinary equity holders of the Company From discontinued operations Earnings per share for (loss)/profit attributable to the ordinary equity holders of the Company From profit before CGU impairment, restructure and closure costs and other associated impairments net of gains on sale of businesses attributable to the ordinary equity holders of the Company (b) Diluted earnings per share From (loss)/profit from continuing operations attributable to the ordinary equity holders of the Company From discontinued operations Earnings per share for (loss)/profit attributable to the ordinary equity holders of the Company From profit before CGU impairment, restructure and closure costs and other associated impairments net of gains on sale of businesses attributable to the ordinary equity holders of the Company Consolidated 2013 Cents 2012 Cents (12.9) (25.3) 9.4 1.1 (38.2) 10.5 7.8 10.5 Consolidated 2013 Cents 2012 Cents (12.9) (25.3) 9.4 1.1 (38.2) 10.5 7.8 10.5 Basic and diluted earnings per share before CGU impairment, restructure and closure costs and other associated impairments net of gains on sale of businesses in the year ended 30 June 2013 is a non–IFRS measure calculated using loss attributable to owners of $94.125 million adjusted for CGU impairment, restructure and closure costs and other associated impairments net of gains on sale of businesses of $113.326 million. 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. 86 HLS0339_ Annual Report_v16.indd 86 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 22 Earnings per share continued (c) Reconciliation of earnings used in calculating earnings per share Basic earnings per share (Loss)/profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share From discontinued operations Diluted earnings per share Consolidated 2013 $’000 2012 $’000 (31,667) 26,021 (62,458) – (94,125) 26,021 (Loss)/profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share (31,667) 26,021 From discontinued operations Used in calculating diluted earnings per share (Loss)/profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share CGU impairment, restructure and closure costs and other associated impairments net of gains on sale of businesses – refer note 5 (62,458) (94,125) (94,125) 113,326 – 26,021 26,021 – Profit before CGU impairment, restructure and closure costs and other associated impairments net of gains on sale of businesses attributable to the ordinary equity holders of the Company used in calculating basic earnings per share 19,201 26,021 (d) Weighted average number of shares used as denominator Adjustments for calculation of diluted earnings per share: Weighted average number of ordinary shares used as a denominator in calculating basic earnings per share Effect of share options and rights on issue Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share Consolidated 2013 $’000 2012 $’000 246,186 246,764 – 285 246,186 247,049 The 280,000 (2012: 483,000) share options granted between 2003 and 2007 are not included in the calculation of diluted earnings per share because they are antidilutive ended 30 June 2013 (year ended 30 June 2012). These options could potentially dilute basic earnings per share in the future. HLS0339_ Annual Report_v16.indd 87 87 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 23 Share based payments (a) Employee Option Plan In 2010 the Group established the Hills Holdings Limited Long Term Incentive Share Plan (LTIP). The Plan was designed to provide long–term incentives to eligible senior employees in the Group and entitled 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). The rights issued under the Plan were cancelled for no consideration on 28 June 2013. Accordingly, the remaining unvested options of $0.002 million were expensed immediately to profit or loss. 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 performance rights and options under the current and previous scheme are as follows: Grant date Expiry date 2013 28 April 2011 30 June 2013 19 December 2011 30 June 2014 1 February 2001 1 January 2023 1 February 2002 1 January 2024 1 February 2003 1 January 2025 1 February 2004 1 January 2026 1 February 2005 1 January 2027 Weighted average exercise price Exercise price Balance at start of the year number Granted during the year number Exercised during the year number Forfeited/ cancelled during the year number Balance at end of the year number – – $2.50 $2.90 $3.23 $3.66 $4.16 198,929 405,518 50,000 53,000 80,000 115,000 185,000 1,087,447 $3.58 – – – – – – – – – – – (25,000) – – – – (25,000) $2.50 (198,929) (405,518) – (18,000) (40,000) (60,000) (60,000) (782,447) $3.66 – – 25,000 35,000 40,000 55,000 125,000 280,000 $3.62 Vested and exercisable at end of the year number – – 25,000 35,000 40,000 55,000 125,000 280,000 $3.62 88 HLS0339_ Annual Report_v16.indd 88 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 23 Share based payments continued Exercise price Balance at start of the year number Granted during the year number Exercised during the year number Forfeited/ cancelled during the year number Balance at end of the year number Grant date Expiry date 2012 28 April 2011 30 June 2013 19 December 2011 30 June 2014 1 February 2001 1 January 2023 1 February 2002 1 January 2024 1 February 2003 1 January 2025 1 February 2004 1 January 2026 1 February 2005 1 January 2027 1 February 2009 1 January 2032 Weighted average exercise price – – $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 $3.33 – – – – – – – – – – Vested and exercisable at end of the year number – – 50,000 53,000 80,000 115,000 185,000 – (10,811) (20,903) – – – (10,000) (10,000) (415,000) 198,929 405,518 50,000 53,000 80,000 115,000 185,000 – (466,714) 1,087,447 483,000 $3.05 $3.58 $3.58 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: • exercise price: $0.00 • vesting period: three years • grant date (for Accounting Standards): 19 December 2011 • expiry date: 30 June 2014 • share price at grant date: $1.11 • expected price volatility of the Company’s shares: 40% • expected dividend yield: 9.0% • risk free interest rate: 3.01% Fair value of options granted No performance rights were granted during the current financial year. The share price used to calculate the number of performance rights issued in the previous financial year 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 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 per performance right. The fair value at grant date was independently determined using a Black Scholes methodology for the non–market hurdles and a Monte Carlo valuation methodology for the market hurdles, that took 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. HLS0339_ Annual Report_v16.indd 89 89 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 23 Share based payments (b) Employee share scheme The Hills Employee Share Bonus Plan provides that eligible employees may receive up to $1,000 of Hills ordinary shares for no consideration. In the current financial year, shares were allotted under the plan in November 2012. In the previous financial year, shares were allotted under the plan in two tranches, (March 2012 and September 2011). 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. Due to the Company’s performance, participants were issued with 100 shares in each tranche, based on the weighted average market price of $0.76 (2012: $1.09 (March 2012 issue) and in the previous financial year $1.01 (September 2011 issue). Number of shares issued under the plan to participating employees on 2 November 2012 (2012: 30 September 2011) Number of shares issued under the plan to participating employees in the previous financial year on 26 March 2012 Consolidated 2013 $’000 2012 $’000 142 – 142 153 151 304 (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 Long Term Incentive Plans Shares issued under Employee Share Bonus Plan Consolidated 2013 $’000 2012 $’000 121 46 167 170 119 289 90 HLS0339_ Annual Report_v16.indd 90 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 24 Key Management Personnel disclosures (a) Key Management Personnel compensation Consolidated 2013 $’000 2012 $’000 Short–term employee benefits (fixed and STI remuneration) 5,162,309 3,838,022 Post–employment benefits (superannuation) Long–term benefits (cash LTI and accrued long service leave) Termination benefits 258,648 291,271 157,690 96,319 470,632 – Share based payments (LTI expense and employee share bonus plan expense) 1,548 60,797 6,050,827 4,286,409 Rights and 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 on page 92. Detailed remuneration disclosures are provided in the remuneration report on pages 14 to 29. (b) Equity instrument disclosures relating to Key Management Personnel Rights and options provided as remuneration Details of options and rights to deferred shares granted as remuneration, together with their terms and conditions, can be found in the Remuneration Report on pages 14 to 29. The report also shows shares issued on the exercise of such options and on vesting of the rights. HLS0339_ Annual Report_v16.indd 91 91 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 2013 Name Directors of Hills Holdings Limited G Twartz Other Key Management Personnel of the Group S Cope G Logan M McKinstry T Sullivan 2012 Name Balance at start of the year Granted as compensation Exercised Rights/ options lapsed/ forfeited/ cancelled Balance at end of the year Vested and exercisable Unvested 551,859 63,429 41,806 62,709 44,398 – – – – – (25,000) (526,859) – – – – (63,429) (41,806) (62,709) (44,398) – – – – – – – – – – – – – – – Balance at start of the year Granted as compensation Exercised Rights/ options lapsed/ forfeited/ cancelled Balance at end of the year Vested and exercisable Unvested – – – – – – – (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 Directors of Hills Holdings Limited G Twartz 421,926 229,933 Other Key Management Personnel of the Group 81,623 10,811 – – 80,000 15,134 41,806 20,903 41,806 62,709 – 29,264 S Cope D Lethbridge G Logan M McKinstry A Muir T Sullivan 92 HLS0339_ Annual Report_v16.indd 92 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statements Notes to the consolidated financial statements 24 Key Management Personnel disclosures continued Other changes during the previous financial 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. 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 (2012: 1,188,918) shares owned by Hills Associates Limited & Poplar Pty Ltd (jointly held) and 15,889,441 (2012: 14,450,548) shares owned by Hills Associates Limited, of which JH Hill–Ling is a Director. Other changes during the year for JH Hill–Ling comprises the acquisition of 1,438,893 (2012: 994,859) shares in Hills Holdings Limited by Hills Associates Limited. Other changes during the financial year for G Twartz comprises the removal of the disclosure of his shareholdings in the Company, as G Twartz ceased to be a Director of the Company on 2 September 2012. 2013 Name Directors of Hills Holdings Limited Ordinary shares JH Hill–Ling E Pretty G Twartz F Bennett I Elliot D Spence P Stancliffe Other Key Management Personnel of the Group Ordinary shares M Campbell S Cope G Stephens Balance at start of the year Received during the year on the exercise of options Other changes during the year Balance at end of the year 15,812,530 – 4,342 4,000 6,235 19,000 19,104 1,000 1,178 – – – 25,000 – – – – – – – 1,438,893 17,251,423 250,000 (29,342) – 45,500 131,000 30,896 – (1,178) 50,000 250,000 – 4,000 51,735 150,000 50,000 1,000 – 50,000 HLS0339_ Annual Report_v16.indd 93 93 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 24 Key Management Personnel disclosures 2012 Name Directors of Hills Holdings Limited Ordinary shares JH 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 (c) Loans to Key Management Personnel There were no loans outstanding at the reporting date to Key Management Personnel and their related parties. (d) 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, purchased goods during the previous financial 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 previous financial year was $30,977. 94 Balance at start of the year Received during the year on the exercise of options Other changes during the year Balance at end of the year 14,817,671 4,342 4,000 – 6,235 35,665 19,000 19,104 978 5,278 – – – – – – – – 200 – 994,859 15,812,530 – – 1,000 – (35,665) – – – (5,278) 4,342 4,000 1,000 6,235 – 19,000 19,104 1,178 – 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 (2012: $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. HLS0339_ Annual Report_v16.indd 94 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 25 Related party transactions 26 Contingencies 25 Related party transactions (a) Parent entities The parent entity within the Group and the ultimate parent entity is Hills Holdings Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 30. (c) Key Management Personnel Disclosures relating to Key Management Personnel are set out in note 24. (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 $15.585 million (2012: $24.917 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 $0.185 million (2012: $0.410 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 $1.749 million (2012: $2.278 million). Group entities charge an administration fee for services rendered which during the year was $6.915 million (2012: $14.277 million). Inter–entity dividends paid and received during the year amounted to $4.405 million (2012: $16.168 million). Other related parties Contributions to superannuation funds on behalf of employees are disclosed in note 5. (e) Loans to/from related parties Subsidiaries Group entity trading transactions and borrowings result in balances arising in respect of current and non–current assets and liabilities. At 30 June 2013, the Group current assets and liabilities that were eliminated were $224.114 million (2012: $265.682 million) and the Group non–current assets and liabilities that were eliminated were $3.211 million (2012: $0.336 million). 26 Contingencies (a) Contingent liabilities The Group had contingent liabilities at 30 June 2013 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) Letters of credit established in favour of suppliers/creditors amounting to $1.036 million (2012: $19.955 million). (b) Bank guarantees in favour of customers and suppliers amounting to $13.216 million (2012: $16.953 million). (c) 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. The Group has various commercial legal claims common to businesses of its type which constitute contingent liabilities, none 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. HLS0339_ Annual Report_v16.indd 95 95 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 27 Commitments (a) Capital commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Property, plant and equipment Consolidated 2013 $’000 2,827 2012 $’000 4,866 (b) Lease commitments: Group as lessee (i) Non–cancellable operating leases The Group leases a number of warehouse and factory facilities under operating leases. The leases run for a period ranging from 1 to 10 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 2013 $’000 2012 $’000 21,750 49,197 16,523 24,865 60,972 29,410 87,470 115,247 (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 Later than one year but not later than five years Later than five years Consolidated 2013 $’000 679 2,718 170 3,567 2012 $’000 187 – – 187 96 HLS0339_ Annual Report_v16.indd 96 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 28 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, i.e. 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 ageing analysis for credit risk. Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Investments Financial liabilities Trade and other payables Borrowings Derivative financial instruments 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 cooperation 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 2013 $’000 2012 $’000 61,480 24,638 84,694 175,206 703 – – 2 146,877 199,846 56,818 87,725 65,462 117,010 3,080 4,712 125,360 209,447 HLS0339_ Annual Report_v16.indd 97 97 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 (a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises when future commercial transactions and recognised financial assets and financial liabilities are denominated in a currency that is not the Group’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. Management and Group Treasury manage the Group’s foreign exchange risk against their functional currency. The companies and business units within the Group are required to hedge their foreign exchange risk exposure arising from future commercial transactions and recognised assets and liabilities using forward contracts transacted by Group Treasury. The Group Treasury’s risk management policy is to hedge approximately three months’ of anticipated cash flows (mainly purchases of inventory) in US dollars. The Group’s exposure to foreign currency risk at the reporting date, was as follows: Consolidated entity Trade receivables Cash at bank Trade payables Forward exchange contracts 30 June 2013 30 June 2012 USD $’000 2,222 (279) NZD $’000 Euro ’000 JPY ’000 GBP ’000 USD $’000 NZD $’000 Euro ’000 JPY ’000 – 21 6 – – – 166 1,419 4 331 – – – – – – (22,581) (70) (445) (13,869) (133) (23,672) (211) (226) (22,867) – buy foreign currency (cash flow hedges) (17,061) – buy foreign currency (FVTPL) (1,621) – – – – – – – – (47,060) (4,327) – – – – – – 98 HLS0339_ Annual Report_v16.indd 98 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statements Notes to the consolidated financial statements 28 Financial risk management continued Group sensitivity Based on the financial instruments held at 30 June 2013, 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 $2,155,000 lower/$1,764,000 higher (2012: $1,880,000 lower/$1,537,000 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 2013 than 2012 because of the increased amount of US dollar denominated trade receivables. Other components of equity would have been $1,989,000 higher/$1,677,000 lower (2012: $5,125,000 higher/$4,193,000 lower) had the Australian dollar weakened/strengthened by 10% against the US dollar, arising from forward foreign exchange contracts designated as cash flow hedges. Consolidated entity Bank overdrafts and bank loans Cash and cash equivalents Other loans Interest rate swaps (notional principal amount) An analysis by maturities is provided in note 28(c). (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 2013 and 2012, 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. As at the end of the reporting period, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: 30 June 2013 30 June 2012 Weighted Average Interest Rate % Balance $’000 Weighted Average Interest Rate % 2.8% (65,000) 2.9% 2.6% 6.0% 61,480 (462) 65,000 3.8% 3.2% 2.6% 6.0% Balance $’000 (116,333) 24,638 (556) 65,000 HLS0339_ Annual Report_v16.indd 99 99 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Sensitivity At 30 June 2013, 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 $40,000 higher/$40,000 lower (2012: $1,159,000 higher/$925,000 lower), mainly as a result of higher interest income from cash and cash equivalents and lower interest expense from borrowings. Other components of equity would have been $928,000 higher/$948,000 lower (2012: $1,300,000 higher/$1,586,000 lower) mainly as a result of an increase in the fair value of the cash flow hedges of borrowings. Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk and foreign exchange risk. Consolidated At 30 June 2013 Financial assets Cash and cash equivalents Trade and other receivables Derivatives – cash flow hedges Financial liabilities Derivatives – cash flow hedges Derivatives – fair value through profit or loss Trade payables Borrowings Total increase/decrease Carrying amount ‘000 61,480 84,694 703 (3,000) (80) (56,818) (65,462) Interest rate risk Foreign exchange risk –100 bps +100 bps –10% +10% Profit $’000 615 – – – – – (655) (40) Other equity $’000 – – – (948) – – – (948) Profit $’000 (615) – – – – – 655 40 Other equity $’000 Profit $’000 – – – 928 – – – (31) 267 60 – 371 (2,822) – Other equity $’000 – – 1,989 – – – – Profit $’000 Other equity $’000 25 (218) (48) – (304) 2,309 – – – (1,677) – – – – 928 (2,155) 1,989 1,764 (1,677) 100 HLS0339_ Annual Report_v16.indd 100 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statements Notes to the consolidated financial statements 28 Financial risk management continued Consolidated At 30 June 2013 Financial assets Interest rate risk Foreign exchange risk –100 bps +100 bps –10% +10% Carrying amount ‘000 Profit $’000 Other equity $’000 Profit $’000 Other equity $’000 Profit $’000 Other equity $’000 Profit $’000 Other equity $’000 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 payables Borrowings 24,638 175,206 (4,613) (99) (87,725) 239 – 239 – – – (117,010) (1,164) Total increase/decrease in financial liabilities Total increase/(decrease) (1,164) (1,586) (925) (1,586) – – – (239) – (239) – – – (1,586) 234 1,300 – – – – – 1,164 1,398 1,159 – – – 1,300 1,300 39 164 203 – 595 (2,678) – (2,083) (1,880) – – – (32) (134) (166) – – – 5,125 (1) (4,193) – – – 5,125 5,125 (487) 2,191 – 1,703 1,537 – – – (4,193) (4,193) 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, ageing profile, maturity and existence of previous financial difficulties. In most cases goods are sold subject to retention of title clauses, so that in the event of non–payment the Group may have a priority claim. 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 9. (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. HLS0339_ Annual Report_v16.indd 101 101 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 The Group had access to the following undrawn borrowing facilities at the end of the reporting period: 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. (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. Financing arrangements At 30 June 2013 the Group had banking facilities totalling $196 million, through a Common Deed with Commonwealth Bank, National Australia Bank and Westpac Banking Corporation. The facility comprises Tranche A $81 million, expiring in two years (16 August 2015), Tranche B $69 million, expiring in three years (16 August 2016), and Tranche C $46 million, expiring in two years (but subject to annual review) (16 August 2015). Tranches A and B comprise bank loans and Tranche C comprises bank guarantees, letters of credit and cash advances. At 30 June 2012 the Group had multi–option financing facilities totalling $220.0 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. Floating rate Expiring within one year (bank overdraft and short–term money market) Expiring beyond one year (bank loans and standby letters of credit) Consolidated 2013 $’000 2012 $’000 39,437 83,964 123,401 6,929 70,031 76,960 102 HLS0339_ Annual Report_v16.indd 102 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statements Notes to the consolidated financial statements 28 Financial risk management continued Contractual maturities of financial liabilities At 30 June 2013 Non–derivatives Trade payables Borrowings Total non–derivatives Derivatives Net settled (interest rate swaps and forward exchange contracts) At 30 June 2012 Non–derivatives Trade payables Borrowings Total non–derivatives Derivatives Net settled (interest rate swaps and forward exchange contracts) Less than 6 months $’000 6 to 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total contractual cash flows $’000 Carrying amount (assets)/ liabilities $’000 56,818 1,115 57,933 – 938 938 – 1,877 1,877 – 65,235 65,235 – 320 320 56,818 69,485 56,818 65,462 126,303 122,280 1,070 1,037 1,040 196 – 3,343 3,080 87,725 3,765 91,490 – 2,397 2,397 – 116,146 116,146 – – – – 121 121 87,725 87,725 122,429 117,010 210,154 204,735 1,376 997 1,773 959 – 5,105 4,712 HLS0339_ Annual Report_v16.indd 103 103 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 28 Financial risk management d) Fair value measurements 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 2013 and 30 June 2012: 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 2013. 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. Consolidated entity – at 30 June 2013 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 Assets Derivatives for hedging Total assets Liabilities Derivatives used for hedging Total liabilities – – – – 703 703 3,080 3,080 – – – – 703 703 3,080 3,080 Consolidated entity – at 30 June 2012 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 Assets Total assets Liabilities Derivatives used for hedging Total liabilities – – – – 4,712 4,712 – – – – 4,712 4,712 104 HLS0339_ Annual Report_v16.indd 104 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 29 Business combination (a) Summary of acquisition Current period Lan1 Pty Ltd On 26 October 2012 the Group acquired 100% of the issued shares in Lan1 Pty Ltd. The acquisition complements the Group’s Electronics, Video and Security division within the Electronics & Communications segment. Since acquisition, the acquired business contributed revenues of $24.503 million and net profit of $1.693 million. If the acquisition had occurred on 1 July 2012, the contribution to consolidated revenue and consolidated loss ended 30 June 2013 would have been $36.000 million and $2.400 million respectively. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Purchase consideration (refer to 29(b)): Cash paid Contingent consideration Total purchase consideration The assets and liabilities recognised as a result of the acquisition are as follows: Sundry receivables Inventories Plant and equipment Deferred tax asset Intangible assets: software Provision for employee benefits Net identifiable assets acquired Add: goodwill Net assets acquired $’000 5,160 10,606 15,766 Fair value $’000 6 1,417 4 51 117 (171) 1,424 14,342 15,766 The goodwill is attributable to the synergies expected to arise within the Electronics, Video and Security division. HLS0339_ Annual Report_v16.indd 105 105 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements Contingent consideration In the event that earnings before interest, tax, depreciation and amortisation (EBITDA) exceeds $2.012 million in the first twelve months post acquisition, an amount calculated as 25% of five times EBITDA less debt funding is payable to the former owners. In the event that EBITDA in the second twelve months post acquisition exceeds $2.012 million and EBITDA achieved in the previous year, an amount calculated as 25% of five times second year EBITDA less debt funding is payable to the former owners. If these conditions are not met a lower amount payable is calculated. The maximum amount of the payment in each year is dependent upon EBITDA. Prior period Herma Technologies 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, the net assets acquired and goodwill are as follows: Purchase consideration (refer to 29 (b)): Cash paid $’000 2,011 106 HLS0339_ Annual Report_v16.indd 106 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 29 Business combination continued The assets and liabilities recognised as a result of the acquisition are as follows: Inventories Plant and equipment Other assets Intangible assets: patents and trademarks Provision for employee benefits Net identifiable assets acquired Add: goodwill Net assets acquired Fair value $’000 575 104 27 57 (68) 695 1,316 2,011 (b) Purchase consideration – cash outflow Outflow of cash to acquire subsidiary, net of cash acquired: Cash consideration 2013 $’000 2012 $’000 5,160 2,011 Acquisition–related costs Acquisition related costs of $0.392 million (2012: $0.057 million) are included in expenses in profit or loss and in operating cash flows in the Consolidated statement of cash flows. HLS0339_ Annual Report_v16.indd 107 107 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 30 Subsidiaries and transactions with non–controlling interests (a) Investments in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(c): Name of entity Hills Finance Pty Ltd Hills Holdings NZ Limited Korvest Limited (i) (note (b)) Hills Hoists Pty Ltd Bailey Aluminium Products Pty Ltd Hills Industries Pty Ltd ACN 089 622 622 Pty Ltd 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 Audio Telex Communications Pty Ltd Crestron Control Solutions Pty Ltd Hills Polymers Pty Ltd (formerly 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) Lan 1 Pty Ltd ACN 159 817 955 Pty Ltd Country of incorporation Class of shares Equity holding 2013 % 2012 % Australia New Zealand 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 Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 51 100 50 100 100 100 100 49 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 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. 108 HLS0339_ Annual Report_v16.indd 108 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 30 Subsidiaries and transactions with non–controlling interests 31 Parent entity financial information (b) Transactions with non–controlling interests During the period that Korvest was part of the Group, Korvest made one issue (2012: 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. Carrying amount of non–controlling interests acquired/(diluted) Consideration paid to non–controlling interests Impact of dilution recognised in the transactions with non–controlling interests reserve within equity 31 Parent entity financial information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet 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 Equity compensation reserve Retained earnings Profit or loss for the year Total comprehensive income 2013 $’000 2012 $’000 (9) – (9) (48) – (48) 2013 $’000 2012 $’000 246,815 343,821 174,483 285,059 421,298 628,880 153,341 120,825 77,892 121,339 231,233 242,164 190,065 386,716 303,890 303,805 27,882 (1,397) 658 45,034 (2,910) 643 (140,968) 40,144 190,065 386,716 (178,869) (184,222) 38,706 37,099 HLS0339_ Annual Report_v16.indd 109 109 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 31 Parent entity financial information 32 Deed of cross guarantee (b) Guarantees entered into by the parent entity Bank guarantees given by the Company in favour of customers and suppliers amounted to $5.245 million (2012: $8.696 million). Cross guarantees are given by the Company and its wholly owned subsidiaries as described in note 32. 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 $246.335 million (2012: $241.339 million). No material deficiency in net tangible assets exists in these companies at reporting date with net tangible assets amounting to $167.791 million (2012: $288.815 million). (c) Contingent liabilities of the parent entity The parent entity had a contingent liability in respect of claims, as disclosed in note 26. 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 2013, the Company had contractual commitments for the acquisition of property, plant or equipment totalling $2.047 million (2012: $3.030 million). These commitments are not recognised as liabilities as the relevant assets have not yet been received. 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. Hills Polymers Pty Ltd (formerly Team Poly Pty Ltd) became a party to the deed on 14 May 2008. Fielders Australia Pty Ltd and Access Television Services Pty Ltd became parties to the deed on 29 June 2010. Hills Holdings Limited is the Holding Company and Pacom Security Pty Ltd is the Trustee under the Deed. The above companies represent a ‘closed group’ for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by Hills Holdings Limited, they also represent the ‘extended closed group’. 32 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 Orrcon Operations Pty Ltd Orrcon Holdings Pty Ltd Greenwattle Investments Pty Ltd (Alquip) Audio Telex Communications Pty Ltd Hills Polymers Pty Ltd (formerly Team Poly Pty Ltd) Fielders Australia Pty Ltd Access Television Services Pty Ltd 110 HLS0339_ Annual Report_v16.indd 110 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statements Notes to the consolidated financial statements 32 Deed of cross guarantee continued Set out below is a Consolidated income statement, a Consolidated statement of comprehensive income, a summary of movements in consolidated retained earnings ended 30 June 2013 and a Consolidated statement of financial position as at 30 June 2013 of the Company and controlled entities that are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee. (a) Consolidated income statement, Consolidated statement of comprehensive income and summary of movements in consolidated retained earnings Consolidated income statement Revenue from continuing operations Other income Finance costs Other expenses (Loss)/profit before income tax Income tax benefit/(expense) Loss from discontinued operations (Loss)/profit for the year Consolidated statement of comprehensive income (Loss)/profit for the year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges Income tax relating to these items Other comprehensive income/(loss) for the year that may be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Loss on revaluation of land and buildings Income tax relating to these items Other comprehensive (loss) for the year that will not be reclassified to profit or loss, net of tax Other comprehensive loss for the period, net of tax Total comprehensive (loss)/income for the year Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year (Loss)/profit for the year Transfers from reserves Dividends provided for or paid Retained earnings at the end of the financial year 2013 $’000 2012 $’000 408,731 967,166 28,695 (3,045) 4,853 (5,835) (475,126) (934,545) (40,745) 12,111 (64,770) (93,404) 31,639 (7,009) – 24,630 (93,404) 24,630 2,162 (649) 1,513 (2,296) 689 (1,607) (11,186) 3,524 (7,662) (6,149) (99,553) – – – (1,607) 23,023 12,927 (93,404) (398) 23 24,630 11,757 (12,302) (23,483) (93,177) 12,927 HLS0339_ Annual Report_v16.indd 111 111 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 32 Deed of cross guarantee continued (b) Consolidated statement of financial position Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Current tax receivables Assets 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 Provisions Derivative financial instruments Liabilities associated with assets held for sale 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 112 2013 $’000 2012 $’000 53,630 16,448 84,921 177,426 34,588 149,625 703 – 139,074 – 6,984 – 312,916 350,483 21,940 12,453 76,973 162,605 59,472 19,379 23,429 48,469 177,764 246,956 490,680 597,439 58,603 79,351 141 7,138 42,333 32,419 551 73,975 507 – 175,603 119,415 65,000 115,557 3,283 2,449 2,261 4,106 70,732 121,924 246,335 241,339 244,345 356,100 303,890 303,805 33,632 (93,177) 39,368 12,927 244,345 356,100 HLS0339_ Annual Report_v16.indd 112 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 33 Reconciliation of profit after income tax to net cash inflow from operating activities (Loss)/profit for the year Depreciation and amortisation Impairment of goodwill Impairment of trade receivables Impairment of inventories Impairment of property, plant and equipment Impairment of software 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 (Gain) on disposal of businesses Fair value adjustment to derivatives Rent received Amounts set aside to provisions Change in operating assets and liabilities, net of effects from purchases and sales of controlled entities and business operations: Decrease in trade and other receivables Decrease in inventories (Increase)/decrease in deferred tax assets Increase/(decrease) in trade and other creditors Increase/(decrease) in provision for income taxes payable (Decrease) in other provisions Net cash inflow/(outflow) from operating activities Consolidated 2013 $’000 (91,387) 15,577 16,719 4,547 31,886 53,806 16,587 – 167 (272) (13,462) (173) (790) 2012 $’000 28,822 21,100 – 2,069 (2,030) – – (386) 289 (533) – (161) (787) 62,802 16,562 1,015,165 843,180 6,119 19,296 (33,891) 22,589 5,918 (34,658) 81,380 4,632 5,371 10,427 (10,667) (5,935) (16,104) 52,669 HLS0339_ Annual Report_v16.indd 113 113 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Notes to the consolidated financial statements 34 Remuneration of auditors 35 Events occurring after the reporting period 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: KPMG audit and non–audit services Audit and other assurance services KPMG Australia – audit and review of financial statements Overseas KPMG firms – audit and review of financial statements Total remuneration for audit and other assurance services Consolidated 2013 $’000 2012 $’000 520,000 492,000 32,610 32,909 552,610 524,909 79,641 141,015 8,772 14,316 88,413 155,331 296,516 12,316 – 65,310 – 76,257 46,179 40,504 374,142 162,940 1,015,165 843,180 Commission (ACCC) approval. Completion of the interdependent transactions is targeted to occur by the end of December 2013. As the interdependent asset sale and purchase agreements were signed after 30 June 2013 but before the financial statements were approved by the Directors, the transaction is a post balance sheet event. Furthermore, as the signed contract provides information about a condition that existed as at 30 June 2013, namely the fair value of the assets held for sale, the signing of the contract is an adjusting post balance sheet event. Accordingly, the assets and liabilities classified as held for sale have been adjusted to their fair values with reference to the combined purchase price less estimated incremental costs to sell that are directly attributable to the disposal of the assets. Incremental costs to sell include but are not limited to transaction costs and other costs to prepare the assets for sale in the manner agreed to in the contract. As the carrying value of the assets held for sale were adjusted to fair value less cost to sell as at 30 June 2013, the results of the Group ended 30 June 2013 include the impact of the agreement to sell Orrcon and Fielders in the form of adjustments to the fair value of the related assets held for sale. In the 2014 financial year, assuming the sale transaction completes, the impact on the results is not expected to be material given that the relevant assets and liabilities are carried at fair value considering both the expected proceeds and costs to sell. 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. Taxation services KPMG Australia – taxation and other services Overseas KPMG firms – taxation services Total remuneration for taxation services Other services Financial advisory services Software implementation assurance services Forensic accounting services Other consulting services Total remuneration for other services Total remuneration of KPMG 35 Events occurring after the reporting period As at 31 December 2012, the Group announced that its Orrcon and Fielders steel assets may be sold. At that time, these assets were not classified as assets held for sale. On 4 July 2013, the Group announced that the sale process for Orrcon and Fielders had, as at 30 June 2013, developed to the point that the Board had become satisfied that the assets should be classified as assets held for sale. This resulted in the assets being carried on the Group balance sheet at fair value less costs to sell as at 30 June 2013 with the operations of Orrcon and Fielders classified as discontinued operations. On 19 August 2013, Hills Holdings Limited entered into interdependent agreements with BlueScope Steel Limited to sell certain assets and liabilities comprising the operations of its Orrcon and Fielders businesses for a combined purchase price of $87.5 million. The transactions are subject to customary terms and conditions precedent including Australian Competition and Consumer 114 HLS0339_ Annual Report_v16.indd 114 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013Notes to the consolidated financial statements Directors’ declaration In the opinion of the Directors of Hills Holdings Limited (the Company): (a) the consolidated financial statements and notes set out on pages 37 to 114 and the Remuneration report on pages 14 to 29 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 2013 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 32 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 Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Edward Noel Pretty Director Adelaide 20 August 2013 HLS0339_ Annual Report_v16.indd 115 115 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 116 HLS0339_ Annual Report_v16.indd 116 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 HLS0339_ Annual Report_v16.indd 117 117 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Shareholder information The shareholder information set out below was applicable as at 14 August 2013. A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: B. Equity security holders The names of the twenty largest holders of quoted equity securities are listed below: Class of equity security Ordinary shares Name Shares Options HSBC Custody Nominees (Australia) Limited Holding 1 – 1000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over 4,368 7,800 3,587 2,941 93 18,789 – – – 3 – 3 There were 2,014 holders of less than a marketable parcel of ordinary shares. National Nominees Limited Poplar Pty Ltd Hills Associates Limited JP Morgan Nominees Australia Limited Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited (BKCUST A/C) Jacaranda Pastoral Pty Ltd Greybox Holdings Pty Ltd JP Morgan Nominees Australia Limited (Cash Income A/C) Donald Cant Pty Ltd Colleen Sims Nominees Pty Ltd Gwynvill Trading Pty Limited Hills Associates Limited and Poplar Pty Ltd QIC Limited BNP Paribas Noms (NZ) Ltd (DRP) Aust Executor Trustees SA Ltd (Tea Custodians Limited) Bond Street Custodians Ltd (Macquarie Smaller Co's A/C) Tamarisk Pty Ltd Mr John Gassner & Mr Nathan Rothchild C. Substantial holders Substantial holders in the Company are set out below: Holding Poplar Pty Ltd 1 Hills Associates Limited 2 Ordinary shares Number held Percentage of issued shares 17,363,350 16,659,272 16,550,845 15,789,441 12,259,127 10,835,859 7,557,770 5,968,699 4,367,195 3,523,528 1,979,060 1,694,798 1,260,000 1,188,918 948,393 888,500 766,540 654,999 603,865 501,251 7.04 6.76 6.71 6.41 4.97 4.40 3.07 2.42 1.77 1.43 0.80 0.69 0.51 0.48 0.38 0.36 0.31 0.27 0.24 0.20 121,361,410 49.22 Number held Percentage 17,739,763 15,789,441 7.25% 6.41% 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. 118 HLS0339_ Annual Report_v16.indd 118 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Shareholder information D. Voting rights The voting rights attaching to each class of equity securities are set out below: I. Offices and Officers Company Secretary Ms Gai Stephens 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. Principal Registered Office 159 Port Road, Hindmarsh SA 5007 Telephone: (08) 8301 3200 Facsimile: (08) 8301 3290 Website: 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 Website: www.computershare.com.au Rights/Options No voting rights. E. On–market buyback Details of the on–market buyback are disclosed in note 19. 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. HLS0339_ Annual Report_v16.indd 119 119 18/09/13 2:41 PM Hills Holdings Limited Annual Report for the year ended 30 June 2013 Hills Holdings Limited Registered Office 159 Port Road Hindmarsh, SA 5007 Telephone: +61 8 8301 3200 Facsimile: +61 8 8301 3290 Email: info@hills.com.au ABN 35 007 573 417 hillsholdings.com.au