investing in futuRe gRowth AnnuAl RepoRt 2012 NUFARM LIMITED contents 01 Key events 01 Facts in brief 02 Managing director’s review 08 Business review 14 Health, safety and environment 18 Executive management 20 Board of directors 23 Corporate governance 32 Financial statements 33 Directors’ report 45 Lead auditor’s independence declaration 46 Income statement 47 Statement of comprehensive income 48 Balance sheet 49 Statement of cash flows 50 Statement of changes in equity 52 Notes to the financial statements 109 Directors’ declaration 110 Independent auditor’s report 112 Shareholder and statutory information 116 Directory key events – Underlying earnings show strong improvement – Further progress on strategic growth plan – Brazil business continues to strengthen – Lower average debt reflects more effective working capital management – Dividend reinstated facts in brief Trading results Profit/(loss) attributable to shareholders Material items Underlying net profit after tax Sales revenue Total equity Total assets Ratios Earnings per ordinary share Earnings per ordinary share excluding material items Gearing ratio Net tangible assets per ordinary share Distribution to shareholders Annual dividend per ordinary share People Staff employed 12 months ended 31 July 2012 $000 12 months ended 31 July 2011 $000 72,594 42,846 115,440 2,181,551 1,476,802 2,801,268 (49,851) 148,130 98,279 2,083,589 1,564,118 2,837,836 12 months ended 31 July 2012 12 months ended 31 July 2011 22.3 38.7 24.1% $2.88 (23.7) 32.9 22.9% $3.28 6¢ – 3,401 3,193 The financial information contained within our financial statements has been prepared in accordance with IFRS. Refer to page 5 for definitions of the non-IFRS measures used in the annual report. All references to the prior period are to the year ended 31 July 2011 unless otherwise stated. Non-IFRS measures have not been subject to audit or review. Nufarm Limited Annual Report 2012 | 01 Managing director’s review doug rathbone aM Managing director and chief executive The ResULTs FoR The 2012 FinanciaL yeaR aRe veRy saTisFying anD ReFLecT conTinUeD gRowTh anD eaRnings RecoveRy in The BUsiness anD FURTheR PRogRess in ResPecT oF oUR sTRaTegic gRowTh PLan. The company reported a statutory profit after tax of $72.6 million for the 12 months to 31 July, 2012. This compares to a statutory loss after tax of $49.9 million in the previous financial year. Underlying net profit after tax was $115.4 million, representing a 17 per cent increase on the underlying net profit after tax of $98.3 million generated in the previous year. Underlying earnings before interest and tax (EBIT) was $206.0 million, an increase of 20 per cent on the $171.8 million recorded in the 2011 financial year. Group revenues increased by just under five per cent to $2.18 billion (2011: $2.08 billion). On a constant currency basis, revenues increased by almost 10 per cent. Material items amounted to a net loss of $42.8 million, including an after tax impact of $30.5 million associated with the proposed settlement of a shareholder class action (refer subsequent events). Earnings per share were 22.3 cents (2011: a loss of 23.7 cents per share). Excluding material items, earnings per share were 38.7 cents (2011: 32.9 cents). In 2012, we saw earnings growth in all of our crop protection geographic segments, except Asia, which is the smallest of those segments. In particular, it was very pleasing to see the continued turn-around in Brazil, and the very strong improvement in the results generated by that business. In parallel with the strong profit growth achieved in the period, we also delivered very strong outcomes in respect of the balance sheet. Much closer attention to, and more discipline around the management of working capital – and a prudent approach to the management of our capital in general – has enabled us to improve a number of balance sheet parameters. This remains an important focus for the company and we believe there is more that can be achieved in this area. Net working capital at 31 July was $771 million (31 July, 2011: $814 million) while net debt increased marginally to $468 million from $465 million at the same time in the previous year. This small increase included the impact of a debt funded US$55 million acquisition to support growth in the seeds business. Profit/(loss) attributable to shareholders . 9 7 3 1 . 9 9 7 . 6 2 7 . 0 4 2 - . 8 9 4 - 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 n o i l l i m $ 02 | Nufarm Limited Annual Report 2012 Average net debt was lower in 2012 and reflects more efficient management of working capital through the course of the full year. The 2012 financial year was also a period in which we continued to invest in important operational improvements to the business. The strengthening of the management team; enhanced business systems and reporting; and further progress on the implementation of our regional strategies are all important steps to ensuring we put in place the elements that will enable us to secure continued profit growth and improved shareholder returns over the long term. final dividend Directors declared a fully franked final dividend of three cents per share, resulting in a full year dividend of six cents. No dividend was paid in the previous year. The final dividend will be paid on 16 November 2012 to the holders of all fully paid shares in the company as at the close of business on 19 October 2012. There is no conduit foreign income attributed to the dividend. The dividend reinvestment plan (DRP) will be made available to shareholders for the final dividend. Directors have determined that the issue price will be calculated on the volume weighted average of the company’s ordinary shares on the ASX over a period of 10 consecutive trading days commencing after the record date and concluding prior to the date of allotment of ordinary shares under the plan. The last election date for shareholders who are not yet participants in the DRP is 19 October. The board has determined that, for this dividend payment, no discount will apply to shares issued under the DRP. Underlying net profit after tax was $115.4 million, representing a 17 per cent increase Nufarm Limited Annual Report 2012 | 03 Managing director’s review continued Material items The after tax loss associated with material items was $42.8 million (2011: net loss $148.1 million). Major items included $30.4 million in costs associated with the settlement of a shareholder class action; $5 million in restructuring costs; just under $7 million in refinancing costs; and the final amortisation charge associated with the phase-out of several products in Brazil ($3.7 million). Other one-off costs related to litigation expenses and an impairment charge of just under $2 million relating to Nufarm’s minority equity investment in Excel Crop Care Ltd in India. A $7.7 million gain was booked in relation to the foreign exchange revaluation of Nufarm step-up securities (NSS). interest/tax/cash flow Net external interest costs were lower ($40.9 million versus $48.9 million) due to lower average net debt and more cost effective facilities. The reported effective tax rate is 34 per cent. Excluding material items, the underlying effective tax rate is 31.7 per cent (2011: 31.0 per cent), which has been affected by a number of non-recurring items including tax related write-offs in France and Argentina. Adjusting for those non-recurring items, the effective tax rate for the year was 30 per cent. The business generated net operating cash flow of $166.5 million, which was in line with the previous year ($165.2 million). balance sheet management Net debt at year end was $468 million, slightly above that recorded on 31 July of the previous year ($465 million). Average net debt was down from $672 million in 2011 to $614 million in 2012, reflecting more efficient management of working capital through the course of the year. This calculation excludes the impact of the Seeds 2000 acquisition (US$55 million) in December 2011. Net working capital at 31 July reduced to $771 million from $814 million at the end of the previous year. While receivables were up on the prior period due to the late timing of sales in some markets, this was more than offset by improvements on the inventories and payables lines. The payables position at 31 July includes the settlement ($43.5 million) relating to a shareholder class action (refer to subsequent events). Average net working capital as a proportion of sales was 45 per cent, down from 50 per cent in the previous year. This was particularly pleasing given the growth of the business in markets such as Brazil, where industry standard terms place increased pressure on working capital. year ended 31 July 2012 Material items by category Class action settlement Restructuring costs Due diligence and litigation costs Investment in associate write down Intangibles write-off – Brazil Debt refinancing costs Net foreign exchange gains/(losses) on Nufarm step-up securities financing Total material items add back material items impacting net finance costs: – debt refinancing costs impacting net finance costs only – net foreign exchange gains/(losses) on Nufarm step-up securities financing Total material items impacting operating profit Pre-tax $000 after-tax $000 (43,500) (7,295) (3,552) (1,993) (3,708) (9,931) (30,450) (5,013) (2,427) (1,993) (3,708) (6,952) 11,050 7,697 (58,929) (42,846) 8,978 6,285 (11,050) (61,001) (7,697) (44,258) Gearing (net debt to net debt plus equity) was 24.1 per cent (2011: 22.9 per cent). Capital expenditure in 2012 was $47.6 million, representing a return to more normal levels, compared to the $30.6 million expended in 2011 when the company was subject to a refinancing. People and organisation During the 2012 financial year, the company continued to invest in the strengthening of management and the enhancement of business systems. At a head office level, key appointments were made in areas including global product management, finance, risk management, information services and global procurement and supply chain. Several senior appointments were also made at a regional level and within the seed technologies business. I’m confident these people will make a very valuable contribution to the business over future years. Nufarm employees contributed significantly to the much improved financial performance of the business in 2012. This was a period in which many staff – at both a management and employee level – assumed additional responsibilities associated with business improvement projects and undertook training in new management processes and policy. The willingness of our people to rise to that challenge shows a commitment that deserves acknowledgement and the appreciation of the board and our shareholders. subsequent events On 1 August 2012, the company entered into a conditional settlement agreement in relation to the class action proceedings commenced by Maurice Blackburn and Slater & Gordon in early 2011. The settlement covers claims made on behalf of group members who acquired shares during the period from September 2009 to August 2010. The settlement agreement was reached 14 months before the scheduled trial date in September 2013, as part of a court ordered mediation process. 04 | Nufarm Limited Annual Report 2012 Managing director’s review continued Nufarm has agreed to pay $43.5 million, which covers the claims, interest, the costs of the litigation funders and applicants’ legal fees. The settlement is subject to court approval and, if court approval is obtained, the class action will be dismissed without admission of liability by Nufarm. While there remains considerable uncertainty in relation to market conditions in Europe, the company is expecting some improvement in its regional performance as structural changes and a more focused management approach begin to yield benefits. The settlement payment was recorded as a material item in Nufarm’s 2012 financial year accounts. In agreeing to the settlement, the Nufarm board carefully considered risks and costs associated with a protracted litigation, and demand on management’s time as the company implements its strategic growth plans. The seeds technologies segment is again expected to deliver top line and EBIT growth, although 2013 will see additional investment in these businesses to strengthen and consolidate Nufarm’s position. This additional investment will help deliver more secure long term profit growth in the seeds technologies segment. Given at least average seasonal conditions in Nufarm’s major geographic markets, the company is well positioned to generate an improved underlying earnings result in the 2013 financial year. Doug Rathbone AM Managing Director 24 September 2012 outlook With considerable supply pressure on a number of key soft commodities, the pricing outlook in relation to those crops is very strong. If seasonal conditions are supportive, growers will look to take advantage of high crop prices by maximising their yields and this is generally a positive driver of crop protection and seed technology sales. Nufarm will continue to remain very focused on its strategic growth plans and will implement initiatives and make appropriate changes to support those plans. This will include an investment of capital in areas that are seen to deliver higher and more sustainable returns over the medium to long term. The Australian business is expected to perform approximately in line with 2012, given seasonal conditions are similar over the course of the year. The North American business is expected to generate modest growth at an EBIT level, with the benefit of several new product launches not scheduled to have an impact on regional results until the 2014 financial year. iFRs and non-iFRs financial information Nufarm results are reported under International Financial Reporting Standards (IFRS) including underlying EBIT and underlying EBITDA which are used to measure segment performance. Nufarm also includes certain non-IFRS measures including underlying net profit after-tax and gross profit margin. These measures are used internally by management to assess the performance of our business, make decisions on the allocation of our resources and assess operational management. Non-IFRS measures have not been subject to audit or review. The following notes explain the terms used throughout this annual report: 1. Underlying EBIT is earnings before net finance costs, taxation and material items. Underlying EBITDA is underlying EBIT before depreciation and amortisation of $61.781 million for the year ended 31 July 2012 and $60.057 million for the year ended 31 July 2011. We believe that underlying EBIT and underlying EBITDA provide useful information, but should not be considered as an indication of, or an alternative to, profit/(loss) for the period as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity; 2. Underlying EBIT is used to reflect the underlying performance of Nufarm’s operations. Underlying EBIT is reconciled to operating profit below; year ended 31 July Underlying EBIT Material items impacting operating profit Operating profit 3. Non-IFRS measures are defined as follows: 2012 $000 205,973 (61,001) 144,972 2011 $000 171,779 (143,690) 28,089 • underlying net profit after-tax – comprises profit/(loss) for the period attributable to the equity holders of Nufarm Limited less material items as described on page 4; • average gross margin – defined as average gross profit as a percentage of revenue; • average gross profit – defined as revenue less a standardised estimate of production costs excluding material items and non-product specific rebates and other pricing adjustments; • net external interest expense – comprises interest income – external, interest expense – external and lease expense – finance charges as described in note 10 to the 31 July 2012 Nufarm Limited financial report; and • constant currency revenue – reconciled as per the below – whereby ‘(a)’ represents the impact from the fluctuation in exchange rates between all foreign currency denominated amounts and the Australian dollar. Constant currency results exclude any benefit or loss caused by foreign exchange fluctuations between foreign currencies and the Australian dollar, which would not have occurred if there had been a constant exchange rate. South America – and in particular, Brazil – is positioned for another year of strong growth and improved profit performance. Key drivers will be the very buoyant local market conditions, together with further diversification of Nufarm’s portfolio. year ended 31 July FY 2011 revenue as reported Foreign currency translation impact (a) Revenues constant currency adjusted FY 2012 revenue as reported Change % $000 2,083,589 (97,570) 1,986,019 2,181,551 10% Nufarm Limited Annual Report 2012 | 05 Managing director’s review continued Underlying net profit after tax Group sales . 9 3 6 1 . 6 9 5 1 . 4 5 1 1 . 3 8 9 . 6 8 5 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 Underlying EBITDA 1 . 0 8 3 . 3 6 5 3 . 8 7 6 2 8 . 1 3 2 . 3 6 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 Gearing ratio . 8 0 4 . 5 6 3 . 7 5 2 . 9 2 2 1 . 4 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 n o i l l i m $ n o i l l i m $ e g a t n e c r e P 06 | Nufarm Limited Annual Report 2012 7 7 6 2 , 2 9 4 2 , 9 6 1 , 2 2 8 1 , 2 4 8 0 2 , n o i l l i m $ e g a t n e c r e P s t n e C 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 Return on funds employed . 4 7 1 7 . 1 1 . 4 0 1 6 8 . 4 5 . 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 Earnings per share . 7 9 6 . 5 3 3 . 3 2 2 . 0 5 1 - . 7 3 2 - 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 Nufarm Limited Annual Report 2012 | 07 Implementing important changes to support our strategic growth plan 08 | Nufarm Limited Annual Report 2012 business review The BUsiness PeRFoRmeD soLiDLy in The 2012 FinanciaL yeaR, againsT a BackDRoP oF mixeD seasonaL anD maRkeT conDiTions in The vaRioUs geogRaPhies in which nUFaRm oPeRaTes. Australia experienced average seasonal conditions; market conditions in Brazil were mostly positive although areas of the country were impacted by drought; while in the USA – after a good start to the season – severe drought had an impact. Most European markets had challenging climatic conditions during key periods of the year, while economic and credit risks were also elevated in Europe. In the 2012 financial period, the company continued to implement important changes in support of its strategic growth plan. This included a review and realignment of development programs; the further diversification of product offerings; additional resources to support higher value growth segments; and the strengthening of business systems and management at both a corporate head office and regional level. Corporate (head office) costs were higher in 2012 at $41.4 million (2011: $30.5 million). This reflected investment in additional management resources and systems as well as increased incentive payments made in parallel with the earnings recovery in the business. Nufarm’s crop protection business, which accounts for 94 per cent of group revenues, grew sales by three per cent to $2.06 billion and generated an average gross margin of 27 per cent (2011: 27 per cent). The company’s seed technologies business grew sales by 39 per cent to $121.0 million and generated an average gross margin of 53 per cent, slightly up on the previous year (52 per cent). operating segments summary The table above right provides a summary of the performance of the operating segments for the 2012 financial year and the corresponding period. year ended 31 July Revenue Underlying eBiT 2012 2011 change (%) 2012 2011 change (%) ($000) crop protection Australia and New Zealand Asia Europe North America South America 701,022 125,586 431,095 470,243 332,636 674,827 142,297 435,794 418,931 324,544 1,996,393 87,196 – Total crop protection 2,060,582 Seed technologies – global 120,969 Corporate – nufarm group 2,181,551 2,083,589 3.9 -11.7 -1.1 12.2 2.5 3.2 105,982 16,735 43,223 33,327 17,526 94,723 22,319 38,346 16,456 4,107 216,793 175,951 30,589 38.7 26,318 N/A (41,409) (30,490) 171,779 4.7 205,973 11.9 -25.0 12.7 102.5 326.7 23.2 16.2 35.8 19.9 australia/new Zealand The Australian and New Zealand businesses generated $701.0 million in segment sales, representing 34 per cent of total crop protection revenues. This compares with 2011 sales of $675 million (also 34 per cent of total). Underlying EBIT increased from $94.7 million in the 2011 financial year to $106.0 million in 2012, with the majority of the improvement contributed by New Zealand and the Croplands spray machinery business. Seasonal conditions in Australia were average, with generally good rainfalls in most of the eastern and southern states, and a late and dry season in Western Australia. Both pest and disease pressure was below that of the previous year. A solid first half performance was driven by higher value herbicide sales into the cotton and horticulture segments. Glyphosate margins experienced increased pressure with the high level of formulated Chinese imports, but there was solid demand for the company’s post emergent herbicide range, and the launch of a new 2,4-D formulation – Amicide Advance – was very successful. A number of other new products were launched under both the Nufarm and Crop Care brands, and Crop Care’s proprietary ‘suSCon’ controlled release technology continued to secure increased market support. The Croplands machinery business benefited from increased capital expenditure in the farm sector and generated strong sales and an improved margin. Nufarm’s New Zealand business also generated higher sales and improved profitability on the previous year with the important pasture and horticulture markets performing solidly. The company’s New Zealand based insecticide and fungicide manufacturing facility, which produces product for export to Nufarm’s global markets, contributed strongly in its first full year of operation. asia Asian crop protection sales were $125.6 million in 2012 (six per cent of total revenues), compared to $142.3 million in the previous year (seven per cent of total revenues). Underlying EBIT was $16.7 million, down from $22.3 million in 2011. Nufarm Limited Annual Report 2012 | 09 south america South American crop protection sales increased slightly to $332.6 million (2011: $324.5 million), but generated a much stronger underlying EBIT, $17.5 million versus $4.1 million in 2011. Regional sales comprised 16 per cent of total crop protection revenues, the same proportion as in the previous year. Seasonal impacts in Brazil were mixed during the year, with drought conditions in the south of Brazil affecting demand in the first half of the period and dry conditions in the north east of the country having a negative impact on some sales in that region in the latter months of the second half. Conditions in the important central cropping regions were positive, however, and supported a very large ‘safrinha’ corn crop. Brazilian growers looked to capitalise on strong crop prices, and this generated positive demand for crop protection inputs. Nufarm’s Brazilian business strengthened its positions in pasture and sugar cane and introduced new products into several segments, including vegetable crops. In local currency, Brazil sales were up by nearly 14 per cent to R$488 million. Improved margins were driven by new product introductions and a more balanced portfolio. Dry conditions in the north of Argentina affected summer cropping activity, however Nufarm generated increased sales and an improved margin. The business in Chile also performed well but a combination of seasonal impacts and increased competition in some segments resulted in Nufarm’s Colombian operations generating a result in line with the previous year. europe European sales were $431.1 million, down slightly on the previous year (2011: $435.8 million) and represented 21 per cent of total crop protection revenues (2011: 22 per cent). Underlying EBIT improved to $43.2 million, up 13 per cent on the prior year ($38.3 million). Climatic conditions were varied across Europe, with a dry autumn and very cold winter negatively affecting demand in the first half of the year in northern and eastern markets before conditions improved in the spring and summer seasons. Southern Europe also experienced mixed seasonal conditions and the UK recorded its wettest summer in 100 years. Challenging economic and credit conditions had an impact on a number of European markets and this required careful risk management in relation to receivables exposure. On a local currency basis, Nufarm sales were higher in Germany, France, Romania, Hungary and Ukraine and the company reinforced its strong position in the corn herbicide market. Most Mediterranean markets, including Spain and Italy, recorded lower sales. In Italy, Nufarm entered into an agreement with Sumitomo Chemical Company’s local subsidiary and will now sell its crop protection portfolio via Sumitomo’s larger distribution platform. The agreement took effect from 1 August, 2012. Nufarm’s European based phenoxy herbicide manufacturing facilities made a significant contribution to the regional result. Global demand for this range of products was strong and the facilities in Holland, Austria and the UK all produced increased volumes on the previous year and generated improved overhead recoveries. Major product segments crop protection Nufarm’s crop protection business, which accounts for 94 per cent of group revenues, grew sales by three per cent to $2.06 billion and generated an average gross margin of 27 per cent (2011: 27 per cent). Herbicide sales were up five per cent on the previous year to $1.43 billion and generated an average gross margin of 26 per cent (2011: 26 per cent). business review continued A prolonged dry season, which reduced applications in major crops, including the important plantation segment, had an impact on Nufarm’s Indonesian business. Increased pressure on glyphosate margins also contributed to lower sales and a lower EBIT result. A number of new products were launched during the year as the Nufarm businesses in Asia further diversified their portfolios in the rice and fruit and vegetable segments. north america North American crop protection sales increased by just over 12 per cent to $470.2 million. Measured in local currency, the increase in US sales was slightly higher. The region generated 23 per cent of total crop protection revenues (2011: 21 per cent). Underlying EBIT was up strongly, increasing to $33.3 million from $16.5 million in the previous year. After a positive and early start to the major cropping season in the US, conditions deteriorated significantly, with key agricultural regions experiencing the worst drought in many years. Nufarm was able to capitalise on the strong early season conditions with large plantings of corn and soybeans supporting positive demand for herbicides during that period. Glyphosate pricing remained competitive in the US. The dry conditions had a negative impact on the turf and ornamental segment, particularly opportunities for fungicide sales in the latter months of the financial year. Despite this, Nufarm increased its sales in this segment, reflecting its strong market position and customer relationships. The company also performed strongly in the industrial vegetative management segment. Seasonal conditions in Canada were mixed, but increased cropping activity drove stronger demand for crop protection inputs after several years of flood-affected below average plantings. Nufarm Canada benefited from the addition of the Valent range of products in the second half of the financial year. Valent is a subsidiary of Sumitomo Chemical Company. 10 | Nufarm Limited Annual Report 2012 business review continued Glyphosate sales were 22 per cent of crop protection revenues, slightly higher than in the previous year (21 per cent). Pricing and margins improved in some markets, including South America, but increased competitive pressure in Australia and Indonesia led to a fall in glyphosate profitability. Phenoxy herbicides were in strong demand in most markets and Nufarm’s leadership position in this segment helped facilitate both higher sales and an increase in margins. Several new formulations and mixtures were successfully launched and a new production facility for a proprietary dry formulation of 2,4-D was commissioned in India. An expanded position in the pasture market in Brazil helped drive increased sales of picloram, and several other herbicides – including bromoxynil and trifluralin – also recorded increased sales. Insecticide sales were down on the previous year ($184 million versus $197 million) but when these numbers are adjusted to reflect several products that were phased out at the end of last financial year, the segment generated eight per cent growth. These sales generated an average gross margin of 35 per cent (2011: 36 per cent). Insect pressure in South America was relatively high, leading to strong demand for Nufarm’s insecticide portfolio, in particular products based on imidacloprid. Two insecticides that had generated $27.5 million in sales for Nufarm in 2011 were phased out in Brazil at the end of that year, however replacement products generating improved margins have been introduced into the portfolio. Insect pressure in Europe was below average in most markets and Australia did not see a repeat of the locust infestation that generated very high sales of products such as fipronil in the previous year. Other insecticide products to perform strongly in 2012 included lambda- cyhalothrin, on which several new product launches were based, and abamectin. Fungicide sales in 2012 were $213 million versus $244 million in the previous year. A lower average gross margin (28 per cent versus 32 per cent) was achieved. The 2012 financial year was characterised by lower fungal disease pressure in most of Nufarm’s major geographic markets. Dry conditions in the south of Brazil, severe drought through the major cropping regions of the United States and the severe winter experienced in much of Europe all contributed to softer demand for fungicide products in those markets and increased competition for lower sales. Australia also had a lower incidence of fungal disease. Initial registration approvals were secured by Nufarm in France and the UK for azoxystrobin, a major fungicide with global sales in excess of $1 billion. Additional registrations, and related product launches, will follow in other markets. Sales of plant growth regulators were up by just over 12 per cent year on year to $76 million, with a number of niche products positioned in the horticulture segment performing strongly and generating good margins. Nufarm’s spray machinery business, Croplands (Australia and New Zealand), also recorded higher sales ($57 million versus $47 million) and a stronger EBIT contribution. seed technologies The company’s seed technologies business grew sales by 39 per cent to $121.0 million and generated an average gross margin of 53 per cent, slightly up on the previous year (52 per cent). Underlying EBIT was $30.6 million, up from $26.3 million in the previous corresponding period. This segment includes the global Nuseed business and Nufarm’s seed treatment applications. Generally positive seasonal conditions and strong oilseed prices drove growth in canola and sunflower markets in Australia. Nuseed Australia realised excellent growth in all segments including Roundup Ready canola, triazine tolerant canola and high oleic sunflower. The Monola specialty canola oil business experienced a strong lift in demand with several new end-use customers, including KFC Australia, committing to the product for its high stability, low saturate and trans fat free profile. Nuseed’s sorghum business achieved record volume and improved margin, driven by growth in the US domestic market and the establishment of demand for elite hybrids in emerging markets. Increased investment in product development, sales and marketing within South America and Mexico resulted in improved market presence and branded sales growth. The company also invested in the development of its food grade, milling quality grain sorghum, which is attracting strong international interest and the emergence of a completely new high value segment. The Nuseed sunflower business experienced strong organic and acquisition growth in 2012. With the purchase during the year of Seeds 2000 USA, Seeds 2000 Argentina and the breeding assets of Super Seeds in Serbia, Nuseed has established a global breeding and development sunflower platform. Seeds 2000 experienced strong growth in its oilseed sunflower segments in the US and in European markets. The China confection sunflower market saw a drop in total plant acreage in 2012 due to carry over grain stocks from the record crops in 2011. Despite this, Nuseed continued to gain total share of this high value segment. Sales of seed treatment chemistry grew strongly in 2012, with the US, Brazil and European markets contributing the majority of that growth. Several new products were launched and registration approvals were secured to support additional product launches over the next 12 months. Nufarm supplied seed treatment solutions to a number of major seed companies and is increasingly seen as a reliable supply partner in this expanding market segment. During 2012, Nuseed’s global headquarters were relocated to Chicago, reflecting its expanding operations in North America. The company invested in strengthening management, in the optimisation of its seed technologies research and development pipeline and in the establishment of the Nuseed brand. Nufarm Limited Annual Report 2012 | 11 business review continued Sales revenue by region 2012 Crop protection segment Sales revenue by region 2011 Crop protection segment Australia/New Zealand North America South America Europe Asia $2,061 million 34% 23% 16% 21% 6% Australia/New Zealand 34% North America South America Europe Asia $1,996 million 21% 16% 22% 7% Sales by product segment 2012 Crop protection segment Sales by product segment 2011 Crop protection segment Herbicides Fungicides Insecticides Other* 70% 10% 9% 11% Herbicides Fungicides Insecticides Other 68% 12% 10% 10% $2,061 million $1,996 million * Other includes equipment, adjuvants, PGR’s and industrial. Sales by product segment 2012 Seed technologies Sales by product segment 2011 Seed technologies Seed Seed treatment 65% 35% Seed Seed treatment 61% 39% $121.0 million $87.2 million 12 | Nufarm Limited Annual Report 2012 Nufarm Limited Annual Report 2012 | 13 HealtH, safety and environMent nUFaRm conTinUes To PLace a veRy high PRioRiTy on managing anD minimising The comPany’s enviRonmenTaL imPacT anD saFegUaRDing The heaLTh anD saFeTy oF oUR emPLoyees. As an organisation, we support initiatives aimed at improving industry-wide performance; we adhere closely to regulatory requirements; and we are committed to a culture of continuous improvement. It is very disappointing when accidents occur that result in harm to our people. The 2011 tragedy of a fatal accident at our manufacturing facility in Laverton North is a stark reminder of the need to be ever more vigilant when it comes to personal safety in the workplace. Ultimately, the test of how well we maintain a safe working environment comes down to the vigilance and response of individual employees. Despite regular training and the best procedures, circumstances will often result in us having to use initiative and good judgement when going about our own work and encouraging our work colleagues to follow safe work practice. Nufarm’s annual report of its health, safety and environment performance for the calendar year 2011 may be downloaded from the company’s website, together with individual site reports. It provides performance data and examples of initiatives by employees to enhance the safety of our people and customers, and to minimise environmental effects from our operations and products. The health and safety data is collated from 16 manufacturing sites, 20 offices and regional service centres. Not included is data from a further eight offices in Asia and South America. The health and safety data includes permanent and casual employees and contractors, as well as targets set by the Nufarm board, including the expectation of an annual 15 per cent improvement. LTIFR 2006-2011 Severity 2006-2011 4.0 3.5 3.0 2.5 2.0 1.5 1.0 8 7 6 5 4 3 2 0.06 0.05 0.04 0.03 0.02 0.01 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 Limit Actual Limit Actual MTIFR 2006-2011 Unusual incident report/injury report versus LTIFR 2006-2011 14 12 10 8 6 4 2 0 1 0 0 2 3 0 0 2 5 0 0 2 7 0 0 2 9 0 0 2 1 1 0 2 14 12 10 8 6 4 2 0 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 Limit Actual LTIFR UIR/IR ratio 14 | Nufarm Limited Annual Report 2012 HealtH, safety and environMent continued nufarm 2012 limits LtiFR <1.16 MtiFR <2.31 Severity <0.014 LtiFR or lost time injury frequency rate is the number of lost time injuries per million hours worked that result in one or more day’s absence from work. MtiFR or medical treatment injury frequency rate is the number of lost time injuries plus those that did not result in lost time but required treatment by a qualified medical practitioner per million hours worked. Severity is the number of days lost due to injuries per thousand hours worked. Nufarm includes employees, contractors and visitors in its statistics. The injury statistics reported for the 2011 period reflect the fact that it requires only a small number of incidents to reverse a trend of improving performance. Nufarm continues to expand its behavioural training courses across its operations, focusing on people related incidents. A review of the 20 lost time injuries in 2011 showed that all could have been prevented. Engineering solutions remove the more risky situations but what remains are a few injuries that have to do with behaviour. We need to know what happened and then determine what needs to be done to prevent or modify the situation to avoid it resulting in a further incident. The causes may include: lack of training; time pressure; fatigue; lack of understanding (especially of written instructions); and language difficulties. We need to deal with the causes if we are to further reduce injuries. On a broader front, the company has achieved very significant reductions in its carbon emissions over the past decade of operations. Despite a significant increase in the volume of product produced at Nufarm’s global manufacturing facilities, we have reduced our CO2 emissions to 40 per cent of the level produced in 2001. Nufarm’s water consumption has also dramatically reduced through process and technology improvements and a rationalisation of production to improve efficiencies. Water efficiency 2006-2011 Production volume 2006-2011 500 s e n n o t 0 0 0 ‘ 400 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2.5 2.0 1.5 t c u d o r p s e n n o t / r e t a w s e n n o t 200 150 s e n n o t 0 0 0 ‘ 100 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 CO2 released from energy use and processes 2006-2011 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 Nufarm Limited Annual Report 2012 | 15 16 | Nufarm Limited Annual Report 2012 Nufarm Limited Annual Report 2012 | 17 executive ManageMent doug rathbone aM managing director and chief executive Doug Rathbone’s background is chemical engineering and commerce and he has worked for Nufarm Australia Ltd for 39 years. Doug was appointed managing director of Nufarm Australia in 1982 and managing director of Nufarm Ltd in October 1999. He joined the board of directors in 1987. He also served as a non-executive director on the board of CSIRO (2007-2010). brian benson group executive agriculture Brian Benson joined Nufarm in 2000, bringing with him extensive experience in the crop protection industry in the areas of international marketing and strategy. He has degrees in agricultural science and business administration. Brian is responsible for Nufarm’s regional sales operations and commercial strategy. Paul binfield chief financial officer Paul Binfield joined Nufarm in November 2011. He has held senior strategic financial roles at Coles Liquor and Hotels, a major division of Wesfarmers Ltd, and at Mayne Group. Paul has extensive experience in publicly listed and private company finance functions, both in Australia and the UK. bonita croft group executive human resources and organisation development Bonita joined Nufarm in December 2010 in a newly created role responsible for people and organisation structure. She is a very experienced professional who has had previous human resources executive roles in large companies with international operations, including Brambles. rodney Heath group executive corporate services and company secretary Rod Heath has a bachelor of law and joined the company in 1980, initially as legal officer, later becoming assistant company secretary. In 1989, Rod moved from New Zealand to Australia to become company secretary of Nufarm Australia Ltd. In 2000, Rod was appointed company secretary of Nufarm Ltd. greg Hunt group executive global marketing and business development Greg joined Nufarm in February 2012. He has had considerable executive and agribusiness experience with a successful career at Elders Australia Limited where he held a number of management positions focused on both the Australian and international operations of Elders. Greg was appointed chief executive officer of Elders in 2001, a position he held until 2007, leading the company’s operations across a broad range of activity, including rural merchandising and product distribution. After leaving Elders, Greg worked with a number of organisations in business development and agribusiness related advisory roles. He is a director of Tandou Limited. dale Mellody group executive global supply chain and strategic procurement Dale Mellody joined Nufarm as a territory manager in 1995, having completed his bachelor of agricultural science. Promoted to the senior management group in July 2005, he has had various global roles including group executive global marketing, general manager NAFTA and has assisted with a number of company acquisitions. Dale is now responsible for global supply chain and strategic procurement. Mike Pointon group executive innovation and development Mike Pointon joined Nufarm in 2001 and was responsible for Nufarm’s southern European business based in France. He has a degree in agricultural science and over 25 years experience in the crop protection industry. Most recently based in Melbourne with responsibility for Nufarm’s global glyphosate business, Mike was appointed to the executive team in July 2008. He is responsible for the group’s product development and regulatory affairs activities. david Pullan group executive operations David Pullan joined the company in 1985. A mechanical engineer, David has extensive experience in chemical synthesis and manufacturing, having held a variety of operational and management positions in the oil and chemical industries. David is responsible for all of Nufarm’s global manufacturing and production sites. robert reis group executive corporate strategy and external affairs A former journalist, political adviser and lobbyist, Robert joined Nufarm in 1991. Robert has executive management responsibility for corporate strategy and is responsible for global issues management, investor relations, media, government and stakeholder relations. bob ooms group executive chemicals (1999–2012) Bob Ooms joined the company in 1999. An industrial chemist by training, he has more than 40 years experience in the chemical industry. At the time of his retirement in February 2012, he was responsible for global supply chain issues. 18 | Nufarm Limited Annual Report 2012 executive ManageMent continued doug Rathbone AM david Pullan Robert Reis Mike Pointon Bonita croft Brian Benson Paul Binfield dale Mellody Rodney Heath Greg Hunt Nufarm Limited Annual Report 2012 | 19 board of directors donald Mcgauchie ao chairman Donald McGauchie AO, 62, joined the board in 2003 and was appointed chairman on 13 July 2010. He has wide commercial experience within the food processing, commodity trading, finance and telecommunication sectors. He also has extensive public policy experience, having previously held several high-level advisory positions to the government including the Prime Minister’s Supermarket to Asia Council, the Foreign Affairs Council and the Trade Policy Advisory Council. He is a former member of the board of the Reserve Bank of Australia. Donald is chairman of Australian Agricultural Company Limited and a director of James Hardie Industries SE and Graincorp Ltd. Donald is chairman of the nomination and governance committee and a member of the human resources committee. doug rathbone aM managing director and chief executive Doug Rathbone AM, 66, joined the board in 1987. His background is chemical engineering and commerce and he has worked for Nufarm Australia Limited for 39 years. Doug was appointed managing director of Nufarm Australia in 1982 and managing director of Nufarm Limited in October 1999. He was appointed to the board of the CSIRO in 2007 and retired from that board in September 2010. anne brennan gordon davis Anne Brennan, 52, joined the board on 10 February 2011. Gordon Davis, 56, joined the board on 31 May 2011. He has a bachelor of forest science (hons), master of agricultural science and holds a master of business administration. Gordon was managing director of AWB Limited between 2006 and 2010. Prior to this, he held various senior executive positions with Orica Limited, including general manager of Orica Mining Services (Australia, Asia) and general manager of Incitec Fertilizers. He has also served in a senior capacity on various industry associations. Gordon is chairman of the health, safety and environment committee and a member of the audit committee and the human resources committee. She has a bachelor of commerce (hons) from University College Galway and is a fellow of the Institute of Chartered Accountants in Australia and a fellow of the Australian Institute of Company Directors. She has over 25 years experience in senior finance roles and in professional accounting firms. She was formerly the executive finance director for the Coates Group and chief financial officer for CSR. Anne is a director of Myer Limited, Charter Hall Group, Argo Investments Limited and Echo Entertainment Group Limited. She is also a director of Cuscal Limited, Rabobank Australia Limited and Rabobank New Zealand Limited. Anne is a member of the audit committee and health, safety and environment committee. 20 | Nufarm Limited Annual Report 2012 board of directors continued bob edgar (retired 27 March 2012) Bob Edgar, 66, joined the board on 1 June 2009. Dr Edgar holds a bachelor of economics (hons) from University of Adelaide and a PhD from Ohio State University. Bob was deputy chief executive officer of ANZ Banking Group, where he also held the positions of chief operating officer, managing director, institutional financial services and chief economist. Bob is a chairman of Centro Retail Australia and a director of Transurban Holdings Ltd, Transurban Infrastructure Management Ltd, Asciano Ltd, and Linfox Armaguard Pty Ltd. He is also chairman of the Prince Henry’s Institute of Medical Research. Bob was chairman of the human resources committee and a member of the audit committee and nomination committee. John stocker ao (retired 1 December 2011) John Stocker AO, 67, joined the board in 1998. He has a medical, scientific and management background and was formerly chief scientist of the Commonwealth of Australia and formerly chief executive and subsequently chairman of CSIRO. He is a principal of Foursight Associates Pty Ltd and is a director of Telstra Corporation Ltd. John was a member of the audit committee. bruce goodfellow garry Hounsell Peter Margin Bruce Goodfellow, 61, joined the board representing the holders of the ‘C’ shares in 1991. Following the conversion of the ‘C’ shares into ordinary shares, he was elected a director in 1999. He has a doctorate in chemical engineering and experience in the chemical trading business and financial and commercial business management experience. Dr Goodfellow is a director of Sanford Ltd, a public company registered in New Zealand and listed on NZX Limited, Chairman of Refrigeration Engineering Co Ltd and a director of Sulkem Co Ltd and Cambridge Clothing Co Ltd, all privately owned companies. Bruce is a member of the nomination and governance committee. Garry Hounsell, 57, joined the board on 1 October 2004. Peter Margin, 52, joined the board on 3 October 2011. He has a bachelor of business (accounting) and is a former senior partner with Ernst & Young and a former Australian country-managing partner with Arthur Andersen. He has extensive experience across a range of areas relating to management and corporate finance and has worked with some of Australia’s leading companies in consulting and audit roles, with a particular emphasis in the manufacturing sector. Garry is chairman of Pan Aust Ltd and a director of Qantas Airways Limited, Orica Ltd, Dulux Group Ltd, Treasury Wine Estates Limited and has been appointed to the Advisory Board of Rothschilds Australia. Garry is also chairman of the audit committee at Qantas and Dulux. In the past three years Garry has been deputy chairman of Mitchell Communication Group Ltd. Garry is chairman of the audit committee and a member of the nomination and governance committee. He has a bachelor of science (hons) from the University of NSW and holds a master of business administration from Monash University. Peter has many years of leadership experience in major Australian and international food companies. His most recent role was a chief executive of Goodman Fielder Ltd and, before that Peter was chief executive and chief operating office of National Foods Ltd. Peter has also held senior management roles in Simplot Australia Pty Ltd, Pacific Brands Limited (formerly known as Pacific Dunlop Limited), East Asiatic Company and HJ Heinz Company Australia Limited. Peter is currently a director of Bega Cheese Ltd and PMP Limited and has been appointed to the advisory board of Grant Samuel. Over the past three years Peter has been a director of Goodman Fielder Ltd. Peter is chairman of the human resources committee and a member of the health, safety and environment committee. Nufarm Limited Annual Report 2012 | 21 22 | Nufarm Limited Annual Report 2012 corPorate governance nUFaRm’s BoaRD PRocesses have Been RevieweD To ensURe They RePResenT anD PRoTecT The inTeResTs oF aLL sTakehoLDeRs. The review included detailed consideration of the Corporate Governance Principles and Recommendations (‘the ASX principles’), published by the Australian Securities Exchange Limited’s (ASX) Corporate Governance Council. Nufarm’s corporate governance practices can be reviewed in the corporate governance section of our website: www.nufarm.com compliance with asx principles The ASX Listing Rules require Nufarm to disclose in our annual report the extent to which we have adopted the 30 best practice ASX recommendations during our reporting period and, where we do not comply, to explain why not. Nufarm complies with all the ASX principles. Management and oversight of nufarm The board The governing body of the company is the board of directors. The board’s clear responsibility is to oversee the company’s operations and ensure that Nufarm carries out its business in the best interests of all shareholders and with proper regard to the interests of all other stakeholders. The board charter clearly defines the board’s individual and collective responsibilities and describes those delegated to the managing director and senior executives. The board has set specific limits to management’s ability to incur expenditure, enter contracts or acquire or dispose of assets or businesses without full board approval. The board’s specific responsibility is to: • ratify, monitor and review strategic plans for the company and its business units; • approve financial and dividend policy; • review the company’s accounts; • review and approve operating budgets; • approve major capital expenditure, acquisitions, divestments and corporate funding; • oversee risk management and internal compliance; and The company is managed according to the recommendations of ASX Principle 1. • review codes of conduct and legal compliance. The board is also responsible for: • the appointment and remuneration of the managing director; • ratifying the appointment of the chief financial officer and the company secretary; and • reviewing remuneration policy for senior executives and Nufarm’s general remuneration policy framework. The board annually reviews its composition and terms of reference for the board, chairman, board committees and managing director. There are seven scheduled board meetings each year. When necessary, additional meetings are convened to deal with specific issues that require attention before the next scheduled meeting. Each year the board also reviews the strategic plan and direction of the company. At 31 July 2012, there are four board committees: audit; human resources; nomination and governance; and health, safety and environment. All directors are entitled to attend any committee meeting. Details of the attendances at meetings of board and committees during the reporting period appear on page 34 of this report. evaluating the performance of senior executives The performance of the senior executive team is reviewed by the managing director, and then the human resources committee and the board, as part of the annual remuneration review. In the case of the managing director, the human resources committee and the board conduct his review. A performance evaluation of senior executives was undertaken in accordance with this process in the reporting period. The executive compensation principles and remuneration mix are set out in detail in the remuneration report on pages 35 to 44 of this report. A summary of the board charter is available on the corporate governance section of the company’s website. board of directors composition There are seven members of the board with a majority of independent non-executive directors who have an appropriate range of proficiencies, experience and skills to ensure that it properly discharges its responsibilities. The company’s constitution specifies that the number of directors may be neither less than three, nor more than 11. At present there are six non-executive directors and one executive director, namely the managing director, and the board has decided at this time that no other company executive will be invited to join the board. independence Directors are expected to bring independent views and judgement to the board. The board applies the framework set out in ASX Principle 2 to determine the independence of directors. To decide whether a director has a material relationship with the company that may compromise independence, the board considers all relevant circumstances. The board reviewed the ASX principles and the circumstances of individual directors and believes it is unnecessary to define any specific materiality limits, except that a substantial shareholder is defined as one who holds or is associated directly with a shareholder controlling in excess of five per cent of the company’s equity. Tenure The board believes that the way directors discharge their responsibilities and their contribution to the success of the company determines their independence and justifies their positions. The nomination committee reviews the performance of directors who seek to offer themselves for re-election at the company’s annual general meeting. That committee then recommends to the Nufarm Limited Annual Report 2012 | 23 corPorate governance continued board whether or not it should continue to support the nomination of the retiring directors. The board conducts an annual review of the independence of directors and, at the date of this report, it has determined that all directors are independent with the exception of Dr WB Goodfellow (non-executive director) and DJ Rathbone (chief executive officer and managing director). Profiles of each board member, including terms in office, are on pages 20 to 21 of this report. access to independent advice To help directors discharge their responsibilities, any director can appoint legal, financial or other professional consultants, at the expense of the company with the chairman’s prior approval, which may not be unreasonably withheld. The board charter provides that non-executive directors may meet without management present. conflicts of interest Board members must identify any conflict of interest they may have in dealing with the company’s affairs and then refrain from participating in any discussion or voting on these matters. Directors and senior executives must disclose any related party transactions in writing. chairman of the board The chairman is elected annually at the directors’ meeting immediately following the company’s annual general meeting. Nufarm’s chairman, Donald McGauchie, is an independent director. The Nufarm board has stipulated that the role of the chairman and chief executive officer may not be filled by the same person. The board structure is consistent with ASX Principle 2. 24 | Nufarm Limited Annual Report 2012 Nufarm recognises the valuable contribution made by each board member to the effective running of the company. When board positions become available the opportunity is taken to review the mix of skills and experience on the board in considering the skills and experience sought in new directors. This analysis forms the basis of selection criteria, which includes diversity, both as to gender and experience. The board is committed to reviewing its performance and ensuring the board has the skills and knowledge to provide appropriate leadership and governance for the company. For some years now the board has undertaken an annual internal survey of its performance, the results of which are used to monitor and improve performance and identify ongoing development to ensure directors have a suitable level of knowledge of the business. In the current period, this formal internal review was undertaken together with the chairman’s assessment of board members against the skills and experience matrix. An external assessment is being considered in 2013. In line with ASX Principle 2.6 Nufarm applies a capability matrix to assess the collective capability of the board. This matrix covers qualifications, strategic and functional expertise, industry knowledge, business and board experience and diversity. Prior to initiating a search for a new board member, these areas of capability are reviewed in light of Nufarm’s strategy and the prevailing and expected market conditions. The collective capability of the current board is assessed against requirements and the search then focuses on finding a board member who will best complement the current mix of capability on the board. The nomination and governance committee Donald McGauchie is chairman of the nomination committee and Bruce Goodfellow and Garry Hounsell are members, with a majority of independent directors. The committee is chaired by an independent director. The formal charter setting out the committee’s membership requirements includes the following responsibilities: • considering the appropriate size and composition of the board; • developing criteria for board membership selection, composition and assessing the skills required on the board; • reviewing the skills represented on the board and determining whether those skills meet the required skills; • developing a process for the evaluation of the performance of the board, its committees and directors; • recommending changes to the membership of the board; • making recommendations to the board on candidates it considers appropriate for appointment; • reviewing board succession plans; • in conjunction with the human resources committee, ensuring the application of the diversity policy to the selection of board members; • reviewing the time required from non-executive directors and whether those requirements are met; • reviewing any retiring non-executive director’s performance and making recommendations to the board as to whether the board should continue to support the nomination of a retiring non-executive director; • managing the process of managing director recruitment and transition on behalf of the board; • reviewing and approving the company’s corporate governance policies for continuous disclosure and securities trading; and • reviewing the company’s code of conduct and other ethical standards. corPorate governance continued The capability matrix is also used to select induction, development and education activities for the board and to articulate the ongoing relevance of a board member’s expertise prior to recommending re-election of that board member. In 2012 the board reviewed and updated the capability matrix and determined that all the criteria remained relevant and were free of gender bias. The board ensures that new directors are inducted to the company appropriately, including relevant industry knowledge, visits to specific company operations and briefings by key executives. All directors may obtain independent professional advice and have direct access to the company secretary, who is appointed by, and accountable to, the board on all governance matters. The operation of the board is in accordance with the recommendations of ASX Principle 2. A copy of the nomination committee charter and a summary of the policy and procedure for appointment of directors is available on the corporate governance section of the company’s website. ethical and responsible decision-making ethical standards Nufarm operates in many countries and does so in accordance with the social and cultural beliefs of each country. It is politically impartial except where the board believes it is necessary to comment due to any perceived major impact on the company, its business or any of its stakeholders. We require directors, senior executives and all employees to adopt standards of business conduct that are ethical and in compliance with all legislation. Where there are no legislative requirements, the company develops policy statements to ensure appropriate standards and carefully selects and promotes employees. The board endorses the principles of the Code of Conduct for Directors, issued by the Australian Institute of Company directors. Our formal code of conduct is available on the corporate governance section of the company’s website. Diversity and inclusion Nufarm is committed to building a diverse and inclusive workforce. Diversity of gender, sexual orientation, age, ethnicity and religion increase our capability to develop and maintain a high performing workforce, and to better take advantage of the diverse challenges and opportunities we face around the globe. To this end opportunities are provided for our people to work in different countries and regions as part of their development. Leadership teams within countries and regions, are representative of those countries and regions, resulting in truly global representation across the business. In 2012 an initiative was undertaken to better understand our diversity profile and identify opportunities for improvement. As a first step to creating a sustainable diverse workforce, Nufarm established a platform upon which to base diversity objectives and programs. Gender and culture were confirmed as the first areas for specific focus, without diminishing the company’s commitment to inclusion of all employees. Five measurable objectives were set for the year. 1. Adopt a formal diversity policy Nufarm adopted a formal diversity policy in 2012. This policy has been published on our website – www.nufarm.com 2. Articulate nufarm’s overall approach to implementation of the diversity policy Nufarm’s overall approach is to establish and maintain long term sustainable diversity and inclusion. Our initial areas of focus will be gender and culture. The company will combine the use of planned programs to create a diverse talent pool with activities to ensure current employees are treated equitably and provided with equal opportunities for career progression and developmental support. 3. ensure human resources policies and practices support the attraction and retention of women and other diversity candidates In 2012 the following activities were undertaken: • flexible working arrangements were reviewed, and have been available to Nufarm employees for many years; • recruitment and selection processes were reviewed and confirmed as being free of gender or other bias. All recruitment assignments actively seek qualified diverse candidates; • expatriate and relocation policies were reviewed and updated to better facilitate cross-regional movement of employees; and • the Nufarm global performance management and development process was introduced in 2012 providing the opportunity for performance and development discussions with all employees. 4. establish a formal process to collect global gender and cultural diversity statistics Our Equal Opportunity for Women in the Workplace Agency (EOWA) categories were revised in 2012 for greater transparency of our Australian gender statistics. Currently detailed gender and other diversity statistics are not available from all regions. The processes and systems to enable the collection and analysis of this data will be a major focus for the coming year. 5. Review board selection criteria to ensure gender diversity is encouraged The selection criteria for board members were reviewed and confirmed as being appropriate for the company and without inherent gender bias. Gender, experience and cultural diversity are stated criteria in the board capability matrix. Nufarm Limited Annual Report 2012 | 25 corPorate governance continued 2012 gender statistics category Non executive board members Senior executives (MD and direct reports) Permanent full time employees globally Permanent part time* employees globally male 6 9 2,125 24 Female 1 1 597 63 * Part-time = regular hours but less than full time e.g. 20 hrs per week The balance of staff are employed on a casual or temporary basis mainly in manufacturing areas. The mix of male and female varies but is predominantly male. Our diversity and inclusiveness focus in 2013 will be in the following three key areas: 1. build a deeper understanding of our diversity profile through improved reporting and the Nufarm employee survey; 2. create an employee value proposition, targeted at diverse candidates including gender, culture and experience, to attract them to our industry and company; and 3. continue to encourage gender and cultural diversity while maintaining inclusion for all employees. The duties of the human resources committee include: • reviewing and making recommendations to the board on the diversity policy to ensure it is in line with applicable legislation and governance principles; • in conjunction with the nomination committee, ensuring the application of the diversity policy to board appointments and succession; • making recommendations to the board regarding the diversity policy and strategies to address board diversity; • monitoring the application of the diversity policy to executive appointments and succession; and • reviewing remuneration by gender. The manner in which the company promotes ethical and responsible decision making is consistent with ASX Principle 3. safeguard integrity in financial reporting Financial reports The company has put in place a structure of review and authorisation to independently verify and safeguard the integrity of financial reporting. The audit committee reviews the company’s financial statements and the independence of the external auditors. audit committee Garry Hounsell is chairman of the board audit committee with Anne Brennan and Gordon Davis as members. The committee comprises independent non-executive directors and is chaired by an independent director. Details of attendances at meetings of the audit committee are set out on page 34. Garry Hounsell has a bachelor of business (accounting) and is a former senior partner with Ernst & Young and a former Australian country-managing partner with Arthur Andersen. He has extensive experience across a range of areas, relating to management and corporate finance and has worked with some of Australia’s leading companies in consulting and audit roles, with a particular emphasis in the manufacturing sector. He is chairman of PanAust Limited, and a director of Qantas Airways Limited, Orica Limited, Dulux Group Ltd, Treasury Wine Estates Limited and has been appointed to the Advisory Board of Rothschilds Australia. Garry is also chairman of the audit committee at Qantas and Dulux. Anne Brennan has over 25 years experience in senior finance roles and in professional accounting firms. Anne has a bachelor of commerce (hons) from University College Galway and is a fellow of the Institute of Chartered Accountants in Australia and a fellow of the Australian Institute of Company Directors. She was formerly the executive finance director for the Coates Group and chief financial officer for CSR. Anne is a director of Myer Limited, Charter Hall Group, Argo Investments Ltd and Echo Entertainment Group Limited. She is also a director of Cuscal Limited, Rabobank Australia Limited and Rabobank New Zealand Limited. Gordon Davis has a bachelor of forest science (hons), master of agricultural science and holds a master of business administration. Gordon was managing director of AWB Limited between 2006 and 2010. Prior to this, he held various senior executive positions with Orica Limited, including general manager of Orica Mining Services (Australia, Asia) and general manager of Incitec Fertilizers. He has also served in a senior capacity on various industry associations. The committee has a formal charter which is reviewed annually. The charter sets out membership requirements for the committee, its responsibilities and provides that the committee shall annually assess the external auditor’s actual or perceived independence by reviewing the services provided by the auditor. The charter also identifies those services that: • the external auditor may and may not provide; and • require specific audit committee approval. 26 | Nufarm Limited Annual Report 2012 corPorate governance continued The committee has recommended that any former lead engagement partner of the firm involved in the company’s external audit should not be invited to fill a vacancy on the board and the lead engagement audit partner will be required to rotate off the audit after a maximum five years involvement and it will be at least two years before that partner can again be involved in the company’s audit. A copy of the audit committee charter and its duties is available on the corporate governance section of the company’s website. The financial reporting system of the company is consistent with ASX Principle 4. disclosure The company has a detailed written policy and procedure to ensure compliance with both the ASX Listing Rules and Corporations Act. This policy is reviewed regularly with the company’s legal advisers who also provide annual disclosure training to the board and senior executives. The company secretary prepares a schedule of compliance and disclosure matters for directors to consider at each board meeting. Nufarm’s communication policy aims to: • ensure that shareholders and the financial markets are provided with full and timely information about its activities; • comply with its continuous disclosure obligations; • ensure equality of access to briefings, presentations and meetings for shareholders, analysts and media; and • encourage attendance and voting at shareholder meetings. Postal and electronic communication with shareholders includes: • half year and annual reports; • proxy voting; and • notices of AGM. Copies of: • relevant market announcements and related information; and • presentations made to analysts and investor briefings; are also immediately made available on the company’s website. Nufarm’s formal communications policy is available on the corporate governance section of the company’s website. A summary of the disclosure policy is available on the corporate governance section of the company’s website. The company’s policy in relation to the rights of shareholders is consistent with ASX Principle 6. The company’s disclosure policy is consistent with ASX Principle 5. rights of shareholders communication Nufarm is committed to timely, open and effective communication with its shareholders and the general investment community. identifying and managing risk The board is committed to identifying, assessing, monitoring and managing its material business risks. Nufarm’s policies and procedures relating to the management and oversight of risk provide effective management of material risks at a level appropriate to Nufarm’s global business. The board annually, at its strategy review meeting, comprehensively reviews the material risks faced by the company. In so doing, it considers the interests of all relevant stakeholders. In addition, at each board meeting, management report on specific issues of risk and compliance, including legal compliance, health safety and environmental compliance and financial reporting. The company recognises a number of operational risks related to its crop protection business including: • climate conditions and seasonality; • regulatory, freedom to operate, product registration, product use and sustainability; • relationships with key suppliers and customers; and • licences and operating permits for manufacturing facilities. The managing director and the company’s senior management (group executives who report directly to the managing director) are responsible for the management of material risks in their respective areas of responsibility. Their regular reports, submitted for review to each board meeting, will include relevant commentary on any material risk. In the current period, external consultants assisted in the completion of a management review of Nufarm’s risk profile and risk inventory. Management presented a risk profile report to the board to provide assurance that all material risks are being effectively managed. The company remains committed to continuous improvement in relation to effective risk management and during the period appointed a general manager global risk and assurance to enhance and manage the company’s enterprise–wide risk Nufarm Limited Annual Report 2012 | 27 corPorate governance continued management system. The position formally reports to the audit committee and has continual access to the chairman and members of the audit committee. enterprise-wide risk management and internal control framework and oversight of the relationship with the external and internal auditors. The board is responsible for the oversight of the company’s risk management system. The board ensures that appropriate policies are in place to ensure compliance with risk management controls and requires management to monitor, manage and report on business risks. The board delegates certain responsibilities to board committees. All board committees report to the board on risk management issues within their area of responsibility. The nomination and governance committee is responsible for ensuring the company has appropriate governance policies and practices and appropriate ethical standards. During the period the board constituted a new committee, the health, safety and environment (HSE) committee. Gordon Davis is chairman of the HSE committee with Anne Brennan and Peter Margin as members. The committee comprises independent non-executive directors and is chaired by an independent director. The HSE committee assists the board in respect of the company’s responsibilities in relation to health, safety and environment matters arising out of activities within the Nufarm group as they affect employees, contractors, visitors, customers and the communities in which the Nufarm group operates. The audit committee assists the board in regard to financial reporting, audit and risk management, including oversight of the preparation of Nufarm’s financial reporting, compliance with legal and regulatory obligations, oversight of the effectiveness of the Nufarm’s The audit committee has specific oversight of financial and treasury risk, including credit, liquidity and market risks and will refer any relevant matters to the board. The year-end exposure to these risks is described in note 31 of the financial statements. The Nufarm audit committee charter specifies the roles and responsibilities of the committee and the general manager global risk and assurance and requires the committee to: • evaluate the effectiveness of the Group’s process for assessing, monitoring and managing significant risks or exposures and the steps management has taken to minimise such risks to the group as required by ASX Principle 7.2; • assess the effectiveness of, or weaknesses in, the group’s internal control framework including computerised information system controls and security, the overall control environment, and accounting, treasury and financial controls; • consider significant findings and recommendations of the external auditors and internal auditors, together with management’s responses thereto, and the timetable for implementation of recommendations to correct identified weaknesses in internal controls; and • review, with the general manager global risk and assurance and the external auditors, the coordination of audit effort to assure completeness of coverage of key business controls and risk areas, reduction of redundant effort, and the effective use of risk management and audit resources. Senior executives and regional and local financial controllers complete certificates, which are reviewed by the chief financial officer and the audit committee, as part of the company’s reporting to the market and to achieve compliance with Section 295A of the Corporations Act. In accordance with Section 295A, the board procedures to safeguard the integrity of the company’s financial reporting require the chief executive officer and the chief financial officer to state in writing to the board that: • the company’s financial reports present a true and fair view, in all material respects, of the company’s financial condition and operational results and are in accordance with relevant accounting standards; and • the statement is founded on a sound system of risk management and internal compliance and control, which is operating effectively in all material respects in relation to financial reporting risks. The board received in the current reporting period an assurance from the chief executive officer and chief financial officer that the declaration relating to the company’s financial reports has been made with due regard to appropriate risk management controls. A summary of the company’s policies on risk oversight and management of material business risks is available in the corporate governance section of the company’s website. Nufarm’s management of risk is consistent with ASX Principle 7. 28 | Nufarm Limited Annual Report 2012 corPorate governance continued remuneration The board has procedures to ensure that the level and structure of remuneration for executives and directors is appropriate. Full details of the executive remuneration structure are set out in the remuneration report on pages 35 to 44 of this report. • existing or proposed incentive schemes; • retirement and termination benefits and payments for senior management; and • professional indemnity and liability insurance policies. human resources committee Peter Margin is chairman of the human resources committee and Gordon Davis and Donald McGauchie are members. The committee comprises independent non-executive directors and is chaired by an independent director. The committee’s formal charter includes responsibility to review and make recommendations to the board in relation to Nufarm’s board and executive remuneration strategy, structure and practice with regard to: • Nufarm’s strategic objectives; • corporate governance principles; and • competitive practice. The specific matters the committee may consider include the review of: • executive management and directors’ remuneration, including the link between company and individual performance; • current industry best practice; • the outcome of the annual vote on the adoption of the remuneration report; • different methods for remunerating senior management and directors including superannuation arrangements; The committee is responsible for seeking and approving independent remuneration advisers who will provide independent remuneration advice, as appropriate, on board, chief executive officer and other key management personnel remuneration strategy, structure, practice and disclosure. The committee reports to the board on all matters and the board makes all decisions, except when power to act is delegated expressly to the committee. The company distinguishes the structure of non-executive directors’ remuneration from that of senior executives. Details of senior executive and non-executive directors’ remuneration are set out in the remuneration report on pages 35 to 44 of this report. A copy of the human resources committee charter and the company policy on margin loans and prohibiting key management personnel from entering into transactions in associated products which operate to limit the economic risk of security holdings in Nufarm over unvested entitlements (contained within the security trading policy) are available on the corporate governance section of the company’s website. Nufarm’s remuneration policies are consistent with ASX Principle 8. Nufarm Limited Annual Report 2012 | 29 30 | Nufarm Limited Annual Report 2012 Nufarm Limited Annual Report 2012 | 31 financial stateMents 32 | Nufarm Limited Annual Report 2012 DIRECTORS’ REPORT The directors present their report together with the financial report of Nufarm Limited (‘the company’) and of the group, being the company and its subsidiaries and the group’s interests in associates and jointly controlled entities, for the financial year ended 31 July 2012 and the auditor’s report thereon. Directors The directors of the company at any time during or since the end of the financial year are: DG McGauchie AO (Chairman) DJ Rathbone AM (Managing director) AB Brennan GR Davis Dr WB Goodfellow GA Hounsell PM Margin (appointed 3 October 2011) Dr JW Stocker AO (retired 1 December 2011) Dr RJ Edgar (retired 27 March 2012) Unless otherwise indicated, all directors held their position as a director throughout the entire period and up to the date of this report. Details of the qualifications, experience and responsibilities and other directorships of the directors are set out on pages 20 and 21. Company secretary The company secretary is R Heath. Details of the qualifications and experience of the company secretary are set on page 18. Directors’ interests in shares and step-up securities Relevant interests of the directors in the shares and step-up securities issued by the company and related bodies corporate are, at the date of this report, as notified by the directors to the Australian Securities Exchange in accordance with S205G(1) of the Corporations Act 2001, as follows: AB Brennan GR Davis Dr WB Goodfellow 1, 2 GA Hounsell 1 DG McGauchie 1 PM Margin DJ Rathbone Nufarm Ltd ordinary shares 10,000 Nufarm Finance (NZ) Ltd step-up securities – 40,000 1,141,491 43,723 31,239 2,458 11,676,031 – 48,423 – – 1,500 Note, at the date of their retirement Dr JW Stocker and Dr RJ Edgar owned 41,521 and 13,000 shares respectively. 1. The shareholdings of Dr WB Goodfellow, GA Hounsell and DG McGauchie include shares issued under the company’s non-executive director share plan and held by Pacific Custodians Pty Ltd as trustee of the plan. 2. The holding of Dr WB Goodfellow includes his relevant interest in: (i) St Kentigern Trust Board (430,434 shares and 19,727 step-up securities) – Dr Goodfellow is Chairman of the Trust Board. Dr Goodfellow does not have a beneficial interest in these shares or step-up securities. (ii) Sulkem Company Limited (120,000 shares). (iii) 531 Trust (400,861 shares). Dr Goodfellow and EW Preston are trustees of 531 Trust. (iv) Auckland Medical Research Foundation (26,558 step-up securities). Dr Goodfellow does not have a beneficial interest in these step-up securities. (v) Trustees of the Goodfellow Foundation (33,854 shares and 1,338 step-up securities). Dr Goodfellow is Chairman of the Foundation and does not have a beneficial interest in these shares or step-up securities. (vi) Archem Trading (NZ) Ltd (700 step-up securities). Nufarm Limited Annual Report 2012 | 33 DIRECTORS’ REPORT continued Directors’ meetings The number of directors’ meetings (including meetings of board committees) and number of meetings attended by each of the directors of the company during the financial year are: Director Board Audit Committees Human resources Nomination and governance Health science and environment AB Brennan GR Davis Dr WB Goodfellow GA Hounsell DG McGauchie PM Margin1 DJ Rathbone Dr JW Stocker 1 Dr RJ Edgar 1 Meetings held2 13 Meetings attended 12 Meetings held2 3 Meetings attended 3 Meetings held2 – Meetings attended – Meetings held2 – Meetings attended – Meetings held2 1 Meetings attended 1 13 13 13 13 8 13 8 11 13 13 13 13 8 13 7 11 1 – 3 – – – 1 2 1 – 3 – – – 1 1 3 – – 3 1 – – 2 3 – – 3 1 – – 2 – 2 1 2 – – – 1 – 2 1 2 – – – 1 1 – – – 1 – – – 1 – – – 1 – – – 1. PM Margin was appointed a director on 3 October 2011. Dr JW Stocker retired as a director on 1 December 2011. Dr RJ Edgar retired as a director on 27 March 2012. 2. Number of meetings held during the period the director held office. Principal activities and changes Nufarm is a leading global crop protection company and has operated in the industry for over 50 years. Nufarm develops, manufactures and sells a wide range of crop protection products, including herbicides, insecticides and fungicides that help crop producers protect their crops against damage caused by weeds, pests and disease. Nufarm sells its products in most of the world’s major agricultural regions, and operates primarily in the off-patent segment of the crop protection market, which consists of products using technical active ingredients for which the patent has expired. Nufarm’s focus is on creating products that use off-patent active ingredients within a differentiated formulation, delivery system or other technology that provide additional benefits to farmers. The company also has a proprietary seeds business with a portfolio covering canola, sorghum and sunflower crops, and is developing a global presence in the fast growing and high value seed treatment segment. Nufarm employs approximately 3,400 people at its various locations in Australasia, Africa, the Americas and Europe. The company is listed on the Australian Securities Exchange (symbol NUF). Its head office is located at Laverton in Melbourne. Results The net profit attributable to members of the group for the 12 months to 31 July 2012 is $72.6 million. The comparable figure for the 12 months to 31 July 2011 was a loss of $49.9 million. Dividends The following dividends have been paid declared or recommended since the end of the preceding financial year. The interim dividend for 2011–2012 of 3 cents paid 30 April 2012. The final dividend for 2011–2012 of 3 cents as declared and recommended by the directors is payable 16 November 2012. Nufarm step-up securities distributions The following Nufarm step-up securities distributions have been paid since the end of the preceding financial year: Distribution for the period 15 April 2011 – 16 October 2011 at the rate of 6.94 per cent per annum paid 17 October 2011 Distribution for the period 17 October 2011 – 15 April 2012 at the rate of: (i) 6.61 per cent for the period 17 October 2010 – 23 November 2011, and (ii) 8.61 per cent for the period 24 November 2011 – 15 April 2012 paid 16 April 2012 $000 7,865 $000 8,829 10,253 34 | Nufarm Limited Annual Report 2012 DIRECTORS’ REPORT continued Review of operations The review of the operations during the financial year and the results of those operations are set out in the managing director’s review on pages 2 to 6 and the business review on pages 9 to 12. State of affairs The state of the group’s affairs are set out in the managing director’s review on pages 2 to 6 and the business review on pages 9 to 12. Operations, financial position, business strategies and prospects The directors believe that information on the group, which enables an informed assessment of its operations, financial position, strategies and prospects, is contained in the financial accounts, managing director’s review and the business review. Events subsequent to reporting date On 1 August 2012 the company announced that it had entered into a conditional settlement agreement in relation to the class action proceedings originally issued in January 2011 by Maurice Blackburn and Slater & Gordon. In accordance with Accounting Standards the class action settlement amount, along with related legal costs, has been provided for in the financial statements and is reported in the items of material income and expense (refer to note 6 for further information). On 21 September 2012, Nufarm announced that it intended to offer, subject to market and other conditions, US$300 million aggregate principal amount of senior unsecured notes. If successful, the net proceeds would be used to repay existing indebtedness outstanding under the $625 million senior secured syndicated bank facility (SFA) entered into in November 2011. Concurrent with this, US$250 million of the commitments under the $625 million SFA would be cancelled. On 24 September 2012, the directors declared a final franked dividend of 3 cents per share payable 16 November 2012. Likely developments The directors believe that likely developments in the group’s operations and the expected results of those operations are contained in the managing director’s review and the business review. Environmental performance Details of Nufarm’s performance in relation to environmental regulations are set out on pages 14 to 15. The group did not incur any prosecutions or fines in the financial period relating to environmental performance. The group publishes annually a health, safety and environment report. This report can be viewed on the group’s website or a copy will be made available upon request to the company secretary. Non-audit services During the year KPMG, the company’s auditor, has performed certain other services in addition to their statutory duties. Details of the audit fee and non-audit services are set out in note 42 to the financial report. The board has considered the non-audit services provided during the year by the auditor and, in accordance with written advice provided by resolution of the audit committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the reason that all non-audit services were subject to the corporate governance procedures adopted by the company and have been reviewed by the audit committee to ensure they do not impact the integrity and objectivity of the auditor. Remuneration report Introduction Nufarm’s remuneration report is for the year ended 31 July 2012. The report details remuneration information as it applies to Nufarm non-executive directors (NED) and Nufarm’s executives (referred to as key management personnel [KMP]). KMP include the managing director and the group executives who have the authority and responsibility for successfully planning, directing and controlling Nufarm’s business. Remuneration governance The human resources (HR) committee is responsible for reviewing and making recommendations to the board on remuneration policies and packages applicable to KMP. The committee is comprised of three independent non-executive directors and is tasked with ensuring that remuneration policies and packages retain and motivate high calibre executives and have a clear relationship between company performance and executive remuneration. The committee charter can be found at www.nufarm.com Nufarm Limited Annual Report 2012 | 35 DIRECTORS’ REPORT continued The board measures financial performance under the short term incentive (STI) and long term incentive plan (LTIP) using audited numbers. The relative total shareholder return (TSR) will be measured by an independent external advisor. Within this framework the board has discretion to ‘clawback’ deferred STI prior to vesting where: payment is contrary to the financial soundness of the company; in circumstances where the financial performance of Nufarm over the relevant period (including the initial STI performance period) has been mis-stated; and/or for individual gross misconduct. KMP are not permitted to hedge any shares issued to them under the STI while those shares remain held in trust. Key outcomes for the 2012 year detailed in this report include: • fixed remuneration increases for KMP; • STI awards to KMP in line with performance; • initial LTIP awards to KMP; and • fee increases for NEDs. Remuneration advice The human resources committee engaged Mercer as advisors to provide executive remuneration benchmarking data through comparisons to organisations of similar size and complexity to Nufarm and through detailed analysis of KMP compensation trends. This advice covered both fixed and variable components of compensation. Mercer was paid $35,222 for the provision of this advice. No other services were provided by Mercer during the year. The human resources committee appointed Mercer with a set of clear criteria including the requirement for all reporting to be delivered directly to the chairman of the human resources committee. A process was established to ensure that Mercer would be able to carry out its work, including information capture and the formation of its recommendations, free from undue influence from KMP to whom the recommendations would apply. The human resources committee undertook a full and independent review of the advice. The board was satisfied that the remuneration recommendations made by Mercer were free from undue influence by members of the KMP to whom the recommendations would apply. The remuneration recommendations were provided to the Nufarm board as an input into decision making only. The board considered the recommendations, along with other factors, in making its remuneration decisions. Principles of remuneration for the period ended 31 July 2012 As disclosed in last year’s remuneration report, the board undertook a major review of the executive remuneration structure which resulted in: • a change to the target remuneration mix and a plan to move all KMP to this mix over a defined period; • a change to the STI measures to be more directly aligned to financial accountabilities; • the addition of strategic and business improvement objectives to ensure focus on the ongoing health and profitability of the business; and • the introduction of the LTIP to better align executive remuneration with shareholder returns. The company’s remuneration policy for the period ended 31 July 2012 was based on total target reward (TTR) structured to align overall remuneration spend with business performance. TTR was composed of total fixed remuneration (TFR), a variable component of STI linked to current year performance and an LTIP linked to longer term performance and business outcomes. Remuneration mix The TTR for the majority of the KMP (excluding the managing director) will have a mix at target of 55 per cent fixed, 25 per cent STI (50 per cent paid cash and 50 per cent retained in equity) and 20 per cent LTIP (retained in performance rights). New KMP are employed on this basis. For longer serving KMP a case by case transition plan is being implemented to arrive at the target remuneration mix. Individual plans are necessary given different salary levels and contractual arrangements. The effect of this transition is that an increasing percentage of the KMP’s remuneration is ‘at risk’ and is directly linked to company performance in the short, medium and longer term. 36 | Nufarm Limited Annual Report 2012 DIRECTORS’ REPORT continued Fixed remuneration The company’s policy for the fixed reward was benchmarked against Australian executives with reference to the 62.5th percentile of companies of similar size and complexity excluding retail, utilities, financial and resources companies. The 62.5th percentile positioning reflects the reality that while the current KMP are Australian based they have significant international responsibility and operate in a globally competitive employment market where remuneration levels are often higher than in the Australian market. Short term incentive Nufarm’s strategy focuses on growth and increased participation in high value markets with sustainable returns. Therefore our STI program is heavily biased to growth in profitability and a strong focus on balance sheet management. Twenty per cent of STI potential was attached to strategic objectives focused on the development of innovation capability and increased business discipline, both of which the company sees as integral to delivering targeted financial outcomes and returning the company to acceptable returns for shareholders. In 2012 the STI, which rewards annual performance, was delivered through a combination of cash incentive and shares which were retained and will vest 50 per cent on the first anniversary and 50 per cent on the second anniversary. Future awards will vest on the second anniversary. Who participates in the Sti? Plan participants include KMP and senior managers globally. When are awards made? Awards under the plan are made at the end of the financial year. What measures are used in the plan? The board sets measures at the start of each year focused on profitability, balance sheet management and overall return. Noted below are the measures used in 2012 and the measures to be applied in 2013. 2012 80 per cent of the potential is based on budget measures of underlying EBIT and return on operating assets (ROA). 20 per cent of the potential is based on strategic and business improvement objectives. 2013 80 per cent of the potential will be based on net operating profit after tax (NPAT) and average net working capital ANWC/sales*. 20 per cent of the potential is based on strategic and business improvement objectives. These changes in 2013 better reflect Nufarm’s strong focus on the use of capital and refines the alignment of reward to business outcomes and shareholder returns. When and how are the Sti payments determined? Awards are assessed annually at the end of the financial year. Awards are based on the percentage achievement against the budget and strategic measures. Percentage budget achievement Percentage of STI target award realised <85 Nil 85 25 100 100 120* 150 Straight-line vesting between 85 per cent and budget and between budget and 120 per cent budget achievement. Are payments in cash or shares? 50 per cent of STI paid in cash at time of performance testing and 50 per cent deferred into shares or rights in the company for nil consideration. Strategic and business improvement objectives are assessed on a merit basis against stated objectives. When do the shares vest? Vesting will occur on the second anniversary subject to continued employment. The unvested awards are subject to the clawback provisions of the plan. 2012 awards will vest 50 per cent on the first anniversary and 50 per cent on the 2nd anniversary. Future awards will vest in full on the second anniversary. * In respect of the ANWC/sales measure in FY13, the maximum potential budget achievement will be set at 110 per cent. Nufarm Limited Annual Report 2012 | 37 DIRECTORS’ REPORT continued Long term incentive plan Nufarm’s LTIP commenced in 2012 and is based on the principle of aligning executive interests and reward with those of shareholders. Return on funds employed (ROFE) has long been held as an important metric for Nufarm and it was considered important to include a return measure in the LTIP. Relative TSR recognises that investors will choose to invest their money in industries and companies with acceptable returns. This plan rewards executives to the degree the company performs against two hurdles over three years. Why have an LtiP? Who participates in the LtiP? Are the awards cash or shares? This plan aligns executive interests and earnings with the longer term Nufarm strategy and the interests of shareholders. The current participants in the plan are KMP and other selected senior managers (together, the LTIP participants). Awards are granted to Australian executives in the form of performance rights, which comprise rights to acquire ordinary shares in the company for nil consideration, subject to the achievement of global performance hurdles. The plan rules provide the flexibility to use other instruments to comply with local regulations and sound practice. When are the awards made? Under the plan, Australian LTIP participants receive an annual award of performance rights as soon as practical after the announcement of results for the preceding year. In the case of the managing director the award is delayed until after shareholder approval is gained at an AGM. The initial awards were made to LTIP participants (excluding the managing director) in the first quarter of 2012 in line with the individual transition plans mentioned above under ‘remuneration mix’. How are the number of rights calculated? The number of rights for the 2012 award was calculated at ‘face value’ using the five day VWAP post the announcement of annual results for FY12. The 2013 awards will be valued in the same way. The board will review the efficacy of a fair value methodology for the 2014 awards. When do the awards vest? The performance/vesting period for awards is three years. Awards will vest in two equal tranches as follows: To be eligible the LTIP participant needs to be employed by Nufarm on the vesting date. Why have RoFe and relative tSR been chosen as the hurdles? What is the comparator group for the assessment of relative tSR? How is relative tSR measured? • 50 per cent of the LTIP grant will vest subject to the achievement of a relative TSR performance hurdle measured against a selected comparator group of companies; and • the remaining 50 per cent of the LTIP grant will vest subject to the three year average of an absolute ROFE target. ROFE is used to track progress towards the goal to return long term results back to acceptable levels for Nufarm. Strong relative TSR performance ensures Nufarm is an attractive investment for shareholders. Based on the results of research and modelling carried out by Ernst & Young, the board approved the adoption of the ‘S&P ASX 200 excluding those companies in the Financial, Materials and Energy groups’ as the TSR comparator group. This provides a group which is large enough for sound measurement with exclusions that reduce the volatility by removing companies which are in significantly different industries to Nufarm. This comparator group is also seen as an appropriate representation of Nufarm’s competitors for investment. TSR will be measured over the performance period. For the purposes of this measurement, each company’s share price will be measured using the average closing price over 60 days up to (but excluding) the first day of the performance period, and the average closing price over 60 days up to and including the last day of the performance period. 38 | Nufarm Limited Annual Report 2012 DIRECTORS’ REPORT continued What is the relative tSR performance required for vesting? tSR of nufarm relative to the tSR of comparator group companies Less than 50th percentile 50th percentile Between 51st percentile and 75th percentile 75th percentile Proportion of tSR grant vesting 0 per cent 50 per cent Straight-line vesting between 50 per cent and 100 per cent 100 per cent vesting How is the RoFe measure set? ROFE objectives are set by the board at the beginning of each year. There is both a ‘target’ and a ‘stretch’ hurdle. These numbers are based on the budget and growth strategy. How is RoFe measured? Return is calculated on the group’s earnings before interest and taxation and adjusted for any non-operating items. Funds employed are represented by shareholder’s funds plus total interest bearing debt. For the purposes of measuring ROFE performance in the LTIP, ROFE will be averaged over the life of the plan. What RoFe result is required for vesting? Percentage of RoFe target achieved Less than target Proportion of RoFe grant vesting 0 per cent Target Between target and stretch Stretch 50 per cent Straight-line vesting between 50 per cent and 100 per cent 100 per cent What was the result for the 2012 year? There is no partial vesting of the LTI before the third anniversary which will be 31 July 2014. However the 2012 ROFE result of 10.4 per cent is currently tracking at a level of performance required to achieve the 2014 ROFE target hurdle rate. What happens if the awards do not vest? To the extent the TSR and ROFE performance hurdles are not met at the end of the initial three year performance period and full vesting is not achieved, performance will not be retested and the award will lapse. Link between performance and KMP remuneration outcomes • Fixed and variable remuneration review – given the financial performance of the group and the contribution to the continued recovery of the business, KMP were granted a four per cent increase in fixed remuneration and short term incentive potential. Salary benchmarking carried out by Mercer confirmed that a four per cent increase was in line with market movement in executive salaries. • STI – based on an underlying EBIT result at 100.2 per cent of target and a return on operating assets result at 105.4 per cent of target and performance against individual strategic and business improvement objectives, KMP were awarded an STI. – Individual objectives were driven by Nufarm’s strategy and the goals to deliver on sustainable innovation and business discipline across the business. These objectives included organisation restructuring, management and board renewal, business process and systems improvements and the implementation of initiatives to support growth in higher value segments. • LTIP – The LTIP vests on the third anniversary. While both measures are tested on the third anniversary, the 2012 ROFE result of 10.4 per cent is currently tracking at a level to achieve the 2014 ROFE target hurdle rate. The table below summarises the company’s performance and shareholder wealth statistics over the last five years. *Underlying EBIT ROFE achieved Dividend rate Dividends paid **Change in share price Share price 31 July EPS $m 307.6 312.5 148.4 171.8 206.0 % 17.0 13.0 6.0 7.6 10.4 cents per share 33 69.7 33.5 (15.0) (23.7) 22.3 35 15 – 3 $000 58,332 65,297 32,709 – 7,865 $ 3.75 (6.01) (7.02) 0.52 1.13 $ 16.85 10.84 3.82 4.34 5.47 ***Total shareholder return % 31.5 (33.8) (62.7) 13.6 26.8 2008 2009 2010 2011 2012 * Underlying EBIT is earnings before net finance costs, taxation and material items. Underlying EBIT is a non-IFRS measure used to reflect the underlying performance of Nufarm’s operations. Underlying EBIT is reconciled to operating profit in the managing director’s review (pages 2 to 6). Refer to note 2(e) of the Nufarm Limited financial statements for a discussion of the classification of foreign exchange gains or losses and debt establishment costs as net finance costs in 2012 and all prior periods. ** This column reflects the change in share price from 1 August to 31 July in the relevant financial year. *** Source: JB Were. Nufarm Limited Annual Report 2012 | 39 DIRECTORS’ REPORT continued 2012 STI outcomes 2012 STI Potential KMP Doug Rathbone*** At target $ 1,560,000 At maximum $ 2,340,000 To be paid in cash in October 2012 $ 652,454 2012 STI Awarded Retained in shares vesting on 1st anniversary $ 489,341 Retained in shares vesting on 2nd anniversary $ 489,341 Paul Binfield* David Pullan Brian Benson Robert Reis Greg Hunt** Dale Mellody Mike Pointon Bonita Croft Rodney Heath 213,000 497,297 475,675 411,840 198,000 360,360 251,909 219,648 216,216 319,500 745,945 713,512 617,760 297,000 540,495 377,863 329,472 324,324 109,226 259,987 248,683 215,310 100,545 182,991 129,179 114,832 113,038 54,613 129,994 124,342 107,655 50,273 91,496 64,590 57,416 56,519 54,613 129,994 124,342 107,655 50,273 91,496 64,590 57,416 56,519 * Potential pro-rated to reflect nine months service. ** Potential pro-rated to reflect six months service. *** Retained STI in cash. 2012 LTIP allocations Doug Rathbone Paul Binfield David Pullan Brian Benson Robert Reis Greg Hunt Dale Mellody Mike Pointon Bonita Croft Rodney Heath Value of award $ 750,000 *Number of performance rights 180,749 227,000 150,696 144,144 124,800 218,000 109,200 76,336 66,650 65,520 54,710 36,320 34,740 30,080 52,588 26,320 18,340 16,040 15,790 * Rights were valued at $4.1494 being the five day VWAP post the announcement of 2011 annual results. Rights will vest on 31 July 2014 to the degree that the ROFE and relative TSR hurdles are met. Service contracts The company has employment contracts with the KMP. These contracts formalise the terms and conditions of employment. The contracts are for an indefinite term. The contracts of the managing director and most other KMP named in this report were entered into prior to the announcement of legislation to change termination payment limits for executives: • the company may terminate the contract of the managing director, either immediately or by giving 12 months notice, in which case the managing director will be paid a termination payment equivalent to 24 months TFR (base salary plus value of benefits such as motor vehicle and superannuation and any fringe benefits tax in relation to those benefits). The contract also provides for the company to be able to make a payment in lieu of notice should it wish, for payment of any entitlements due under existing STI and LTI plans and for payment of applicable statutory entitlements; • the managing director may terminate the contract by giving the company 12 months notice. In this event, the contract provides an entitlement for the managing director to a termination payment equal to any part of the notice period, paid in lieu, by the company. In addition, the managing director will be paid any entitlements due under existing STI and LTI plans and all applicable statutory entitlements; • in certain limited circumstances, the managing director may also terminate his contract on immediate notice. This includes where there is a change of duties or responsibilities without the managing director’s agreement which has the effect of material change in status and in certain other limited circumstances. If the contract is terminated in these circumstances, the managing director will, in general, be entitled to the payments outlined above where the company terminates on immediate notice. In extremely limited circumstances, the managing director may also be entitled to an additional amount equal to 24 months entitlement under the STI and LTI plans; 40 | Nufarm Limited Annual Report 2012 DIRECTORS’ REPORT continued • the company may terminate the contract of other KMP by six months notice in which case a termination payment equivalent to 12 months total employment cost will be paid. In addition, the contracts provide for payment of any part of the applicable notice period paid in lieu, plus any entitlements due under existing STI and LTI plans (including any entitlements which would have been payable under the STI and LTI plans in the period ending on the later of i) the last day of the financial year following notice of termination or ii) six months following notice of termination) and applicable statutory entitlements; and • the company may terminate the employment contracts immediately for serious misconduct. Termination benefits • Under the rules of the STI plan if a KMP leaves before the vesting anniversary under ‘qualifying leaver’ provisions the equity will remain in the plan until the vesting date. If the KMP leaves under other than ‘qualifying leaver’ circumstances the equity will be forfeited. • To be eligible under the LTI plan the KMP must be employed by Nufarm on the first anniversary of the allocation. If the executive leaves before this date the allocation is forfeited. If the executive leaves under ‘qualifying leaver’ provisions after the first anniversary and before the third anniversary of the plan the allocation will be pro-rated and the pro-rated allocation will remain ‘on foot’ in the plan subject always to certain overriding discretions set out in the plan, and to supervening provisions in certain executive contracts, which extend or alter the manner in which the pro-rating is undertaken. • ‘Qualifying leaver’ provisions include participants who cease employment due to retirement, death, ill health/disability, redundancy, or contract severance without cause by Nufarm. • The rules of the plans provide the flexibility, in special circumstances (e.g. health or severe personal hardship), to accelerate the vesting. In the case of the STI this would result in the shares being released from the trust to the KMP. In the case of the LTI plan the qualifying allocation will be tested against the hurdles to determine the value (if any) of the allocation. Non-executive directors The board’s policy with regard to NED remuneration is to position board remuneration at the market median with comparable sized listed entities. The board determines the fees payable to non-executive directors within the aggregate amount approved from time to time by shareholders. At the company’s 2009 AGM, shareholders approved an aggregate of $1,600,000 per year (excluding superannuation costs). Set out below are details of the annual fees payable for the year ending 31 July 2012 (including superannuation costs). Increases in these fees were effective as of 1 February 2012 and bring board remuneration in line with market practice. The board’s decision in relation to NED fee increases was informed by independent advice received from the Godfrey Remuneration Group. The fee changes remained well within the approved cap. Chairman 1 General board Audit committee chair Audit committee member HSE committee chair HSE committee member Human resources committee chair Human resources committee member Nomination and governance committee chair Nomination and governance committee member 1. The chairman receives no fees as a member of any committee. Fees applicable for the period to 31 January 2012 $ 319,000 Fees applicable from 1 February 2012 to the 31 July 2012 $ 330,000 126,500 27,500 5,500 11,000 2,750 11,000 2,750 135,000 27,500 11,000 16,500 5,500 22,000 8,250 11,000 1,375 per meeting Nufarm Limited Annual Report 2012 | 41 DIRECTORS’ REPORT continued Remuneration of directors and executives Details follow of the nature and amount of each major element of remuneration in respect of the non-executive directors and key management personnel, which includes the managing director and group executives. In AUD directors’ non-executive AB Brennan GR Davis Dr RJ Edgar3 Dr WB Goodfellow GA Hounsell DG McGauchie Dr JW Stocker4 P Margin2 GDW Curlewis (Deputy chairman) Sub total non–executive directors’ remuneration executive director DJ Rathbone (Managing director) total directors’ remuneration Group executives DA Pullan (Group executive operations) P Binfield5 (Chief financial officer) BF Benson (Group executive marketing) G Hunt6 (Group executive global marketing) RG Reis (Group executive corporate strategy and external affairs) DA Mellody (Group executive global supply chain and strategic procurement) MJ Pointon (Group executive innovation and development) BJ Croft (Group executive human resources and organisation development) R Heath (Company secretary) RF Ooms7 (Group executive chemicals) KP Martin8 (Chief financial officer) Sub total – total executive remuneration total directors’ and executive remuneration Short term Non- monetary benefits $ Salary and fees $ Cash bonus (vested) $ 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 128,864 56,093 135,025 20,035 84,833 128,446 121,364 117,500 155,114 140,000 295,000 290,000 40,455 120,000 110,310 – – 57,974 1,070,965 930,048 1,451,451 1,370,932 2,522,416 2,300,980 702,458 677,411 449,875 – 624,858 605,879 270,310 – 542,504 538,472 475,262 464,054 298,261 290,204 285,629 173,940 245,157 239,274 604,812 534,781 – 556,748 4,499,126 4,080,763 7,021,542 6,381,743 – – – – – – – – – – – – – – – – – – 1,141,795 300,000 1,141,795 300,000 259,987 – 309,226 – 248,683 – 100,545 – 215,310 – 182,991 – 129,179 – 114,832 100,000 113,038 – – – – – 1,673,791 100,000 2,815,586 400,000 – – – – – – – – – – – – – – – – – 51,508 65,781 51,508 65,781 – 20,414 – – 22,030 33,548 – – 22,829 33,355 31,612 6,419 35,468 34,387 – – 38,096 28,836 13,293 13,173 – 31,750 163,328 201,882 214,836 267,663 1. Represents total remuneration in the financial year. 2. Peter Margin was appointed a director on 3 October 2011. 3. Dr RJ Edgar retired as a director on 27 March 2012. 4. Dr JW Stocker retired as a director on 1 December 2011. 5. Paul Binfield was appointed chief financial officer on 7 November 2011. 6. Greg Hunt was appointed as group executive global marketing on 6 February 2012. 7. Robert Ooms left Nufarm on 29 February 2012. The payments to Mr. Ooms comprised his entitlements and termination under the conditions of his employment contract. 8. Kevin Martin left Nufarm on 30 June 2011. 42 | Nufarm Limited Annual Report 2012 Post- employment Share based payments Other long term Total1 Total Superannuation benefits Equity settled $ $ Termination Percentage of remuneration performance Value of options as a proportion of total based remuneration % % Total remuneration $ 128,864 56,093 135,025 20,035 84,833 128,446 121,364 117,500 155,114 140,000 295,000 290,000 40,455 120,000 110,310 – – 57,974 1,070,965 930,048 2,644,754 1,736,713 3,715,719 2,666,761 962,445 697,825 759,101 895,571 639,427 370,855 – – 780,643 571,827 689,865 470,473 462,908 324,591 400,461 273,940 396,291 268,110 618,105 547,954 – 588,498 6,336,245 4,382,645 10,051,964 7,049,406 $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,525,000 2,026,238 1,525,000 2,026,238 1,525,000 2,026,238 12,886 5,609 13,482 2,003 8,483 12,844 12,136 11,750 14,511 14,000 29,500 29,000 4,045 12,000 11,031 – – 5,797 106,074 93,003 24,102 24,102 130,176 117,105 45,854 47,938 13,311 48,800 48,725 16,667 – 34,646 24,220 24,300 24,300 46,791 48,900 47,917 28,316 45,890 47,330 28,992 49,550 – 44,000 353,168 363,279 483,344 480,384 $ – – – – – – – – – – – – – – – – – – – – – – – 233,393 233,393 145,844 115,000 102,024 139,504 115,000 96,166 – – 120,784 115,000 103,432 75,000 72,830 75,000 64,418 100,000 63,412 50,000 75,000 – – 908,414 720,000 1,141,807 720,000 $ – – – – – – – – – – – – – – – – – – 178,174 170,228 178,174 170,228 17,400 14,233 19,671 13,510 – – – – 20,455 11,826 13,969 10,033 8,520 6,917 – – – – 9,316 5,827 11,994 12,359 89,331 86,699 267,505 256,927 141,750 61,702 148,507 22,038 93,316 141,290 133,500 129,250 169,625 154,000 324,500 319,000 44,500 132,000 121,341 – – 63,771 1,177,039 1,023,051 3,080,423 1,931,043 4,257,462 2,954,094 1,171,543 874,996 874,436 1,103,546 816,662 483,688 – – 956,528 722,873 831,566 579,806 591,049 455,408 512,796 402,256 514,909 371,267 2,172,097 684,498 – 2,671,095 9,212,158 7,578,861 13,469,620 10,532,955 45 16 35 13 24 35 14 41 35 16 34 13 34 16 35 50 34 13 – 11 – 8 – 3 – 6 3 – 11 3 – 3 – 3 – 3 – 3 – – – – Remuneration of directors and executives Details follow of the nature and amount of each major element of remuneration in respect of the non-executive directors and key management personnel, which includes the managing director and group executives. Post- employment Share based payments Other long term Total1 DIRECTORS’ REPORT continued Salary and Cash bonus (vested) fees $ Total $ Superannuation $ benefits Equity settled $ $ Termination 128,864 56,093 135,025 20,035 84,833 128,446 121,364 117,500 155,114 140,000 295,000 290,000 40,455 120,000 110,310 – – 57,974 1,070,965 930,048 2,644,754 1,736,713 3,715,719 2,666,761 962,445 697,825 759,101 – 895,571 639,427 370,855 – 780,643 571,827 689,865 470,473 462,908 324,591 400,461 273,940 396,291 268,110 618,105 547,954 – 588,498 6,336,245 4,382,645 10,051,964 7,049,406 12,886 5,609 13,482 2,003 8,483 12,844 12,136 11,750 14,511 14,000 29,500 29,000 4,045 12,000 11,031 – – 5,797 106,074 93,003 24,102 24,102 130,176 117,105 45,854 47,938 13,311 48,800 48,725 16,667 – 34,646 24,220 24,300 24,300 46,791 48,900 47,917 28,316 45,890 47,330 28,992 49,550 – 44,000 353,168 363,279 483,344 480,384 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,525,000 – – 2,026,238 1,525,000 2,026,238 1,525,000 2,026,238 – – – – – – – – – – – – – – – – – – – – 233,393 – 233,393 – – 145,844 115,000 102,024 – 139,504 115,000 96,166 – 120,784 115,000 103,432 75,000 72,830 75,000 64,418 100,000 63,412 50,000 – 75,000 – 908,414 720,000 1,141,807 720,000 Percentage of remuneration performance based % Value of options as a proportion of total remuneration % Total remuneration $ 141,750 61,702 148,507 22,038 93,316 141,290 133,500 129,250 169,625 154,000 324,500 319,000 44,500 132,000 121,341 – – 63,771 1,177,039 1,023,051 3,080,423 1,931,043 4,257,462 2,954,094 1,171,543 874,996 874,436 – 1,103,546 816,662 483,688 – 956,528 722,873 831,566 579,806 591,049 455,408 512,796 402,256 514,909 371,267 2,172,097 684,498 – 2,671,095 9,212,158 7,578,861 13,469,620 10,532,955 45 16 35 13 24 35 14 41 35 16 34 13 34 16 35 50 34 13 – 11 – 8 – 3 – 6 3 – 11 3 – 3 – 3 – 3 – 3 – – – – $ – – – – – – – – – – – – – – – – – – 178,174 170,228 178,174 170,228 17,400 14,233 – – 19,671 13,510 – – 20,455 11,826 13,969 10,033 8,520 6,917 – – 9,316 5,827 – 11,994 – 12,359 89,331 86,699 267,505 256,927 7. Robert Ooms left Nufarm on 29 February 2012. The payments to Mr. Ooms comprised his entitlements and termination under the conditions of his employment contract. Nufarm Limited Annual Report 2012 | 43 Short term Non- monetary benefits $ – – – – – – – – – – – – – – – – – 51,508 65,781 51,508 65,781 20,414 22,030 33,548 22,829 33,355 31,612 6,419 35,468 34,387 – – – – – – – 38,096 28,836 13,293 13,173 – 31,750 163,328 201,882 214,836 267,663 $ – – – – – – – – – – – – – – – – – – 1,141,795 300,000 1,141,795 300,000 259,987 309,226 248,683 100,545 215,310 182,991 129,179 114,832 100,000 113,038 – – – – – – – – – – – – 1,673,791 100,000 2,815,586 400,000 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 128,864 56,093 135,025 20,035 84,833 128,446 121,364 117,500 155,114 140,000 295,000 290,000 40,455 120,000 110,310 – – 57,974 1,070,965 930,048 1,451,451 1,370,932 2,522,416 2,300,980 702,458 677,411 449,875 624,858 605,879 270,310 – – 542,504 538,472 475,262 464,054 298,261 290,204 285,629 173,940 245,157 239,274 604,812 534,781 – 556,748 4,499,126 4,080,763 7,021,542 6,381,743 In AUD directors’ non-executive AB Brennan GR Davis Dr RJ Edgar3 Dr WB Goodfellow GA Hounsell DG McGauchie Dr JW Stocker4 P Margin2 GDW Curlewis (Deputy chairman) Sub total non–executive directors’ remuneration executive director DJ Rathbone (Managing director) total directors’ remuneration Group executives DA Pullan (Group executive operations) P Binfield5 (Chief financial officer) BF Benson (Group executive marketing) G Hunt6 (Group executive global marketing) RG Reis (Group executive corporate strategy and external affairs) DA Mellody (Group executive global supply chain and strategic procurement) MJ Pointon (Group executive innovation and development) BJ Croft (Group executive human resources and organisation development) R Heath (Company secretary) RF Ooms7 (Group executive chemicals) KP Martin8 (Chief financial officer) Sub total – total executive remuneration total directors’ and executive remuneration 1. Represents total remuneration in the financial year. 2. Peter Margin was appointed a director on 3 October 2011. 3. Dr RJ Edgar retired as a director on 27 March 2012. 4. Dr JW Stocker retired as a director on 1 December 2011. 5. Paul Binfield was appointed chief financial officer on 7 November 2011. 6. Greg Hunt was appointed as group executive global marketing on 6 February 2012. 8. Kevin Martin left Nufarm on 30 June 2011. DIRECTORS’ REPORT continued Remuneration options: granted and vested during the year During the year 465,677 performance rights were granted to executives under the LTIP. No options vested or were exercised by the specified executives. Shares issued as a result of the exercise of options There were no shares issued as a result of the exercise of options during the year. Unissued shares under option There are no unissued shares under option. Indemnities and insurance for directors and officers The company has entered into insurance contracts, which indemnify directors and officers of the company, and its controlled entities against liabilities. In accordance with normal commercial practices, under the terms of the insurance contracts, the nature of the liabilities insured against and the amount of premiums paid are confidential. An indemnity agreement has been entered into between the company and each of the directors named earlier in this report. Under the agreement, the company has agreed to indemnify the directors against any claim or for any expenses or costs which may arise as a result of the performance of their duties as directors. There are no monetary limits to the extent of this indemnity. Lead auditor’s independence declaration The lead auditor’s independence declaration is set out on page 45 and forms part of the directors’ report for the financial year ended 31 July 2012. Rounding of amounts The company is of a kind referred to in Australian Securities and Investment Commission Class Order 98/100 dated 10 July 1998 and, in accordance with that class order, amounts in the financial statements and the directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. This report has been made in accordance with a resolution of directors. DG McGauchie Director DJ Rathbone Director Melbourne 24 September 2012 44 | Nufarm Limited Annual Report 2012 LEaD aUDITOR’S INDEPENDENCE DECLaRaTION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 To: the directors of Nufarm Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 July 2012 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG BW Szentirmay Partner Melbourne 24 September 2012 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Nufarm Limited Annual Report 2012 | 45 INCOME STaTEMENT FOR THE YEAR ENDED 31 JULY 2012 continuing operations Revenue Cost of sales(a) Gross profit Other income Sales, marketing and distribution expenses General and administrative expenses(a) Research and development expenses Share of net profits of equity accounted investees operating profit Financial income(a) Financial expenses(a) Net foreign exchange gains/(losses) on Nufarm step-up securities financing net financing costs Profit/(loss) before income tax Income tax benefit/(expense) Consolidated 2012 $000 2011 $000 Note 2,181,551 2,083,589 (1,570,657) (1,521,643) 610,894 561,946 7 10,124 13,033 (240,543) (234,036) 19 10 10 6, 10 (198,007) (37,874) 378 144,972 16,097 (61,796) 11,050 (278,757) (36,474) 2,377 28,089 27,524 (67,210) (20,951) (34,649) (60,637) 110,323 (32,548) 11 (37,501) (16,981) Profit/(loss) for the period from continuing operations 72,822 (49,529) Attributable to: Equity holders of the company Non-controlling interest Profit/(loss) for the period earnings per share Basic earnings/(loss) per share Diluted earnings/(loss) per share The income statement is to be read in conjunction with the attached notes. (a) Comparative amounts have been reclassifed to align with current classification. Refer to note 2(e) for details. 72,594 228 (49,851) 322 72,822 (49,529) 30 30 22.3 22.3 (23.7) (23.7) 46 | Nufarm Limited Annual Report 2012 STaTEMENT OF COMPREhENSIvE INCOME FOR THE YEAR ENDED 31 JULY 2012 Profit/(loss) for the period other comprehensive income Foreign exchange translation differences for foreign operations Actuarial gains/(losses) on defined benefit plans Income tax on share based payment transactions Income tax on share issue costs recognised directly in equity other comprehensive loss for the period, net of income tax total comprehensive loss for the period Attributable to: Equity holders of the company Non-controlling interest total comprehensive loss for the period The amounts recognised directly in equity are disclosed net of tax. The statement of comprehensive income is to be read in conjunction with the attached notes. Note Consolidated 2012 $000 72,822 2011 $000 (49,529) (135,859) (122,220) (5,494) (1,699) 93 – – (22) (141,260) (123,941) (68,438) (173,470) (68,666) (173,400) 228 (70) (68,438) (173,470) Nufarm Limited Annual Report 2012 | 47 BaLaNCE ShEET AS AT 31 JULY 2012 Assets Cash and cash equivalents Trade and other receivables Inventories Current tax assets Assets held for sale total current assets Non-current assets Trade and other receivables Investments in equity accounted investees Other investments Deferred tax assets Property, plant and equipment Intangible assets Other financial assets total non-current assets totAL ASSetS Current liabilities Bank overdraft Trade and other payables Loans and borrowings Employee benefits Current tax payable Provisions total current liabilities Non-current liabilities Payables Loans and borrowings Deferred tax liabilities Employee benefits total non-current liabilities totAL LiABiLitieS net ASSetS Equity Share capital Reserves Retained earnings equity attributable to equity holders of the company Nufarm step-up securities Non-controlling interest totAL eQuitY The balance sheet is to be read in conjunction with the attached notes. 48 | Nufarm Limited Annual Report 2012 Consolidated 2012 $000 2011 $000 Note 15 16 17 18 13 16 19 20 18 22 23 21 15 24 25 26 18 28 24 25 18 26 191,317 730,496 515,254 37,664 – 257,706 666,124 541,679 40,659 8,830 1,474,731 1,514,998 41,095 4,126 6,213 181,633 370,780 722,690 – 47,184 7,567 5,969 182,502 373,805 705,811 – 1,326,537 1,322,838 2,801,268 2,837,836 – 474,991 292,323 18,167 14,834 6,742 10,881 394,022 700,671 22,102 2,298 5,256 807,057 1,135,230 10,246 366,798 95,823 44,542 517,409 1,324,466 1,476,802 1,059,522 (326,915) 496,663 1,229,270 246,932 600 13,031 11,374 76,898 37,185 138,488 1,273,718 1,564,118 1,058,151 (193,210) 451,472 1,316,413 246,932 773 1,476,802 1,564,118 STaTEMENT OF CaSh FLOwS FOR THE YEAR ENDED 31 JULY 2012 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees(a) Cash generated from operations Interest received Dividends received Interest paid Income tax paid net cash from operating activities 38 Cash flows from investing activities Proceeds from sale of property, plant and equipment Proceeds from sales of businesses and investments Payments for plant and equipment Purchase of businesses, net of cash acquired Payments for acquired intangibles and major product development expenditure net investing cash flows Cash flows from financing activities Debt establishment transaction costs(a) Proceeds from borrowings Repayment of borrowings Distribution to Nufarm step-up security holders Dividends paid net financing cash flows Net increase/(decrease) in cash and cash equivalents Cash at the beginning of the year Exchange rate fluctuations on foreign cash balances cash and cash equivalents at 31 July The statement of cash flows is to be read in conjunction with the attached notes. (a) Comparative amounts have been reclassifed to align with current classification. Refer to note 2(e) for details. 15 Consolidated 2012 $000 2011 $000 Note 2,163,049 2,273,304 (1,927,654) (2,034,079) 235,395 239,225 7,910 151 (48,824) (28,127) 166,505 591 4,915 (47,569) (53,914) (34,320) (130,297) (26,960) 832,466 (863,406) (19,082) (7,614) (84,596) (48,388) 246,825 (7,120) 191,317 7,518 296 (56,372) (25,434) 165,233 1,180 6,128 (30,635) – (37,381) (60,708) (10,838) 21,872 (2,671) (16,967) (388) (8,992) 95,533 160,705 (9,413) 246,825 Nufarm Limited Annual Report 2012 | 49 STaTEMENT OF ChaNgES IN EqUITy FOR THE YEAR ENDED 31 JULY 2012 Consolidated Balance at 1 August 2010 Foreign exchange translation differences Actuarial gains/(losses) on defined benefit plans Shares issued to employees Accrual and issue of shares under global share plan Tax benefit/(expense) on share issue costs Profit/(loss) for the period Distributions to Nufarm step–up security holders Balance at 31 July 2011 Balance at 1 August 2011 Foreign exchange translation differences Actuarial gains/(losses) on defined benefit plans Income tax on share based payment transactions Profit/(loss) for the period Accrued employee share award entitlement Issuance of shares under employee share plans Dividends paid to shareholders Dividend reinvestment plan Distributions to Nufarm step–up security holders Acquisition of non-controlling interest Share capital $000 1,057,861 Translation reserve $000 (105,331) Capital profit reserve $000 33,627 – – 312 – (22) – – (122,220) – – – – – – – – – – – – – 1,058,151 (227,551) 33,627 451,472 1,316,413 246,932 1,058,151 (227,551) 33,627 451,472 1,316,413 246,932 – – – – – 768 – 603 – – (135,859) – – – – – – – – – – – – – – – – – – – (49,851) (49,851) (70) (49,921) (12,220) (12,220) Other reserve $000 717 – – – (3) – – – 714 714 – – 93 – 2,829 (768) – – – – Retained earnings $000 515,242 (1,699) – – – – (5,494) 72,594 (7,865) (14,044) – – – – – – Total $000 1,502,116 (122,220) (1,699) 312 (3) (22) (135,859) (5,494) 93 72,594 2,829 – (7,865) 603 (14,044) – Nufarm step-up securities $000 246,932 Non-controlling interest $000 843 Total equity $000 1,749,891 (122,220) (1,699) 312 (3) (22) (12,220) 1,564,118 1,564,118 (135,859) (5,494) 93 72,822 2,829 – (8,216) 603 (14,044) (50) – – – – – – – – – – – – – 773 773 228 (351) (50) – – – – – – – – – – – – – – – – – Balance at 31 July 2012 1,059,522 (363,410) 33,627 2,868 496,663 1,229,270 246,932 600 1,476,802 The statement of changes in equity is to be read in conjunction with the attached notes. 50 | Nufarm Limited Annual Report 2012 STaTEMENT OF ChaNgES IN EqUITy continued FOR THE YEAR ENDED 31 JULY 2012 Nufarm step-up securities $000 246,932 Non-controlling interest $000 843 Consolidated Balance at 1 August 2010 Foreign exchange translation differences Actuarial gains/(losses) on defined benefit plans Shares issued to employees Accrual and issue of shares under global share plan Tax benefit/(expense) on share issue costs Profit/(loss) for the period Distributions to Nufarm step–up security holders Balance at 31 July 2011 Balance at 1 August 2011 Foreign exchange translation differences Actuarial gains/(losses) on defined benefit plans Income tax on share based payment transactions Profit/(loss) for the period Accrued employee share award entitlement Issuance of shares under employee share plans Dividends paid to shareholders Dividend reinvestment plan Distributions to Nufarm step–up security holders Acquisition of non-controlling interest Share Translation Capital profit capital $000 reserve $000 1,057,861 (105,331) reserve $000 33,627 (122,220) – – 312 – (22) – – – – – – – – – – 768 603 – – – – – – – – – – – – – – – 1,058,151 (227,551) 33,627 1,058,151 (227,551) 33,627 (135,859) – – – – – – – – – – – – – – – – – Other reserve $000 717 – – – (3) – – – 714 714 – – 93 – 2,829 (768) – – – – Retained earnings $000 515,242 – (1,699) – – – Total $000 1,502,116 (122,220) (1,699) 312 (3) (22) (49,851) (49,851) (12,220) (12,220) – – – – – – – 451,472 1,316,413 246,932 451,472 1,316,413 246,932 – (5,494) – 72,594 – – (7,865) – (14,044) – (135,859) (5,494) 93 72,594 2,829 – (7,865) 603 (14,044) – – – – – – – – – – – Total equity $000 1,749,891 (122,220) (1,699) 312 (3) (22) (49,921) (12,220) 1,564,118 1,564,118 (135,859) (5,494) 93 72,822 2,829 – (8,216) 603 (14,044) (50) – – – – – (70) – 773 773 – – – 228 – – (351) – – (50) Balance at 31 July 2012 1,059,522 (363,410) 33,627 2,868 496,663 1,229,270 246,932 600 1,476,802 The statement of changes in equity is to be read in conjunction with the attached notes. Nufarm Limited Annual Report 2012 | 51 NOTES TO ThE FINaNCIaL STaTEMENTS 1. Reporting entity Nufarm Limited (the ‘company’) is a company limited by shares and domiciled in Australia that is listed on the Australian Securities Exchange. The address of the company’s registered office is 103-105 Pipe Road, Laverton North, Victoria, 3026. The consolidated financial statements of the company as at and for the year ended 31 July 2012 comprise the company and its subsidiaries (together referred to as the ‘group’ and individually as ‘group entities’) and the group’s interest in associates and jointly controlled entities. The group is a for-profit entity and is primarily involved in the manufacture and sale of crop protection products used by farmers to protect crops from damage caused by weeds, pests and disease. 2. Basis of preparation (a) Statement of compliance The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRSs) adopted by the International Accounting Standards Board (IASB). The consolidated financial statements were authorised for issue by the board of directors on 24 September 2012. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments which are measured at fair value. The methods used to measure fair values are discussed further in note 4. The group’s financial report has been prepared on the going concern basis, which assumes the realisation of assets and extinguishment of liabilities in the ordinary course of business. The going concern basis is considered appropriate by the directors having regard to the group’s access to appropriate lines of credit to support the group’s working capital and general corporate financing requirements through its three year $625 million syndicated bank facility and a debtors’ securitisation facility, entered into in November 2011 and August 2011 respectively. (c) Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the company’s functional currency. The company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and, in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. (d) Use of estimates and judgements The preparation of financial statements in conformity with AASBs 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 estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant impact on the amount recognised in the financial statements are described below. (i) Business combinations Fair valuing assets and liabilities acquired in a business combination involves making assumptions about the timing of cash inflows and outflows, growth assumptions, discount rates and cost of debt. Refer to note 14 for details of acquisitions made during the period. (ii) impairment testing The group determines whether goodwill and intangibles with indefinite useful lives are impaired on an annual basis or at each reporting date if required. This requires an estimation of the recoverable amount of the cash-generating units, using a value in use discounted cash flow methodology. The estimation of future cash flows requires management to make significant assumptions concerning the identification of impairment indicators, earnings before interest and tax, growth rates, applicable discount rates and useful lives. Further details can be found in note 23 on intangibles. Other non-current assets are also assessed for impairment indicators. 52 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 2. Basis of preparation (continued) (d) Use of estimates and judgements (continued) (iii) income taxes The group is subject to income taxes in Australia and overseas jurisdictions. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. Where the final tax outcome of these matters is different from the amounts initially recorded, such differences will impact the current and deferred tax provisions in the period in which the tax determination is made. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be utilised. The assessment of probability involves estimation of a number of factors including future taxable income. (iv) defined benefit plans A liability in respect of defined benefit pension plans is recognised in the balance sheet, and is measured as the present value of the defined benefit obligation at the reporting date less the fair value of the pension plan’s assets. The present value of the defined benefit obligation is based on expected future payments which arise from membership of the fund at the reporting date, calculated annually by independent actuaries. Consideration is given to expected future salary levels, experience of employee departures and periods of service. Refer note 26 for details of the key assumptions used in determining the accounting for these plans. (v) Valuation of inventories Inventories of finished goods, raw materials and work in progress are valued at lower of cost and net realisable value. The net realisable value of inventories is the estimated market price less costs to sell at the time the product is expected to be sold. (vi) capitalised development costs Development expenditures are recognised as an intangible asset when the group judges and is able to demonstrate: (a) the technical feasibility of completing the intangible asset so that it will be available for use; (b) intention to complete; (c) ability to use the asset; and (d) how the asset will generate future economic benefits and the ability to measure reliably the expenditure during development (e) Reclassification – foreign exchange gains or losses and debt establishment transaction costs Foreign exchange gains of $8.189 million (2011: $20.006 million) and debt establishment transaction costs of $12.972 million (2011: $10.838 million) are classified within net financing costs in the income statement and attached notes having previously been disclosed within cost of sales and general and administrative expenses respectively. Debt establishment cash outflows of $26.960 million (2011: $10.838 million) are classified within cash flows from financing activities having previously been disclosed within cash flows from operating activities. Net foreign exchange gains on proceeds from Nufarm step-up securities financing of $11.505 million (2011: loss $20.951 million) are also classified within net financing costs in the income statement and attached notes. Comparatives have been adjusted to present them on the same basis as current period figures. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by group entities. (a) Basis of consolidation (i) Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the group takes into consideration potential voting rights that currently are exercisable. Acquisitions on or after 1 July 2009 For acquisitions on or after 1 July 2009, the group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; • plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. Nufarm Limited Annual Report 2012 | 53 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (a) Basis of consolidation (continued) Acquisitions on or after 1 July 2009 (continued) When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. Acquisitions between 1 July 2004 and 1 July 2009 For acquisitions between 1 July 2004 and 1 July 2009, goodwill represents the excess of the cost of the acquisition over the group’s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit and loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the group incurred in connection with business combinations were capitalised as part of the cost of the acquisition. Acquisitions prior to 1 July 2004 (date of transition to IFRSs) As part of its transition to IFRSs, the group elected to restate only those business combinations that occurred on or after 1 July 2003. In respect of acquisitions prior to 1 July 2003, goodwill represents the amount recognised under the group’s previous accounting framework, Australian GAAP. Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. (ii) Subsidiaries Subsidiaries are entities controlled by the group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed where necessary to align them with the policies adopted by the group. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. (iii) investments in equity accounted investees Associates are those entities in which the group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the group holds between 20 and 50 per cent of the voting power of another entity. Jointly controlled entities are those entities over whose activities the group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Investments in associates and jointly controlled entities are accounted for using the equity method and are initially recognised at cost. The group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the group’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the group, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the group’s share of losses exceeds its interest in an equity accounted investment, the carrying amount of that interest, including any long term investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that the group has an obligation or has made payments on behalf of the investee. 54 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (a) Basis of consolidation (continued) (iv) transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency gains and losses are included in net financing costs as they are mostly derived from financing arrangements. Proceeds from the Nufarm step-up securities (note 29) have been utilised to provide funding throughout the group. This has provided a foreign currency exposure when the funding currency denomination differs from the respective entity’s functional currency. Foreign exchange gains and losses arising on these proceeds have been disclosed as a material item in finance costs (note 6 and note 10). (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income. Since 1 August 2004, the group’s date of transition to AIFRS, such differences have been recognised in the foreign currency translation reserve (FCTR). When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to profit or loss as part of the profit or loss on disposal. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and are presented within equity in the FCTR. (c) Financial instruments (i) non-derivative financial assets The group initially recognises loans and receivables on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the group becomes a party to the contractual provisions of the instrument. The group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risk and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the group has the legal right to offset the amounts and intends to settle on a net basis or to realise the asset and settle the liability simultaneously. The group has the following non-derivative financial assets: financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. Nufarm Limited Annual Report 2012 | 55 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (c) Financial instruments (continued) (i) non-derivative financial assets (continued) Financial assets at fair value through profit or loss A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the group manages such investments and makes purchases and sale decisions based on their fair value in accordance with the group’s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit and loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. Financial assets designated at fair value through profit or loss comprise equity securities that otherwise would have been classified as available for sale. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any direct attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the group’s cash management are included as a component of cash and cash equivalents for the purposes of the statement of cash flows. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified as another category of financial asset. Available-for-sale financial assets are recognised initiallly at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and any changes other than impairment losses are recognised in other comprehensive income and presented in the fair value reserve in equity. When an investment is derecognised, the cumulative gain or loss in equity is reclassified to profit or loss. (ii) non-derivative financial liabilities The group initially recognises debt securities and subordinated liabilities on the date they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the group becomes a party to the contractual provisions of the instrument. The group derecognises a financial liability when its contractual obligations are discharged or cancelled or expired. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the group has the legal right to offset the amounts and intends to settle on a net basis or to realise the asset and settle the liability simultaneously. The group has the following non-derivative financial liabilities: loans and borrowings, bank overdrafts and trade and other payables. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest rate method. (iii) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any related income tax benefit. Dividends on ordinary shares are recognised as a liability in the period in which they are declared. Hybrid securities The group has on issue a hybrid security called Nufarm step-up securities (NSS). The NSS are classified as equity instruments but as non-controlling interests as they are issued by a subsidiary. After-tax distributions thereon are recognised as distributions within equity. 56 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (c) Financial instruments (continued) (iv) derivative financial instruments, including hedge accounting The group holds derivative financial instruments to manage its foreign currency and interest rate risk exposures. Derivatives are recognised initially at fair value, with attributable transaction costs recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives continue to be measured at fair value, with changes therein accounted for in profit or loss. Cash flow hedges The group has not entered into any cash flow hedging transactions in the current or comparative periods. (d) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net in general and administrative expenses. (ii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. (iii) depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives, unless it is reasonably certain that the group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: • buildings 15–50 years • leasehold improvements 5 years • plant and equipment 10–15 years • motor vehicles 5 years • computer equipment 3 years Depreciation methods, useful lives and residual values are reassessed at each reporting date. (e) Intangible assets (i) Goodwill Goodwill that arises upon the acquisition of business combinations is included in intangible assets. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity accounted investee. Nufarm Limited Annual Report 2012 | 57 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (e) Intangible assets (continued) (ii) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in profit or loss when incurred. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the group has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use and capitalised borrowing costs. Development expenditure that does not meet the above criteria is recognised in profit or loss as incurred. Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. (iii) intellectual property Intellectual property consists of product registrations, product access rights, trademarks, task force seats, product distribution rights and product licences acquired from third parties. Generally, product registrations, product access rights, trademarks and task force seats, if purchased outright, are considered to have an indefinite life. Other items of acquired intellectual property are considered to have a finite life in accordance with the terms of the acquisition agreement. Intellectual property intangibles acquired by the group are measured at cost less accumulated amortisation and impairment losses. Expenditure on internally generated goodwill and brands is expensed when incurred. (iv) other intangible assets Other intangible assets that are acquired by the group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses. (v) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognised in profit or loss when incurred. (vi) Amortisation Amortisation is calculated over the cost of the asset, less its residual value. With the exception of goodwill, intangibles with a finite life are amortised on a straight-line basis in profit and loss over the estimated useful lives of the intangible assets from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life for intangible assets with a finite life, in the current and comparative periods, are as follows: • capitalised development costs 5 – 10 years • intellectual property – finite life over the useful life in accordance with the acquisition agreement terms • computer software 3 – 7 years Amortisation methods, useful lives and residual values are reassessed at each reporting date. (f) Leased assets Leases where the group assumes substantially all of the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised in the group’s balance sheet. 58 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (g) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (h) Impairment (i) non-derivative financial assets A financial asset, not carried at fair value through profit or loss, is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence of impairment includes default or deliquency by a debtor, indications that a debtor will enter bankruptcy, and, in the case of an investment in an equity security, a significant or prolonged decline in its fair value. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of estimated future cash flows discounted at the original effective interest rate. An impairment loss on an available-for-sale financial asset is recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit and loss. The cumulative loss that is reclassified from equity to profit and loss is the difference between the acquisition cost and the current fair value less any impairment loss previously recognised in profit and loss. If, in a subsequent period, the fair value of an impaired available-for-sale financial asset increases and the increase relates to an event occurring after the impairment loss was recognised then the impairment loss is reversed, with the amount of the reversal recognised in profit and loss. (ii) non-financial assets The carrying amounts of the group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash-generating unit is the greater of its value-in-use and its fair value less costs to sell. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ‘cash-generating unit’). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of other assets in the unit on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Nufarm Limited Annual Report 2012 | 59 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (h) Impairment (continued) (ii) non-financial assets (continued) Goodwill that forms part of the carrying amount of an investment in an associate is not recognised separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired. (i) Non-current assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than continuing use are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the group’s accounting policies. Thereafter generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets and employee benefit assets, which continue to be measured in accordance with the group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated. In addition, equity accounting of equity accounted investees ceases once classified as held for sale or distribution. (j) Employee benefits (i) defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (ii) defined benefit plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The group’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognised past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the group, the recognised asset is limited to the net total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that may apply to any plan in the group. An economic benefit is available to the group if it is realisable during the life of the plan, or on settlement of the plan liabilities. When the benefits of a fund are improved, the portion of the increased benefit relating to past service by employees is recognised in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in profit or loss. The group recognises all actuarial gains and losses arising from the defined benefit plans directly in other comprehensive income. The group recognises gains and losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss on curtailment comprises any resulting change in the fair value of plan assets, change in the present value of defined obligation and any related actuarial gains and losses and past service cost that had not previously been recognised. (iii) other long term employee benefits The group’s net obligation in respect of long term employee benefits, other than defined benefit plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on-costs; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the group’s obligations. The calculation is performed using the projected unit credit method. Any actuarial gains or losses are recognised in profit or loss in the period in which they arise. 60 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (j) Employee benefits (continued) (iv) termination benefits Termination benefits are recognised as an expense when the group is demonstrably committed, without a realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the group has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. (v) Short term benefits Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. 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. (vi) Share-based payment transactions The group has a global share plan for employees whereby matching and loyalty shares are granted to employees. The fair value of matching and loyalty shares granted is recognised as expense in the profit or loss over the respective service period, with a corresponding increase in equity, rather than as the matching and loyalty shares are issued. Refer note 27 for details of the global share plan. The group has a short term incentive plan (STI) available to key executives, senior managers and other managers globally. A predetermined percentage of the STI is paid in cash with the remainder deferred into shares which have either a one or two year vesting period. The cash portion is recognised immediately as an expense at the time of performance testing. The expense relating to deferred shares is expensed over the vesting period. Refer to note 27 for further details on this plan. The group has a long term incentive plan (LTIP) which is available to key executives and certain selected senior managers. Peformance rights have been granted to acquire ordinary shares in the company subject to the achievement of global performance hurdles. The expense in relation to the LTIP is recognised over the vesting period of three years. Refer note 27 for further details on this plan. (k) Provisions A provision is recognised if, as a result of a past event, the group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost. A provision for restructuring is recognised when the group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for. (l) Revenue (i) Goods sold Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognised when persuasive evidence of an arrangement exists, usually in the form of an executed sales agreement, that 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. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognised as a reduction of revenue as the sales are recognised. (ii) dividend income Dividend income is recognised when the right to receive the payment is established. This is generally at the point the dividend has been formally declared. (m) Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Nufarm Limited Annual Report 2012 | 61 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (m) Lease payments (continued) Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed. determining whether an arrangement contains a lease At the inception of an arrangement, the group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the group the right to control the use of the underlying asset. At inception or upon reassessment of the arrangement, the group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the group concludes for a finance lease that it is impracticable to separate the payments reliably, an asset and liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the group’s incremental borrowing rate. (n) Finance income and finance costs Finance income comprises interest income on funds invested, changes in the fair value of financial assets at fair value through profit or loss, and gains on hedging instruments that are recognised in profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings, transaction costs, unwinding of the discount on provisions, changes in the fair value of financial assets classified as fair value through profit or loss, dividends on preference shares classified as liabilities, impairment losses recognised on financial assets and losses on hedging instruments that are recognised in profit or loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest rate method. (o) Income tax Income tax expense comprises current and deferred tax. Current and deferred taxes are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they will probably not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of cash dividends are recognised at the same time as the liability to pay the related dividend is recognised. The group does not distribute non-cash assets as dividends to its shareholders. 62 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (o) Income tax (continued) (i) tax consolidation The company and its wholly-owned Australian resident entities are part of a tax-consolidated group. As a consequence, all members of the tax-consolidated group are taxed as a single entity. The head entity within the tax-consolidated group is Nufarm Limited. Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the head entity in the tax-consolidated group and are recognised by the company as amounts payable/(receivable) to/(from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the company as an equity contribution or distribution. The company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. (ii) nature of tax funding arrangements and tax sharing agreements The head entity, in conjunction with other members of the tax-consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability/(asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable/ (payable) equal in amount to the tax liability/(asset) assumed. The inter-entity receivables/(payables) are at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity, in conjunction with other members of the tax-consolidated group, has also entered a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of the income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. (p) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST or equivalent), except where the GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant tax authorities are classified as operating cash flows. (q) Earnings per share The group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all potential dilutive ordinary shares, which comprise convertible notes and share options granted to employees. Nufarm Limited Annual Report 2012 | 63 NOTES TO ThE FINaNCIaL STaTEMENTS continued 3. Significant accounting policies (continued) (r) Segment reporting determination and presentation of operating segments An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the group’s other components. All operating segments’ results are reviewed regularly by the group’s CEO to make decisions about resources to be allocated to the segment and to assess its performance. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly loans and borrowings and related expenses, corporate assets and head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill. (s) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 July 2012, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the group, except for AASB 9 Financial Instruments, which becomes mandatory for the group’s 2016 consolidated financial statements and could change the classification and measurement of financial assets. The group does not plan to adopt this standard early and the extent of the impact has not been determined. 4. Determination of fair values A number of the group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, and willingly. The market value of items of plant, equipment, fixtures and fittings is based on the market approach and cost approaches quoted market prices for similar items when available and replacement cost when appropriate. (ii) Intangibles assets The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. (iii) Inventories The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on effort required to complete and sell the inventories. (iv) Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes. 64 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 4. Determination of fair values (continued) (v) Derivatives 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 based on broker quotes. Those quotes are tested for reasonableness by future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. (i) non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases, the market rate of interest is determined by reference to similar lease agreements. (ii) Share-based payment transactions The fair value of the performance rights issued under the Nufarm long term incentive plan have been measured using Monte Carlo Simulation and the Binomial Tree. The fair value of the deferred shares granted to participants under the Nufarm short term incentive will be measured using the volume weighted average price for the five day period subsequent to year end results announcement. Measurement inputs include the share price on the measurement date, the exercise price of the instrument, expected volatility, expected term of the instruments, dividends, and the risk-free rate (based on government bonds). 5. Operating segments Segment information is presented in respect of the group’s key operating segments. The operating segments are based on the group’s management and internal reporting structure. Operating segments The group operates predominantly along two business lines, being crop protection and seed technologies. The crop protection business deals in the manufacture and sale of crop protection products used by farmers to protect crops from damage caused by weeds, pests and disease. It is managed by major geographic segments, being Australia and New Zealand, Asia, Europe, North America and South America. The North America region includes Canada, USA, Mexico and the Central American countries. The South America region includes Brazil, Argentina, Chile, Uruguay, Paraguay, Bolivia, Colombia and the Andean countries. The seed technologies business deals in the sale of seeds and seed treatment products. The seed technologies business is managed on a worldwide basis. Information regarding the results of each operating segment is included below. Performance is measured based on underlying EBIT as included in the internal management reports that are reviewed by the group’s CEO. Underlying EBIT is used to measure performance as management believes that such information is the most relevant in evaluating the results of each segment. Segment revenue is based on the geographic location of customers. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The corporate segment comprises mainly corporate expenses, interest-bearing loans, borrowings and corporate assets. Change in operating segments In 2011, the group’s operating segments were presented purely on an geographic basis. In 2012, the group’s operating segments are presented on a crop protection and seed technologies basis. The change is an evolution of our segmental reporting reflecting the relative size of our seed technologies business. Nufarm Limited Annual Report 2012 | 65 NOTES TO ThE FINaNCIaL STaTEMENTS continued 5. Operating segments (continued) Operating segments 2012 Revenue Total segment revenue Results Underlying EBITDA(a) Depreciation and amortisation excluding material items underlying eBit(a) Material items included in operating profit (refer note 6) Material items included in net financing costs (refer note 6) Net financing costs (excluding material items) Profit/(loss) before tax Assets Segment assets Crop protection technologies Corporate Group Australia and New Zealand $000 Asia $000 Europe $000 North America $000 South America $000 Total $000 Global $000 $000 Total $000 Seed 701,022 125,586 431,095 470,243 332,636 2,060,582 120,969 – 2,181,551 127,036 19,387 65,801 43,501 19,365 275,090 32,721 (40,057) 267,754 (21,054) (2,652) (22,578) (10,174) (1,839) (58,297) 105,982 16,735 43,223 33,327 17,526 216,793 (2,132) 30,589 (1,352) (61,781) (41,409) 205,973 (61,001) 2,072 (36,721) 110,323 560,976 62,128 618,347 416,170 500,660 2,158,281 224,038 414,823 2,797,142 Investment in associates – 2,658 1,167 – – 3,825 301 – 4,126 Total assets 560,976 64,786 619,514 416,170 500,660 2,162,106 224,339 414,823 2,801,268 Liabilities Segment liabilities Total liabiltiies other segment information Capital expenditure 158,070 40,548 173,894 36,291 79,150 487,953 158,070 40,548 173,894 36,291 79,150 487,953 18,534 18,534 817,979 1,324,466 817,979 1,324,466 21,013 1,392 30,440 9,504 6,707 69,056 3,457 3 72,516 66 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 5. Operating segments (continued) Crop protection technologies Corporate Group Australia and New Zealand $000 Asia $000 Europe $000 North America $000 South America $000 Total $000 Global $000 $000 Total $000 Seed 674,827 142,297 435,794 418,931 324,544 1,996,393 87,196 – 2,083,589 114,907 24,926 61,211 24,185 8,902 234,131 27,840 (30,135) 231,836 underlying eBit(a) 94,723 22,319 38,346 16,456 4,107 175,951 (20,184) (2,607) (22,865) (7,729) (4,795) (58,180) (1,522) 26,318 (355) (60,057) (30,490) 171,779 (143,690) (31,789) (28,848) (32,548) Operating Segments 2011 Revenue Total segment revenue Results Underlying EBITDA(a) Depreciation and amortisation excluding material items Material items included in operating profit (refer note 6) Material items included in net financing costs (refer note 6) Net financing costs (excluding material items) Profit/(loss) before tax Assets Segment assets 545,734 62,455 679,475 368,880 550,560 2,207,104 144,810 478,355 2,830,269 Investment in associates – 6,236 995 – – 7,231 336 – 7,567 Total assets 545,734 68,691 680,470 368,880 550,560 2,214,335 145,146 478,355 2,837,836 Liabilities Segment liabilities Total liabiltiies other segment information Capital expenditure 116,036 36,895 168,282 39,163 96,796 457,172 116,036 36,895 168,282 39,163 96,796 457,172 12,618 12,618 803,928 1,273,718 803,928 1,273,718 21,506 919 6,285 6,387 21,469 56,566 10,007 19 66,592 (a) Underlying EBIT is earnings before net finance costs, taxation and material items. Underlying EBITDA is underlying EBIT, before depreciation, amortisation and impairments. Nufarm Limited Annual Report 2012 | 67 NOTES TO ThE FINaNCIaL STaTEMENTS continued 5. Operating segments (continued) Geographical information Australia New Zealand Asia Europe USA Rest of North America Brazil Rest of South America Unallocated(b) total Revenue by location of customer Non current assets by location 2012 $000 672,504 54,412 139,213 444,624 449,158 70,850 253,789 97,001 – 2,181,551 2011 $000 644,146 52,193 156,250 442,462 389,801 59,862 262,494 76,381 – 2012 $000 269,150 14,443 30,289 304,895 265,653 29,776 214,281 16,417 181,633 2011 $000 259,050 15,148 34,268 318,946 198,661 31,721 267,048 15,494 182,502 2,083,589 1,326,537 1,322,838 (b) Unallocated assets predominantly include deferred tax assets. 6. Items of material income and expense Material items are those items where their nature and/or amount is considered material to the financial statements. Such items included within the group’s profit for the year are detailed below. Consolidated Consolidated 2012 $000 Pre-tax 2012 $000 After-tax 2011 $000 Pre-tax 2011 $000 After-tax Material items by category: Class action settlement Restructuring costs Debt refinancing costs Due diligence and litigation costs Investment in associate write down Goodwill impairment loss – Brazil Intangibles write off – Brazil Net foreign exchange gains/(losses) on Nufarm step-up securities financing Receivable write down Regulatory inquiry costs (43,500) (30,450) (7,295) (9,931) (3,552) (1,993) – (3,708) 11,050 – – (5,013) (6,952) (2,427) (1,993) – (7,002) (24,093) (3,467) (4,919) – (6,310) (17,238) (2,734) (4,919) – (70,004) (70,004) (3,708) 7,697 – – (4,340) (4,340) (20,951) (14,666) (40,357) (27,671) (346) (248) (58,929) (42,846) (175,479) (148,130) class action settlement On 1 August 2012 the company announced that it had entered into a conditional settlement agreement in relation to the class action proceedings originally issued in January 2011 by Maurice Blackburn and Slater & Gordon. The company agreed to pay $43.500 million, which covers the claims, interest, costs of the litigation funders and the applicants’ legal fees. The settlement is subject to court approval and, if court approval is obtained, the class action will be dismissed without the admission of liability by the company. In accordance with Accounting Standards the settlement amount, along with related legal costs, has been provided for in the financial statements in the current year. Restructuring costs After-tax restructuring costs of $5.013 million (2011: $6.310 million) mainly relate to the reorganisation of the European business. The prior year costs related to the reorganisation of the sales force in Brazil. 68 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 6. Items of material income and expense (continued) debt refinancing costs The company incurred significant debt refinancing costs associated with a 12 month facility that was put in place in December 2010. These costs were treated as a material item and were partially recognised in the prior year ($17.238 million) with the balance recognised in the current year ($6.952 million). Costs associated with the new financing arrangements drawn down in November 2011 are being amortised over the respective terms of these arrangements and are included within net financing costs. due diligence and litigation costs The 2012 financial year due diligence and litigation costs largely relate to the settlement of the class action, the Seeds 2000 acquisition and arbitration proceedings against the previous owner of the Brazilian business. The prior year due diligence and litigation costs largely relate to the settlement of the receivable dispute, the class action and arbitration proceedings against the previous owner of the Brazilian business. investment in associate write down The company has written down by $1.993 million (2011: $4.919 million) the value of a minor equity investment in an Indian crop protection company Excel Crop Care Ltd. The remaining carrying value of this investment at 31 July 2012 is $2.658 million. net foreign exchange gains/(losses) on nufarm step-up securities financing The company benefited from a net after-tax gain of $7.697 million (2011: $14.666 million net loss) associated with the year end mark-to-market revaluation of proceeds from Nufarm step-up securities. Goodwill impairment loss/intangibles write off – Brazil In 2011 the company recognised an impairment of goodwill of the Brazil CGU due to a number of market, product and economic factors that have impacted the business. Whilst the business did record a strong earnings recovery in the 2011 year relative to the previous year, after discussions with advisors, it was determined that a higher discount rate should be applied to the business projections in recognition of the risks attached to the acheivement of the forecast. A total impairment charge of $70.004 million was recognised in the year ended 31 July 2011. Several older insecticide products have been phased out of the Brazilian product portfolio due to regulatory requirements. The company took a write down in the carrying value of the intangible assets associated with these products in the prior year ($4.340 million) with the balance of $3.708 million written down in the current financial year. Replacement products have been introduced into the portfolio. Receivable write down In the prior year the company announced that it had executed a binding settlement agreement in relation to a receivables dispute. The settlement resulted in a partial recovery and the subsequent write down of unrecovered funds resulting in an after-tax loss of $27.671 million. Material items are classified by function as follows Year ended 31 July 2012 $000 Class action settlement Restructuring costs Debt refinancing costs Due diligence and legal costs Investment in associate write down Intangibles write off – Brazil Net foreign exchange gains/(losses) on Nufarm step-up securities financing Cost of sales – (805) – – – – – Selling, marketing and distribution expense General and administrative expense – (43,500) (4,846) – – – – – (1,644) (953) (3,552) (1,993) (3,708) – (55,350) (55,350) Net financing costs – – (8,978) – – – 11,050 2,072 – Total Pre-tax (43,500) (7,295) (9,931) (3,552) (1,993) (3,708) 11,050 (58,929) (61,001) Total material items included operating profit (805) (805) (4,846) (4,846) Nufarm Limited Annual Report 2012 | 69 Net financing costs – – – (10,838) – – – – (20,951) (31,789) – Total Pre-tax (70,004) (4,340) (7,002) (24,093) (3,467) (4,919) (40,357) (346) (20,951) (175,479) (143,690) Consolidated 2012 $000 24 318 9,782 10,124 2011 $000 63 69 12,901 13,033 (65,489) (2,966) (64,397) (3,203) NOTES TO ThE FINaNCIaL STaTEMENTS continued 6. Items of material income and expense (continued) Year ended 31 July 2011 $000 Goodwill impairment loss – Brazil Intangibles write off – Brazil Restructuring costs Debt refinancing costs Due diligence and legal costs Investment in associate write down Receivable write down Regulatory inquiry costs Net foreign exchange gains/(losses) on Nufarm step-up securities financing Selling, marketing and distribution expense – General and administrative expense (70,004) Cost of sales – – (606) – (4,558) – – – – – – – – – – – – (4,340) (1,838) (13,255) (3,467) (4,919) (40,357) (346) – (138,526) (138,526) Total material items included operating profit (606) (606) (4,558) (4,558) 7. Other income Dividend income Rental income Sundry income Total other income 8. Other expenses The following expenses were included in the period result: Depreciation and amortisation Inventory write down 70 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 9. Personnel expenses Wages and salaries Other associated personnel expenses Contributions to defined contribution superannuation funds Expenses related to defined benefit superannuation funds Short term employee benefits Other long term employee benefits Restructuring expense Personnel expenses Consolidated 2012 $000 (212,306) (32,520) (13,371) (1,813) (7,976) (2,252) (4,847) 2011 $000 (192,088) (29,402) (14,845) (3,528) (7,437) (1,949) (6,291) (275,085) (255,540) The restructuring expense is mainly the restructuring of the group’s European operations (2011: Brazilian business sales force restructuring). The restructuring expenses are included in material items in note 6. 10. Finance income and expense Interest income – external Net foreign exchange gains/(losses) – other(a) Financial income Interest expense – external Interest expense – debt establishment transaction costs(a) Lease expense – finance charges Financial expenses Consolidated 2012 $000 7,910 8,187 16,097 (47,405) (12,972) (1,419) (61,796) 2011 $000 7,518 20,006 27,524 (54,954) (10,838) (1,418) (67,210) Net foreign exchange gains/(losses) on Nufarm step-up securities financing(a) 11,050 (20,951) Net financing costs (34,649) (60,637) (a) Refer note 2(e) for an explanation of the prior year reclassification. Nufarm Limited Annual Report 2012 | 71 NOTES TO ThE FINaNCIaL STaTEMENTS continued 11. Income tax expense Recognised in the income statement current tax expense Current period Adjustments for prior periods Current tax expense deferred tax expense Origination and reversal of temporary differences Reduction in tax rates Benefit of recognised tax losses utilised Derecognition of tax losses/credits Deferred tax expense/(benefit) Total income tax expense/(benefit) in income statement Attributable to: Continuing operations Total income tax expense/(benefit) in income statement numerical reconciliation between tax expense and pre-tax net profit Profit/(loss) before tax Income tax using the local corporate tax rate of 30 per cent Increase in income tax expense due to: Non-deductible expenses Other taxable income Effect of changes in the tax rate Effect of tax losses/assets derecognised/(recognised) Decrease in income tax expense due to: Effect on tax rate in foreign jurisdictions Tax exempt income Tax incentives not recognised in the income statement Under/(over) provided in prior years Income tax expense/(benefit) income tax recognised directly in equity Nufarm step-up securities distribution Income tax recognised directly in equity income tax recognised in other comprehensive income Relating to actuarial gains on defined benefit plans Relating to cost of issuing equity Relating to equity based compensation Income tax recognised in other comprehensive income 72 | Nufarm Limited Annual Report 2012 Consolidated 2012 $000 2011 $000 46,782 (690) 46,092 17,331 845 18,176 (16,024) (8,953) 10 7,223 200 (8,591) (190) 178 7,770 (1,195) 37,501 16,981 37,501 37,501 16,981 16,981 110,323 (32,548) 33,097 (9,764) 7,121 887 10 200 (1,476) (385) (1,267) 38,187 (686) 37,501 25,618 752 (190) 7,770 (2,391) (3,065) (2,594) 16,136 845 16,981 (5,038) (5,038) (4,910) (4,910) (1,596) – (93) (1,689) (492) 22 – (470) NOTES TO ThE FINaNCIaL STaTEMENTS continued 12. Discontinued operation There were no discontinued operations in the current or prior period. 13. Non-current assets held for sale There were no assets held for sale in the current period. In the year ended 31 July 2011, the Belvedere, UK manufacturing site was shut down and prepared for sale. A sale agreement for the site was executed with sales proceeds of £6.1 million. The site demolition was completed, however, title could not pass until remediation was complete and the necessary regulatory approvals received, which occurred post year end. The following assets and liabilities related to the site were classified as assets held for sale in the period ended 31 July 2011. Assets classified as held for sale Property, plant and equipment including costs incurred in preparing site for sale Total assets held for sale Consolidated 2012 $000 – – 2011 $000 8,830 8,830 14. acquisition of businesses and acquisition of non-controlling interests Business acquisitions On 1 December 2011, the group acquired 100 per cent of the shares in Seeds 2000 Inc at a total cost of US$55.2 million. Seeds 2000 is a sunflower seed research and production company based in Minnesota, USA and has activities in the USA, Canada, China, Argentina, and a number of European markets. On 31 March 2012 the group acquired 100 per cent of the shares in Seeds 2000 Argentina SRL, a related company of Seeds 2000 Inc, at a total cost of US$1.4 million. On 24 October 2011, the group acquired the breeding and germplasm assets of the Super Seeds sunflower business in Serbia. The Seeds 2000 Argentina SRL and Super Seeds acquisitions are individually immaterial. These acquisitions have been made to expand the seeds business in the regions of North America, South America and Europe. Management believes that the purchase of these will complement and result in synergies with the existing seeds businesses in these regions and expand our market share. Acquisitions for the year ended 31 July 2012 Acquiree’s net assets at acquisition date Cash and cash equivalents Receivables Inventory Property, plant and equipment Deferred tax asset Pre-acquistion intangibles assets Other assets Trade and other payables Interest bearing loans and borrowings Deferred tax liability Other liabilities Net identifiable assets and liabilities Identifiable intangibles acquired on acquisition Goodwill on acquisition Consideration paid Cash acquired Net cash outflow Seeds 2000 Inc Fair value on acquisition (restated) $000 Individually immaterial acquisitons Fair value on acquisition $000 1,382 1,733 12,493 1,726 400 1,879 164 (1,041) (2,074) (14,392) (4,213) (1,943) 34,665 19,334 52,056 (1,382) 50,674 462 234 689 23 – – – (234) – (8) (108) 1,058 2,622 21 3,701 (462) 3,239 Nufarm Limited Annual Report 2012 | 73 NOTES TO ThE FINaNCIaL STaTEMENTS continued 14. acquisition of businesses and acquisition of non-controlling interests (continued) Business acquisitions (continued) The Seeds 2000 Inc net assets recognised in the 31 January 2012 interim financial statements were based on a provisional assessment of fair value as the group sought an independent assessment of Seeds 2000 Inc’s taxation position. The results of the assessment had not been received at the date the 31 January 2012 interim financial statements were approved for issue by the board of directors. Subsequent to the issuance of the 31 January 2012 interim financial statements, the taxation assessment was completed and showed that the fair value of income tax liability was $462,000 lower than the provisional value, and deferred tax assets were $284,000 lower than the provisional value. There was a corresponding reduction in goodwill of $178,000, to give total goodwill arising on the acqusition of $19,334,000. For Seeds 2000 Inc, the trade receivables comprise gross contractual amounts due of $1,733,000. Total goodwill of $19,355,000 from business acquisitons is attributable mainly to the synergies expected to be achieved from integrating the respective companies into the group’s existing seeds business. There were no business acquisitions for the year ended 31 July 2011. Acquisition of non-controlling interest On 1 May 2012, the group acquired an additional 49 per cent interest in the voting shares of Nufarm Technologies (M) Sdn Bhd, increasing its ownership interest to 100 per cent. A cash consideration of $50,000 was paid to the non-controlling interest shareholders. The carrying value of the net assets of Nufarm Technologies (M) Sdn Bhd at the acquisition date was $102,000, and the carrying value of the additional interest acquired was $50,000. The group recognised a decrease in non-controlling interests of $50,000. There were no acqusitions of non-controlling interests for the year ended 31 July 2011. 15. Cash and cash equivalents Bank balances Call deposits Cash and cash equivalents Bank overdrafts repayable on demand Cash and cash equivalents in the statement of cash flows 16. Trade and other receivables current Trade receivables Provision for impairment losses Receivables due from associates Derivative financial instruments Proceeds receivable from sale of businesses Prepayments Other receivables Current receivables non-current Receivables due from associates Other receivables Proceeds receivable from sale of businesses Non-current receivables Total trade and other receivables 74 | Nufarm Limited Annual Report 2012 Consolidated 2012 $000 103,522 87,795 191,317 – 191,317 2011 $000 129,020 128,686 257,706 (10,881) 246,825 688,059 (22,278) 665,781 – 7,196 3,363 11,484 42,672 730,496 614,810 (26,587) 588,223 450 74 5,695 26,811 44,871 666,124 38 39,420 1,637 41,095 38 41,748 5,398 47,184 771,591 713,308 NOTES TO ThE FINaNCIaL STaTEMENTS continued 17. Inventories Raw materials Work in progress Finished goods Provision for obsolescence of finished goods Total inventories Consolidated 2012 $000 138,018 13,991 368,172 520,181 (4,927) 515,254 2011 $000 146,087 19,230 380,007 545,324 (3,645) 541,679 18. Tax assets and liabilities Current tax assets and liabilities The current tax asset for the group of $37,664,065 (2011: $40,659,419) represents the amount of income taxes recoverable in respect of prior periods and that arose from the payment of tax in excess of the amounts due to the relevant tax authority. The current tax liability for the group of $14,833,945 (2011: $2,297,832) represents the amount of income taxes payable in respect of current and prior financial periods. Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net Consolidated Property, plant and equipment Intangible assets Employee benefits Provisions Other items Tax value of losses carried forward Tax assets/(liabilities) Set off of tax Net tax assets/(liabilities) 2012 $000 4,507 8,511 14,265 25,951 28,319 103,346 184,899 (3,266) 181,633 2011 $000 6,434 6,776 13,778 11,174 50,033 99,831 188,026 (5,524) 182,502 Movement in temporary differences during the year 2012 $000 (8,215) (75,510) – – 2011 $000 (8,485) 2012 $000 (3,708) 2011 $000 (2,051) (60,372) (66,999) (53,596) (15,364) (13,565) – – (99,089) (82,422) 3,266 5,524 – – 14,265 25,951 12,955 103,346 85,810 – 13,778 11,174 36,468 99,831 105,604 – (95,823) (76,898) 85,810 105,604 Consolidated 2012 Property, plant and equipment Intangible assets Employee benefits Provisions Other items Tax value of losses carried forward Consolidated 2011 Property, plant and equipment Intangible assets Employee benefits Provisions Other items Tax value of losses carried forward (14,400) (66,999) Balance 31.07.11 $000 Recognised in income $000 Recognised in equity $000 Currency adjustment $000 Other movement $000 (2,051) (53,596) 13,778 11,174 36,468 99,831 105,604 (1,917) (2,131) (1,109) 17,110 3,862 (7,223) 8,592 – – 1,596 – 93 – 1,689 260 3,128 – (2,333) (5,313) (10,956) (15,214) – – – (22,155) 21,694 (14,861) Balance 31.07.10 $000 (13,563) Recognised in income $000 9,433 Recognised in equity $000 – Currency adjustment $000 2,079 Other movement $000 – (41,571) 14,446 9,641 34,292 99,188 102,433 (18,525) 616 2,135 7,714 (178) 1,195 – 492 – (22) – 470 6,500 (1,776) (602) (3,893) (7,989) (5,681) – – – (1,623) 8,810 7,187 Balance 31.07.12 $000 (3,708) 14,265 25,951 12,955 103,346 85,810 Balance 31.07.11 $000 (2,051) (53,596) 13,778 11,174 36,468 99,831 105,604 Nufarm Limited Annual Report 2012 | 75 NOTES TO ThE FINaNCIaL STaTEMENTS continued 18. Tax assets and liabilities (continued) Deferred tax assets and liabilities (continued) The carrying value of deferred tax assets relating to tax losses and tax credits is largely dependent on the generation of sufficient future taxable income. The Brazilian business carries total deferred tax assets of $59.1 million (2011: $72.1 million). Based on the group’s accounting policy of recouping tax losses and tax credits within a maximum time frame of eight years, the carrying value of the deferred tax asset would be impaired if aggregate earnings over the eight year period are 12 per cent below management’s forecasts. The carrying value of this asset will continue to be assessed at each reporting date. unrecognised deferred tax liability At 31 July 2012, a deferred tax liability of $17,589,702 (2011: $21,060,570) relating to investments in subsidiaries has not been recognised because the company controls the repatriation of retained earnings and it is satisfied that it will not be incurred in the foreseeable future. This amount represents the theoretical withholding tax payable if all overseas retained earnings were paid as dividends. unrecognised deferred tax assets At 31 July 2012, there are unrecognised tax losses and timing differences of $30,805,379 (2011: $38,888,650). These losses do not have an expiry date. 19. Investments accounted for using the equity method The group accounts for investments in associates using the equity method. The group had the following significant investments in associates during the year: Excel Crop Care Ltd Agricultural chemicals manufacturer Country India Balance date of associate 31 March Ownership and voting interest 2011 14.69% 2012 14.69% F&N joint ventures Agricultural chemicals distributor Eastern Europe 31 December 50.00% 50.00% The 14.69 per cent investment in Excel Crop Care Ltd is equity accounted as Nufarm has the ability to appoint two directors to the board and, together with an unrelated partner, has significant influence over nearly 34 per cent of the shares of the company. The relationship also extends to manufacturing and marketing collaborations. The F&N joint ventures represents the group’s interest in three joint ventures with FMC Corporation, which operate in Poland, Czech Republic and Slovakia. The joint ventures sell Nufarm and FMC products within their country. Financial summary of material associates (at reporting date) Revenues (100%) $000 130,561 49,948 180,509 157,320 59,780 217,100 Profit after-tax (100%) $000 2,766 668 3,434 9,294 1,638 10,932 Total assets (100%) $000 97,755 51,158 148,913 101,359 53,973 155,332 Net assets as reported by associates (100%) $000 Share of associate’s net assets equity accounted $000 39,604 2,334 41,938 44,891 1,990 46,881 5,818 1,167 6,985 6,594 995 7,589 Total liabilities (100%) $000 58,151 48,824 106,975 56,468 51,983 108,451 2012 Excel Crop Care Ltd F&N joint ventures 2011 Excel Crop Care Ltd F&N joint ventures The financial summary information is as per the latest management accounts. 76 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 19. Investments accounted for using the equity method (continued) Financial summary of material associates (at reporting date) (continued) carrying value by major associate Excel Crop Care Ltd F&N joint ventures Others Carrying value of associates Consolidated 2012 $000 2,658 1,167 301 4,126 2011 $000 5,760 995 812 7,567 At 31 July 2012, the carrying value of the Excel Crop Care Ltd investment was written down by $1.993 million (2011: $4.919 million). Refer note 6. Share of profit by major associate Excel Crop Care Ltd F&N joint ventures Others Share of net profits of associates 202 254 (78) 378 1,398 856 123 2,377 The share of net profits has been derived from the latest management reports as at 31 July 2012 for the F&N joint ventures. The Excel Crop Care share of net profits is from the 30 June 2012 management accounts. 20. Other investments investments – available-for-sale Balance at the beginning of the year New investments during the year Exchange adjustment Balance at the end of the year other investments Other investments Total other investments The group’s investment in an unlisted entity is classified as available-for-sale. 21. Other non-current assets Derivative financial instruments 5,324 – 244 5,568 6,481 – (1,157) 5,324 645 645 6,213 5,969 – – – – Nufarm Limited Annual Report 2012 | 77 NOTES TO ThE FINaNCIaL STaTEMENTS continued 22. Property, plant and equipment Consolidated 2012 cost Balance at 1 August 2011 Additions Additions through business combinations Disposals Other transfers Exchange adjustment Balance at 31 July 2012 depreciation and impairment losses Balance at 1 August 2011 Depreciation charge for the year Additions through business combinations Disposals Other transfers Exchange adjustment Balance at 31 July 2012 Land and buildings $000 Plant and machinery $000 Leased plant and machinery $000 Capital work in progress $000 192,698 554,660 2,328 1,303 (125) 3,677 (10,899) 188,982 22,075 2,283 (4,221) 11,329 (17,997) 568,129 Total $000 775,204 47,575 3,586 (4,350) – 9,644 6,048 – – (31) (20) 18,202 17,124 – (4) (14,975) (923) (29,839) 15,641 19,424 792,176 (60,619) (340,140) (4,763) (33,056) (376) 75 (78) (1,461) 3,855 48 3,842 12,097 (640) (215) – – 30 5 (61,919) (358,657) (820) – – – – – – – (401,399) (38,034) (1,837) 3,930 – 15,944 (421,396) Net property, plant and equipment at 31 July 2012 127,063 209,472 14,821 19,424 370,780 Consolidated 2011 cost Balance at 1 August 2010 Additions Disposals Other transfers Exchange adjustment Balance at 31 July 2011 depreciation and impairment losses Balance at 1 August 2010 Depreciation charge for the year Disposals Other transfers Exchange adjustment Balance at 31 July 2011 Land and buildings $000 Plant and machinery $000 Leased plant and machinery $000 Capital work in progress $000 203,445 564,625 11,303 865 (874) 2,936 (13,674) 14,846 (8,198) 17,438 (34,051) 192,698 554,660 25,565 14,940 – – – (124) (20,250) (1,535) 9,644 (2,053) 18,202 (59,804) (331,367) (6,895) (33,558) 707 64 5,309 7,405 (141) 17,521 (532) (233) – 77 48 (60,619) (340,140) (640) – – – – – – Total $000 804,938 30,651 (9,072) – (51,313) 775,204 (391,703) (40,686) 8,112 – 22,878 (401,399) Net property, plant and equipment at 31 July 2011 132,079 214,520 9,004 18,202 373,805 Assets pledged as security for finance leases amount to $8.8 million (2011: $9.0 million). 78 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued Additions through business combinations 19,355 28,724 8,563 23. Intangible assets Consolidated 2012 cost Balance at 1 August 2011 Additions Disposals and write-offs Other transfers Exchange adjustment Balance at 31 July 2012 Amortisation and impairment losses Balance at 1 August 2011 Amortisation charge for the year Impairment loss Disposals and write-offs Other transfers Exchange adjustment Balance at 31 July 2012 Intellectual Indefinite life $000 property Finite life $000 Capitalised development costs $000 Computer software $000 Goodwill $000 327,610 391,948 77,063 – 13 548 – (183) – (20,953) 25,730 (14,309) (32,203) (30,800) (1,219) (8,338) 124,151 29,029 1,857 (87) (646) 27,357 2,052 22 (15) – (717) Total $000 948,129 31,642 58,521 (285) (10,178) (73,277) 300,453 368,749 110,685 145,966 28,699 954,552 (129,585) (12,916) (44,508) – – – – (3,708) (10,422) – – – – – (222) 18,995 1,730 1,804 (38,630) (10,272) (16,679) (242,318) (3,053) (27,455) – (3) 10,314 4,491 – – 86 716 – (3) 10,178 27,736 (110,590) (14,894) (53,348) (34,100) (18,930) (231,862) Intangibles carrying amount at 31 July 2012 189,863 353,855 57,337 111,866 9,769 722,690 Consolidated 2011 cost Balance at 1 August 2010 Additions Disposals Other transfers Exchange adjustment Balance at 31 July 2011 Amortisation and impairment losses Balance at 1 August 2010 Amortisation charge for the year Impairment loss Other transfers Exchange adjustment Balance at 31 July 2011 Intellectual Indefinite life $000 property Finite life $000 Capitalised development costs $000 Computer software $000 Goodwill $000 358,610 434,749 85,840 – – 2,162 (33,162) 327,610 7,684 – 557 – (5,485) (103) (45,000) (9,231) 391,948 77,063 (67,102) (9,296) (43,814) – (4,340) (7,241) (70,004) 234 7,287 – (54) 774 – 3,246 3,301 114,696 20,840 (136) (2,490) (8,759) 124,151 (34,996) (9,426) – 2,490 3,302 23,187 5,943 (21) (131) (1,621) 27,357 (15,115) (2,704) – 131 1,009 Total $000 1,017,082 35,024 (157) (6,047) (97,773) 948,129 (170,323) (23,711) (70,004) 6,047 15,673 (129,585) (12,916) (44,508) (38,630) (16,679) (242,318) Intangibles carrying amount at 31 July 2011 198,025 379,032 32,555 85,521 10,678 705,811 Nufarm Limited Annual Report 2012 | 79 NOTES TO ThE FINaNCIaL STaTEMENTS continued 23. Intangible assets (continued) The major intangibles with an indefinite economic life are the product registrations that Nufarm owns. These registrations are considered to have an indefinite life because, based on past experience, they will be renewed by the relevant regulatory authorities, the underlying products will continue to be commercialised and available for sale in the foreseeable future, the company will satisfy all of the conditions necessary for renewal and the cost of renewal is minimal. In determining that the registrations have indefinite useful life, the principal factor that influenced this determination is the expectation that the existing registration will not be subject to significant amendment in the foreseeable future. The group has determined that operating unit by country is the appropriate method for determining the cash-generating units (CGU) of the business. This level of CGU aligns with the cash flows of the business and the management structure of the group. The goodwill and intellectual property with an indefinite life are CGU specific, as the acquisitions generating goodwill and the product registrations that are the major indefinite intangibles are country specific in nature. There is no allocation of goodwill between CGUs. The major CGUs and their intangible value is as follows: Brazil $158 million (2011: $202 million), US $146 million (2011: $142 million), Seeds business $166 million (2011: $105 million), UK and Holland $76 million (2011: $82 million) and Australia $57 million (2011: $55 million). The balance of intangibles is spread across multiple CGUs, with no individual amount being material relative to the total intangibles at balance date. Impairment testing for cash-generating units containing goodwill For the impairment testing of these assets, the carrying amount of the asset is compared to its recoverable amount at a CGU level. The group uses the value-in-use method to estimate the recoverable amount. In assessing value-in-use, the estimated future cash flows are derived from the five year plan for each cash-generating unit with a growth factor applied to extrapolate a cash flow beyond year five. A perpetuity factor is then applied to the normalised cash flow beyond year five in order to include a terminal value in the value-in-use calculation. The terminal growth rate assumed for each CGU is generally a long term inflation estimate, ranging from 1.4 per cent to 5.0 per cent (2011: 0 per cent to 5 per cent). The cash flow is then discounted to a present value using a discount rate which is the company’s weighted average cost of capital, but then adjusted for country risk and asset-specific risk associated with each CGU. The nominal post-tax discount rate applied to the group’s CGUs ranges from 8.5 per cent to 12.8 per cent (2011: 9.8 per cent to 16.3 per cent). Brazil cash-generating unit (CGU) The Brazil CGU has the following intangible assets: Goodwill Indefinite life intangibles Capitalised development costs Computer software Total 2012 $000 47,374 102,908 7,619 397 158,298 2011 $000 60,959 134,235 6,434 558 202,186 The indefinite life intangibles relate to the product registrations and trade marks acquired in June 2007. In 2012, the company has assessed the recoverable amount of the Brazil CGU and determined the CGU’s recoverable amount exceeds its carrying value. In 2011, the company recognised an impairment of goodwill of the Brazil CGU due to a number of market, product and economic factors that have impacted the business. Whilst the business did record a strong earnings recovery in the 2011 year relative to the 2010 year, after discussions with advisors, it was determined that a higher discount rate should be applied to the business projections in recognition of the risks attached to the achievement of the forecast. A total impairment charge of $70.004 million was recognised in the year ended 31 July 2011. Considering the 2011 impairment of the Brazil CGU, the amount by which the CGU recoverable amount exceeds the carrying value in 2012 is minimal. Should the Brazil CGU fail to meet its forecast operating result going forward, this may necessitate a revision to the future forecasts or alternatively a further increase in the discount rate used in the value-in-use modelling. By way of sensitivity and all other things being equal: (a) a one per cent increase in the discount rate would result in a reduction in recoverable amount of approximately $61 million; or (b) a five per cent decrease in EBITDA compared to budget for all years in the forecast period and also in the terminal value calculation would result in a reduction in recoverable amount of approximately $41 million. 80 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 24. Trade and other payables current payables – unsecured Trade creditors and accruals – unsecured Payables due to associated entities Derivative financial instruments Payables – acquisitions Current payables non-current payables – unsecured Creditors and accruals Payables – acquisitions Non-current payables 25. Interest-bearing loans and borrowings This note provides information about the contractual terms of the group’s interest-bearing loans and borrowings. current liabilities Bank loans – secured Bank loans – unsecured Deferred debt establishment costs Other loans – unsecured Finance lease liabilities – secured Current liabilities non-current liabilities Bank loans – secured Bank loans – unsecured Deferred debt establishment costs Other loans – unsecured Finance lease liabilities – secured Non-current liabilities Consolidated 2012 $000 2011 $000 467,121 389,507 – 2,129 5,741 535 629 3,351 474,991 394,022 8,343 1,903 10,246 8,289 4,742 13,031 215,321 82,268 (5,995) 557 172 579,746 119,839 – 998 88 292,323 700,671 359,441 4,134 (7,993) 816 10,400 366,798 – – – 1,136 10,238 11,374 Financing facilities On 22 November 2011, the company executed a $625 million senior secured syndicated bank facility (SFA) with a term of three years. As at 31 July 2012, the amount of funding drawn under the syndicated bank facility was $336 million with loans being advanced in multiple currencies. On 23 August 2011, Nufarm executed a $300 million trade receivables securitisation facility. Subsequent to execution, the facility size has been reduced to $250 million to reflect the current value of trade receivables being used to secure funding under this program. As at 31 July 2012, the amount of funding drawn under the securitised facility by the participating Nufarm entities was $202 million. Funding from the securitisation facility and the syndicated bank facility was used to repay the amount outstanding under the previous 12 month $900 million bank facility that had been established on 15 December 2010. The syndicated bank facility and trade receivables securitisation facility provide access to committed lines of credit to support the group’s seasonal working capital demands and general corporate financing requirements. The SFA includes covenants of a type normally associated with facilities of this kind, and the group was in compliance with these covenants throughout the financial year. The majority of debt facilities that reside outside the SFA and the trade receivables securitisation facility are regional working capital facilities, primarily located in Brazil and Europe, totalling $152 million (2011: $178 million). Total net debt (interest bearing liabilities net of cash) at 31 July 2012 of $467.8 million (2011: $465.2 million) includes the draw down of an additional US$55 million of debt funding for the Seeds 2000 acquisition. Nufarm Limited Annual Report 2012 | 81 NOTES TO ThE FINaNCIaL STaTEMENTS continued 25. Interest-bearing loans and borrowings (continued) 2012 Bank loan facilities Other facilities Total financing facilities 2011 Bank loan facilities Other facilities Total financing facilities Financing arrangements Bank loans Repayment of borrowings (excluding finance leases) Period ending 31 July 2012 Period ending 31 July 2013 Period ending 31 July 2014 Period ending 31 July 2015 or later Finance lease liabilities Finance leases are entered into to fund the acquisition of plant and equipment. Lease commitments for capitalised finance leases are payable as follows: Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Less future finance charges Finance lease liabilities Finance lease liabilities are secured over the relevant leased plant. Average interest rates Nufarm step-up securities Bank loans Other loans Finance lease liabilities – secured Consolidated Accessible $000 Utilised $000 1,027,218 1,373 661,164 1,373 1,028,591 662,537 1,075,867 710,466 2,134 2,134 1,078,001 712,600 Consolidated 2012 $000 – 298,146 816 363,575 2011 $000 700,583 1,136 – – 1,382 1,493 3,696 80,587 87,158 (76,586) 10,572 1,260 1,276 3,557 82,078 88,171 (77,845) 10,326 Consolidated 2012 % 7.60 4.28 11.33 12.13 2011 % 6.83 5.76 6.82 11.71 82 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 26. Employee benefits current Liability for short term employee benefits Liability for current portion of other long term employee benefits Current employee benefits non-current Defined benefit fund obligations Present value of unfunded obligations Present value of funded obligations Fair value of fund assets – funded Recognised liability for defined benefit fund obligations Liability for other long term employee benefits Non-current employee benefits Total employee benefits Consolidated 2012 $000 15,066 3,101 18,167 4,768 112,005 (84,971) 31,802 12,740 44,542 62,709 2011 $000 15,646 6,456 22,102 4,713 104,104 (80,630) 28,187 8,998 37,185 59,287 The group makes contributions to defined benefit pension funds in the UK, Holland, France and Indonesia that provide defined benefit amounts for employees upon retirement. Historical information Present value of defined benefit obligation Fair value of plan assets Surplus/(deficit) Consolidated 2012 $000 (116,773) 84,971 (31,802) 2011 $000 (108,817) 80,630 (28,187) 2010 $000 (117,766) 87,900 (29,866) 2009 $000 (121,657) 89,829 (31,828) 2008 $000 (118,688) 93,786 (24,902) Experience adjustments arising on plan liabilities Experience adjustments arising on plan assets (1,541) (1,191) (550) 3,591 1,103 6,013 (1,223) (8,058) 700 (10,088) Nufarm Limited Annual Report 2012 | 83 NOTES TO ThE FINaNCIaL STaTEMENTS continued 26. Employee benefits (continued) changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation Service cost Interest cost Actuarial loss Past service cost Losses/(gains) on curtailment Contributions Benefits paid Exchange differences on foreign funds Closing defined benefit obligation changes in the fair value of fund assets are as follows: Opening fair value of fund assets Expected return Actuarial gains/(losses) Surplus taken to retained earnings Contributions by employer Distributions Exchange differences on foreign funds Closing fair value of fund assets The actual return on plan assets is the sum of the expected return and the actuarial gain/(loss). expense recognised in profit or loss Current service costs Interest on obligation Expected return on fund assets Past service cost Losses/(gains) on curtailment Expense recognised in profit or loss The expense is recognised in the following line items in the income statement: Cost of sales Sales, marketing and distribution expenses General and administrative expenses Research and development expenses Expense recognised in profit or loss Consolidated 2012 $000 2011 $000 108,817 2,260 5,858 8,391 25 (1,066) 172 (5,067) (2,617) 116,773 80,630 5,264 1,492 (191) 4,632 (4,876) (1,980) 84,971 2,260 5,858 (5,264) 25 (1,066) 1,813 1,436 263 36 78 1,813 117,766 2,817 5,672 3,462 (16) – 182 (5,235) (15,831) 108,817 87,900 4,945 3,465 (2,057) 2,961 (4,720) (11,864) 80,630 2,817 5,672 (4,945) (16) – 3,528 2,007 551 747 223 3,528 Actuarial gains/(losses) recognised in other comprehensive income (net of tax) Cumulative amount at 1 August Recognised during the period Cumulative amount at 31 July (11,504) (5,494) (16,998) (9,805) (1,699) (11,504) 84 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 26. Employee benefits (continued) The major categories of fund assets as a percentage of total fund assets are as follows: European equities European bonds Property Cash Principal actuarial assumptions at the reporting date (expressed as weighted averages): Discount rate at 31 July Expected return on fund assets at 31 July Future salary increases Future pension increases Consolidated 2012 % 48.0 46.6 1.5 3.9 4.2 6.3 2.8 2.2 2011 % 62.8 34.9 1.6 0.7 5.4 6.4 3.6 2.8 The overall expected long term rate of return on assets is 6.3 per cent. The expected rate of return on plan assets reflects the average rate of earnings expected on the funds invested to provide for the benefits included in the projected benefit obligation. The group expects to pay $3,609,000 in contributions to defined benefit plans in 2013. 27. Share-based payments Nufarm Executive Share Plan (2000) The Nufarm Executive Share Plan (2000) offers shares to executives. The executives may select an alternative mix of shares (at no cost) and options at a cost determined under the ‘Black Scholes’ methodology. These benefits are only given when a predetermined return on capital employed is achieved over the relevant period. The shares and options are subject to forfeiture and dealing restrictions. The executive cannot deal in the shares or options for a period of between three and 10 years without board approval. An independent trustee holds the shares and options on behalf of the executives. At 31 July 2012 there were 61 participants (2011: 70 participants) in the scheme and 989,830 shares (2011: 1,127,034) were allocated and held by the trustee on behalf of the participants. The cost of issuing shares is expensed in the year of issue. From 1 August 2011, it was decided that there will be no further awards under this share plan and that it would be replaced by the Nufarm short term incentive plan (refer below). Any unvested equities held in the executive share plan will remain and be subject to the vesting conditions under the rules of the plan. Nufarm Short Term Incentive Plan (STI) The STI is available to key executives, senior managers and other managers globally. The first awards under the plan will be issued at the end of the current financial year. The STI is measured as follows: • 80 per cent of the potential is based on budget measures of EBIT and return on operating assets (ROA). • 20 per cent of the potential is based on strategic and business improvement objectives. A predetermined percentage of the STI is paid in cash at the time of performance testing and the balance is deferred into shares in the company for nil consideration. The number of shares granted is based on the volume weighted average price (VWAP) of Nufarm Limited shares in the five days subsequent to the results announcement. Vesting will occur after a two year period, although for the first year 50 per cent of the shares will vest on the first anniversary and 50 per cent of the shares will vest on the second anniversary. Nufarm Executive Long Term Incentive Plan (LTIP) On 1 August 2011, the LTIP commenced and is available to key executives and certain selected senior managers. Awards are granted to individuals in the form of performance rights, which comprise rights to acquire ordinary shares in the company for nil consideration, subject to the achievement of global performance hurdles. Under the plan, individuals will receive an annual award of performance rights as soon as practical after the announcement of results in the preceding year. The initial awards were granted to executives (excluding the managing director) on 9 February 2012. The performance and vesting period for the awards will be three years. Awards will vest in two equal tranches as follows: • 50 per cent of the LTIP grant will vest subject to the achievement of a relative total shareholder return (TSR) performance hurdle measured against a selected comparator group of companies; and • the remaining 50 per cent will vest subject to meeting an absolute return on funds employed (ROFE) target. Nufarm Limited Annual Report 2012 | 85 NOTES TO ThE FINaNCIaL STaTEMENTS continued 27. Share-based payments (continued) Global Share Plan (2001) The Global Share Plan commenced in 2001, and is available to all permanent employees. Participants contribute a proportion of their salary to purchase shares. The company will contribute an amount equal to 10 per cent of the number of ordinary shares acquired with a participant’s contribution in the form of additional ordinary shares. Amounts over 10 per cent of the participant’s salary can be contributed but will not be matched. For each year the shares are held, up to a maximum of five years, the company contributes a further 10 per cent of the value of the shares acquired with the participant’s contribution. An independent trustee holds the shares on behalf of the participants. At 31 July 2012 there were 722 participants (2011: 756 participants) in the scheme and 1,783,289 shares (2011: 1,602,481) were allocated and held by the trustee on behalf of the participants. The power of appointment and removal of the trustees for the share purchase schemes is vested in the company. Employee expenses Total expense arising from share-based payment transactions 2012 $000 2011 $000 2,829 457 Measurement of fair values nufarm Sti Plan The grant date of the shares awarded under the STI Plan was subsequent to 31 July 2012. As the services received in consideration for these shares commenced on 1 August 2011, an estimate of the fair value of the awards has been recognised as an expense in the year ended 31 July 2012. The weighted average fair value and associated fair value assumptions of the awards granted subsequent to 31 July 2012 will be disclosed in the 2013 annual report. nufarm Lti Plan The fair value of the rights granted through the LTI Plan was measured as follows: Award type Performance rights Vesting conditions Relative TSR Valuation methodology Monte Carlo simulation ROFE performance condition Binomial Tree Vesting condition Fair value at grant date Share price at grant date Grant date Earliest vesting date Exercise price Expected life Volatility Risk free interest rate Dividend yield Reconciliation of outstanding performance rights Outstanding at 1 August Forfeited during the year Exercised during the year Expired during the year Granted during the year Outstanding at 31 July Exercisable at 31 July Number of performance rights 2012 000 Weighted average exercise price 2012 $000 – – – – 465,677 465,677 – – – – – $nil $nil – Relative TSR $2.91 $4.86 9.2.2012 31.7.2014 – ROFE performance condition $4.51 $4.86 9.2.2012 31.7.2014 – 2.5 years 2.5 years 35% 3.59% 3.0% 35% 3.59% 3.0% Number of performance rights 2011 000 – Weighted average exercise price 2011 $000 – – – – – – – – – – – – – The performance rights outstanding at 31 July 2012 have a $nil exercise price and a weighted average contractual life of 2.5 years. 86 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 28. Provisions current Restructuring Other Current provisions Consolidated Movement in provisions Balance at 1 August 2011 Provisions made during the year Provisions used during the year Exchange adjustment Balance at 31 July 2012 Consolidated 2012 $000 3,747 2,995 6,742 Restructuring $000 Other provisions $000 1,477 2,487 (114) (103) 3,747 3,779 – – (784) 2,995 2011 $000 1,477 3,779 5,256 Total $000 5,256 2,487 (114) (887) 6,742 The provision for restructuring is mainly relating to the restructuring of the European operations. The restructuring provision primarily consists of unpaid redundancy costs. The other provision consists of liabilities recognised with the Agripec acquisition. 29. Capital and reserves Share capital Balance at 1 August Issue of shares Balance at 31 July Parent company Number of ordinary shares 2012 261,833,005 Number of ordinary shares 2011 261,775,731 309,242 57,274 262,142,247 261,833,005 The company does not have authorised capital or par value in respect of its issued shares. On 23 November 2011, 114,560 shares at $4.15 were issued under the executive share plan. On 3 January 2012, 70,492 shares at $4.16 were issued under the global share plan. On 30 April 2012, 124,190 shares at $4.85 were issued under the dividend reinvestment program. On 5 January 2011, 57,274 shares at $5.44 were issued under the global share plan. 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. nufarm step-up securities In the year ended 31 July 2007 Nufarm Finance (NZ) Limited, a wholly owned subsidiary of Nufarm Limited, issued a new hybrid security called Nufarm step-up securities (NSS). The NSS are perpetual step-up securities and on 24 November 2006, 2,510,000 NSS were allotted at an issue price of $100 per security raising $251 million. The NSS are listed on the ASX under the code ‘NFNG’ and on the NZDX under the code ‘NFFHA’. The after-tax costs associated with the issue of the NSS, totalling $4.1 million, were deducted from the proceeds. Distributions on the NSS are at the discretion of the directors and are floating rate, unfranked, non-cumulative and subordinated. However, distributions of profits and capital by Nufarm Limited are curtailed if distributions to NSS holders are not made, until such time that Nufarm Finance (NZ) Limited makes up the arrears. The first distribution date for the NSS was 16 April 2007 and on a six-monthly basis after this date. The floating rate is the average mid-rate for bills with a term of six months plus a margin of 3.9 per cent (2011: 1.9 per cent). On 23 September 2011, Nufarm announced that it would ‘step-up’ the NSS. This resulted in the interest margin attached to the NSS being stepped up by 2.0 per cent, with the new interest margin being set at 3.9 per cent as at 24 November 2011. No other terms were adjusted and there are no further step-up dates. Nufarm retains the right to redeem or exchange the NSS on future distribution dates. Nufarm Limited Annual Report 2012 | 87 NOTES TO ThE FINaNCIaL STaTEMENTS continued 29. Capital and reserves (continued) translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different from the presentation currency of the reporting entity. capital profit reserve This reserve is used to accumulate realised capital profits. other reserve This reserve represents the accrued employee entitlements to share awards that have been charged to the income statement and have not yet been exercised. dividends An interim dividend of three cents per share, totalling $7,864,874 was declared on 27 March 2012 and was paid on 30 April 2012 (2011: Nil). distributions Distributions recognised in the current year by Nufarm Finance (NZ) Ltd on the Nufarm step-up securities are: 2012 Distribution Distribution 2011 Distribution Distribution Distribution rate % Total amount $000 Payment date Consolidated 6.61% and 8.61* 6.94 10,253 16 April 2012 8,829 17 October 2011 19,082 6.94 6.71 8,686 15 April 2011 8,444 15 October 2010 17,130 * Refer to discussion titled ‘Nufarm step-up securities’ above. The distribution on the Nufarm step-up securities reported on the equity movement schedule has been reduced by the tax benefit on the gross distribution, giving an after-tax amount of $14.044 million (2011: $12.220 million). Franking credit/(debit) balance The amount of franking credits available for the subsequent financial year are: Franking account balance as at the end of the year at 30 per cent (2011: 30 per cent) 30,421 25,746 Franking credits/(debits) that will arise from the payment of income tax payable/(refund) as at the end of the year Balance at 31 July (4,923) 25,498 (9,971) 15,775 The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. In accordance with the tax consolidation legislation, the company as the head entity in the tax-consolidated group has also assumed the benefit of $25,498,018 (2011: $15,775,833) franking credits. 2012 $000 2011 $000 88 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 30. Earnings per share Net profit for the year Net profit attributable to minority interest Net profit attributable to equity holders of the parent Nufarm step-up securities distribution Earnings used in the calculations of basic and diluted earnings per share Earnings from continuing operations Subtract items of material income/(expense) (refer note 6) Earnings excluding items of material income/(expense) used in the calculation of earnings per share excluding material items Consolidated 2012 $000 72,822 (228) 72,594 (14,044) 58,550 2011 $000 (49,529) (322) (49,851) (12,220) (62,071) 58,550 58,550 (62,071) (62,071) (42,846) (148,130) 101,396 86,059 For the purposes of determining basic and diluted earnings per share, the after-tax distributions on NSS are deducted from net profit. Weighted average number of ordinary shares used in calculation of basic earnings per share Weighted average number of ordinary shares used in calculation of diluted earnings per share Number of shares 2012 261,983,233 2011 261,808,212 262,203,348 261,808,212 There have been no conversions to, calls of, or subscriptions for ordinary shares or issues of ordinary shares since the reporting date and before the completion of this financial report. earnings per share for continuing and discontinued operations Basic earnings per share From continuing operations Diluted earnings per share From continuing operations Earnings per share (excluding items of material income/expense – see note 6) Basic earnings per share Diluted earnings per share Cents per share 2012 2011 22.3 22.3 22.3 22.3 38.7 38.7 (23.7) (23.7) (23.7) (23.7) 32.9 32.9 Nufarm Limited Annual Report 2012 | 89 NOTES TO ThE FINaNCIaL STaTEMENTS continued 31. Financial risk management and financial instruments The group has exposure to the following financial risks: • credit risk; • liquidity risk; and • market risk. This note presents information about the group’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing risk, and the management of capital. The board of directors has responsibility to identify, assess, monitor and manage the material risks facing the group and to ensure that adequate identification, reporting and risk minimisation mechanisms are established and working effectively. To support and maintain this objective, the audit committee has established detailed policies on risk oversight and management by approving a global risk management charter that specifies the responsibilities of the general manager global risk management (which includes responsibility for the internal audit function). This charter also provides comprehensive global authority to conduct internal audits, risk reviews and system-based analyses of the internal controls in major business systems operating within all significant company entities worldwide. The general manager global risk management reports to the chairman of the audit committee and functionally to the chief financial officer. He provides a written report of his activities at each meeting of the audit committee. In doing so he has direct and continual access to the chairman and members of the audit committee. Credit risk Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the group’s receivables from customers and other financial assets. exposure to credit risk The group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the group’s customer base, including the default risk of the industry and country in which the customers operate, has less of an influence on credit risk. The group has credit policies in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers before the group’s standard payment and delivery terms and conditions are offered. Purchase limits are established for each customer, which represents the maximum open amount without requiring further management approval. The group’s maximum exposure to credit risk at the reporting date was: carrying amount Trade and other receivables Cash and cash equivalents Forward exchange contracts: Assets The group’s maximum exposure to credit risk for trade and other receivables at the reporting date by geographic region was: carrying amount Australia/New Zealand Asia Europe North America South America Trade and other receivables Consolidated 2012 $000 2011 $000 764,395 191,317 713,234 257,706 7,196 74 962,908 971,014 199,740 22,476 192,943 122,663 226,573 764,395 173,917 22,825 223,998 52,513 239,981 713,234 The group’s top five customers account for $150.6 million of the trade receivables carrying amount at 31 July 2012 (2011: $110.1 million). These top five customers represents 22 per cent (2011: 17 per cent) of the total receivables. 90 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 31. Financial risk management and financial instruments (continued) Credit risk (continued) impairment losses The ageing of the group’s customer trade receivables at the reporting date was: Receivables ageing Current Past due – 0 to 90 days Past due – 90 to 180 days Past due – 180 to 360 days Past due – more than one year Provision for impairment Trade receivables Consolidated 2012 $000 578,876 85,681 1,801 4,809 16,892 688,059 (22,278) 665,781 2011 $000 511,303 58,280 8,906 6,145 30,176 614,810 (26,587) 588,223 Some of the past due receivables are secured by collateral from customers such as directors’ guarantees, bank guarantees and charges on fixed assets. The past due receivables not impaired relate to customers that have a good credit history with the group. Historically, the bad debt write-off from trade receivables has been very low. Over the past nine years, the bad debt write-off amount has averaged 0.03 per cent of sales, with no greater than 0.11 per cent of sales written off in any one year. In the crop protection industry, it is normal practice to vary the terms of sales depending on the climatic conditions experienced in each country. The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 August Provisions made during the year Provisions used during the year Provisions acquired through business combinations Exchange adjustment Balance at 31 July Consolidated 2012 $000 26,587 410 (410) – (4,309) 22,278 2011 $000 26,677 2,413 (346) – (2,157) 26,587 The allowance account for trade receivables is used to record the impairment losses unless the group is satisfied that no recovery of the amount owing is possible. At that point the amount is considered irrecoverable and is written off against the receivable directly. 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. On 23 August 2011, Nufarm executed a $300 million trade receivables securitisation facility. Subsequent to execution, the facility size has been reduced to $250 million to reflect the current value of trade receivables being used to secure funding under this program. The facility provides funding that aligns with the working capital cycle of the company. In November 2011, the group finalised a three year $625 million syndicated bank facility. The amount drawn down under the facility at 31 July 2012 is $336 million. At 31 July 2012, the group had access to facilities of $1,029 million (2011: $1,078 million) under the SFA, trade receivables securitisation facility and with other lenders. The majority of debt facilities that reside outside the SFA and the trade receivables securitisation facility are regional working capital facilities, primarily located in Brazil and Europe, totalling $152 million (2011: $178 million). The SFA is secured by assets in the primary geographies in which Nufarm operates including Australia, United States, Canada, United Kingdom and France. A parent guarantee is provided to support working capital facilities in Brazil. Total net debt (net of cash) at 31 July 2012 was $467.8 million (2011: $465.2 million). The Senior Facility Agreement (SFA) includes covenants of a type normally associated with facilities of this kind, and the group was in compliance with these covenants throughout the financial year. Nufarm Limited Annual Report 2012 | 91 NOTES TO ThE FINaNCIaL STaTEMENTS continued 31. Financial risk management and financial instruments (continued) Liquidity risk (continued) The following are the contractual maturities of the group’s financial liabilities: Consolidated 2012 non-derivative financial liabilities Bank overdrafts Trade and other payables Bank loans – secured Bank loans – unsecured Other loans – unsecured Finance lease liabilities – secured derivative financial liabilities Forward exchange contracts: Outflow Inflow derivative financial assets Forward exchange contracts: Outflow Inflow Consolidated 2011 non-derivative financial liabilities Bank overdrafts Trade and other payables Bank loans – secured Bank loans – unsecured Other loans – unsecured Finance lease liabilities – secured derivative financial liabilities Forward exchange contracts: Outflow Inflow derivative financial assets Forward exchange contracts: Outflow Inflow Carrying amount $000 Contractual cash flows $000 Less than 1 year $000 1–2 years $000 More than 2 years $000 – 483,108 574,762 86,402 1,373 10,572 – 483,108 604,435 86,402 1,373 87,158 – 472,862 228,038 82,268 557 1,382 – 1,903 12,717 – 816 – 8,343 363,680 4,134 – 1,493 84,283 2,129 179,158 179,158 – (177,029) (177,029) – 183,880 183,880 (7,196) (191,076) (191,076) – – – – – – – – 1,151,150 1,257,409 780,040 16,929 460,440 10,881 10,881 406,424 406,978 579,746 119,839 2,134 10,326 579,746 119,839 2,134 88,171 10,881 393,393 579,746 119,839 998 1,260 – 4,742 – – 1,136 1,276 – 8,289 – – – 85,635 629 – 12,439 (11,810) 12,439 (11,810) – (74) 4,005 (4,079) 4,005 (4,079) – – – – – – – – 1,129,905 1,208,304 1,106,672 7,154 93,924 Interest on borrowings is denominated in currencies that match the cash flows generated by the underlying operations of the group. This provides an economic hedge and no derivatives are used to manage the exposure. 92 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 31. Financial risk management and financial instruments (continued) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. currency risk The group uses derivative financial instruments to manage specifically identified foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than the functional currency of the individual group entity. The currencies giving rise to this risk are primarily the US dollar, the Euro, the British pound and the Brazilian real. The group uses forward exchange contracts and options to hedge its foreign currency risk. The group uses foreign exchange contracts and options to manage the foreign currency exposures between the Nufarm step-up securities issued in Australia and New Zealand, and related group funding to several jurisdictions to which the funds were advanced. During the period, the funding, which was previously advanced to these jurisdictions in US dollars, the Euro and the British pound, was converted to Australian dollars. The foreign currency contracts therefore primarily cover the exposure of the lenders to movements in the Australian dollar against their local currencies. For accounting purposes, the group has not designated any derivatives in hedge relationships and all movements in fair value are recognised in profit or loss during the period. The net fair value of forward exchange contracts in the group used as economic hedges of forecast transactions at 31 July 2012 was a $5,067,000 asset (2011: $555,080 liability) comprising assets of $7,196,000 (2011: $74,300) and liabilities of $2,129,000 (2011: $629,380) that were recognised as derivatives measured at fair value. exposure to currency risk The group’s translation exposure to major foreign currency risks at balance date was as follows, based on notional amounts: Net financial assets/(liabilities) – by currency of denomination Consolidated 2012 Functional currency of group operation Australian dollars US dollars Euro UK pounds sterling Consolidated 2011 Functional currency of group operation Australian dollars US dollars Euro UK pounds sterling AUD $000 USD $000 – (24,448) 39,618 336 – 39,954 AUD $000 – – – – – – 38,132 56,172 69,856 USD $000 130,473 – (11,557) 22,770 141,686 Euro $000 (12,396) (1,715) – (5,682) (19,793) Euro $000 14,156 – – 5,584 19,740 GBP $000 (24,665) – (9,498) – (34,163) GBP $000 8,435 – (639) – 7,796 Sensitivity analysis Based on the aforementioned group’s net financial assets/(liabilities) at 31 July, a one per cent strengthening or weakening of the following currencies at 31 July would have increased/(decreased) profit or loss by the amounts shown below. This analysis assumes all other variables, including interest rates, remain constant. The analysis is performed on the same basis for 2011. Nufarm Limited Annual Report 2012 | 93 NOTES TO ThE FINaNCIaL STaTEMENTS continued 31. Financial risk management and financial instruments (continued) Market risk (continued) Sensitivity analysis (continued) currency movement 1 per cent change in the Australian dollar exchange rate 1 per cent change in the US dollar exchange rate 1 per cent change in the Euro exchange rate 1 per cent change in the GBP exchange rate Strengthening Weakening Strengthening Weakening Profit or (loss) after-tax 2012 $000 Profit or (loss) after-tax 2012 $000 Profit or (loss) after-tax 2011 $000 Profit or (loss) after-tax 2011 $000 185 (728) (54) (139) (189) 743 55 142 (1,061) (992) (58) (259) 1,082 1,012 59 264 The group’s financial asset and liability profile may not remain constant, and therefore these sensitivities should be used with care. The following significant exchange rates applied during the year: AUD US dollar Euro GBP BRL Average rate Reporting date 2012 1.033 0.783 0.654 1.900 2011 1.017 0.733 0.634 1.669 2012 1.051 0.854 0.671 2.151 2011 1.099 0.763 0.669 1.704 interest rate risk The group has the ability to use derivative financial instruments to manage specifically identified interest rate risks. Interest rate swaps, denominated in AUD, are entered into to achieve an appropriate mix of fixed and floating rate exposures. However, at 31 July 2012 and at 31 July 2011, there were no interest rate swaps in place. cash flow risk on nufarm step-up securities The group uses interest rate caps to protect the cash flow impact of a movement in the distribution base rate. The distribution rate is the average mid-rate for bank bills with a term of six months plus a margin of 3.90 per cent. Profile At the reporting date the interest rate profile of the group and company’s interest-bearing financial instruments was: Variable rate instruments Financial assets Financial liabilities Consolidated carrying amount 2012 $000 2011 $000 87,795 128,686 (673,109) (585,314) (722,926) (594,240) There were no fixed interest rate instruments during the year ended 31 July 2012 (2011: nil). Sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased/(decreased) profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The sensitivity is calculated on the debt at 31 July. Due to the seasonality of the crop protection business, debt levels can vary during the year. This analysis is performed on the same basis for 2011. 94 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 31. Financial risk management and financial instruments (continued) Market risk (continued) Sensitivity analysis for variable rate instruments (continued) 2012 Variable rate instruments Total sensitivity 2011 Variable rate instruments Total sensitivity Fair values Profit or loss 100bp increase $000 100bp decrease $000 (5,853) (5,853) 5,853 5,853 (5,942) (5,942) 5,942 5,942 Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: Consolidated Cash and cash equivalents Trade and other receivables Forward exchange contracts: Assets Liabilities Trade and other payables Bank overdraft Secured bank loans Unsecured bank loans Other loans Finance leases Carrying amount 2012 $000 Fair value 2012 $000 191,317 191,317 764,395 764,395 Carrying amount 2011 $000 257,706 713,234 Fair value 2011 $000 257,706 713,234 7,196 (2,129) 7,196 (2,129) 74 (629) 74 (629) (483,108) (483,108) (406,424) (406,424) – – (10,881) (10,881) (574,762) (574,762) (579,746) (579,746) (86,402) (86,402) (119,839) (119,839) (1,373) (1,373) (10,572) (10,572) (2,134) (10,326) (2,134) (10,326) (195,438) (195,438) (158,965) (158,965) Note 15 16 16 24 24 15 25 25 25 25 Fair value hierarchy The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Nufarm Limited Annual Report 2012 | 95 NOTES TO ThE FINaNCIaL STaTEMENTS continued 31. Financial risk management and financial instruments (continued) Fair values (continued) Fair value hierarchy (continued) 2012 Derivative financial assets Derivative financial liabilities 2011 Derivative financial assets Derivative financial liabilities Level 1 $000 – – – – Level 1 $000 – – – – Consolidated Level 2 $000 7,196 7,196 (2,129) 5,067 Level 3 $000 – – – – Consolidated Level 2 $000 74 74 (629) (555) Level 3 $000 – – – – Total $000 7,196 7,196 (2,129) 5,067 Total $000 74 74 (629) (555) There have been no transfers between levels in either 2012 or 2011. Capital management The board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The board of directors monitors the group’s return on funds employed (ROFE). Return is calculated on the group’s earnings before interest and tax and adjusted for any material items. Funds employed is defined as shareholder’s funds plus total interest bearing debt. The board of directors determines the level of dividends to ordinary shareholders and reviews the group’s total shareholder return with similar groups. The board believes ROFE is an appropriate performance condition as it ensures management is focused on the efficient use of capital and the measure remains effective regardless of the mix of equity and debt, which may change from time to time. ROFE objectives are set by the board at the beginning of each year. There is a target and a stretch hurdle. These numbers will be based on the budget and growth strategy. The ROFE return for the year ended 31 July 2012 was 10.4 per cent (2011: 8.5 per cent). There were no changes in the group’s approach to capital management during the year. 32. Operating leases Non-cancellable operating lease rentals are payable as follows: Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Consolidated 2012 $000 8,569 9,429 17,956 127,427 163,381 2011 $000 10,474 9,797 13,955 127,234 161,460 Operating leases are generally entered into to access the use of shorter term assets such as motor vehicles, mobile plant and office equipment. Rentals are fixed for the duration of these leases. There is a small number of leases for office properties. These rentals have regular reviews based on market rentals at the time of review. 96 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 33. Capital commitments The group had contractual obligations to purchase plant and equipment for $8.253 million at 31 July 2012 (2011: $10.828 million). 34. Contingencies The directors are of the opinion that provisions are not required in respect of the following matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Shareholder class action proceedings (refer to note 41). Consolidated 2012 $000 N/A 2011 $000 – Guarantee facility for Eastern European joint ventures with FMC Corporation. 6,983 6,279 Environmental guarantee given to the purchaser of land and buildings at Genneviliers for EUR 8.5 million. The guarantee expires in 2014, 18 months after the expiry of the business tenancy contract. 9,953 11,136 Insurance bond for EUR 2.717 million established to make certain capital expenditures at Gaillon plant in France. The insurance bond is for a three year term and expires in December 2013. Brazilian taxation proceedings(a) Contingent liabilities 3,182 3,560 86,163 60,312 106,281 81,287 (a) The group has a contingent liability for an amount of $86.163 million (July 2011: $60.312 million) in respect of arbitration proceedings against the previous owner of the Brazil business (acquired in 2007). The arbitration is in regard to potential pre-acquisition related tax liabilities and seeks to confirm that the tax indemnification clauses contained in the initial Investment Agreement are effective in allowing Nufarm to recover amounts from the previous owner. Based on indemnification clauses in the agreement together with related legal advice, management is confident that the Arbitration Tribunal will find the previous owner responsible for indemnifying Nufarm in respect of the potential liabilities. The Arbitration Tribunal hearing has been completed and the outcome is expected to be known within the calendar year. The contingent liability comprises potential primary tax liabilities, inflation and interest adjustments. Advice obtained by the company to date indicates that there is a high likelihood of successfully defending the claims made by the tax authorities. Nufarm will only be liable to the extent that the tax authorities are ultimately successful in pursuing the claims for primary tax and related interest and inflation adjustments, and the company is unsuccessful in enforcing the tax indemnities provided by the former owner. 35. group entities Parent entity Nufarm Limited – ultimate controlling entity Subsidiaries Access Genetics Pty Ltd ACN000425927 Pty Ltd Agcare Biotech Pty Ltd Agchem Receivables Corporation Agryl Holdings Limited Ag-seed Research Pty Ltd Agturf Inc AH Marks (New Zealand) Limited New Zealand Notes Place of incorporation 2012 2011 Percentage of shares held (a) (a) Australia Australia Australia USA Australia Australia USA 100 100 70 100 100 100 100 100 100 100 70 100 100 100 100 100 Nufarm Limited Annual Report 2012 | 97 NOTES TO ThE FINaNCIaL STaTEMENTS continued 35. group entities (continued) AH Marks Australia Pty Ltd AH Marks Holdings Limited Artfern Pty Ltd Australis Services Pty Ltd Bestbeech Pty Ltd Chemicca Limited CNG Holdings BV Crop Care Australasia Pty Ltd Crop Care Holdings Limited Croplands Equipment Limited Croplands Equipment Pty Ltd Danestoke Pty Ltd Edgehill Investments Pty Ltd Fchem (Aust) Limited Fernz Canada Limited Fernz Singapore Pte Ltd Fidene Limited First Classic Pty Ltd Framchem SA Frost Technology Corporation Greenfarm Hellas Chemicals SA Growell Limited Grupo Corporativo Nufarm SA Laboratoire European de Biotechnologie s.a.s Le Moulin des Ecluses s.a Lefroy Seeds Pty Ltd Les Ecluses de la Garenne s.a.s Manaus Holdings Sdn Bhd Marman (Nufarm) Inc Marman de Guatemala Sociedad Anomima Marman de Mexico Sociedad Anomima De Capital Variable Marman Holdings LLC Mastra Corporation Pty Ltd Mastra Corporation Sdn Bhd Mastra Corporation USA Pty Ltd Mastra Holdings Sdn Bhd Mastra Industries Sdn Bhd Medisup International NV Medisup Securities Limited Midstates Agri Services de Mexico Midstates Agri Services Inc MMR Genetics Ltd Nufarm (Asia) Pte Ltd Nufarm Africa SARL AU Nufarm Agriculture (Pty) Ltd Nufarm Agriculture Inc Nufarm Agriculture Inc (USA) Nufarm Agriculture Zimbabwe (Pvt) Ltd Nufarm Americas Holding Company 98 | Nufarm Limited Annual Report 2012 Notes Place of incorporation 2012 2011 Percentage of shares held (a) (a) (a) (a) Australia United Kingdom Australia Australia Australia Australia Netherlands (a) Australia (a) (a) (a) New Zealand New Zealand Australia Australia Australia Australia Canada Singapore New Zealand Australia Egypt USA Greece United Kingdom Guatemala France France Australia France Malaysia USA Guatemala Mexico USA Australia Malaysia Australia Malaysia Malaysia N. Antillies Australia Mexico USA USA Singapore Morocco South Africa Canada USA Zimbabwe USA 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 70 70 70 70 70 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 70 70 70 70 70 100 100 100 100 100 100 100 100 100 100 100 100 NOTES TO ThE FINaNCIaL STaTEMENTS continued 35. group entities (continued) Nufarm Americas Inc Nufarm Asia Sdn Bhd Nufarm Australia Limited Nufarm BV Nufarm Canada Receivables Partnership Nufarm Chemical (Shanghai) Co Ltd Nufarm Chile Limitada Nufarm Colombia SA Notes Place of incorporation 2012 2011 Percentage of shares held (a) USA Malaysia Australia Netherlands Canada China Chile Colombia Nufarm Crop Products UK Limited United Kingdom Nufarm de Costa Rica Nufarm de Guatemala SA Nufarm de Mexico Sa de CV Nufarm de Panama SA Nufarm de Venezuela SA Nufarm del Ecuador SA Nufarm Deutschland GmbH Nufarm do Brazil LTDA Nufarm Espana SA Nufarm Finance BV Nufarm Finance (NZ) Limited Nufarm GmbH Nufarm GmbH & Co KG Nufarm Grupo Mexico Nufarm Holdings (NZ) Limited Nufarm Holdings BV Nufarm Holdings s.a.s Nufarm Hong Kong Investments Ltd Nufarm Hungaria Kft Nufarm Inc. Nufarm Industria Quimica e Farmaceutica SA Nufarm Insurance Pte Ltd Nufarm Investments Cooperatie WA Nufarm Italia srl Nufarm KK Nufarm Labuan Pte Ltd Nufarm Limited Nufarm Malaysia Sdn Bhd Nufarm Materials Limited Nufarm NZ Limited Nufarm Peru SAC Nufarm Platte Pty Ltd Nufarm Portugal LDA Nufarm Romania SRL Nufarm s.a.s Nufarm SA Nufarm Suisse Sarl Nufarm Technologies (M) Sdn Bhd Nufarm Technologies USA Nufarm Technologies USA Pty Ltd Costa Rica Guatemala Mexico Panama Venezuela Ecuador Germany Brazil Spain Netherlands New Zealand Austria Austria Mexico New Zealand Netherlands France Hong Kong Hungary USA Brazil Singapore Netherlands Italy Japan Malaysia (a) United Kingdom Malaysia Australia New Zealand Peru Australia Portugal Romania France Argentina Switzerland Malaysia New Zealand Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 Nufarm Limited Annual Report 2012 | 99 NOTES TO ThE FINaNCIaL STaTEMENTS continued 35. group entities (continued) Percentage of shares held Nufarm Treasury Pty Ltd Nufarm UK Limited Nufarm Ukraine LLC Nufarm USA Inc Nugrain Pty Ltd Nuseed Americas Inc Nuseed Holding Company Nuseed Pty Ltd Nuseed SA Nutrihealth Grains Pty Ltd Nutrihealth Pty Ltd Opti-Crop Systems Pty Ltd Pharma Pacific Pty Ltd PT Crop Care PT Nufarm Indonesia Richardson Seeds Ltd Seeds 2000 Inc Seeds 2000 Argentina SRL Selchem Pty Ltd Notes Place of incorporation 2012 (a) Australia United Kingdom Ukraine USA Australia USA USA Australia Argentina Australia Australia Australia Australia Indonesia Indonesia USA USA Argentina Australia (a) (a) 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 2011 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 – – 100 (a) These entities have entered into a deed of cross guarantee dated 10 July 2000 with Nufarm Limited which provides that all parties to the deed will guarantee to each creditor payment in full of any debt of each company participating in the deed on winding-up of that company. As a result of a class order issued by the Australian Securities and Investment Commission, these companies are relieved from the requirement to prepare financial statements. 36. Deed of cross guarantee Under ASIC Class Order 98/1418, the Australian wholly-owned subsidiaries referred to in note 35 are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports and directors’ reports. It is a condition of the class order that the company and each of the subsidiaries enter into a deed of cross guarantee. The parent entity and all the Australian controlled entities have entered into a deed of cross guarantee dated 10 July 2000 which provides that all parties to the deed will guarantee to each creditor payment in full of any debt of each company participating in the deed on winding-up of that company. A consolidated income statement and consolidated balance sheet, comprising the company and controlled entities which are a party to the deed, after eliminating all transactions between parties to the deed of cross guarantee, at 31 July 2012 is set out as follows: 100 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 36. Deed of cross guarantee (continued) Summarised income statement and retained profits Loss before income tax expense Income tax expense Net loss attributable to members of the closed group Retained profits at the beginning of the period Dividends paid Retained profits at the end of the period Statement of financial position current assets Cash and cash equivalents Trade and other receivables Inventories Current tax assets total current assets non-current assets Equity accounted investments Other investments Deferred tax assets Property, plant and equipment Intangible assets total non-current assets totAL ASSetS current liabilities Trade and other payables Interest bearing loans and borrowings Employee benefits Current tax payable total current liabilities non-current liabilities Interest bearing loans and borrowings Deferred tax liabilities Employee benefits Provisions total non-current liabilities totAL LiABiLitieS net ASSetS equity Share capital Reserves Retained earnings totAL eQuitY Consolidated 2012 $000 2011 $000 (32,368) (3,039) (35,407) (87,425) 3,253 (84,172) 169,628 253,800 (7,865) 126,356 – 169,628 29,073 407,800 159,509 13,327 66,771 514,894 174,514 19,625 609,709 775,804 2,658 6,237 1,120,632 930,856 38,019 159,337 23,806 1,344,452 1,954,161 24,347 157,879 25,158 1,144,477 1,920,281 512,574 – 11,656 – 216,939 365,505 10,167 – 524,230 592,611 131,914 7,126 9,464 – 148,504 672,734 1,281,427 – 4,390 8,998 – 13,388 605,999 1,314,282 1,059,522 95,549 126,356 1,058,151 86,503 169,628 1,281,427 1,314,282 Nufarm Limited Annual Report 2012 | 101 NOTES TO ThE FINaNCIaL STaTEMENTS continued 37. Parent entity disclosures Result of the parent entity Profit/(loss) for the period Other comprehensive income Total comprehensive profit/(loss) for the period Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities total equity of the parent entity comprising of: Share capital Reserves Accumulated losses Retained earnings total equity Company 2012 $000 2011 $000 (30,344) (1,205) (31,549) 25,597 (930) 24,667 1,096,826 1,104,438 1,432,484 1,430,798 173,448 173,714 135,980 136,138 1,059,522 36,355 (30,344) 193,237 1,058,151 35,407 – 201,102 1,258,770 1,294,660 Parent entity contingencies The parent entity is one of the guarantors of the Senior Facility Agreement (SFA) and would be obliged, along with the other guarantors, to make payment on the SFA in the unlikely event of a default by one of the borrowers. The parent entity also provides corporate guarantees to support several of the regional working capital facilities located in Brazil and Europe. In the prior year, the parent entity had a contingent liability as a result of the class action proceedings. On 1 August 2012, Nufarm Limited entered into a conditional settlement agreement in relation to the class action proceedings. Subject to court approval, Nufarm has agreed to pay $43.5 million, which has been recorded as a expense at 31 July 2012. Refer note 6. Parent entity capital commitments for acquisition of property, plant and equipment There are no capital commitments for the parent entity in 2012 or 2011. Restatement of prior year comparatives The prior year parent entity comparatives have been restated as a result of the omission of the AUD 4.919 million impairment in Excel Crop Care Ltd, an equity investment held by the parent. This has resulted in a restatement of total comprehensive income from $29.586 million to $24.667 million and total assets from $1,435.717 million to $1,430.798 million. 102 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 38. Reconciliation of cash flows from operating activities cash flows from operating activities Profit/(loss) for the period Adjustments for: Dividend from associated company Amortisation of intangibles Depreciation Impairment loss – Brazil Investment in associates write down Gain on disposal of non-current assets Share of profits of associates net of tax Financial expense Interest paid Tax expense Taxes paid Movements in working capital items: (Increase)/decrease in receivables (Increase)/decrease in inventories Increase/(decrease) in payables Exchange rate change on foreign controlled entities working capital items net operating cash flows Consolidated 2012 $000 2011 $000 72,822 (49,529) 151 27,455 38,034 – 1,993 (333) (378) 61,796 (48,824) 37,501 (28,127) 162,090 (61,231) 39,607 84,830 (58,791) 4,415 166,505 234 23,711 40,686 70,004 4,919 (273) (2,377) 67,210 (56,372) 16,981 (25,434) 89,760 152,935 11,754 (10,942) (78,274) 75,473 165,233 Nufarm Limited Annual Report 2012 | 103 NOTES TO ThE FINaNCIaL STaTEMENTS continued 39. Key management personnel disclosures The following were key management personnel of the consolidated entity at any time during the reporting period and were key management personnel for the entire period (except where denoted otherwise). non-executive directors DG McGauchie AO (Chairman) AB Brennan GR Davis Dr RJ Edgar (retired 27 March 2012) Dr WB Goodfellow GA Hounsell PM Margin (appointed 3 October 2011) executives BF Benson P Binfield(1) BJ Croft R Heath G Hunt(2) DA Mellody(3) RF Ooms(4) title Group general manager agriculture Chief financial officer Group executive human resources and organisation development Group general manager corporate services and company secretary Group general manager global marketing and business development Group general manager supply chain and strategic procurement Group general manager chemicals Dr JW Stocker AO (retired 1 December 2011) MJ Pointon Group general manager innovation and development DA Pullan RG Reis Group general manager operations Group general manager corporate strategy and external affairs executive director DJ Rathbone AM – Managing director and chief executive 1. P Binfield was appointed as CFO with effect from 7 November 2011. 2. G Hunt was appointed as group general manager of global marketing and business development with effect from 6 February 2012. 3. DA Mellody, formerly the group general manager global marketing, moved into a new executive role of group general manager supply chain and strategic procurement with effect from 1 February 2012. 4. RF Ooms resigned as group general manager chemicals with effect from 29 February 2012. Key management personnel compensation The key management personnel compensation included in personnel expenses (see note 9) are as follows: Short term employee benefits Post employment benefits Equity compensation benefits Termination benefits Other long term benefits Consolidated 2012 $ 10,051,964 483,344 1,141,807 2011 $ 7,049,406 480,384 720,000 1,525,000 2,026,238 267,505 256,927 13,469,620 10,532,955 Individual directors and executives compensation disclosures Information regarding individual directors and executives compensation is provided in the remuneration report section of the director’s report. Apart from the details disclosed in this note, no director has entered into a material contract with the company or entities in the group since the end of the previous financial year and there were no material contracts involving directors’ interest existing at year-end. Loans to key management personnel and their related parties There were no loans to key management personnel at 31 July 2012 (2011: nil). Other key management personnel transactions with the company or its controlled entities A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the company or its subsidiaries in the reporting period. The terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-director related entities on an arms-length basis. 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. 104 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 39. Key management personnel disclosures (continued) Options and rights over equity instruments granted as compensation The movement during the reporting period in the number of rights over ordinary shares in Nufarm Limited held directly, indirectly or beneficially, by each key management person, including their related parties, is as follows Options/rights over ordinary shares in Nufarm Ltd Balance at 1 August 2011 Granted as remuneration Exercised Net change other Balance at 31 July 2012 2012 directors DJ Rathbone executives BF Benson P Binfield BJ Croft R Heath G Hunt DA Mellody MJ Pointon DA Pullan RG Reis Total – – – – – – – – – – – 180,749 34,740 54,710 16,040 15,790 52,588 26,320 18,340 36,320 30,080 465,677 – – – – – – – – – – – – – – – – – – – – – – 180,749 34,740 54,710 16,040 15,790 52,588 26,320 18,340 36,320 30,080 465,677 No options held by key management personnel vested during the year, nor were they vested and exercisable or vested but not exercisable as at 31 July 2012. No options/rights over the ordinary shares of Nufarm Limited were granted or held, directly, indirectly or beneficially by key management persons during 2011 or as at 31 July 2011. Movements in shares The movement during the reporting period in the number of ordinary shares in Nufarm Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Shares held in Nufarm Ltd 2012 directors DG McGauchie1 DJ Rathbone4 AB Brennan GR Davis Dr RJ Edgar (resigned 27 March 2012) Dr WB Goodfellow 1, 2 GA Hounsell 1 PM Margin (appointed 3 October 2011) Dr JW Stocker (retired 1 December 2011) 1, 3 executives BF Benson P Binfield (appointed 7 November 2012) BJ Croft R Heath G Hunt (appointed 6 February 2012) DA Mellody RF Ooms (retired 27 March 2012) MJ Pointon DA Pullan RG Reis Total Balance at 1 August 2011 Granted as remuneration Exercise of options Net change other Balance at 31 July 2012 31,239 11,676,031 10,000 20,000 13,000 1,120,551 43,723 – 41,521 33,068 – 19,990 206,250 – 16,773 333,409 19,217 159,527 104,096 13,848,395 – – – – – – – – – 27,715 – 12,050 12,050 – 18,075 18,075 18,075 27,715 27,715 161,470 – – – – – – – – – – – – – – – – – – – – – – – 20,000 (13,000) 20,940 – 2,458 (41,521) 31,239 11,676,031 10,000 40,000 – 1,141,491 43,723 2,458 – 10,000 30,000 4,000 – 10,000 – (351,484) – – – (308,607) 70,783 30,000 36,040 218,300 10,000 34,848 – 37,292 187,242 131,811 13,701,258 Nufarm Limited Annual Report 2012 | 105 NOTES TO ThE FINaNCIaL STaTEMENTS continued 39. Key management personnel disclosures (continued) Movements in shares (continued) Shares held in Nufarm Ltd 2011 directors DG McGauchie1 DJ Rathbone AB Brennan (appointed 10 February 2011) GDW Curlewis (retired 2 December 2010)3 GR Davis (appointed 31 May 2011) Dr RJ Edgar Dr WB Goodfellow 1, 2 GA Hounsell1 Dr JW Stocker1 executives BF Benson BJ Croft R Heath KP Martin3 DA Mellody RF Ooms MJ Pointon DA Pullan RG Reis Total Balance at 1 August 2010 Granted as remuneration Exercise of options Net change other Balance at 31 July 2011 31,239 16,144,890 – 45,913 – – 1,120,551 43,723 41,521 63,162 – 206,250 394,135 20,128 333,409 19,217 159,527 104,096 – – – – – – – – – – 10,990 – – – – – – – 18,727,761 10,990 – – – – – – – – – – – – – – – – – – – – 31,239 (4,468,859) 11,676,031 10,000 (45,913) 20,000 13,000 – – – 10,000 – 20,000 13,000 1,120,551 43,723 41,521 (30,094) 9,000 33,068 19,990 – 206,250 (394,135) (3,355) – – – – – 16,773 333,409 19,217 159,527 104,096 (4,890,356) 13,848,395 All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length. 1. The shareholdings of Dr WB Goodfellow, GA Hounsell, DG McGauchie and Dr JW Stocker include shares issued under the company’s non-executive director share plan and are held by Pacific Custodians Pty Ltd as trustee of the plan. 2. The shareholding of Dr WB Goodfellow includes his relevant interest in: (i) St Kentigern Trust Board (430,434 shares and 19,727 Nufarm step-up securities) – Dr Goodfellow is chairman of the Trust Board. Dr Goodfellow does not have a beneficial interest in these shares or step-up securities. (ii) Sulkem Company Limited (120,000 shares). (iii) 531 Trust (400,861 shares). Dr Goodfellow and EW Preston are trustees of 531 Trust. (iv) Auckland Medical Research Foundation (26,558 step-up securities). Dr Goodfellow does not have a beneficial interest in these step-up securities. (v) Trustees of the Goodfellow Foundation (33,854 shares and 1,338 step-up securities). Dr Goodfellow is chairman of the Foundation Board and does not have a beneficial interest in these shares or step-up securities. (vi) Archem Trading (NZ) Ltd (700 step up securities) 3. The shareholding of Dr JW Stocker, Dr RJ Edgar and GDW Curlewis has been removed under the ‘net change other’ column due to their retirement as a director on 1 December 2011, 27 March 2012 and 2 December 2010 respectively. The shareholding of KP Martin has been removed under the ‘net change other’ column due to his resignation from the company on 30 June 2011. 4. DJ Rathbone holds 1,500 step-up securities at 31 July 2012 (2011: nil). 106 | Nufarm Limited Annual Report 2012 NOTES TO ThE FINaNCIaL STaTEMENTS continued 40. Non-key management personnel disclosures (a) Transactions with related parties in the wholly-owned group The parent entity entered into the following transactions during the year with subsidiaries of the group: • loans were advanced and repayments received on short term intercompany accounts; and • management fees were received from several wholly-owned controlled entities. These transactions were undertaken on commercial terms and conditions. (b) Transactions with associated parties Excel Crop Care Ltd F&N joint ventures Sumitomo Chemical Company Ltd Purchases from Trade payable Sales to Trade payable Trade receivable Sales to Purchases from Trade receivable Trade payable Consolidated 2012 $000 – – 2011 $000 2,860 99 32,454 43,376 99 25,554 15,737 27,545 5,868 14,675 118 31,696 9,885 28,542 1,435 13,507 These transactions were undertaken on commercial terms and conditions. 41. Subsequent events On 1 August 2012 the company announced that it had entered into a conditional settlement agreement in relation to the class action proceedings originally issued in January 2011 by Maurice Blackburn and Slater & Gordon. In accordance with Accounting Standards the class action settlement amount, along with related legal costs, has been provided for in the financial statements and is reported in the items of material income and expense (refer to note 6 for further information). On 21 September 2012, Nufarm announced that it intended to offer, subject to market and other conditions, US$300 million aggregate principal amount of senior unsecured notes. If successful, the net proceeds would be used to repay existing indebtedness outstanding under the $625 million senior Secured Syndicated Bank Facility (SFA) entered into in November 2011. Concurrent with this, US$250 million of the commitments under the $625 million SFA would be cancelled. Nufarm Limited Annual Report 2012 | 107 Consolidated 2012 $000 2011 $000 615 592 617 405 1,637 259 1,896 356 41 2 399 675 386 1,653 81 1,734 – 36 36 72 NOTES TO ThE FINaNCIaL STaTEMENTS continued 42. auditors’ remuneration Audit services KPMG Australia Audit and review of group financial report Overseas KPMG firms Audit and review of group financial report Audit and review of local statutory reports Other auditors Audit and review of financial reports Audit services remuneration other services KPMG Australia Other assurance services Other advisory services Overseas KPMG firms Other assurance services Other services remuneration 108 | Nufarm Limited Annual Report 2012 DIRECTORS’ DECLaRaTION 1. In the opinion of the directors of Nufarm Limited (the company): (a) the consolidated financial statements and notes, and the remuneration report in the directors’ report, are in accordance with the Corporations Act 2001 including: (i) giving a true and fair view of the group’s financial position as at 31 July 2012 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; 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. 2. There are reasonable grounds to believe that the company and the group entities identified in note 36 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. 3. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 31 July 2012. 4. The directors draw attention to note 2 to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the directors: Dated at Melbourne this 24th day of September 2012 DG McGauchie Director DJ Rathbone Director Nufarm Limited Annual Report 2012 | 109 INDEPENDENT aUDITOR’S REPORT TO THE MEMBERS OF NUFARM LIMITED Report on the financial report We have audited the accompanying financial report of Nufarm Limited (the company), which comprises the consolidated balance sheet as at 31 July 2012, consolidated income statement and consolidated statement of comprehensive income, consolidated statement of changes in equity and statement of cash flows for the year ended on that date, notes 1 to 42 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the group comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 110 | Nufarm Limited Annual Report 2012 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. INDEPENDENT aUDITOR’S REPORT continued TO THE MEMBERS OF NUFARM LIMITED Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of the group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the group’s financial position as at 31 July 2012 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2(a). Report on the remuneration report We have audited the remuneration report included under the heading ‘remuneration report’ of the directors’ report for the year ended 31 July 2012. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Nufarm Limited for the year ended 31 July 2012, complies with Section 300A of the Corporations Act 2001. KPMG BW Szentirmay Partner Melbourne 24 September 2012 Nufarm Limited Annual Report 2012 | 111 ShaREhOLDER aND STaTUTORy INFORMaTION Details of shareholders, shareholdings and top 20 shareholders Listed securities – 24 September 2012 Fully paid ordinary shares Twenty largest shareholders Sumitomo Chemical Company Limited HSBC Custody Nominees (Australia) Limited National Nominees Limited J P Morgan Nominees Australia Limited Amalgamated Dairies Limited Falls Creek No 2 Pty Ltd Citicorp Nominees Pty Limited JP Morgan Nominees Australia LimitedChallenge Investment Company Limited Mr Edgar William Preston + Mr Paul Gerard Keeling Citicorp Nominees Pty Limited GBH Trustee Services Limited + Mr Aaron Craig Quintal Pacific Custodians Pty Limited BNP Paribas Noms Pty Ltd Forsyth Barr Custodians Ltd QIC Limited Douglas Industries Limited HSBC Custody Nominees (Australia) Limited Moturua Properties Ltd UBS Wealth Management Australia Nominees Pty Ltd Distribution of shareholders Size of holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Number of holders Number of securities Percentage held by top 20 11,343 262,142,247 83.13 Ordinary shares as at 24.09.12 Percentage of issued capital as at 24.09.12 60,210,136 37,200,613 33,694,962 25,869,356 14,430,798 10,763,092 8,428,822 7,785,729 3,130,282 2,364,282 2,076,566 1,900,000 1,766,552 1,503,289 1,295,212 1,263,419 1,170,866 1,169,289 964,455 930,944 22.97 14.19 12.85 9.87 5.50 4.11 3.22 2.97 1.19 0.90 0.79 0.72 0.67 0.57 0.49 0.48 0.45 0.45 0.37 0.36 Number of holders as at 24.09.12 Ordinary shares held as at 24.09.12 5,218 4,738 849 470 68 2,334,632 11,231,857 5,971,321 10,269,254 232,335,183 Of these, 851 shareholders held less than a marketable parcel of shares of $500 worth of shares (87 shares). In accordance with the ASX Listing Rules, the last sale price of the company’s shares on the ASX on 24 September 2012 was used to determine the number of shares in a marketable parcel. 112 | Nufarm Limited Annual Report 2012 ShaREhOLDER aND STaTUTORy INFORMaTION continued Stock exchanges on which securities are listed Ordinary shares: Australian Securities Exchange Limited. Substantial shareholders In accordance with section 671B of the Corporations Act, as at 24 September 2012, the substantial shareholders set out below have notified the company of their respective relevant interest in voting shares in the company shown adjacent to their respective names as follows: Number and percentage of shares in which interest held at date of notice MFS Investment Management on behalf of Sun Life Financial Inc Sumitomo Chemical Company Nufarm Limited1 Amalgamated Dairies Ltd Co The Khyber Pass Investment Ltd 2, 6 Glade Buildings Ltd 3, 6 Hauraki Trading Co. Ltd 4 PG Keeling & EW Preston (Oxford Trustees) 5 Date of notice 14 October 2011 10 June 2011 10 June 2011 31 May 2010 31 May 2010 31 May 2010 31 May 2010 31 May 2010 Number 13,112,345 60,210,136 60,210,136 14,330,798 14,349,658 14,692,730 14,679,639 14,711,590 Interest % 5.01 23 23 5.47 5.48 5.61 5.61 5.62 1. Nufarm Limited has a relevant interest in the shares held by Sumitomo Chemical Company. The relevant interest arises under a Shareholder Deed dated 22 January 2010 between Nufarm and Sumitomo which contains certain obligations relating to the voting and disposal of shares in Nufarm by Sumitomo. 2. The Khyber Pass Investment Co. Ltd has a relevant interest in Amalgamated Dairies Ltd and, as a result, the number of shares disclosed by it includes the shares held by Amalgamated Dairies Ltd. 3. Glade Building Ltd has a relevant interest in Amalgamated Dairies Ltd and, as a result, the number of shares disclosed by it includes the shares held by Amalgamated Dairies Ltd. 4. Hauraki Trading Ltd has a relevant interest in Amalgamated Dairies Ltd and, as a result, the number of shares disclosed by it includes the shares held by Amalgamated Dairies Ltd. 5. Oxford Trustees has a relevant interest in Glade Building Ltd, Khyber Pass Ltd and Amalgamated Dairies Ltd and, as a result, the number of shares disclosed by it includes the shares held by Glade Building Ltd, Khyber Pass Ltd and Amalgamated Dairies Ltd. 6. On 30 March 2012 Glade Buildings Ltd and the Khyber Pass Investment Co Ltd amalgamated to become The Khyber Pass Investment Co Ltd. Glade Buildings Ltd was struck off as a NZ Limited Company. Voting rights On a show of hands, every shareholder present in person or represented by a proxy or representative shall have one vote and on a poll every shareholder who is present in person or represented by a proxy or representative shall have one vote for every fully paid share held by the shareholder. Shareholder information Annual general meeting The annual general meeting of Nufarm Limited will be held on Thursday 6 December 2012 at 10.00am in Bourke Rooms 1 & 2, Level 2, RACV Club, 501 Bourke Street, Melbourne, Victoria. Full details are contained in the notice of meeting sent to all shareholders. Voting rights Shareholders are encouraged to attend the annual general meeting. However, when this is not possible, they are encouraged to use the form of proxy by which they can express their views. Proxy voting can be completed online via www.nufarm.com/ annualgeneralmeeting or via post by completing the proxy form and sending it back in the return envelope. Nufarm Limited Annual Report 2012 | 113 ShaREhOLDER aND STaTUTORy INFORMaTION continued Every shareholder, proxy or shareholder’s representative has one vote on a show of hands. In the case of a poll, each share held by every shareholder, proxy or representative is entitled to: (a) one vote for each fully paid share; and (b) voting rights in proportion to the paid up amount of the issue price for partly paid shares. Stock exchange listing Nufarm shares are listed under the symbol NUF on the ASX. The securities of the company are traded on the ASX under CHESS (Clearing House Electronic Sub-register System), which allows settlement of on-market transactions without having to reply on paper documentation. Shareholders seeking more information about CHESS should contact their stockbroker or the ASX. Shareholder details The Nufarm Limited Share Register is managed by Computershare Investor Services. You can gain access to your shareholding information in the following ways. online via investor centre Step 1 Go to www.computershare.com/au/investors Step 2 Select ‘Holding Enquiry’ Step 3 Enter NUF or Nufarm Limited Step 4 Enter your Securityholder Reference Number (SRN) or Holder Identification Number (HIN), postcode or country if outside Australia Step 5 Enter the security code that appears and agree to the terms and conditions Step 6 Select ‘Submit’ Step 7 You will be asked to choose a User ID and password. Please keep this information confidential. By telephone via investorPhone: InvestorPhone provides telephone access 24 hours a day seven days a week. Step 1 Call the Nufarm shareholder information line on 1300 652 479 (within Australia) or +61 3 9415 4360 (outside Australia). Step 2 Follow the prompts to gain secure, immediate access to your: – holding details – registration details – payment information. Shareholder communications You can choose to receive shareholder communications electronically. Register for this initiative at www.eTree.com.au/nufarm and a donation of $1 will go to Landcare to support urgent reforestation projects in Australia and New Zealand. The default for receiving the annual report is now via the company’s website – www.nufarm.com 114 | Nufarm Limited Annual Report 2012 ShaREhOLDER aND STaTUTORy INFORMaTION continued Shareholder enquires contact: Computershare Investor Services Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 GPO Box 2975 Melbourne Victoria 3001 Telephone: 1300 652 479 (within Australia) +61 3 9415 4360 (outside Australia) Email: web.queries@computershare.com.au Key dates 30 October 2012* Annual report sent to shareholders 6 December 2012 Annual general meeting 28 March 2013* 31 July 2013 Announcement of profit result for half year ending 31 January 2013 End of financial year * Subject to confirmation. For enquiries relating to the operations of the company, please contact the Nufarm Corporate Affairs Office on: Telephone: +61 3 9282 1177 Facsimile: +61 3 9282 1111 Email: robert.reis@au.nufarm.com Written correspondence should be directed to: Corporate Affairs Office Nufarm Limited PO Box 103 Laverton Victoria 3028 Australia Nufarm Limited Annual Report 2012 | 115 DIRECTORy Directors DG McGauchie AO – Chairman DJ Rathbone AM – Managing director AB Brennan GR Davis Dr WB Goodfellow GA Hounsell PM Margin Company secretary R Heath Solicitors Arnold Bloch Leibler & Co 333 Collins Street Melbourne Victoria 3000 Australia auditors KPMG 147 Collins Street Melbourne Victoria 3000 Australia Trustee for Nufarm step-up securities Permanent Trustee Company Ltd 35 Clarence Street Sydney NSW 2000 Australia Share registrar Australia Computershare Investor Services Pty Ltd GPO Box 2975EE Melbourne Victoria 3001 Australia Telephone: 1300 850 505 Outside Australia: +61 3 9415 4000 Step-up securities registrar New Zealand Computershare Registry Services Limited Private Bag 92119 Auckland NZ 1020 Telephone: +64 9 488 8700 Registered office 103–105 Pipe Road Laverton North Victoria 3026 Australia Telephone: +61 3 9282 1000 Facsimile: +61 3 9282 1001 NZ branch office 6 Manu Street Otahuhu Auckland New Zealand Telephone: +64 9 270 4157 Facsimile: +64 9 267 8444 website www.nufarm.com Nufarm Limited ACN 091 323 312 116 | Nufarm Limited Annual Report 2012 Produced by Gillian Sweetland. Photographers include Lynton Crabb, Danielle Moore and Melissa Powell. Designed by MDM Design.