Company Financial Analysis - Billabong Company
Billabong International Limited Financial report ended 30 June 2012 Page 1 Appendix 4E Preliminary final report Name of entity BILLABONG INTERNATIONAL LIMITED ABN Financial year ended 17 084 923 946 30 JUNE 2012 Comparative Financial year ended 30 JUNE 2011 Results for announcement to the market Results $A'000 Revenues from continuing operations Down 7.3% to 1,444,079 Loss from ordinary activities after tax attributable to members Down 331.4% to (275,649) Net loss for the period attributable to members Down 331.4% to (275,649) Dividends Amount per security Franked amount per security Tax rate for franking Current period – 2012 Final dividend --- --- n/a Interim dividend – paid on 19 April 2012 3.0¢ 0.00¢ n/a Previous corresponding period – 2011 Final dividend – payable on 21 October 2011 13.0¢ 3.25¢ 30% Interim dividend – paid on 21 April 2011 16.0¢ 8.00¢ 30% The Board has not declared a final ordinary dividend for the year ended 30 June 2012 and does not expect to declare an interim ordinary dividend for the half-year ended 31 December 2012. The Board confirm that the dividend policy will be reviewed thereafter. The Dividend Reinvestment Plan is suspended until such time as the dividend policy review has been undertaken.
NTA backing 2012 2011 Net tangible asset backing per ordinary security $0.76 $(0.29) Billabong International Limited Financial report ended 30 June 2012 Page 2 Compliance statement This report is based on the consolidated financial report which has been audited. Refer to the attached full financial report for all other disclosures in respect of the Appendix 4E.
Signed: ............................................................ Date: 27 August 2012 Launa Inman Chief Executive Officer C Dir Au d Co Fi n Dir In d Sh a ontents ectors’ report ditor’s indepen rporate gover n nancial report ectors’ declar a dependent aud i areholder info r : : dence declara nance stateme n ation tor’s report to t rmation FULL tion nt the members FINA N B Inte A N CIAL B illab o rnati o Lim i ABN 17 084 9 Page 2 36 37 45 133 134 136 REP O 2011 - o ng o nal ited 923 946 O RT - 12 Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 2 Your Directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of Billabong International Limited (the Company) and the entities it controlled at the end of, or during, the year ended 30 June 2012.
Directors The following persons were Directors of Billabong International Limited during the whole of the financial year and up to the date of this report:
E.T. Kunkel A.G. Froggatt F.A. McDonald G.S. Merchant P. Naude C. Paull L. Inman was appointed as Managing Director and Chief Executive Officer (CEO) on 14 May 2012 and continues in office at the date of this report.
D. O’Neill was the CEO and an Executive Director from the beginning of the financial year until he ceased employment on 12 May 2012.
S. Pitkin was appointed as a Director on 28 February 2012 and continues in office at the date of this report.
M.A. Jackson was a Director from the beginning of the financial year until her resignation on 25 October 2011.
Principal activities During the year the principal continuing activities of the Group consisted of the wholesaling and retailing of surf, skate, snow and sports apparel, accessories and hardware, and the licensing of the Group trademarks to specified regions of the world.
Dividends – Billabong International Limited Dividends paid to members during the financial year were as follows:
$’000 Final ordinary dividend partially franked to 25% for the year ended 30 June 2011 of 13.0 cents per fully paid share paid on 21 October 2011 33,025 Interim ordinary dividend unfranked for the half-year ended 31 December 2011 of 3.0 cents per fully paid share paid on 19 April 2012 7,645 40,670 The Board has not declared a final ordinary dividend for the year ended 30 June 2012 and does not expect to declare an interim ordinary dividend for the half-year ended 31 December 2012. The Board confirms that the dividend policy will be reviewed thereafter. The Dividend Reinvestment Plan (DRP) is suspended until such time as the dividend policy review has been undertaken.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 3 Review of operations A summary of consolidated revenues and results by significant geographical segments is set out below:
Segment As Reported Segment revenues Segment EBITDAI* 2012 2011 2012 2011 $’000 $’000 $’000 $’000 Australasia 522,265 501,904 (22,471) 55,225 Americas 750,307 843,737 (39,250) 80,194 Europe 278,064 337,627 (12,277) 54,246 Third party royalties 2,608 2,211 2,608 2,211 Share of net profit after-tax of associate --- --- 293 --- Gain on sale, net of transaction costs before income tax --- --- 201,448 --- 1,553,244 1,685,479 130,351 191,876 Less: Net interest expense (27,883) (23,045) Depreciation and amortisation (47,691) (41,931) Impairment charge (342,955) --- (Loss)/profit before income tax expense (288,178) 126,900 Income tax benefit/(expense) 11,497 (8,855) (Loss)/profit after income tax expense (276,681) 118,045 Loss attributable to non-controlling interests 1,032 1,094 (Loss)/profit attributable to members of Billabong International Limited (275,649) 119,139 Segment Constant Currency ** Segment revenues Segment EBITDAI* 2012 2011 2012 2011 $’000 $’000 $’000 $’000 Australasia 522,265 497,414 (22,471) 54,466 Americas 750,307 816,051 (39,250) 79,770 Europe 278,064 318,013 (12,277) 50,465 Third party royalties 2,608 2,211 2,608 2,211 Share of net profit after-tax of associate --- --- 293 --- Gain on sale, net of transaction costs before income tax --- --- 201,448 --- 1,553,244 1,633,689 130,351 186,912 Less: Net interest expense (27,883) (22,291) Depreciation and amortisation (47,691) (40,457) Impairment charge (342,955) --- (Loss)/profit before income tax expense (288,178) 124,164 Income tax benefit/(expense) 11,497 (9,396) (Loss)/profit after income tax expense (276,681) 114,768 Loss attributable to non-controlling interests 1,032 1,094 (Loss)/profit attributable to members of Billabong International Limited (275,649) 115,862 * Segment Earnings Before Interest, Taxes, Depreciation, Amortisation and Impairment (EBITDAI) excludes inter- company royalties and sourcing fees and includes an allocation of global overhead costs (which include corporate overhead, international advertising and promotion costs, central sourcing costs and foreign exchange movements). ** Due to a significant portion of the Group’s operations being outside of Australia, the Group is exposed to currency exchange rate translation risk i.e. the risk that the Group’s offshore earnings and assets fluctuate when reported in Australian Dollars. The Group’s segment information for the prior year has therefore also been presented in a constant currency basis (i.e. using the current year exchange rates to convert the prior year foreign earnings) to remove the impact of foreign exchange movements from the Group’s performance against the prior year comparative. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 4 Review of operations (continued) Given the impact of the Group’s strategic capital structure review announced to the market on 17 February 2012 and the impact the difficult global macro trading conditions have had on results this year, the Group’s results have been presented on an adjusted basis to exclude significant and exceptional items to enable a more representative comparison to the prior year as detailed below. Significant income and cost items associated with the strategic capital structure review includes but is not limited to, doubtful debts, inventory write downs and redundancies partially offset by the gain on sale of 51.5% of the Nixon business (significant items). Exceptional items include other costs and charges associated with certain initiatives outside the ordinary course of operations (exceptional items) (collectively significant and exceptional items). 2012 Adjusted Net Profit After Tax Reconciliation Australasia Americas Europe Other ^ Total $’000 $’000 $’000 $’000 $’000 EBITDAI As Reported (22,471) (39,250) (12,277) 204,349 130,351 Significant Items (notes 8 and 10) 47,071 91,348 35,553 (201,448) (27,476) Exceptional Items ^^ 3,880 3,686 58 --- 7,624 Exceptional Items Unaudited and Non-IFRS ^^^ 5,306 3,919 869 --- 10,094 Adjusted EBITDAI ^^ 33,786 59,703 24,203 2,901 120,593 Less: Net interest expense (27,883) Depreciation and amortisation ^^^^ (44,775) Adjusted profit before income tax expense ^^^^ 47,935 Adjusted income tax expense ^^^^ (15,427) Adjusted profit after income tax expense ^^^^ 32,508 Loss attributable to non-controlling interests 1,032 Adjusted profit attributable to members of Billabong International Limited ^^^^ 33,540 ^ Includes third party royalties, share of net profit after-tax of associate and gain on sale, net of transaction costs before income tax ^^ Includes costs arising from the strategic capital structure review included in the income statement which are not separately identified in the financial report due to their individual size or nature. The types of expenses included in this balance are fees, charges and other adjustments ^^^ Reflects the margin dilution on the clearance of inventory as a result of the strategic capital structure review which resulted in a margin below that achieved by the Group historically in the ordinary course of business and wage costs associated with employees from the beginning of the year to the date of their redundancy arising from the strategic capital structure review ^^^^ Excludes audited significant and IFRS and unaudited Non-IFRS exceptional items The prior year included the following pre-tax significant items being acquisition and restructuring costs by segment:
Australasia $7.4 million, Americas $4.6 million and Europe $0.3 million.
Comments on the operations and the results of those operations are set out below:
Consolidated Result Net Loss After Tax for the year ended 30 June 2012 was $275.6 million, a decrease of 331.4% in reported terms (a decrease of 337.9% in constant currency terms) compared to the prior corresponding period (pcp). This result was impacted by the abovementioned significant and exceptional items. Excluding the after-tax impact of these significant and exceptional items in both years, Adjusted Profit attributable to members of Billabong International Limited for the year ended 30 June 2012 was $33.5 million, a decrease of 74.3% in reported terms (a decrease of 73.6% in constant currency terms) compared to the pcp.
Group sales revenue of $1,550.6 million, excluding third party royalties, represents a 7.9% decrease on the pcp in reported terms (down 5.0% in constant currency terms). At a segment level, in constant currency terms, sales revenue in the Americas decreased 8.1%, Europe decreased 12.6% and Australasia increased 5.0% over the pcp.
Consolidated gross margins excluding the impact of significant and exceptional items were 53.2% (53.8% in the pcp in as reported terms). Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 5 Review of operations (continued) Adjusted EBITDAI of $120.6 million represents a decrease of 40.9% in reported terms (a decrease of 39.4% in constant currency terms) compared to the pcp. The consolidated Adjusted EBITDAI margin of 7.8% decreased by 4.3% points compared to that of the pcp of 12.1%. The lower Adjusted EBITDAI was driven, in particular, by factors including:
In Europe, sovereign debt issues had a significant adverse impact on consumer confidence and demand, especially in southern European territories, leading to:
- Delays in shipment of summer product at the request of some wholesale customers - Weak in-season repeat business for summer product - Weaker winter indent and delayed shipment of winter product - Soft trading conditions in Company owned retail In Australia, consumers continued to be very cautious given the weak global macroeconomic climate which led to:
- A significant reduction in summer product shipments in the important trading month of June - A highly promotional retail environment adversely impacting Company owned retail performance In North America, both wholesale and Company owned retail performance in Canada was subdued and below expectations. In addition, an exceptionally warm winter negatively impacted snow related products leading to lower winter repeats and subdued spring / summer indents Segment Analysis In addition to the specific factors discussed by segment below, Adjusted EBITDAI margins have been affected by the allocation of lower global overhead costs compared to the pcp.
Australasia Compared to the pcp in reported terms, sales revenue increased 4.1% to $522.3 million (up from $501.9 million) and Adjusted EBITDAI decreased 46.1% to $33.8 million (down from $62.7 million). Adjusted EBITDAI margins were lower at 6.5% compared with 12.5% in the pcp, principally reflecting the combined impact of a very weak retail environment in Australia and extremely difficult trading conditions in South Africa offset in part by the abovementioned allocation of lower global overhead costs. Excluding the allocation of global overhead costs, Adjusted EBITDAI margins were 9.1% compared with 16.3% in the pcp.
Compared to the pcp in constant currency terms, sales revenue increased 5.0% and Adjusted EBITDAI decreased 45.4%.
Sales revenues in the Australasian segment increased over the pcp principally as a result of the inclusion of a full year of trading for the prior year acquisitions of SDS/Jetty Surf and Rush Surf in Australia. However, the performance of the underlying Australian business weighed on the region. Low consumer confidence, record savings levels and unseasonally cold summer weather led to a very weak retail trading environment in Australia, compounded by a shift to online shopping given the strong AUD. These factors impacted wholesale repeat business and also impacted company owned retail performance.
Americas Compared to the pcp in reported terms, sales revenue decreased 11.1% to $750.3 million (down from $843.7 million in the pcp) and Adjusted EBITDAI decreased 29.6% to $59.7 million (down from $84.8 million in the pcp). Adjusted EBITDAI margins were lower at 8.0% compared with 10.1% in the pcp, principally reflecting the performance of both wholesale and Company owned retail performance in Canada offset by the abovementioned allocation of lower global overhead costs. Excluding the allocation of global overhead costs, Adjusted EBITDAI margins were 10.6% compared with 13.9% in the pcp. Compared to the pcp in constant currency terms, sales revenue decreased 8.1% and Adjusted EBITDAI decreased 29.1%.
Europe Compared to the pcp in reported terms, sales revenue decreased 17.6% to $278.1 million (down from $337.6 million in the pcp) and Adjusted EBITDAI decreased 55.6% to $24.2 million (down from $54.5 million in the pcp). Adjusted EBITDAI margins of 8.7% were down compared to the pcp of 16.1%, principally reflecting the impact of European sovereign debt issues with shortfalls in wholesale repeat business and higher product input costs offset in part by the abovementioned allocation of lower global overhead costs. Excluding the allocation of global overhead costs, Adjusted EBITDAI margins were 11.3% compared with 20.0% in the pcp. Compared to the pcp in constant currency terms, sales revenue decreased 12.6% and Adjusted EBITDAI decreased 52.2%.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 6 Review of operations (continued) Depreciation and Amortisation Expense Depreciation and amortisation expense increased 13.7% in reported terms (17.9% in constant currency terms) compared to the pcp primarily due to the inclusion of a full year of trading for the prior year acquisitions of RVCA, West 49, SDS/Jetty Surf, Rush Surf and retail store expansion.
Impairment Charge Expense As a result of the impairment review of intangible assets, goodwill in North America, Australia and South Africa and goodwill and brand intangibles for Billabong have been written down to their recoverable amounts, being the higher of their value in use or fair value less costs to sell. In addition, a review of retail fixed assets and other intangibles was also performed and where appropriate these have been written down to their recoverable amount. For the year ended 30 June 2012, this resulted in a total impairment charge amounting to $343.0 million.
Net Interest Expense Net interest expense increased 21.0% in reported terms (25.1% in constant currency terms) compared to the pcp, driven primarily by the inclusion of a full year of borrowings for the abovementioned prior year acquisitions and increased borrowings to fund the payment of the deferred consideration payment for the original acquisition of Nixon and working capital requirements.
Income Tax Expense The income tax benefit for the year ended 30 June 2012 was $11.5 million (tax expense of $8.9 million in the pcp), an effective rate of tax of 4.0% (2011: 7.0%). The lower effective tax rate is driven by the partial sale of Nixon and other non- taxable items including deferred consideration. Adjusting for these significant amounts and also goodwill impairment and non-recognition of losses the effective tax rate for the Group would have been approximately 33.8% (2011: 21.0% adjusting for equivalent amounts). The effective tax rate is dependent on the mix of profit by country and exchange rate fluctuations.
Consolidated Balance Sheet, Cash Flow Items and Capital Expenditure Excluding Nixon wholesale sales made in the current year as a result of the partial sale and deconsolidation of that business from the Group accounts and including in the pcp the pre-acquisition sales of RVCA and the significant retail acquisitions of West 49, SDS/Jetty Surf and Rush Surf and excluding any wholesale sales made to these accounts prior to acquisition, working capital represents 19.7% as a percentage of the prior twelve months’ sales stated at year end exchange rates, being 8.1% lower compared to the pcp of 27.8% in reported terms in part due to the acceleration of inventory clearance and provisions taken as part of the strategic capital structure review.
Cash inflow from operating activities increased to $78.9 million, being 224.2% higher compared to $24.3 million in the pcp, principally reflecting higher net cash receipts from customers and lower tax payments offset in part by the cash cost of the significant and exceptional items associated with the strategic capital structure review.
Net cash receipts from customers of $123.9 million were 23.7% higher compared to $100.2 million in the pcp representing 102.8% of Adjusted EBITDAI compared to 49.1% for the pcp reflecting strong trading cash flows for the period relative to Adjusted EBITDAI, despite the cash cost of the significant and exceptional items associated with the strategic capital structure review.
Cash inflow from investing activities of $135.1 million was in accordance with expectations and includes the proceeds from the partial sale of Nixon offset by the payment of the deferred consideration payment for the original acquisition of Nixon and investment in owned retail globally.
Net debt decreased 65.6% to $160.9 million over the pcp which principally reflects the receipt of the proceeds from the partial sale of Nixon and the institutional component of the accelerated pro-rata non-renounceable entitlement offer offset by the payment of the deferred consideration for the original acquisition of Nixon, investment in owned retail globally and working capital requirements. The Group has a gearing ratio (net debt to net debt plus equity) of 13.5% as at 30 June 2012 (28.1% in the pcp) and interest cover excluding significant and exceptional items of 2.6 times (6.1 times in the pcp).
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 7 Significant changes in the state of affairs During the year the Group undertook a strategic capital structure review which included the following:
The sale of a 51.5% interest in Nixon as announced on 17 February 2012 with the proceeds used to partially repay the amount of outstanding drawn debt. Details of the sale are disclosed in note 10 to the financial statements. Based on information available at the time of the half-year results announcement, the Board and management considered that this transaction would stabilise the Group’s balance sheet and capital structure Post the announcement of the half-year results on 17 February 2012, the Group experienced a further deterioration in trading conditions, in particular in Europe, Australia and Canada with the result that the Board decided it was prudent to take further action to restore the balance sheet. As a result the Group launched an accelerated non-renounceable pro-rata entitlement offer to shareholders to subscribe for 6 new ordinary shares for every 7 existing ordinary shares to raise approximately $225 million with the proceeds to be applied towards partially repaying the amount of outstanding drawn debt. Details of the changes in contributed equity are disclosed in note 29 to the financial statements The closure of underperforming company-owned retail stores to yield an improvement in EBITDAI and reduce lease charges The implementation of a cost reduction program targeting annualised cost savings of approximately $30 million Other than the above there were no significant changes in the state of affairs of the Group during the financial year.
Matters subsequent to the end of the financial year On 20 July 2012 the Group announced the completion of the retail component of the accelerated non-renounceable pro- rata entitlement offer announced on 21 June 2012. The Group received the proceeds for the retail component on 26 July 2012 and applied these proceeds towards the repayment of debt drawn under its financing facilities.
On 24 July 2012 the Board received an indicative, non-binding and conditional proposal from TPG International LLC (TPG) to acquire all of the shares in the Company for $1.45 cash per share by way of a scheme of arrangement. This follows an earlier indicative, non-binding and conditional proposal received from TPG in February 2012 for $3.00 cash per share, subsequently increased to $3.30 cash per share. The latest TPG proposal follows a trading update to the market on 21 June 2012 and subsequent entitlement offer to shareholders increasing shares on issue from 255.1 million (in February 2012) to 478.9 million (in July 2012). Discussions between TPG and the Board are continuing and the proposal is subject to due diligence and the satisfaction of a number of other conditions. There is no guarantee that, following the due diligence process, a transaction will be agreed or that the Board will recommend an offer at the current proposed offer price. In fact, the Board does not believe that the proposal reflects the fundamental value of the Group in the context of a change of control transaction. Other than the items mentioned above, there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Group, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years.
Likely developments and expected results of operations The Group expects the current challenging trading conditions to continue during 2012-13. Assuming no further deterioration in these trading conditions, 2012-13 EBITDAI is currently expected to be in the range of $100.0 million to $110.0 million in constant currency terms. This compares to proforma 2011-12 EBITDAI of $84.0 million, excluding 100% of Nixon and significant and exceptional items. This result is expected to be driven by: The benefits from the previously announced strategic capital structure review The additional benefits realised under the transformation strategy announced on 27 August 2012 Recognition of the Group's share of after-tax Nixon associate profits The Board has not declared a final ordinary dividend for the year ended 30 June 2012 and does not expect to declare an interim ordinary dividend for the half-year ended 31 December 2012. The Board confirms that the dividend policy will be reviewed thereafter. Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to the Group.
Environmental regulation The Group, while not subject to any significant environmental regulation or mandatory emissions reporting, voluntarily measures its carbon emissions using the National Greenhouse and Energy Reporting Act 2007. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 8 Information on Directors TED KUNKEL (Non-Executive Chairman) Experience and expertise Previously the President and Chief Executive Officer of Foster’s Group Limited and associated companies. Mr Kunkel has extensive international business experience. Appointed Non-Executive Director on 19 February 2001.
Other current directorships None.
Former directorships in last 3 years None.
Special responsibilities Chairman of the Board and Nominations Committee and member of Human Resource and Remuneration and Audit Committees.
Interests in shares and options 116,435 ordinary shares in Billabong International Limited.
LAUNA INMAN (Executive Director from 14 May 2012) Experience and expertise Launa Inman was appointed as Managing Director and Chief Executive Officer effective 14 May 2012. Ms Inman has 32 years of experience in the retail sector and was the managing director of Target Australia, the country’s largest retailer of apparel, from 2005 to 2011. Prior to this she was managing director of Officeworks, Australia’s largest stationery and office technology retailer, and has considerable skills and depth of experience in global retail, supply chain management, finance, strategic planning and brand marketing.
Other current directorships Commonwealth Bank of Australia, director since 16 March 2011.
Former directorships in last 3 years None.
Special responsibilities Managing Director and Chief Executive Officer.
Interests in shares and options Nil. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 9 Information on Directors (continued) TONY FROGGATT (Non-Executive Director) Experience and expertise Tony Froggatt was the CEO of Scottish and Newcastle PLC brewing company based in Edinburgh, UK until he retired on 31 October 2007 to return to Australia. He has extensive marketing and distribution knowledge in Australia, Western and Central Europe and Asia particularly in the international food and beverages sectors. Appointed Non-Executive Director on 21 February 2008.
Other current directorships Brambles Limited, since 21 August 2006.
Coca-Cola Amatil Limited, since 1 December 2010. Former directorships in last 3 years AXA Asia Pacific Holdings Limited from 16 April 2008 to 30 March 2011.
National Mutual Life Association of Australasia Ltd from 16 April 2008 to 30 March 2011.
Special responsibilities Member of Nominations, Human Resource and Remuneration and Audit Committees.
Chairman of Human Resource and Remuneration Committee from 26 October 2011 to 12 April 2012.
Interests in shares and options 7,505 ordinary shares in Billabong International Limited.
ALLAN MCDONALD (Non-Executive Director) Experience and expertise Allan McDonald has extensive experience in the investment and commercial banking fields and is presently associated with a number of companies as a consultant and company director. Appointed Non-Executive Director on 4 July 2000.
Other current directorships Multiplex SITES Trust (director of responsible entity, Brookfield Funds Management Limited), director since 22 October 2003 and chairman from May 2005.
Astro Japan Property Group, stapled securities of Astro Japan Property Group Limited (director) and Astro Japan Property Trust (director of responsible entity, Astro Japan Property Management Limited), director and chairman since 19 February 2005.
Brookfield Australian Opportunities Fund, Multiplex European Property Fund and Brookfield Prime Property Fund (director of responsible entity, Brookfield Capital Management Limited) director and chairman since 1 January 2010.
Brookfield Office Properties Inc. (dual listed on NYSE and TSX), director since 4 May 2011.
Former directorships in last 3 years Ross Human Directions Limited, director and chairman from 3 April 2000 to 14 February 2011. Special responsibilities Chairman of Audit Committee and member of Nominations and Human Resource and Remuneration Committees.
Interests in shares and options 218,046 ordinary shares in Billabong International Limited.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 10 Information on Directors (continued) GORDON MERCHANT AM (Non-Executive Director) Experience and expertise Gordon Merchant founded Billabong’s business in 1973 and has been a major stakeholder in the business since its inception. Mr Merchant has extensive experience in promotion, advertising, sponsorship and design within the surfwear apparel industry. Mr Merchant was awarded a Member of the Order of Australia in the 2010 Australia Day Honours List for service to business, particularly the manufacturing sector, as a supporter of medical, youth and marine conservation organisations, and to surf lifesaving. Appointed Non-Executive Director on 4 July 2000.
Other current directorships Plantic Technologies Limited, since 12 April 2005.
Former directorships in last 3 years None.
Special responsibilities Member of Nominations and Human Resource and Remuneration Committees.
Interests in shares and options 69,705,463 ordinary shares in Billabong International Limited.
PAUL NAUDE (Executive Director) Experience and expertise Paul Naude was appointed President of Billabong's American operations in 1998 and established Billabong USA as a wholly owned activity in North America. Paul was appointed to the expanded role of President of the Americas on 9 May 2012. He has been involved in the surfing industry since 1973 with extensive experience in apparel brand management.
Appointed Executive Director on 14 November 2002.
Other current directorships None.
Former directorships in last 3 years None.
Special responsibilities President, Americas.
Interests in shares and options 1,045,988 ordinary shares in Billabong International Limited.
282,598 share rights in Billabong International Limited.
524,170 options in Billabong International Limited.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 11 Information on Directors (continued) COLETTE PAULL (Non-Executive Director) Experience and expertise Colette Paull was one of the earliest employees of the Billabong business in 1973. Since that time, Ms Paull has been broadly involved in the development of Billabong’s business from its initial growth within Australia to its expansion as a global brand. Ms Paull previously held the position of Company Secretary until 1 October 1999. Appointed Non-Executive Director on 4 July 2000.
Other current directorships Plantic Technologies Limited, since 7 December 2010.
Former directorships in last 3 years None.
Special responsibilities Member of Nominations and Human Resource and Remuneration Committees.
Interests in shares and options 2,973,289 ordinary shares in Billabong International Limited.
SALLY PITKIN (Non-Executive Director from 28 February 2012) Experience and expertise Sally Pitkin is a former corporate partner of a leading Australian law firm and has extensive experience in listed companies, public sector bodies and specialist fields including corporate governance and structural reform. Ms Pitkin is a Councillor of the Australian Institute of Company Directors (Queensland Council). Appointed Non-Executive Director on 28 February 2012.
Other current directorships Super Retail Group Limited, director since 1 July 2010.
Former directorships in last 3 years Aristocrat Leisure Limited, director from 20 June 2005 to 3 May 2011. Special responsibilities Chairman of Human Resource and Remuneration Committee (from 13 April 2012) and member of Audit and Nominations Committees.
Interests in shares and options Nil.
DEREK O’NEILL (Executive Director until 12 May 2012) Experience and expertise Derek O'Neill was appointed as Chief Executive Officer effective 1 January 2003. He has previously held senior management positions with Billabong, including General Manager of Billabong’s European operations from 1992 to 2003.
In 2002, Mr O’Neill was awarded a Chevalier d'Ordre de Merite Nationale for services to business in France. Appointed Executive Director on 5 March 2002 and ceased employment on 12 May 2012.
Special responsibilities Chief Executive Officer until 12 May 2012.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 12 Information on Directors (continued) MARGARET JACKSON AC (Non-Executive Director until 25 October 2011) Experience and expertise Margaret Jackson was a Partner of KPMG Peat Marwick’s Management Consulting Division and National Chairman of the KPMG Micro Economic Reform Group until 30 June 1992, when she resigned to pursue a full-time career as a company director. Ms Jackson previously served as a Director of Australia and New Zealand Banking Group Limited, The Broken Hill Proprietary Company Limited, Pacific Dunlop Limited, John Fairfax Holdings Limited, Southcorp Limited and Chairman of Qantas Airways Limited. Margaret was awarded a Companion of the Order of Australia in the General Division (AC) in June 2003 for service to business in diverse and leading Australian corporations and to the community in the area of support for medical research, the arts and education. Appointed Non-Executive Director on 4 July 2000 and resigned on 25 October 2011.
Special responsibilities Chairman of Human Resource and Remuneration Committee and member of Nominations and Audit Committees until 25 October 2011.
Company Secretary The Company Secretary is Ms Maria Manning B.Bus (Acc), CPA and FCIS. Ms Manning was appointed to the position of Company Secretary in April 2006. She has over 21 years experience as a Company Secretary of publicly listed companies in Australia.
Meetings of Directors The numbers of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 30 June 2012, and the numbers of meetings attended by each Director were:
Billabong International Limited Board Audit Committee Nominations Committee Human Resource and Remuneration Committee Scheduled Meetings Unscheduled Meetings Held Attended Held Attended Held Attended Held Attended Held Attended E.T. Kunkel 9 9 32 32 3 3 15 15 10 10 L.K. Inman 1** 1 8** 8 * * * * * * A.G. Froggatt 9 9 32 30 3 3 15 15 10 10 F.A. McDonald 9 9 32 30 3 3 15 14 10 4 G.S. Merchant 9 9 32 31 * * 15 14 10 9 P. Naude 9 9 32 28 * * * * * * C. Paull 9 9 32 32 * * 15 15 10 10 S.A.M. Pitkin 2** 2 10** 9 0** 0 5** 5 8** 8 D. O'Neill 8** 8 23** 23 * * * * * * M.A. Jackson 4** 4 7** 7 1** 1 4** 3 2** 2 * Not a member of the relevant Committee.
** Number of meetings held during the time the Director held office or was a member of the committee during the year.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 13 Remuneration Report CONTENTS The information provided in this report has been prepared based on the requirements of the Corporations Act 2001 and the applicable accounting standards. The report has been audited and is set out under the following headings. MESSAGE FROM THE BOARD 14 BILLABONG GROUP EXECUTIVES 15 Other executive changes during 2011-12 15 2011-12 REMUNERATION IN BRIEF 16 Non-executive and key management personnel changes 16 Performance and reward 16 Remuneration outcomes for the CEO and senior executives 16 Non-Executive Director (NED) remuneration 17 1. INTRODUCTION 18 2. REMUNERATION GOVERNANCE 18 Recommendation provided 18 3. CEO AND SENIOR EXECUTIVE REMUNERATION 19 Remuneration principles 19 Remuneration strategy 20 Executive remuneration structure 21 Remuneration outcomes for 2011-12 25 Summary of executive contracts 28 Statutory remuneration disclosures 29 Fixed and at risk remuneration 30 4. NON-EXECUTIVE DIRECTOR REMUNERATION 30 Approach to setting Non-Executive Director remuneration 30 Approved fee pool 30 Fees paid during 2011-12 (and comparatives) 31 5. ADDITIONAL STATUTORY DISCLOSURES 31 Share-based compensation 31 Short Term Incentive (STI) and options 32 Billabong Int e Remune r MESSAGE F Dear Shareh o On behalf of The 2011-12 Launa Inma n retail, supply Officer, Dere The Board h Board with t h global searc experience. S When it com executive re m Shareholder engaged wit h current appr o thoroughly r e policy reflect s The Board u number of m evolve and i m the substanti The link bet w in 2011-12. remuneratio n decreased b y The Board c o and ultimatel y We have en d concise and p Yours faithfu l Sally Pitkin Chair of the H ernational Limi t ration Rep o FROM THE B O olders, the Board of B financial year n was appoint e chain manag e k O’Neill left th as also comm he search for a h for a new C Substantial pr o es to executiv e muneration, co m feedback con t h a number o f oach to exec u eviewed and c o s a pay-for-per f ndertook a m a meetings were mprove. Overa al redraft in 20 ween performa n For the third c o n outcomes fo r y 16%.
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age 14 extensive Executive assist the cludes a bal retail between he Board rding the ces was uneration ed and a tinues to ge given xecutives average, 2011-12 strategy clear and ce. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 15 Remuneration Report (continued) BILLABONG GROUP EXECUTIVES The Billabong Group executives, including the Executive Directors, other Key Management Personnel (KMP) and the Non-Executive Directors in 2011-12 referenced throughout this report are listed below.
Executive Directors Launa Inman 1 Managing Director and Chief Executive Officer (CEO) Paul Naude President of the Americas (President Americas) Other Key Management Personnel (KMP) Franco Fogliato General Manager, Billabong Group Europe (GM Europe) Shannan North General Manager, Billabong Group Australasia (GM Australasia) Craig White Chief Financial Officer (CFO) Non-Executive Directors (NEDs) Ted Kunkel Chairman Tony Froggatt Director Allan McDonald Director Gordon Merchant AM Director Colette Paull Director Sally Pitkin 2 Director 1 Appointed 14 May 2012. 2 Appointed 28 February 2012.
Other executive changes during 2011-12 Derek O’Neill’s employment as Chief Executive Officer ceased on 12 May 2012, effective the same date, he resigned as Executive Director.
Margaret Jackson retired from the role of Non-Executive Director on 25 October 2011.
Effective 1 July 2011, Johnny Schillereff no longer classified as KMP.
As per amendments to the Corporations Law effective 1 July 2011 regarding remuneration disclosure of KMP only, Ed Leasure’s remuneration for the 2011-12 financial year is not disclosed.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 16 Remuneration Report (continued) 2011-12 REMUNERATION IN BRIEF Non-executive and key management personnel changes Key events during the 2011-12 financial year were the appointments and departures of a number of non-executive, executive and key management personnel. Details of these changes are summarised below with remuneration particulars included throughout this report.
Date Details 25 October 2011 Margaret Jackson retired as a Non-Executive Director at the 2011 Annual General Meeting and did not stand for re-election.
28 February 2012 Sally Pitkin was appointed Non-Executive Director. On 13 April 2012 she was also appointed Human Resources and Remuneration Committee Chair.
12 May 2012 Derek O’Neill’s employment as Chief Executive Officer ceased and he resigned as an Executive Director.
14 May 2012 Launa Inman was appointed Managing Director and Chief Executive Officer. Also during the year both Ted Kunkel and Allan McDonald announced their intention to retire from the Board of Directors. Ted Kunkel intends to retire from the position of Board Chair between the Annual General Meeting in October 2012 and the release of 31 December 2012 half year results in February 2013. Allan McDonald intends to retire from the position of Non-Executive Director and Audit Committee Chair at the conclusion of the Annual General Meeting in October 2012.
Performance and reward In order to ensure executive reward is directly linked to performance, Billabong’s executive remuneration framework was reviewed alongside a number of key 2011-12 business success drivers. The table below provides a top line summary of the strong link between business performance and executive reward. 2011-12 key success driver How this driver is recognised in Billabong’s executive remuneration framework Financial success 70% of short term incentive potential is based on the achievement of Net Profit After Tax (NPAT) and Earnings Before Income Tax, Depreciation, Amortisation and Impairment (EBITDAI) targets.
Strong working capital position 30% of short term incentive potential is based on a Group net cash flow target 1. Increasing shareholder wealth LTI performance hurdles are related to Earnings Per Share (EPS) and Total Shareholder Return (TSR).
Alignment of executive and shareholder interests Between 25% to 30% of short term incentive is in the form of deferred equity. Linkage of short term incentive and long term incentive performance hurdles to financial success, strong working capital position and return to shareholders.
1 The Board determined to introduce a Group Return on Capital Employed (ROCE) measure as a key success driver for the 2012-13 performance year. This driver will replace the current Group net cash flow target. The Committee considers this to be among the most important factors which drives sustainable improvement in shareholder value. The measure clearly shows the return the business is gaining from its assets.
Remuneration outcomes for the CEO and senior executives Table A sets out the 2011-12 remuneration outcomes of Billabong’s continuing CEO and other senior executives. This table provides shareholders with a clear picture of take home pay for the year ended 30 June 2012.
Details of Launa Inman’s remuneration arrangements and employment agreement were announced to the market on 9 May 2012 and are summarised on page 25. Details of former CEO, Derek O’Neill’s remuneration for 2011-12 are set out on page 26.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 17 Remuneration Report (continued) In 2011-12 there were no changes to base salary or short term incentive (STI) potential for President Americas Paul Naude, GM Australasia Shannan North, GM Europe Franco Fogliato and Chief Financial Officer Craig White. The last time the Board granted a base salary increase to these executives was 1 September 2010. For executives in Billabong’s employ in 2010-11 and 2011-12 any changes to base salary in the remuneration tables throughout this report are a result of financial year reporting versus calendar year reporting and/or currency fluctuations. In 2010-11 a number of changes were made to the Tier 1, Executive Performance Share Plan (EPSP) including the introduction of Total Shareholder Return (TSR) as a second performance hurdle, a pooling approach to the Earnings Per Share (EPS) calculation and the decision to no longer pay dividends on unvested shares. Given these changes, the Board believes that the structure of the current plan is appropriate and no changes were made to the EPSP in 2011-12. Furthermore, there was no change to the number of shares allocated to the Executives under the EPSP in 2011-12.
Table: A 1 Name Base salary $’000 Short- term incentive earned (cash) $’000 Short- term incentive (deferred equity) $’000 Other incentive $’000 Non- monetary benefits 2 $’000 Long-term incentives (value vested during the year) $’000 Super- annuation $’000 Total Remun- eration realised $’000 Launa Inman 3 2012 148 --- --- 100 2 --- 2 252 2011 --- --- --- --- --- --- --- --- Paul Naude 4 2012 1,066 --- --- --- 17 --- 3 1,086 2011 1,112 190 --- --- 16 --- 3 1,321 Franco Fogliato 5 2012 605 --- --- --- 14 --- --- 619 2011 612 95 32 --- 10 --- --- 749 Shannan North 2012 705 --- --- --- 9 --- 16 730 2011 675 130 52 --- 7 --- 15 879 Craig White 2012 739 --- --- --- 3 --- 16 758 2011 720 103 44 --- 3 --- 15 885 1 This Table A excludes details of accrued long service leave and accounting charges for share based payments. Details of these items are set out in Table E on page 29.
2 Non-monetary benefits may include clothing allowance, vehicle allowance, health insurance and for Franco Fogliato, an annual statutory payment. 3 Appointed CEO on 14 May 2012. Upon appointment was paid a sign-on payment (shown in ‘Other incentive’ column) to be used to purchase Billabong shares. 4 Remuneration impacted by exchange rate fluctuations. 5 Remuneration impacted by exchange rate fluctuations. Non-Executive Director (NED) remuneration The NED fee pool currently stands at $1,500,000 in total and was approved by shareholders at the 2010 Annual General Meeting.
In 2011-12 there were no changes to individual NED fees with the exception of Tony Froggatt and Sally Pitkin. Tony Froggatt temporarily filled the role of Human Resources and Remuneration Committee Chair for the period 26 October 2011 up to 12 April 2012. Over this period Tony Froggatt was paid an additional Committee Chair fee. Sally Pitkin was appointed on 28 February 2012 and on 13 April 2012 she was also appointed Human Resources and Remuneration Committee Chair. For the other Non-Executive Directors there have been no changes to their individual fees since 1 July 2007. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 18 Remuneration Report (continued) 1. INTRODUCTION This Billabong Group Remuneration Report is for the year ended 30 June 2012. It forms part of the Billabong Group Directors’ Report and has been audited in accordance with the Corporations Act 2001. The Remuneration Report details remuneration information as it applies to Billabong Group executives, including the CEO, Key Management Personnel (KMP) and Non-Executive Directors.
For clarity, the term KMP is used throughout this report to reference the Executive Directors and identified Billabong Group executives included in this report who are direct reports to the CEO. The term KMP does not refer to all direct reports to the CEO.
The people currently in these positions are listed in the table on page 15.
2. REMUNERATION GOVERNANCE The Board is responsible for ensuring the Group’s remuneration strategy is equitable and aligned with company performance and shareholder interests. To assist with this, the Board has established a Human Resource and Remuneration Committee made up of Non-Executive Directors only. The Committee is primarily responsible for making recommendations to the Board regarding non-executive director fees, remuneration levels of KMP, the over-arching executive remuneration framework and the general operation of short and long term incentive plans including the setting of performance hurdles.
To ensure the Committee is fully informed when making remuneration decisions, it draws on the services of independent remuneration advisors. Independent remuneration advisors are engaged by and report directly to the Committee and provide advice and assistance on a range of matters including but not limited to:
updates on remuneration trends, regulatory developments and shareholder views; the review, design or implementation of the executive remuneration strategy and its underlying components (such as incentive plans); and market remuneration analysis.
The overall remuneration strategy is reviewed annually by the Board to ensure it continues to meet the needs of the Company and shareholders.
Recommendation provided The Human Resource and Remuneration Committee approved the engagement of Ernst & Young Australia to provide remuneration advice, benchmarking data, market commentary and professional guidance regarding Billabong’s executive incentive plans. During this engagement a remuneration recommendation (as defined by the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011) was provided by Ernst & Young Australia. Both Ernst & Young Australia and the Committee are satisfied that any advice received from, or recommendation provided by Ernst & Young Australia is free from undue influence from the KMP to whom any remuneration advice and remuneration recommendation apply.
The remuneration advice and recommendation was provided to Billabong as an input into decision making only. The Human Resource and Remuneration Committee considered the advice and recommendation, along with other factors, in making its remuneration decisions. The fees paid to Ernst & Young Australia for the remuneration recommendation was $15,450. Other services provided by Ernst & Young Australia were in relation to general human capital advice (including the remuneration advice noted above), tax advice, and transaction support services. The fees for these services were $775,088 in the 2011-12 financial year.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 19 Remuneration Report (continued) 3. CEO AND SENIOR EXECUTIVE REMUNERATION Remuneration principles A number of principles underpin our remuneration strategy.
Support the execution of business strategy Apply performance targets that take into consideration the Group’s strategic objectives and business performance expectations and deliver rewards commensurate to achieving these objectives and targets.
Ensure executives are able to have an impact on the achievement of performance targets.
Alignment with business performance and shareholder return Ensure executive remuneration strikes a balance between retaining, motivating and rewarding executives whilst aligning with business performance and shareholder return.
Align executive remuneration with the creation of shareholder value through offering a portion of the reward package as equity and using performance hurdles linked to shareholder return.
Remuneration benchmarking and market positioning Provide a market competitive reward opportunity.
Encourage the retention of executives and senior management who are critical to the future success of the Group.
Consider market practice and shareholder views in relation to executive remuneration, while ensuring executive remuneration meets the commercial requirements of the Group.
Ensure remuneration arrangements are equitable for like positions.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 20 Remuneration Report (continued) Remuneration strategy The Group’s executive remuneration strategy provides a strong link between performance and reward so that executive reward outcomes are dependent on delivering results to shareholders, while at the same time motivating and retaining top talent by providing market competitive fixed remuneration and an incentive framework that rewards for results delivered. The following diagram illustrates how the Group’s remuneration strategy aligns with business objectives and links executive remuneration to company performance and the delivery of shareholder returns.
Business objective To maintain a global leadership position in the design, marketing, wholesaling and retailing of boardsports inspired apparel and accessories and, in turn, build long-term value for stakeholders. Remuneration strategy objectives and approach Align executive remuneration to company performance and deliver results to shareholders Remuneration is measured against Group business objectives as well as Total Shareholder Return (TSR) and Earnings Per Share (EPS). Short and long-term components of remuneration are “at risk” based on performance and return to shareholders. Attract and retain executive talent in a highly competitive global market Reward competitively in the global markets in which the Group operates, which include Australasia, the Americas and Europe.
Offer remuneration that balances fixed and variable (“at risk”) short and long-term incentives Fixed remuneration Short Term Incentive (STI) Long Term Incentive (LTI) Consists of… Base salary plus benefits (which vary by country). Annual payment opportunity (cash or part cash, part deferred equity for some participants). An offer to participate in the EPSP. Granted annually at the discretion of the Group. Rewards for… Performance, skills and capabilities. Performance over a 12-month period against agreed performance objectives. Growth in the Company’s EPS over a three- year period. TSR relative to a comparator group, also over a three-year period. Is… Fixed. Reviewed annually. At risk. Wholly dependent on achieving agreed performance objectives. Granted annually. At risk. Awards rely on hurdles being met. Value to the executive depends wholly on the Group’s performance. Determined by… Referencing global and local market movements for the role, market pay comparisons, individual performance and role accountabilities. Performance hurdles focus executive attention on the Group’s critical performance metrics and key business objectives.
If all performance objectives are fully met as set, 100% of the STI is earned. If performance objectives are only partially met, a proportional percentage of STI is earned. No outperformance STI targets are set. Alignment to the Group’s business strategy and requirement for key executives to drive company performance in both absolute and relative terms. Performance is assessed using EPS and TSR. EPS takes into account the impact of currency movements, as these movements impact the value created for shareholders.
TSR demonstrates value returned to shareholders relative to a comparator group. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 21 Remuneration Report (continued) Executive remuneration structure Remuneration mix Fixed annual remuneration provides a “base” level of remuneration. Short and long term variable (“at risk”) incentives reward executives for meeting and exceeding predetermined performance targets linked to the achievement of the Group’s business objectives. This ensures variable reward is achieved only when value has been created for shareholders. As executives gain seniority within the Group, the balance of the remuneration mix shifts to a higher proportion of variable reward to ensure senior executive reward is linked to performance. The following table sets out the current target remuneration mix for the KMP.
Table: B Name Fixed remuneration 1 At risk – Target Short Term Incentive (cash) 2 At risk – Target Short Term Incentive (deferred equity) 3 At risk – Long Term Incentive 4 Launa Inman 5 40% 30% 10% 20% Paul Naude 50% 33% --- 17% Franco Fogliato 45% 30% 12% 13% Shannan North 45% 31% 12% 12% Craig White 45% 31% 13% 11% 1 Includes base salary and superannuation. 2 Includes cash portion of target short term incentive potential. 3 Includes deferred equity portion of target short term incentive potential. All executives with the exception of Paul Naude receive between 25 to 30% of their total STI as deferred equity.
4 Includes shares and rights and is quantified using the purchase price at grant date (for 2011-12 this was $3.62) 5 As Launa Inman was not eligible for STI nor LTI in 2011-12, her remuneration breakdown shown above is that for the 2012-13 financial year. Fixed annual remuneration Fixed annual remuneration includes base salary, non-cash benefits (such as vehicle and clothing allowance) and superannuation contributions. It rewards executives for effective delivery of the requirements of their roles and behaving in accordance with the Group’s culture and values.
Fixed annual remuneration is determined by individual performance and by referencing market movements. Generally, fixed annual remuneration is set at the market median, with a total remuneration opportunity, including the variable short- term and long-term (“at risk’) components, at around the 75 th percentile of the market.
KMP remuneration levels are reviewed by the Human Resource and Remuneration Committee annually and upon promotion. This ensures executive fixed remuneration reflects the executive’s role requirements and level of accountability and remains competitive in the marketplace. In 2011-12 Ernst & Young Australia were engaged to undertake a comprehensive remuneration benchmarking exercise on all KMP roles. Market data used for this exercise included data from other ASX listed organisations along with data from a select group of organisations within the retail, apparel and boardsports sector both domestically and globally.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 22 Remuneration Report (continued) Variable remuneration components Short Term Incentive (STI) What is the purpose of the STI? STI performance hurdles focus executive attention on the Group’s critical performance metrics and key business objectives.
STI rewards executives for achieving Billabong Group performance targets against expectations. Who participates? All Key Management Personnel (KMP). For 2011-12 Launa Inman was not eligible to participate in the STI Plan. This is because her appointment to the role of CEO occurred with less than 2 months of the financial year remaining. What are the performance conditions? Each executive has a target STI amount that can be earned each year, subject to performance against the measures relevant to their role. If all performance objectives are fully met as set, 100% of the STI is earned. If performance objectives are only partially met, a corresponding proportional percentage of STI is earned. In 2011-12, Paul Naude, Franco Fogliato, Shannan North and Craig White also had the potential to earn a stretch STI amount. The Board has discretion to pay beyond the target STI amount only in exceptional circumstances. This discretion is wholly based on the financial performance of the Group.
Details of the actual performance measures (that is, the KPIs) set for the senior executives for 2011-12, together with the performance achieved, are provided on page 27. How is it measured to determine payments? With the exception of Group NPAT and Group EBITDAI, financial performance is assessed in local constant currency terms so that some portion of the potential reward is not skewed by currency fluctuations that are beyond the control of the executive. Over what period is it measured? Performance is measured over the 12 month period from 1 July to 30 June. STI payments are made early the following September. How is it paid? The STI reward is paid as a cash bonus. For all KMP except Paul Naude a portion (25-30%) of STI earned is delivered as deferred equity in the form of shares or rights, which vest after a two year period. STI deferral is not implemented for Paul Naude due to existing contractual arrangements. The deferred portion is forfeited if the executive leaves before the end of the two year vesting period. The target STI opportunity for Franco Fogliatio, Shannan North and Craig White is between 95 and 100% of base salary. In 2011-12 each of these executives also had the potential to earn a stretch STI amount which is the same as the target amount. Paul Naude’s target STI opportunity is 68% of base salary and his stretch opportunity is 45% of base salary. As noted above, payment of any stretch STI is only in exceptional circumstances and is wholly based on the Group’s financial performance. Launa Inman did not participate in the STI plan for the 2011-12 financial year, however, her target STI opportunity going forward will be equivalent to 100% of total fixed remuneration. When and how is it reviewed? STI measures are reviewed annually in line with a review of budgets and the annual business plan. The design of the STI plan was last reviewed in 2011-12. Who assesses performance against targets? The CEO provides recommendations for her direct reports to the Human Resource and Remuneration Committee. The Human Resource and Remuneration Committee make recommendations to the Board, which makes the final determination on the CEO direct reports’ remuneration. The Board reviews the performance of the CEO. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 23 Remuneration Report (continued) Executive Performance Share Plan (EPSP) / Long Term Incentive (LTI) plan What is the purpose of the EPSP? The EPSP is a long term incentive plan that focuses executives on the long term performance of the Group.
Executives are rewarded in the form of shares or conditional rights, depending on the tax implications in the relevant market, when targets are met and exceeded. Who participates? All Key Management Personnel (KMP). Launa Inman’s first award under the EPSP will be in 2012-13. All other KMP received awards in 2011-12. What are the performance conditions? 50% of awards are based on Executives meeting the Group’s three-year Earnings Per Share (EPS) performance targets.
EPS is a key financial indicator that measures how the Group’s earnings have grown over the performance period. EPS takes into account the impact of currency movements, as these movements impact the value created for shareholders.
50% of awards are based on relative Total Shareholder Return (TSR).
Relative TSR demonstrates how the Group has returned value to its shareholders relative to a select comparator group over a three year period. This means executives will be rewarded only where Billabong’s shareholder return has at least met the median of its peers, with 100% of the EPSP grant vesting only if the Group’s performance is in the upper quartile of the selected peer group. Billabong’s comparator group comprises Australian companies listed in the S&P/ASX 200 at the beginning of each performance period, excluding those companies classified within the Financials and Energy sectors and Metals and Mining Industry Group. Following a comprehensive review of a number of potential comparator groups and external advice from remuneration consultants, the group selected by the Board was chosen on the basis that it had the highest correlation with Billabong’s TSR and in comparison to smaller peer groups within the same sector, is less likely to create significant volatility in Billabong’s TSR ranking and potentially reduce the effectiveness of the LTI as a performance incentive. Executive Director grants are subject to shareholder approval. How is it measured to determine payments? For awards granted during 2011-12, the EPS performance targets are measured as follows. All figures are calculated based on EPS achieved in the 2010-11 base year: For 6% EPS compound annual growth, 50% of the EPSP award vests.
For 10% or greater EPS compound annual growth, 100% of the EPSP award vests.
Straight line vesting of awards for performance between these two targets.
Below 6% EPS compound annual growth, nothing vests.
EPS is calculated on a pooling approach which requires the Company to achieve an aggregated target pool of EPS over the performance period, with the target pool calculated based on challenging EPS compound growth targets ranging from 6% to 10% per annum growth for minimum and maximum vesting respectively.
TSR performance targets are measured as follows: If relative TSR performance is at or above the 75 th percentile, full vesting of the TSR portion (100%) occurs. For performance between the 50 th percentile and the 75 th percentile, 50% to 100% of the TSR portion will vest on a pro-rata basis. For relative TSR performance below the 50th percentile against the selected comparator group of companies, none of the TSR portion will vest. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 24 Remuneration Report (continued) Executive Performance Share Plan (EPSP) / Long Term Incentive (LTI) plan (continued) Over what period is it measured? All EPSP performance is measured over a three year period commencing 1 July in the year the grants were made. For example, the performance period for the 2011-12 awards is 1 July 2011 to 30 June 2014. How is it paid? Grants are approved annually and vest on the third anniversary of the grant being made subject to meeting the EPS performance hurdles in the relevant performance period. The performance periods for outstanding awards are as follows:
Grant approved Performance period Vesting subject to performance testing 2009-10 From July 2009 to June 2012 August 2012 2010-11 From July 2010 to June 2013 August 2013 2011-12 From July 2011 to June 2014 August 2014 For awards granted up to and including the 2010-11 awards, the employee can vote and receive dividends in respect of shares allocated to them. For awards granted in 2011-12 and beyond, the employee cannot vote and the EPSP dividends will be held in trust during the performance period and net dividends will be paid to executives only on performance shares that vest. If no shares vest, no dividends are payable.
Dividends are paid on any STI deferral earned. When and how is it reviewed? At the end of each performance period, the Human Resource and Remuneration Committee consider the EPS and TSR performance of the Company and determines to what extent the awards should vest. What market benchmark is applied? Each year, prior to awards being granted, the Human Resource and Remuneration Committee considers the market environment, the Group’s business strategy, performance expectations and shareholder expectations and sets the performance targets for the awards to be granted.
No retesting is permitted. Are performance conditions set? Target and stretch performance hurdles are set in line with economic conditions and business objectives and are designed to be challenging but ultimately achievable if the Group performs in accordance with its business strategy. What happens if a change of control occurs? If a 50% change of control occurs, the Board may in its absolute discretion resolve that the conditions applicable to the award of shares which have not been satisfied are waived.
If a 90% Change of Control has occurred, all shares immediately vest. Who assesses performance against targets? The Human Resource and Remuneration Committee. Executive Performance and Retention Plan (EPRP) The EPRP was a one-off initiative in 2008-09 to reward and retain the Group’s senior executives for growing Billabong’s market value, measured by share price growth, over the five year period to 2012-13. Under the EPRP, Paul Naude, Shannan North, Franco Fogliato and Craig White were granted options, which, provided they vest and become exercisable, can be converted into ordinary company shares. Given the EPRP was a one-off initiative in 2008-09 and Launa Inman was appointed in May 2012, she does not participate in the plan. The plan directly links executive performance to shareholder return by requiring executives to achieve two Total Shareholder Return (TSR) performance targets: a ‘gateway’ hurdle under which executives need to achieve above median TSR performance relative to a comparator group and a ‘stretch’ hurdle requiring the achievement of a 120% target over five years. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 25 Remuneration Report (continued) Should a takeover bid be made or the Board recommend that a takeover bid be accepted or a takeover bid be declared unconditional, the Board may, in its absolute discretion, having reasonable regard to pro-rata performance against the EPRP hurdles and the time elapsed since the grant date, determine that all or a specified number of options which have not previously become exercisable, become exercisable. In 2011-12 the Company’s TSR performance against the gateway relative TSR hurdle is below the level that will permit any of the award to vest (that is, it is below the median of the comparator group). In addition, absolute TSR has not achieved the 80%, 100% or 120% target. This means that no EPRP incentive payments vested in 2011-12.
Equity arrangements for Billabong Employees Billabong encourages employee share ownership to promote alignment between employee and shareholder interests. Billabong currently offers a Tax Exempt Employee Share Plan to permanent Australian based employees with at least 12 months of service. Non-executive directors are not eligible to participate in this plan. In 2011-12, the plan operated as follows:
Tax Exempt Employee Share Plan: Eligible employees can contribute a maximum of $800 of their pre-tax base salary and/or bonus and the Company will contribute a further $200 to purchase Billabong shares. Shares acquired under the Plan are subject to a three year restriction period and are income tax free on the condition that the employee’s taxable income for the year ended 30 June 2012 does not exceed $180,000.
Securities Trading Policy The trading of shares or rights issued to participants under any of Billabong’s equity plans is subject to, and conditional upon, compliance with Billabong’s securities trading policy. Executives are prohibited from hedging or otherwise reducing or eliminating the risk associated with equity-based incentives offered by Billabong, such as unvested performance shares and options or vested shares that remain subject to a disposal restriction.
If an executive breaches this policy by hedging or otherwise enters into an arrangement which is designed to reduce or eliminate the risk associated with equity-based incentives, the executive’s incentives will be forfeited or will lapse and the executive will be subject to disciplinary action and potential dismissal.
Remuneration outcomes for 2011-12 Managing Director and Chief Executive Officer remuneration arrangements Launa Inman was appointed Managing Director and Chief Executive Officer on 14 May 2012. Her remuneration arrangements in this role are as follows:
Fixed annual remuneration Initial total fixed remuneration is $1.3 million per annum (includes superannuation).
Short term incentive Will participate in Billabong’s STI Plan from the 2012-13 financial year onwards. The STI potential for any one performance year will be up to 100% of total fixed remuneration. 25% of any STI paid will be in the form of deferred equity. The deferral period is two (2) years.
Long term incentive Will participate in Billabong’s LTI Plan from the 2012-13 financial year onwards. Face value of 2012-13 LTI award is $614,000.
Sign-on payment Upon commencement received a sign-on payment of $100,000 which was to be used to acquire Billabong shares.
Non-monetary benefits Payment of reasonable expenses involved in relocating from Melbourne, Victoria to the Gold Coast, Queensland.
An annual clothing allowance of $2,500 for the purchase of Billabong Group garments and accessories.
For KMP Paul Naude, Shannan North, Franco Fogliato and Craig White, the combined amount of executive remuneration paid and/or vested decreased in 2011-12 by around 16%. This reflects the Group’s business performance.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 26 Remuneration Report (continued) Derek O’Neill Termination Arrangements Derek O’Neill left the organisation on 12 May 2012. As at termination he was paid his contractual entitlements. The company entered into an Executive Agreement with Derek O’Neill in November 2002 appointing him as Chief Executive Officer. Prior to his appointment as Chief Executive Officer he had been employed by the Group as General Manager - Europe. The Executive Agreement entered into with Derek O’Neill at that time of his appointment to the position of Chief Executive Officer included a notice provision requiring him to give the company twelve months’ notice and the company to give him twenty four months’ notice of termination. Derek O’Neill received payment in lieu of notice of termination. No short term incentive was paid and no long term incentive vested. All existing long term incentives (rights and options) lapsed as a result of his termination. Five year performance and reward relationship The overall level of executive reward takes into account the performance of the Group over a number of years. Over the past five years, the Group’s profit from ordinary activities after income tax has decreased at a compound rate of 210.5% per annum on a statutory reported basis or decreased at a compound rate of 27.5% (unaudited) excluding significant and exceptional items, and shareholder wealth has decreased at a compound rate of 40.5% per annum, assuming all dividends are re-invested back into Billabong International Limited shares on the payment date. During the same period, executive remuneration has decreased at a compound rate of 7.4% per annum.
Short Term Incentive (STI) outcomes aligned with company performance As evidenced in Table C, there were no STI payments in line with declining key financial performance metrics.
STI outcomes The following table shows STI paid/forfeited where the STI represents the total STI potential possible (stretch and deferred equity).
Table: C STI paid and forfeited 2007-08 to 2011-12 2007-08 2008-09 2009-10 2010-11 2011-12 Executive paid forfeited paid forfeited paid forfeited paid forfeited paid forfeited Launa Inman 1 -- -- -- -- -- -- -- -- -- -- Derek O'Neill 2 100% 0% 50% 50% 42% 58% 0% 100% 0% 100% Paul Naude 100% 0% 40% 60% 35% 65% 15% 85% 0% 100% Franco Fogliato 100% 0% 100% 0% 33% 67% 10% 90% 0% 100% Shannan North 100% 0% 70% 30% 31% 69% 13% 87% 0% 100% Craig White 100% 0% 100% 0% 31% 69% 10% 90% 0% 100% 1 Based on appointment date of 14 May 2012, not eligible to participate in the STI plan for the 2011-12 financial year. 2 Employment ceased on 12 May 2012. LTI outcomes aligned with company performance For the Executive Performance Share Plan (EPSP) as it applies to the KMP, company performance is currently measured by growth in annual compound Earnings Per Share (EPS). The second TSR hurdle is only applicable to awards made from 2010-11 onwards. EPS growth is determined by calculating the annual compound growth in EPS from 1 July in the base year to 30 June at the end of the three year period. Since the introduction of the EPSP in 2004, only two grants have vested. The 2004-05 grant vested fully in 2006-07 at 100% based on growth in EPS in excess of 20%. The 2005-06 grant vested partially in 2007-08 at 87.5% based on 17.5% growth in EPS. No other awards have met the required performance hurdles and therefore no other awards have vested, including the current tranche of the EPSP granted in 2009-10, which did not meet the required EPS growth targets.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 27 Remuneration Report (continued) EPSP vested LTI grants for the five most senior executives pay out only if the Group’s performance meets set performance hurdles. As this chart shows, sometimes grants do not pay out at all or pay out only proportionally.
Other Group Executives In 2008, unhurdled share and rights awards were introduced under the EPSP for other Group Executives. At the time of the 2011-12 award (1 September 2012), this Plan covered 94 employees below KMP. This Plan has a retention focus and is unhurdled with awards vesting two years from grant date as long as the participant remains employed at the vesting date. The participants receive dividends on unvested shares. Change of control provisions for the unhurdled EPSP are the same as those for the hurdled plan, that is, if a 50% change of control occurs, the Board may at its discretion resolve that the conditions applicable to the award which have not yet been satisfied are waived. If a 90% change of control occurs all the performance shares will immediately vest.
Summary of executive performance measures set and achieved The table below shows the performance measures (that is, the Key Performance Indicators or KPIs) set for KMP for 2011- 12, together with the performance achieved against each KPI. Table: D Executive Summary of performance measures / KPIs Weighting Achievement 2011-12 President Americas Paul Naude Billabong Group Net Profit After Tax (NPAT) target North America EBITDAI target Billabong Group net cash flow target 35% 35% 30% Not achieved GM Europe Franco Fogliato Billabong Group Net Profit After Tax (NPAT) target Europe EBITDAI target Billabong Group net cash flow target 35% 35% 30% Not achieved GM Australasia Shannan North Billabong Group Net Profit After Tax (NPAT) target Australasia EBITDAI target Billabong Group net cash flow target 35% 35% 30% Not achieved CFO Craig White Billabong Group Net Profit After Tax (NPAT) target Billabong Group EBITDAI target Billabong Group net cash flow target 35% 35% 30% Not achieved 100% 87.5% 0% 0% 0% 0% 0% 20% 40% 60% 80% 100% 120% Awarded 04/05, vested 06/07Awarded 05/06, vested 07/08Awarded 06/07, tested but did not vest 08/09Awarded 07/08, tested but did not vest 09/10Awarded 08/09, tested but did not vest 10/11Awarded 09/10, tested but did not vest 11/12 Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 28 Remuneration Report (continued) Summary of executive contracts Executive contracts set out remuneration details and other terms of employment for each individual executive. The contracts provide for base salary inclusive of superannuation, reviewed annually by the Human Resource and Remuneration Committee, performance-related cash bonuses, other benefits including health insurance, car allowances and clothing allowances, and participation, where eligible, in long-term incentive plans. The key provisions of the executive contracts relating to the terms of employment and notice periods are set out in the table below. Contractual terms vary due to the timing of contracts, individual negotiations and different local market practices. It should be noted that Derek O’Neill’s contract was executed prior to the implementation of the legislation applying to termination benefits payable to executives. The contract was not amended or updated following the legislative changes.
Consequently, the termination benefit cap is not applicable. Paul Naude’s contract was also executed prior to the implementation of the termination benefit legislation and has not been amended or updated since. As a result, his termination benefits exceed the 12 month cap unless his contract is revised. The contract also prohibits certain changes to his remuneration structure and quantum, for example, the introduction of STI deferral.
Position Term of contract Notice period required by executive Notice period required by the company Maximum contractual termination payment for good leavers CEO & Managing Director Launa Inman On-going 12 months 12 months Payment in lieu of notice * President Americas Paul Naude On-going 18 months 18 months One and a half times annual base salary plus the performance bonus for the year of termination GM Billabong Europe Franco Fogliato On-going 3 months 6 months 6 month separation payment plus payment in lieu of notice * GM Billabong Australasia Shannan North On-going 12 months 12 months Payment in lieu of notice * CFO Craig White On-going 6 months, unless leaving to undertake “restricted activities” (including working for a competitor), in which case 9 months notice is required 12 months Payment in lieu of notice * * Payment will be “scaled back” if it would otherwise exceed the 12 month average base salary termination benefit cap applicable under Australian law.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 29 Remuneration Report (continued) Statutory remuneration disclosures The following section of this report includes statutory remuneration disclosures. It should be noted that numbers in the share based payments columns represent accounting expenses and not vested awards. As noted on page 26 no LTI awards have vested to the KMP since the 2007-08 financial year.
Table: E Short term employee benefits Post employment benefits Long term benefits Share based payments Total remun- eration Cash salary Cash bonus Bonus defer- red Non- monetary benefits Other 1 Super- annuation Long service leave Termin- ation benefits Options 2 Rights 3 Name Year $’000 $’000 $’000$’000$’000$’000$’000$’000 $’000 $’000$’000 Executive Directors L. Inman 4 2012 148 --- --- 2 100 2 --- --- --- --- 252 2011 --- --- --- --- --- --- --- --- --- --- --- D. O’Neill 5 2012 1,073 --- --- 7 --- 14 108 2,510 (762) --- 2,950 2011 1,261 --- --- 3 --- 15 206 --- 286 (146) 1,625 P. Naude 6 2012 1,066 --- --- 17 --- 3 --- --- 238 78 1,402 2011 1,112 190 --- 16 --- 3 --- --- 238 (126) 1,433 Other KMP F. Fogliato 7 2012 605 --- --- 14 --- --- --- --- 91 39 749 2011 612 95 32 10 --- --- --- --- 91 (72) 768 S. North 2012 705 --- --- 9 --- 16 --- --- 143 39 912 2011 675 130 52 7 --- 15 47 --- 143 (73) 996 J. Schilleref 8 2012 --- --- --- --- --- --- --- --- --- --- --- 2011 464 25 --- 23 --- 2 --- --- --- 97 611 C. White 2012 739 --- --- 3 --- 16 27 --- 143 39 967 2011 720 103 44 3 --- 15 26 --- 143 (84) 970 Total 2012 4,336 --- --- 52 100 51 135 2,510 (147) 195 7,232 2011 4,844 543 128 62 --- 50 279 --- 901 (404) 6,403 1 Other short-term employee benefits relate to a sign on payment received upon appointment to purchase company shares.
2 Remuneration in the form of options relates to the accounting charge recognised in the Group's income statement based on the fair value of the award at the date of grant amortised on a straight-line basis over the vesting period of the EPRP.
The accounting charge is reflected as an expense in the financial statements regardless of whether the EPRP may fully vest, partially vest or not vest at all.
3 Remuneration in the form of rights relates to the accounting charge recognised in the Group's income statement in respect of the EPSP. The accounting charge reflects at 30 June 2012 and 30 June 2011 the most probable likelihood of the 2010-11 and 2011-12 grants vesting to the individual. 4 Appointed 14 May 2012. 5 Ceased employment 12 May 2012. The negative amount of share based payments relates to the forfeiture of his unvested Executive Performance Share Plan awards.
6 Remuneration impacted by exchange rate fluctuations. 7 Remuneration impacted by exchange rate fluctuations. 8 Effective 1 July 2011, no longer classified Key Management Personnel.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 30 Remuneration Report (continued) Fixed and at risk remuneration Based on Table E, the 2011-12 fixed remuneration of Paul Naude, Franco Fogliato, Shannan North and Craig White ranged from 77% to 83% whilst their at risk remuneration ranged from 23% to 17%. For Derek O’Neill, his 2011-12 fixed remuneration made up 126% of his total remuneration whilst his at risk remuneration was (26%) due to a negative accounting charge relating to options. In 2011-12 Launa Inman only received fixed remuneration. No short term incentive was paid and no long term incentive was allocated. For remuneration mix details using fixed remuneration, target potential and LTI allocation refer to Table B, page 21. 4. NON-EXECUTIVE DIRECTOR REMUNERATION Approach to setting Non-Executive Director remuneration Individual Non-Executive Director fees and the Non-Executive Director fee pool were most recently benchmarked against publicly available data in July 2012. Appropriate benchmark data was selected by setting parameters around revenue, market capitalisation, ASX rank, assets and operating profit before tax. Non-Executive Directors receive fixed remuneration in the form of a base fee plus a fee for chairmanship of Board committees. Non-Executive Directors do not receive variable remuneration or other performance-related incentives such as equity-based awards or retirement benefits other than statutory superannuation payments.
In 2011-12 Tony Froggatt temporarily filled the role of Human Resources and Remuneration Committee Chair from 26 October 2011 to 12 April 2012 and was paid a Committee Chair fee during this period. Sally Pitkin was appointed on 28 February 2012 and was appointed Human Resources and Remuneration Committee Chair on 13 April 2012. Effective from this date she began receiving a Committee Chair fee.
No other change has been made to individual Non-Executive Director fees since 1 July 2007. Currently, annual Non-Executive Directors fees are as follows: Table: F Non-Executive Director fees Fee Amount 1 $’000 Board Chair fee 325 Director fee 130 Committee Chair fee (Audit and Human Resource and Remuneration) – paid in addition to base fee 25 1 Excludes superannuation. Approved fee pool Non-Executive Director fees are determined within a maximum Directors’ fee pool limit. In 2010, with shareholder approval, this pool fund was increased from $1,200,000 to $1,500,000 to provide flexibility to make required additions to the Board and to revise fees in line with external market rates. The fee pool is inclusive of superannuation.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 31 Remuneration Report (continued) Fees paid during 2011-12 (and comparatives) Table: G Name Fees 1 $’000 Non- monetary benefits $’000 Super- annuation $’000 Long service leave $’000 Total remuneration $’000 Ted Kunkel 2012 328 2 16 --- 346 2011 325 2 15 --- 342 Tony Froggatt 2 2012 143 2 13 --- 158 2011 130 2 12 --- 144 Margaret Jackson 3 2012 53 2 7 --- 62 2011 155 2 14 --- 171 Allan McDonald 2012 156 2 14 --- 172 2011 155 2 14 --- 171 Gordon Merchant 2012 131 2 12 --- 145 2011 130 2 12 --- 144 Colette Paull 2012 131 2 12 --- 145 2011 130 2 12 --- 144 Sally Pitkin 4 2012 47 1 4 --- 52 2011 --- --- --- --- --- Total 2012 989 13 78 --- 1,080 2011 1,025 12 79 --- 1,116 1 The 2011-12 financial year fell into a leap year cycle. Up until May of 2012 Director's fees were paid on a weekly cycle and therefore because of the leap year the weekly cycle included an additional week of payment. The payroll cycle transitioned from a weekly to a fortnightly cycle in May. There were no increases in Director’s fees for the financial year. The increase reported results from the fact that 2011-12 was a leap year.
2 Temporarily filled the role of Human Resources and Remuneration Committee Chair from 26 October 2011 to 12 April 2012. During this period received Committee Chair fee.
3 Ceased employment on 25 October 2011. 4 Appointed 28 February 2012 and appointed Human Resources and Remuneration Committee Chair on 13 April 2012.
From this date commenced receiving Committee Chair fee.
5. ADDITIONAL STATUTORY DISCLOSURES Share-based compensation Executive Performance Share Plan (EPSP) Details of equity instruments, comprising either performance shares or conditional rights (collectively “rights”), provided as remuneration to each executive are set out below. When vested, each instrument will entitle the holder to one ordinary share of the Company. Rights under the EPSP will vest only if applicable performance hurdles are satisfied in the relevant performance period. Table: H Name Number of rights awarded during the year Number of rights vested during the year 2011-12 2011-12 Executive Directors Derek O’Neill (approved at the 2011 Annual General Meeting) 1 118,735 --- Paul Naude (approved at the 2011 Annual General Meeting) 103,168 --- Other Key Management Personnel Franco Fogliato 51,400 --- Shannan North 51,400 --- Craig White 51,400 --- 1 Rights awarded during the year have since lapsed due to employment ceasing effective 12 May 2012 Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 32 Remuneration Report (continued) The assessed fair value at grant date of rights granted under the EPSP during the year ended 30 June 2012 was $3.62 per right (2011: $7.80). The fair value at grant date is determined by reference to the Company’s share price at grant date, taking into account the terms and conditions under which the rights were granted.
Participants do not need to pay for awards on grant, vesting or exercise.
Executive Performance and Retention Plan (EPRP) The EPRP provides for grants of options over ordinary shares in the Company. Under the EPRP, selected executives were granted options that vest only if certain performance conditions are met and the executives are still employed by the Group at the end of the vesting period. Once vested, the options remain exercisable for a period of two years. The terms and conditions of each grant of options affecting remuneration in the current or a future reporting period are as follows:
Table: I Grant date Date vested and exercisable Expiry date Exercise price Value per option at grant date Performance achieved % Vested 31 October 2008 31 October 2013 31 October 2015 $11.08 1 $2.27 To be determined n/a 24 November 2008 24 November 2013 24 November 2015 $10.80 $1.45 To be determined n/a 1 Shareholder approval was obtained at the 2009 Annual General Meeting to change the exercise price of options granted during the 2008-09 financial year to take into account the Company’s entitlement offer in May 2009. Previously, the exercise price for the options was the five day volume weighted average price of the Company’s shares up to the date of the grant. Options granted under the EPRP carry no dividend or voting rights.
Short Term Incentive (STI) and options For STI paid, the percentage of the potential STI that was earned or paid, in the financial year, and the percentage that was forfeited are set out below. STI in this table includes stretch cash and deferred equity. Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 33 Remuneration Report (continued) Details of cash bonuses, performance shares and conditional rights Table: J Name 2011-12 Short Term Incentive (cash) 2011-12 Short Term Incentive (deferred equity)Performance shares and conditional rights Earned or paid Forfeited Earned or paid Forfeited Year granted Vested Forfeited Financial years in which may vest Maximum total value of grant yet to vest 1 $’000 Derek O’Neill 2 --- 100% --- --- 2012 2011 2010 2009 --- --- --- --- 100% 100% 100% 100% 30 June 2015 30 June 2014 30 June 2013 30 June 2012 --- --- --- --- Paul Naude --- 100% --- --- 2012 2011 2010 2009 --- --- --- --- --- --- --- 100% 30 June 2015 30 June 2014 30 June 2013 30 June 2012 296 805 802 801 Franco Fogliato 3 --- 100% --- 100% 2012 2011 2010 2009 --- --- --- --- --- --- --- 100% 30 June 2015 30 June 2014 30 June 2013 30 June 2012 147 401 455 454 Shannan North 4 --- 100% --- 100% 2012 2011 2010 2009 --- --- --- --- --- --- --- 100% 30 June 2015 30 June 2014 30 June 2013 30 June 2012 147 401 463 463 Craig White 5 --- 100% --- 100% 2012 2011 2010 2009 --- --- --- --- --- --- --- 100% 30 June 2015 30 June 2014 30 June 2013 30 June 2012 147 401 536 535 1 The maximum total value of grant yet to vest and yet to be expensed. The figures above are calculated as the amount of the grant date fair value of the performance shares and conditional rights and assuming 100% of the award vests.
2 Ceased employment 12 May 2012. 3 Receives between 25% to 30% of STI payment as deferred equity. 4 Receives between 25% to 30% of STI payment as deferred equity. 5 Receives between 25% to 30% of STI payment as deferred equity. Details of options Table: K Name Options Year granted Vested % Forfeited % Financial years in which may vest Derek O’Neill 1 2009 --- 100% --- Paul Naude 2009 --- --- 30 June 2014 Franco Fogliato 2009 --- --- 30 June 2014 Shannan North 2009 --- --- 30 June 2014 Craig White 2009 --- --- 30 June 2014 1 Ceased employment 12 May 2012. No options were granted or vested during the year ended 30 June 2012.
Directors’ report : : Billabong International Limited 2011-12 Full Financial Report Page 34 Shares under option Unissued ordinary shares of the Company under option at the date of this report are as follows:
Number Grant date Issue price of shares Expiry date Executive Performance and Retention Plan 1,153,176 31 October 2008 $11.08 31 October 2015 Executive Performance and Retention Plan 314,503 24 November 2008 $10.80 24 November 2015 Total 1,467,679 Performance shares and conditional rights Performance shares and conditional rights awarded under the EPSP and STI deferred equity payment at the date of this report are as follows:
Type of right Balance Grant date Performance/service determination date Performance Shares 179,891 1 December 2009 30 June 2012 Conditional Rights 43,284 1 December 2009 30 June 2012 Performance Shares 579,896 1 September 2010 1 September 2012 Conditional Rights 165,040 1 September 2010 1 September 2012 Performance Shares 205,968 1 September 2010 30 June 2013 Conditional Rights 51,400 1 September 2010 30 June 2013 Performance Shares – STI 26,585 1 September 2011 30 June 2013 Conditional Rights – STI 10,528 1 September 2011 30 June 2013 Performance Shares 518,020 1 September 2011 1 September 2013 Conditional Rights 211,023 1 September 2011 1 September 2013 Performance Shares 205,968 1 September 2011 30 June 2014 Conditional Rights 51,400 1 September 2011 30 June 2014 Total 2,249,003 Insurance of officers During the financial year Billabong International Limited paid a premium in respect of a contract insuring the Directors of the Company, the Company Secretary and all executive officers of the Group against a liability incurred as such a Director, Secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium.
The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Group. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities.
Non-audit services The Company may decide to employ the auditors on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. These assignments are principally tax advice and due diligence reporting on acquisitions and disposals, or where PricewaterhouseCoopers is awarded assignments on a competitive basis.
Details of the amount paid or payable to the auditors (PricewaterhouseCoopers) for non-audit services provided during the year are set out below.
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Corporate governance statement : : Billabong International Limited 2011-12 Full Financial Report Page 37 The Board of Directors is responsible to shareholders for the performance of the Group and believes that high standards of corporate governance underpin the Company’s objective of maximising returns to shareholders. The Board is committed to the highest level of governance and endeavours to foster a culture that rewards ethical standards and corporate integrity. As required by the ASX Listing Rules this statement sets out the extent to which the Company has complied with the ASX Corporate Governance Principles and Recommendations (ASX Recommendations) during the financial year ended 30 June 2012. The Board of Directors considers that the Group’s corporate governance practices comply with the ASX Recommendations. PRINCIPLE 1: Lay solid foundations for management and oversight The Directors are responsible to the shareholders for the performance of the Group in both the short and the longer term.
Their focus is to enhance the interests of shareholders and other key stakeholders and to ensure the Company is properly managed.
A summary of matters reserved for the Board are as follows:
setting objectives, goals and strategic direction for each of the major business units; monitoring financial performance including approving business plans, the annual operating and capital expenditure budgets and financial statements; establishing, monitoring and evaluating the effectiveness of internal controls, risk management and compliance systems; appointing and reviewing the performance of the CEO and senior management; approving and monitoring major capital expenditure, capital management, acquisitions, divestments and identified business drivers; monitoring areas of significant business risk and ensuring arrangements are in place to manage those risks; ensuring conformance to environmental, social and occupational health and safety requirements; and reporting to shareholders on performance.
A copy of a Statement of Matters Reserved for the Board is available on the Company’s corporate website www.billabongbiz.com. Beyond those matters, the Board has delegated all authority to achieve the objectives of the Company to the CEO and senior management as set out in the Group’s Delegation of Authority document. The Delegation of Authority document is reviewed on an annual basis. The Board set, on an annual basis, financial and non-financial performance hurdles for the CEO and senior executives and performance is assessed against these performance hurdles. A performance assessment for the CEO and senior executives last took place in August 2012. Mr. Derek O’Neill ceased employment as Executive Director and Chief Executive Officer of the Company effective 12 May 2012. Ms. Launa Inman commenced employment as Managing Director and Chief Executive Officer on 14 May 2012. The Board identified the need for a different set of executive skills and experience now that retail is a more significant part of the Billabong business. Ms. Inman’s skills and depth of experience in retail, supply chain management, finance, strategic planning and brand management were identified by the Board as being important skills for the future management of the Company.
PRINCIPLE 2: Structure the Board to add value The Board is comprised of both Executive and Non-Executive Directors, with a majority of Non-Executive Directors. The Board seeks to ensure that:
at any point in time, its membership represents an appropriate balance between Directors with experience and knowledge of the Group and Directors with an external perspective; the size of the Board is conducive to effective discussion and efficient decision-making.
Non-Executive Director, Ms. Margaret Jackson, retired at the Company’s 2011 Annual General Meeting on 25 October 2011, and did not stand for re-election. Ms. Sally Pitkin was appointed as a Non-Executive Director on 28 February 2012 and in accordance with the Company’s Constitution will retire at the 2012 Annual General Meeting, and will stand for election. As announced to the ASX on 21 June 2012, further Board renewal will occur during the year ending 30 June 2013, with Mr. Kunkel indicating his intention to retire in the period between the 2012 Annual General Meeting and the release of the Company’s 31 December 2012 half year results in February 2013, and Mr. McDonald indicating his intention to retire at the 2012 Annual General Meeting. The names, skills and experience of the Directors in office at the date of this Statement, and the period of office of each Director, are set out in the Directors’ Report on pages 8 to 12.
Corporate governance statement : : Billabong International Limited 2011-12 Full Financial Report Page 38 Independent Professional Advice Directors and Board Committees have the right, in connection with their duties and responsibilities, to seek independent professional advice at the Company’s expense. Prior approval of the Chairman is required, but this will not be unreasonably withheld. The advice obtained must be made available to all Board members in due course, where appropriate.
Independence of Directors An assessment of Non-Executive Director’s independence is carried out annually or at any other time where the circumstances of a Director change such as to warrant reconsideration. When determining independence, a director must be a Non-Executive Director and consideration is given to whether the Non-Executive Director:
is a substantial shareholder of the Company or an officer of, or otherwise associated directly with, a substantial shareholder of the Company; is employed, or has previously been employed in an executive capacity by the Company, and there has not been a period of at least three years between ceasing such employment and serving on the Board; has within the last three years been a principal of a material professional advisor or a material consultant to the Company, or an employee materially associated with the service provided; is a material supplier or customer of the Company, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; or has a material contractual relationship with the Company other than as a Director.
Materiality for these purposes is determined on both quantitative and qualitative bases.
The Board assesses independence each year. To enable this process, the Directors must provide all information that may be relevant to the assessment.
Mr. Gordon Merchant is a substantial shareholder of the Company and accordingly he is not considered to be independent of the Company based on the ASX Recommendations. Mr. Merchant is a founder of the Billabong Group and the Board considers that it is in the best interests of all shareholders to have a Director with Mr. Merchant’s industry and business expertise and Company history as a member of the Board. Ms. Colette Paull was previously employed in an executive capacity by the Company and there was not a period of three years between her ceasing employment in 1999 and joining the Board. It is the view of the Board that Ms. Paull exercises her judgement in an independent and unfettered manner bringing independent thought and experience to her role.
However having regard to all current circumstances, including the qualitative factors relevant for the determination of director independence, the Board has concluded that Ms. Paull should be classified as a non-independent Non-Executive Director in light of her direct association with Mr. Merchant, a substantial shareholder of the Company.
All other Non-Executive Directors do not have any business interest or other relationship that could materially interfere with the exercise of their independent judgement and their ability to act in the best interests of the Company. The Chairman of the Company is an independent Non-Executive Director.
The roles of Chairman and CEO are exercised by separate individuals.
The Independence of Directors’ Policy is available on the Company’s corporate website.
Board Commitment The Board held 41 Board meetings during the year. The number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 30 June 2012, and the number of meetings attended by each Director, is disclosed in the Directors’ Report on page 12.
Board Committees The Board has established a number of Committees to assist in the execution of its duties and to allow detailed consideration of complex issues. Current Committees of the Board are the Nominations, Human Resource and Remuneration and Audit Committees. Each is comprised entirely of Non-Executive Directors. Each Committee has its own written charter setting out its role and responsibilities, composition, structure, membership requirements and the manner in which the Committee is to operate. All of these charters are reviewed on an annual basis and are available on the Company’s corporate website. All matters determined by Committees are submitted to the full Board as recommendations for Board decisions.
Corporate governance statement : : Billabong International Limited 2011-12 Full Financial Report Page 39 Nominations Committee Committee Members Ted Kunkel (Chairman) Tony Froggatt Allan McDonald Gordon Merchant Colette Paull Sally Pitkin The Nominations Committee consists only of Non-Executive Directors and a majority of the members of the Committee are independent. The Chairman of the Committee is a Non-Executive Director. The Nominations Committee met 15 times during the year. Details of these Directors’ attendance at Committee meetings are set out in the Directors’ Report on page 12.
The main functions of the Committee are to:
assess periodically the skill set required to discharge competently the Board’s duties, having regard to the strategic direction of the Group, and assess the skills currently represented on the Board; regularly review and make recommendations to the Board regarding the structure, size and composition of the Board (including the balance of skills, knowledge, expertise and diversity of gender, age, experience and relationships of the Board) and keep under review the leadership needs of the Company, both executive and non-executive; identify suitable candidates to fill Board vacancies as and when they arise and nominating candidates for the approval of the Board; ensure that, on appointment, all Directors receive a formal letter of appointment, setting out the time commitment and responsibility envisaged in the appointment including any responsibilities with respect to Board Committees; oversee appropriate Board succession planning; and establish a process for the review of the performance of individual Directors and the Board as a whole.
When a new Director is to be appointed, the Committee reviews the diversity objectives of the Board and the range of skills, experience and expertise required. In the current Board renewal process we have identified skills such as financial strength, public company board experience, international retail skills and specific industry skills relating to either consumer goods, retail, e-commerce, wholesale or supply chain logistics. Additionally consideration is being given to candidates with the potential to fill the roles of Board Chair and Audit Committee Chair.
The Company has engaged independent search consultants to assist with the process. The consultants will be required to provide a short list of candidates with appropriate skills and experience for Board consideration. The full Board will then appoint the most suitable candidate who must submit themselves to shareholders for election at the first Annual General Meeting following their appointment. New Directors are provided with a letter of appointment setting out the Company’s expectations including involvement with committee work, their responsibilities, remuneration, including superannuation and expenses, and the requirement to disclose their interests and any matters which affect the Director’s independence. New Directors are also provided with all relevant policies including the Company’s Securities Trading Policy, a copy of the Company’s Constitution, organisational chart and details of indemnity and insurance arrangements. A formal induction program which covers the operation of the Board and its Committees and financial, strategic, operations and risk management issues is also provided to ensure that Directors have significant knowledge about the Company and the industry within which it operates. New Directors are advised of the time commitment required of them in order to appropriately discharge their responsibilities as a Director of the Company. Directors are required to confirm that they have sufficient time to meet this requirement. The Nominations Committee Charter is available on the Company’s corporate website.
The Nominations Committee reports to, and makes recommendations to, the full Board in relation to each of its functions. Tenure of Office Non-Executive Directors have open-ended contracts and tenure is subject to the individual performance of the Director and rotational requirements for re-election by shareholders.
Board Performance The Board undertakes an annual self-assessment of the performance of the Board as a whole, its Committees, the Chairman, individual Directors and governance processes that support Board work. The Board conducted such an assessment during the 2011-12 reporting period. Performance of individual Directors is assessed against a range of dimensions including the ability of the Director to consistently create shareholder value, to contribute to the development Corporate governance statement : : Billabong International Limited 2011-12 Full Financial Report Page 40 of strategies and risk identification, to provide clarity of direction to senior management, to listen to the views of fellow Directors, members of management and key third party stakeholders, as well as provide the time commitment required to ensure the discharge of duties and obligations to the Company. The Chairman meets privately with each Director to discuss individual and collective performance of Directors. PRINCIPLE 3: Promote ethical and responsible decision-making Group Code of Conduct The Company has a Group Code of Conduct which is available in nine languages and draws together all of the Company’s practices and policies. The Code reflects the Company’s values of integrity, honesty, trust, teamwork, respect and a desire for excellence in everything the Company does. It reinforces the need for Directors, employees, consultants and all other representatives of the Company to always act in good faith, in the Company’s best interests and in accordance with all applicable policies, procedures, laws and regulations relevant to the regions in which the Company operates. The Group Code of Conduct encourages employees to report conduct which they reasonably believe to be corrupt, illegal or unethical on a confidential basis, using the Company’s whistleblower program. It applies to all Company employees, contractors and consultants and is designed to protect individuals who, in good faith, report such conduct on a confidential basis, without fear of reprisal, dismissal or discriminatory treatment.
Appropriate training programs on the Group Code of Conduct are undertaken in each of the regions in which the Company operates. A copy of the Group Code of Conduct is available on the Company’s corporate website.
The Company has a detailed Securities Trading Policy which regulates dealings by Directors, senior managers and certain employees in shares, options and other securities issued in the Company. The policy prohibits trading from the close of trading on 30 June until after two clear trading days have elapsed from the date upon which the Company gives to the ASX its full year result and from the close of trading on 31 December until after two clear days have elapsed from the date upon which the Company gives to the ASX its half year result.
A copy of the Securities’ Trading Policy is available on the Company’s corporate website.
Workplace Equity and Diversity Policy The Company values diversity and recognises the benefits of a diverse workforce. A copy of the Company’s Workplace Equity and Diversity Policy can be found on the Company’s corporate website. In financial year 2010-11, the Board established a set of three-year measurable objectives in relation to gender diversity.
These objectives, progress towards achieving the objectives and the Workplace Equity and Diversity Policy were reviewed by the Board during 2011-12. As evidenced in the table below, significant progress was made towards increasing the number of females in Senior Executive positions, with the most notable female appointment in this category being that of Ms. Launa Inman, Managing Director and Chief Executive Officer.
Whilst the number of females at Board level remains the same as 2010-11, it should be noted that Ms. Sally Pitkin was appointed during the year as a Non-Executive Director. The percentage of females in the Company globally remains at 52%.
Objective – No. of Females Objective – % of Females Actual – No. of Females 30 June 2011 Actual – % of Females 30 June 2011 Actual – No. of Females 30 June 2012 Actual – % of Females 30 June 2012 No. of females on the Board* 3 43% 2 33% 2 33% No. of females in Senior Executive positions** 13 25% 9 17% 12 24% No. of females in the whole Company Maintain female representation of not less than 50% 52% 52% * ‘Board’ includes Non-Executive Directors only **’Senior Executives’ include the CEO and the next two levels of management Corporate governance statement : : Billabong International Limited 2011-12 Full Financial Report Page 41 The implementation of the five year gender diversity strategy continued in 2011-12 with progress made in the areas of diversity communication, realignment of remuneration differences between males and females, development of key female talent and an increase in the number of females taking up flexible working arrangements.
PRINCIPLE 4: Safeguard integrity in financial reporting Audit Committee Committee Members Allan McDonald (Chairman) Tony Froggatt Ted Kunkel Sally Pitkin The Board is committed to implementing and maintaining strong corporate governance practices. As at the date of signing the Directors’ Report, all members of the Audit Committee are Non-Executive Directors and are all independent Directors. The Chairman of the Committee is a Non-Executive Director. The Committee may extend an invitation to any person to attend all or part of any meeting of the Committee which it considers appropriate. All members of the Audit Committee are financially literate. The Chair of the Committee, Allan McDonald holds a Bachelor of Economics Degree from the University of Sydney and is a Fellow of the Australian Society of Certified Practising Accountants, a Fellow of Chartered Secretaries Australia, a Fellow of the Australian Institute of Management and a Fellow of the Australian Institute of Company Directors. The Audit Committee met three times during the year. Details of these Directors’ attendance at Committee meetings are set out in the Directors’ Report on page 12.
The main functions of the Committee are to:
ensure the integrity and reliability of the Company’s financial statements and all other financial information published by the Company or released to the market; review the scope and results of external and compliance audits; assess compliance with applicable legal and regulatory requirements; assess the effectiveness of the systems of internal control and risk management; review the appointment, remuneration, qualifications, independence and performance of the external auditors and the integrity of the audit process as a whole; and monitor and review the nature of non-audit services of external auditors and related fees and ensure it does not adversely impact on auditor independence.
The Audit Committee has authority, within the scope of its responsibilities, to seek any information it requires from any employee or external party. The Audit Committee Charter is available on the Company’s corporate website.
The Audit Committee reports to, and makes recommendations to the full Board in relation to each of its functions. In fulfilling its responsibilities, the Audit Committee:
receives regular reports from management and the external auditors; meets with the external auditors at least twice a year, or more frequently if necessary; and meets separately with the external auditors at least twice a year without the presence of management.
Certification of Financial Reports The CEO and CFO state in writing to the Board in each reporting period that the Company’s financial reports present a true and fair view, in all material respects, of the Company’s financial position and operational results and that they are in accordance with relevant accounting standards. The statements from the CEO and CFO are based on a formal sign-off framework established throughout the Company.
External Auditors The external auditor (PricewaterhouseCoopers) has declared its independence to the Board through is representations to the Committee and provision of its Statement of Independence to the Board, stating that they have maintained their independence in accordance with the provisions of APES 110 Code of Ethics for Professional Accountants and the applicable provisions of the Corporations Act 2001. It is PricewaterhouseCoopers’ policy to rotate audit engagement partners on listed companies at least every five years, and in accordance with that policy, a new audit engagement partner was introduced for the year ended 30 June 2012. Corporate governance statement : : Billabong International Limited 2011-12 Full Financial Report Page 42 The performance of the external auditor is reviewed annually. An analysis of fees paid to the external auditors, including a breakdown of fees for non-audit services, is provided in the Directors’ Report and in the notes to the financial statements.
The external auditor is requested to attend the Annual General Meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the audit report. A policy on the Selection and Appointment of External Auditors is available on the Company’s corporate website.
PRINCIPLES 5 and 6: Make timely and balanced disclosure and respect the rights of shareholders The Company has an established policy and procedure for timely disclosure of material information concerning the Company. This includes internal reporting procedures to ensure that any material price sensitive information is reported to the Company Secretary in a timely manner. The Company Secretary has been nominated as the person responsible for communication with the Australian Securities Exchange (ASX). This role includes responsibility for ensuring compliance with the continuous disclosure requirements of the ASX Listing Rules and overseeing and co-ordinating information disclosure to the ASX, analysts, brokers, shareholders, the media and the public. All information disclosed to the ASX is posted on the Company’s corporate website as soon as it is disclosed to the ASX. When analysts are briefed following half year and full year results announcements, the material used in the presentations is released to the ASX prior to the commencement of the briefing.
This information is also posted on the Company’s corporate website. Procedures have also been established for reviewing whether any price sensitive information has been inadvertently disclosed and, if so, this information is also immediately released to the market. The Company is committed to ensuring that all stakeholders and the market are provided with relevant and accurate information regarding its activities in a timely manner.
A copy of the Continuous Disclosure Policy is available on the Company’s corporate website.
The Company aims to keep shareholders informed of the Company’s performance and all major developments in an ongoing manner. Information is communicated to shareholders through:
the Interim Financial Report and Full Financial Report, Shareholder Review, Notice of Meetings and explanatory materials which are published on the Company’s corporate website and distributed to shareholders where nominated; the Annual General Meeting, and any other formally convened Company meetings; transcripts of analyst briefings held by teleconference for half year and full year results announcements which are posted on the Company’s corporate website within 24 hours of the briefing; and all other information released to the ASX is posted to the Company’s corporate website.
The Company’s corporate website maintains, at a minimum, information about the last three years’ press releases or announcements. Where possible the Company arranges for advance notification of significant group briefings (including, but not limited to, results announcements) and makes them widely accessible, including through the use of webcasting. A copy of the Stakeholder Communications Policy is available on the Company’s corporate website.
PRINCIPLE 7: Recognise and manage risk The Board, through the Audit Committee, is responsible for ensuring the adequacy of the Company’s risk management and compliance framework, and its system of internal controls and for regularly reviewing its effectiveness.
The Company has implemented a risk management system based on AS/NZS 4360:2004; Risk Management standard and the ASX Recommendations. The framework is based around the following risk activities:
Risk Identification: Identify all significant foreseeable risks associated with business activities in a timely and consistent manner; Risk Evaluation: Evaluate risks using an agreed risk assessment criteria; Risk Treatment/Mitigation: Develop mitigation plans for risk areas where the residual risk is greater than tolerable risk levels; and Risk Monitoring and Reporting: Report risk management activities and risk specific information to appropriate levels of management in a timely manner. The Board, through the Audit Committee, reviews the Risk Management Policy and framework on a regular basis and satisfies itself that management has in place appropriate systems for managing risk and maintaining internal controls.
The CEO and senior management team are responsible for identifying, evaluating and monitoring risk in accordance with the risk management framework. Senior management are responsible for the accuracy and validity of risk information reported to the Board and also for ensuring clear communication of the Board and senior management’s position on risk throughout the Company. Corporate governance statement : : Billabong International Limited 2011-12 Full Financial Report Page 43 In particular, at the Board and senior management strategy planning sessions held throughout the year, the CEO and management team reviews and identifies key business and financial risks which could prevent the Company from achieving its objectives. Additionally a formal risk assessment process is part of each major capital acquisition with a post acquisition review undertaken after 18 to 24 months of major business acquisitions, major capital expenditures or significant business initiatives.
Certification of risk management controls In conjunction with the certification of financial reports under Principle 4, the CEO and CFO state in writing to the Board each reporting period that:
the statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board; and the Company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects.
The Risk Management Policy is available on the Company’s corporate website.
Corporate Reporting In complying with recommendation 7.3, the CEO and CFO have made the following certifications to the Board:
that the Company’s financial reports have been properly maintained, are complete and present, and are a true and fair view, in all material respects, of the financial condition and operational results of the Company and Group and are in accordance with relevant accounting standards; and that the above statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board and that the Company’s risk management and internal compliance and control is efficiently and effectively in all material aspects in relation to financial reporting risks.
PRINCIPLE 8: Remunerate fairly and responsibly Human Resource and Remuneration Committee Committee Members Sally Pitkin (Chairman) Tony Froggatt Ted Kunkel Allan McDonald Gordon Merchant Colette Paull The Human Resource and Remuneration Committee consists only of Non-Executive Directors and a majority of the members of the Committee are independent. The Chairman of the Committee is an independent Non-Executive Director.
The Committee may extend an invitation to any person to attend all or part of any meeting of the Committee which it considers appropriate. The Human Resource and Remuneration Committee met 10 times during the year. Details of these Directors’ attendance at Committee meetings are set out in the Directors’ Report on page 12.
The main functions of the Committee are to assist the Board in establishing remuneration policies and practices which:
(a) enable the Group to attract and retain Executives and Directors (Executive and Non-Executive) who will create sustainable value for shareholders and other stakeholders; (b) fairly and responsibly reward Executives and Directors having regard to the Group’s overall strategy and objectives, the performance of the Group, the performance of the Executive and the general market environment; and (c) comply with all relevant legislation and regulations including the ASX Listing Rules and Corporations Act 2001. Corporate governance statement : : Billabong International Limited 2011-12 Full Financial Report Page 44 In particular to:
review the remuneration for each Executive Director (including base pay, incentive payments, equity awards and retirement or severance benefits), having regard to the Executive remuneration policy and whether in respect of any elements of remuneration any shareholder approvals are required; annually appraise the performance of the CEO and provide appropriate Executive development programs; review the remuneration (including incentive awards, equity awards and service employment contracts) for the CEO and senior management, to ensure they are consistent with the Executive remuneration policy; review Non-Executive Director remuneration with the assistance of external consultants as appropriate; review all equity based plans and all cash-based Executive incentive plans; engage with and review feedback from shareholders and advisory groups regarding executive remuneration and agree any required actions; review the appropriateness of management succession plans; review annually the remuneration trends (including major changes in employee benefit structures, philosophies and practices) across the Group in its various regions; review policies, reports and performance relating to diversity, conduct and any other Group Human Resource matters; and ensure that the Board is aware of all relevant legal requirements regarding disclosure of remuneration.
The Committee reviews and sets key performance indicators (KPI’s) relating to financial and non-financial targets for senior management at the commencement of each financial year. These KPI’s are evaluated at the end of each reporting period and impact on the discretionary element of the Executive’s remuneration. Committee members receive briefings from external remuneration consultants on recent developments on remuneration and related matters. The Human Resource and Remuneration Committee Charter is available on the Company’s corporate website.
The Human Resource and Remuneration Committee reports to, and makes recommendations to the full Board in relation to each of its functions.
Structure of Remuneration Details of the nature and amount of each element of the remuneration for Executive Directors, Non-Executive Directors and key management personnel of the Company, are set out in the ‘Remuneration Report’ section of the Directors’ Report from pages 13 to 33. There are no retirement benefits, other than statutory superannuation, for Non-Executive Directors of the Company. In accordance with group policy, participants in equity-based remuneration plans are not permitted to enter into any transactions that would limit the economic risk of options or other unvested entitlements. Details of this policy can be found in the Securities’ Trading Policy on the Company’s website.
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2012. The Com p rting is timely, ces, financial rep.com. o ng o nal ited 923 946 O RT 012 ed and its miciled in tivities is pany has omplete, ports and Consolidated income statement For the year ended 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 46 Notes 2012 $’000 2011 $’000 Revenue from continuing operations 5 1,444,079 1,558,459 Cost of goods sold 7 (765,313) (728,298) Other income 6 27,862 5,105 Selling, general and administrative expenses 7 (644,996) (564,661) Other expenses 7 (543,617) (144,770) Finance costs 7 (40,973) (37,151) Share of net profit after-tax of associate accounted for using the equity method 16 293 --- (Loss)/profit before income tax (522,665) 88,684 Income tax benefit 9 39,981 3,849 (Loss)/profit from continuing operations (482,684) 92,533 Profit from discontinued operation after income tax 10 206,003 25,512 (Loss)/profit for the year (276,681) 118,045 Loss attributable to non-controlling interests 1,032 1,094 (Loss)/profit for the year attributable to the members of Billabong International Limited (275,649) 119,139 Earnings per share for (loss)/profit from continuing operations attributable to the ordinary equity holders of the Company Cents Cents Basic earnings per share 44 (158.7) 31.1 Diluted earnings per share 44 (158.7) 30.9 Earnings per share for (loss)/profit attributable to the ordinary equity holders of the Company Basic earnings per share 44 (90.8) 39.6 Diluted earnings per share 44 (90.8) 39.3 The above consolidated income statement should be read in conjunction with the accompanying notes. Consolidated statement of comprehensive income For the year ended 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 47 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.
Notes 2012 $’000 2011 $’000 (Loss)/profit for the year (276,681) 118,045 Other comprehensive income Changes in the fair value of cash flow hedges, net of tax 30(b) 4,437 (3,452) Exchange differences on translation of foreign operations 30(b) (7,773) (52,205) Net investment hedge, net of tax 30(b) 5,299 (10,064) Other comprehensive income/(expense) for the year, net of tax 1,963 (65,721) Total comprehensive (expense)/income for the year (274,718) 52,324 Loss attributable to non-controlling interests 1,032 1,094 Total comprehensive (expense)/income for the year attributable to members of Billabong International Limited (273,686) 53,418 Total comprehensive (expense)/income for the year attributable to members of Billabong International Limited arises from: Continuing operations (479,689) 27,906 Discontinued operation 206,003 25,512 (273,686) 53,418 Consolidated balance sheet As at 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 48 Notes 2012 $’000 2011 $’000 ASSETS Current assets Cash and cash equivalents 11 317,263 144,858 Trade and other receivables 12 245,035 374,375 Inventories 13 293,201 348,738 Current tax receivables 18,622 15,858 Other 14 24,800 25,025 Total current assets 898,921 908,854 Non-current assets Receivables 15 11,560 14,106 Investment accounted for using the equity method 16 134,579 --- Property, plant and equipment 17 160,153 184,852 Intangible assets 18 795,900 1,268,461 Deferred tax assets 19 71,098 35,963 Other 20 7,658 7,729 Total non-current assets 1,180,948 1,511,111 Total assets 2,079,869 2,419,965 LIABILITIES Current liabilities Trade and other payables 21 320,225 344,034 Borrowings 22 229,088 15,262 Current tax liabilities 23 2,953 1,839 Provisions 24 59,177 28,073 Total current liabilities 611,443 389,208 Non-current liabilities Borrowings 25 249,069 597,903 Deferred tax liabilities 26 44,181 46,909 Provisions and other payables 27 80,346 25,003 Deferred payments 28 67,565 164,103 Total non-current liabilities 441,161 833,918 Total liabilities 1,052,604 1,223,126 Net assets 1,027,265 1,196,839 EQUITY Contributed equity 29 843,268 678,949 Treasury shares 30(a) (27,935) (30,291) Option reserve 30(b) 9,375 8,814 Other reserves 30(b) (143,107) (127,297) Retained profits 30(c) 346,970 663,289 Capital and reserves attributable to members of Billabong International Limited 1,028,571 1,193,464 Non-controlling interests (1,306) 3,375 Total equity 1,027,265 1,196,839 The above consolidated balance sheet should be read in conjunction with the accompanying notes. Consolidated statement of changes in equity For the year ended 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 49 Attributable to members o f Billabong International Limited Notes Contri- buted equity Reserves Retained earnings Total Non-con- trolling interests Total equity $’000 $’000 $’000 $’000 $’000 $’000 Balance at 1 July 2010 671,761 (85,292) 630,290 1,216,759 820 1,217,579 Profit for the year --- --- 119,139 119,139 (1,094) 118,045 Other comprehensive income --- (65,721) --- (65,721) --- (65,721) Total comprehensive income for the year --- (65,721) 119,139 53,418 (1,094) 52,324 Transactions with equity holders in their capacity as equity holders:
Dividend reinvestment plan issues 29(b) 7,188 --- --- 7,188 --- 7,188 Dividends paid 31 --- --- (86,140) (86,140) --- (86,140) Treasury shares purchased by employee share plan trusts 30(a) --- (4,446) --- (4,446) --- (4,446) Option reserve in respect of employee share plan 30(b) --- 5,892 --- 5,892 --- 5,892 Redemption option for non- controlling derivative 30(b) --- 793 --- 793 --- 793 Non-controlling interests on acquisition of subsidiary 38 --- --- --- --- 3,649 3,649 7,188 2,239 (86,140) (76,713) 3,649 (73,064) Balance at 30 June 2011 678,949 (148,774) 663,289 1,193,464 3,375 1,196,839 Loss for the year --- --- (275,649) (275,649) (1,032) (276,681) Other comprehensive income --- 1,963 --- 1,963 --- 1,963 Total comprehensive income for the year --- 1,963 (275,649) (273,686) (1,032) (274,718) Transactions with equity holders in their capacity as equity holders: Transactions with non-controlling interests 29(g) 3,960 (311) --- 3,649 (3,649) --- Rights issue, net of transaction costs 29(b) 152,714 --- --- 152,714 --- 152,714 Dividend reinvestment plan issues 29(b) 7,645 --- --- 7,645 --- 7,645 Dividends paid 31 --- --- (40,670) (40,670) --- (40,670) Treasury shares purchased by employee share plan trusts 30(a) --- (2,665) --- (2,665) --- (2,665) Option reserve in respect of employee share plan 30(b) --- 5,582 --- 5,582 --- 5,582 Redemption option for non- controlling derivative 30(b) --- (17,462) --- (17,462) --- (17,462) 164,319 (14,856) (40,670) 108,793 (3,649) 105,144 Balance at 30 June 2012 843,268 (161,667) 346,970 1,028,571 (1,306) 1,027,265 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Consolidated cash flow statement For the year ended 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 50 Notes 2012 $’000 2011 $’000 Cash flows from operating activities Receipts from customers (inclusive of GST) 1,746,868 1,773,303 Payments to suppliers and employees (inclusive of GST) (1,622,947) (1,673,100) 123,921 100,203 Interest received 1,923 2,287 Other revenue 3,334 2,264 Finance costs (34,869) (35,688) Income taxes paid (15,420) (44,730) Net cash inflow from operating activities 42 78,889 24,336 Cash flows from investing activities Payments for purchase of subsidiaries and businesses, net of cash acquired 38 (84,232) (215,064) Payments for property, plant and equipment (40,378) (43,244) Payments for intangible assets (15,156) (9,126) Proceeds from sale of business, net of cash divested and transaction costs 10 274,136 --- Proceeds from sale of property, plant and equipment 711 499 Net cash inflow/(outflow) from investing activities 135,081 (266,935) Cash flows from financing activities Proceeds from issues of shares and other equity securities 157,752 --- Payments for treasury shares held by employee share plan trusts (2,665) (4,446) Proceeds from borrowings 987,083 956,023 Repayment of borrowings (1,143,991) (671,674) Dividends paid 31 (39,271) (78,952) Net cash (outflow)/inflow from financing activities (41,092) 200,951 Net increase in cash and cash equivalents 172,878 (41,648) Cash and cash equivalents at the beginning of the year 144,425 208,742 Effects of exchange rate changes on cash and cash equivalents (1,639) (22,669) Cash and cash equivalents at the end of the year 11 315,664 144,425 Financing arrangements 25 Non-cash investing and financing activities 43 The above consolidated cash flow statement should be read in conjunction with the accompanying notes. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 51 Contents of the notes to the consolidated financial statements Page Note 1. Summary of significant accounting policies 52 Note 2. Financial risk management 66 Note 3. Critical accounting estimates and judgements 73 Note 4. Segment information 74 Note 5. Revenue 78 Note 6. Other income 78 Note 7. Expenses 79 Note 8. Significant items 80 Note 9. Income tax expense 82 Note 10. Discontinued operation 83 Note 11. Current assets – Cash and cash equivalents 85 Note 12. Current assets – Trade and other receivables 86 Note 13. Current assets – Inventories 87 Note 14. Current assets – Other 87 Note 15. Non-current assets – Receivables 88 Note 16. Non-current assets – Investment accounted for using the equity method 88 Note 17. Non-current assets – Property, plant and equipment 89 Note 18. Non-current assets – Intangible assets 90 Note 19. Non-current assets – Deferred tax assets 94 Note 20. Non-current assets – Other 94 Note 21. Current liabilities – Trade and other payables 95 Note 22. Current liabilities – Borrowings 95 Note 23. Current liabilities – Current tax liabilities 96 Note 24. Current liabilities – Provisions 96 Note 25. Non-current liabilities – Borrowings 97 Note 26. Non-current liabilities – Deferred tax liabilities 99 Note 27. Non-current liabilities – Provisions and other payables 100 Note 28. Deferred payments 100 Note 29. Contributed equity 101 Note 30. Treasury shares, reserves and retained profits 103 Note 31. Dividends 105 Note 32. Derivative financial instruments 106 Note 33. Key management personnel disclosures 109 Note 34. Remuneration of auditors 113 Note 35. Contingencies 114 Note 36. Commitments 114 Note 37. Related party transactions 116 Note 38. Business combinations 117 Note 39. Subsidiaries 120 Note 40. Deed of cross guarantee 121 Note 41. Events occurring after the balance sheet date 123 Note 42. Reconciliation of loss/profit for the year to net cash inflow from operating activities 123 Note 43. Non-cash investing and financing activities 123 Note 44. Earnings per share 124 Note 45. Share-based payments 125 Note 46. Parent entity financial information 132 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 52 Note 1. Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below.
These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Billabong International Limited and its subsidiaries (the Group or consolidated entity).
(a) Basis of preparation The general purpose financial report has been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The Group is a for-profit entity for the purpose of preparing the financial report.
Compliance with IFRS The financial report of the consolidated entity also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Early adoption of standards The Group has elected not to early apply accounting standards that are not applicable to the accounting period ended 30 June 2012.
Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivative instruments) at fair value through profit or loss and certain classes of property, plant and equipment. Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Billabong International Limited (the Company or parent entity) as at 30 June 2012 and the results of all subsidiaries for the year then ended.
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de- consolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(h)).
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, statement of comprehensive income, statement of changes in equity and balance sheet respectively.
Investments in subsidiaries are accounted for at cost in the separate financial statements of Billabong International Limited.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 53 Note 1. Summary of significant accounting policies (continued) (ii) Employee Share Trust The Group has formed trusts to administer the Group’s Executive Performance Share Plan. The trusts are consolidated, as the substance of the relationship is that the trusts are controlled by the Group.
Shares held by the Billabong Executive Performance Share Plan – Australia trust and the Billabong Executive Performance Share Plan trust are disclosed as treasury shares and deducted from equity.
(iii) Associates Associates are all entities over which the Group has significant influence but not control or joint control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group’s investment in associates includes Goodwill identified on acquisition (refer to note 16).
The Group’s share of its associates’ post-acquisition profits or losses is recognised in profit or loss, and its share of post-acquisition other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised as a reduction in the carrying amount of the investment.
When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealised gains on transaction between the group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.
(iv) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interest to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to members of Billabong International Limited.
When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.
If the ownership interest in a jointly-controlled entity or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate.
(c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer (CEO).
(d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is the Company’s functional and presentation currency. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 54 Note 1. Summary of significant accounting policies (continued) (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges, or are attributable to part of the net investment in a foreign operation.
(iii) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: o assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; o income and expenses for each income statement and statement of comprehensive income are translated at average monthly exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and o all resulting exchange differences are recognised in other comprehensive income.
On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
(e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and amounts collected on behalf of third parties. Revenue is recognised for the major business activities as follows:
(i) Sale of goods Revenue from sale of goods is recognised when it can be reliably measured, the significant risks and rewards of ownership have passed to, and the goods been accepted by, the customer and collectability of the related receivable is probable.
Sales terms determine when risks and rewards are considered to have passed to the customer. Given that sales terms vary between regions and customers the Group recognises some wholesale sales on shipment and others on delivery of goods to the customer, whichever is appropriate. The Group recognises retail sales at the time of sale of the goods to the customer.
(ii) Interest income Interest income is recognised on a time proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income over the discounted period.
(iii) Royalty income Royalty income is recognised as it accrues.
(iv) Agent commissions Revenue earned from the sourcing of product on behalf of licensees is recognised net of the cost of the goods, reflecting the sourcing commission only. Sourcing commission is recognised when the goods are provided.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 55 Note 1. Summary of significant accounting policies (continued) (f) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.
Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (g) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance lease is depreciated over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the Group will obtain ownership at the end of the lease term.
Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (note 36). Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term. The respective leased assets are included in the balance sheet based on their nature.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 56 Note 1. Summary of significant accounting policies (continued) (h) Business combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets.
The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase.
Deferred or contingent consideration – acquisitions pre 1 July 2009 When deferred or contingent consideration payable becomes probable and the amount can be reliably measured the Group brings it to account. Where settlement of any part of cash consideration is deferred and recognised as a non-current liability, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the Group’s risk-free rate.
Deferred or contingent consideration – acquisitions post 1 July 2009 Where settlement of any part of cash consideration is deferred or contingent on future events, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the Group’s risk-free rate. Amounts classified as a payable are subsequently remeasured to fair value with changes in fair value recognised in the income statement.
(i) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment charge is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
No amortisation is provided against the carrying value of purchased brands on the basis that these assets are considered to have an indefinite useful life.
Key factors taken into account in assessing the useful life of brands are:
The brands are well established and protected by trademarks across the globe which are generally subject to an indefinite number of renewals upon appropriate application; and There are currently no legal, technical or commercial obsolescence factors applying to the brands or the products to which they attach which indicate that the life should be considered limited.
(j) Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 57 Note 1. Summary of significant accounting policies (continued) (k) Trade receivables All trade receivables are recognised at the date they are invoiced, initially at fair value and subsequently measured at amortised cost, and are principally on 30 day terms. They are presented as current assets unless collection is not expected for more than 12 months after the balance sheet date.
Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment charge is recognised in the income statement within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the income statement.
Other receivables is comprised of amounts receivable under a factoring arrangement (refer note 12) and amounts due as a result of transactions outside the normal course of trading.
(l) Inventories Raw materials, work in progress and finished goods are stated at the lower of cost and net realisable value. (i) Raw materials Cost is determined using the first-in, first-out (FIFO) method and standard costs approximating actual costs. (ii) Work in progress and finished goods Cost is standard costs approximating actual costs including direct materials, direct labour and an allocation of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Cost also includes the transfer from equity of any gains/losses on qualifying cash flow hedges relating to purchases.
(m) Discontinued operations A discontinued operation is a component of the Group that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the income statement.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 58 Note 1. Summary of significant accounting policies (continued) (n) Investments and other financial assets Classification The Group classifies its financial assets in the following categories: financial assets at fair value through profit and loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluates this designation at each reporting date.
(i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are included in trade and other receivables (note 12) and receivables (note 15) in the balance sheet. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.
Subsequent measurement Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method.
Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category, including interest and dividend income, are presented in the income statement within other income or other expenses in the period in which they arise.
Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for- sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. The translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in carrying amount are recognised in other comprehensive income. Changes in the fair value of other monetary and non-monetary securities classified as available-for-sale are recognised in other comprehensive income.
Details on how the fair value of financial instruments is determined are disclosed in note 2. Impairment The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment charge on that financial asset previously recognised in profit and loss – is reclassified from equity and recognised in the income statement. Impairment charges recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement.
Assets carried at amortised cost For loans and receivables, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement.
Impairment testing of trade receivables is described in note 1(k). Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 59 Note 1. Summary of significant accounting policies (continued) (o) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either:
– hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges), or – hedges of a net investment in a foreign operation (net investment hedges).
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.
The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 32.
Movements in the hedging reserve in shareholders' equity are shown in note 30(b). The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months and it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability.
(i) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within other income or other expenses.
Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within ‘finance costs’. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) the gains and losses previously deferred in equity are reclassified from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in profit or loss as cost of goods sold in the case of inventory.
When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss.
(ii) Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges.
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within other income or other expenses.
Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold.
(iii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement and are included in other income or other expenses.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 60 Note 1. Summary of significant accounting policies (continued) (p) Property, plant and equipment Land and buildings are shown at cost. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives, as follows:
– Buildings 20-40 years – Owned and leased plant and equipment 3-20 years – Furniture, fittings and equipment 3-20 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(i)).
Gains and losses on disposals are determined by comparing proceeds an asset’s with carrying amount. These are included in the income statement.
(q) Intangible assets (i) Goodwill Goodwill is measured as described in note 1(h). Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment charges. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.
(ii) Brands Expenditure incurred in developing or enhancing brands is expensed as incurred. Brands are shown at historical cost. Brands have a limited legal life, however the Group monitors global expiry dates and renews registrations where required. Brands recorded in the financial statements are not currently associated with products which are likely to become commercially or technically obsolete. Accordingly, the Directors are of the view that brands have an indefinite life.
Brands are tested annually for impairment and carried at cost less accumulated impairment charges.
(iii) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated contractual lives (three to five years). Costs associated with developing or maintaining computer software programs are expensed as incurred.
(r) Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.
Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the balance sheet date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 61 Note 1. Summary of significant accounting policies (continued) (s) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method.
Fees paid on the establishment of loan facilities, which are not an incremental cost relating to the actual draw-down of the facility, are recognised as prepayments and amortised on a straight-line basis over the term of the facility.
Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income or other expenses.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.
(t) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed.
(u) Provisions Provisions, other than for employee entitlements, are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense.
(v) Employee benefits (i) Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave and accumulating sick leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as other payables.
(ii) Other long-term employee benefit obligations The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting period using the projected unit credit method.
Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 62 Note 1. Summary of significant accounting policies (continued) (iii) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value.
(iv) Profit-sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.
(w) Contributed equity Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business, are not included in the cost of the acquisition as part of the purchase consideration.
(x) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date.
(y) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares.
(ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.
(z) Employee and executive share plans Equity-based compensation benefits are provided to employees via the Billabong Executive Performance Share Plan and the Executive Performance and Retention Plan.
Billabong Executive Performance Share Plan Share-based compensation benefits are provided to the executive team via the Billabong Executive Performance Share Plan. Information relating to this Plan is set out in note 45.
The market value of shares issued to employees for no cash consideration under the employee share scheme is recognised as an employee benefit expense with a corresponding increase in equity when the employees become entitled to the shares.
The fair value of equity instruments granted under the Billabong Executive Performance Share Plan is recognised as an employee benefit expense over the period during which the employees become unconditionally entitled to the instruments. There is a corresponding increase in equity, being recognition of an option reserve. Once the employees become unconditionally entitled to the instruments the option reserve is set-off against the treasury shares vested. The fair value of equity instruments granted is measured at grant date and is determined by reference to the Billabong International Limited share price at grant date, taking into account the terms and conditions upon which the rights were granted. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 63 Note 1. Summary of significant accounting policies (continued) To facilitate the operation of the Billabong Executive Performance Share Plan third party trustees are used to administer the trusts which hold shares allocated under the Plan. CPU Share Plans Pty Ltd and CRS Nominees Ltd are third party trustees for the Billabong Executive Performance Share Plan – Australia trust (for Australian employees) and the Billabong Executive Performance Share Plan trust (for non-Australian employees) respectively. As the trusts were established by the Company for the benefit of the consolidated entity, through the provision of a component of the consolidated entities executive remuneration, the trusts are consolidated in the consolidated entity.
Current equity based instruments granted under the Billabong Executive Performance Share Plan include performance shares and conditional rights. Both performance shares and conditional rights are subject to performance hurdles. Through contributions to the trusts the consolidated entity purchases shares of the Company on market to underpin performance shares and conditional rights issued. The shares are recognised in the balance sheet as treasury shares. Treasury shares are excluded from the weighted average number of shares used as the denominator for determining basic earnings per share and net tangible asset backing per share. The performance shares and conditional rights of the Billabong Executive Performance Share Plan are treated as potential ordinary shares for the purposes of diluted earnings per share.
The Group incurs expenses on behalf of the trusts. These expenses are in relation to administration costs of the trusts and are recorded in the income statement as incurred.
Billabong Executive Performance and Retention Plan Share-based compensation benefits are also provided to the executive team via the Billabong Executive Performance and Retention Plan. Information relating to this Plan is set out in note 45.
The fair value of the options granted under the Billabong Executive Performance and Retention Plan is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the executive team becomes unconditionally entitled to the options.
The fair value at grant date is independently determined using the Monte-Carlo simulation valuation technique that takes into account the exercise price, the term of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option.
The fair value of the options granted is adjusted to reflect market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each reporting date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the income statement with a corresponding adjustment to equity.
(aa) Financial guarantee contracts Financial guarantee contracts are recognised as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value and subsequently at the higher of the amount determined in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less cumulative amortisation, where appropriate.
The fair value of financial guarantees is determined as the present value of the difference in net cash flows between the contractual payments under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligations. Where guarantees in relation to loans or other payables of subsidiaries or associates are provided for no compensation, the fair values are accounted for as contributions and recognised as part of the cost of the investment.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 64 Note 1. Summary of significant accounting policies (continued) (bb) Parent entity financial information The financial information for the parent entity, Billabong International Limited, disclosed in note 46 has been prepared on the same basis as the consolidated financial report, except as set out below.
Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial report of Billabong International Limited. Dividends received from subsidiaries are recognised in the parent entity’s income statement rather than being deducted from the carrying amount of these investments.
Tax consolidation legislation Billabong International Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as of 1 July 2002.
The head entity, Billabong International Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone taxpayer in its own right.
In addition to its own current and deferred tax amounts, Billabong International Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Billabong International Limited for any current tax payable assumed and are compensated by Billabong International Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Billabong International Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements.
The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments.
Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the group.
Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities.
Financial guarantees Where the parent entity has provided financial guarantees in relation to loans and payables of subsidiaries for no compensation, the fair values of these guarantees are accounted for as contributions and recognised as part of the cost of the investment.
(cc) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.
Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet.
Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow.
(dd) Rounding of amounts The Company is of a kind referred to in Class order 98/0100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 65 Note 1. Summary of significant accounting policies (continued) (ee) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2012 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below:
(i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective for annual reporting periods beginning on or after 1 January 2013) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2013 but is available for early adoption. The Group is still to assess its full impact. The Group has not yet decided when to adopt AASB 9.
(ii) AASB 13 Fair value measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Group does not use fair value measurements extensively. It is therefore unlikely that the new rules will have a significant impact on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the financial statements. The Group does not intend to adopt the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 30 June 2014.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 66 Note 2. Financial risk management The Group’s activities expose it to a variety of financial risks; market risk (including foreign exchange risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. Derivatives are used exclusively for hedging purposes and not for trading or speculative purposes.
(a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to United States Dollars. Foreign currency transaction risk arises when assets and liabilities, and forecasted purchases and sales are denominated in a currency other than the functional currency of the respective entities. As sales are mainly denominated in the respective local currency which is the functional currency, the major transactional exposure is in relation to inventory purchases, other than for the United States of America, which are typically denominated in United States Dollars. The risk is measured using sensitivity analysis and cash flow forecasting.
Forward contracts are used to manage foreign exchange risk. The Group’s Risk Management Policy is for each region to hedge greater than 80% of forecast foreign denominated inventory purchases for the upcoming season. Further hedges can be executed following receipt of customer orders. All hedges of projected purchases qualify as “highly probable” forecast transactions for hedge accounting purposes. The Group has, as outlined in note 32, forward exchange contracts designated as cash flow hedges.
The carrying amounts of the Group’s financial assets and liabilities that are denominated in Australian Dollars and significant foreign currency (figures in Australian Dollars), are set out below:
Notes 2012 $’000 2011 $’000 Australian Dollars Cash and cash equivalents 11 170,159 23,243 Trade and other receivables 12, 15 39,055 51,178 Borrowings 22, 25 (84,175) (104,777) Trade and other payables 21 (56,750) (35,515) 68,289 (65,871) United States Dollars Cash and cash equivalents 11 104,172 82,308 Trade and other receivables 12, 15 72,682 122,467 Borrowings 22, 25 (225,203) (423,897) Trade and other payables 21 (163,244) (202,187) (211,593) (421,309) European Euros Cash and cash equivalents 11 11,417 10,280 Trade and other receivables 12, 15 55,127 93,803 Borrowings 22, 25 (45,666) (31,524) Trade and other payables 21 (38,331) (52,711) (17,453) 19,848 Othe r Cash and cash equivalents 11 31,515 29,027 Trade and other receivables 12, 15 89,731 121,033 Borrowings 22, 25 (123,113) (52,967) Trade and other payables 21 (61,900) (53,621) (63,767) 43,472 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 67 Note 2. Financial risk management (continued) (a) Market risk (continued) Sensitivity analysis The majority of the carrying amounts of the Group’s financial assets and liabilities are denominated in the functional currency of the relevant subsidiary and thus there is no foreign exchange exposure. The majority of foreign exchange exposure as at 30 June 2012 relates to intra-group monetary assets or liabilities, which whilst these intra-group assets or liabilities are eliminated on group consolidation, there is an exposure at balance date which is recognised in the consolidated income statement as unrealised foreign exchange gains or losses. This is because the monetary item represents a commitment to convert one currency into another and exposes the Group to a gain or loss through currency fluctuations.
At 30 June 2012 had the Australian Dollar as at 30 June 2012 weakened / strengthened by 10% against the United States Dollar with all other variables held constant, post-tax profit for the year would have been $4.6 million higher / $3.8 million lower (2011: $1.4 million higher / $1.1 million lower), mainly as a result of intra-group monetary assets or liabilities as at 30 June 2012. Profit is more sensitive to movements in the Australian Dollar / United States Dollar in 2012 than 2011 because of an increased net amount of intra-group monetary assets and liabilities as at 30 June 2012 compared with as at 30 June 2011. Equity (excluding the effect to the Foreign Currency Translation Reserve of translating the United States of America operations’ net assets/equity to Australian Dollars) would have been $6.8 million higher / $6.2 million lower (2011: $5.0 million higher / $5.1 million lower). The Group’s exposure to other foreign exchange movements as at 30 June 2012 is not material.
(ii) Cash flow interest rate risk Other than cash deposits at call, the Group has no significant interest-bearing assets and therefore the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. In certain circumstances the Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps.
Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite; ensuring optimal hedging strategies are applied, by either positioning the balance sheet or protecting interest expense through different interest rate cycles.
As at the reporting date, the Group had the following variable rate borrowings and interest rate swap contracts outstanding:
2012 $’000 2011 $’000 Bank loans, syndicated facility, drawdown facility and cash advance facilities 470,149 611,924 Interest rate swaps (notional principal amount) --- (178,571) Net exposure to interest rate risk 470,149 433,353 An analysis by maturities is provided in (c) below and a summary of the terms and conditions is in note 25.
Group sensitivity analysis At 30 June 2012 if interest rates had changed by - / + 50 basis points from the year-end rates with all other variables held constant, post-tax profit for the year would have been $1.6 million lower / higher (2011: $2.1 million lower / higher). Equity would have been $1.6 million lower / higher (2011: $3.6 million lower / higher) mainly as a result of an increase / decrease in the fair value of the cash flow hedges as at 30 June 2012.
(b) Credit risk Credit risk represents the loss that would be recognised if a counterparty failed to perform as contracted. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Group has no significant concentrations of credit risk.
Derivative counterparties and cash deposits are limited to high credit quality financial institutions. The Group has policies that limit the amount of credit exposure to any one financial institution.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 68 Note 2. Financial risk management (continued) (b) Credit risk (continued) It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their financial position, past experience and other factors. Credit limits are set for each individual customer in accordance with parameters set by the Board. These credit limits are regularly monitored. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. Sales to retail customers are settled in cash or using major credit cards, mitigating credit risk.
Credit risk further arises in relation to financial guarantees given to certain parties. Such guarantees are only provided in exceptional circumstances and are subject to specific Board approval. Refer to note 46.
The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. The vast majority of cash at bank and short-term bank deposits are held with banks with at least a credit rating of ‘A’. Derivative counterparties have a credit rating of at least ‘A’. The vast majority of trade receivables are with existing customers (who have been customers for at least six months) with no defaults in the past (for further information about impaired trade receivables and past due but not impaired receivables refer to note 12).
(c) Liquidity risk Due to the financial liabilities within the Group, the Group is exposed to liquidity risk, being the risk of encountering difficulties in meeting such obligations. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to closeout market positions. At the end of the reporting period the Group held deposits at call of $20.2 million (2011: $3.2 million). Due to the dynamic nature of the underlying businesses, the Group aims at maintaining flexibility in funding by keeping committed credit lines available. Refer to note 25(d) for information in regards to the Group’s financing arrangements. Refer to note 29(i) for information in regards to the Group’s capital management strategy.
Management monitors rolling forecasts of the Group’s liquidity reserve (comprising the undrawn borrowing facilities) and cash and cash equivalents (note 11) on the basis of expected cash flows. This is generally carried out at a local level in the operating companies of the Group in accordance with practice and limits set by the Group. These limits vary by location to take into account the liquidity of the market in which the entity operates. In addition, the Group’s liquidity management policy involves monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.
The table below analyses the Group’s financial liabilities, net and gross settled derivative financial instruments into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. For net settled and gross settled derivatives the cash flows have been estimated using spot interest rates applicable at the reporting date.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 69 Note 2. Financial risk management (continued) (c) Liquidity risk (continued) 2012 Less than 6 months $’000 Between 6 and 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total contractual cash flows $’000 Carrying amount (assets) / liabilities $’000 Non-interest bearing trade and other payables 318,430 --- --- --- --- 318,430 318,430 Fixed rate debt 802 747 1,494 4,482 1,120 8,645 8,008 Variable rate debt 236,965 7,779 37,439 218,615 --- 500,798 470,149 Net variable rate liabilities 236,965 7,779 37,439 218,615 --- 500,798 470,149 Less: Cash (i) (317,263) --- --- --- --- (317,263) (317,263) Net variable rate liquidity position (80,298) 7,779 37,439 218,615 --- 183,535 152,886 Gross settled derivatives (forward exchange contracts) - (inflow) (62,975) (22,769) --- --- --- (85,744) (1,495) - outflow 61,603 22,761 --- --- --- 84,364 --- (1,372) (8) --- --- --- (1,380) (1,495) Syndicated facility As at 30 June 2011 the Group had an unsecured Syndicated Revolving Multi-Currency Facility with a limit of US$790.0 million (US$395.0 million due for roll-over on or prior to 28 July 2013 with the remaining US$395.0 million due for roll-over on or prior to 28 July 2014).
On 30 January 2012 the Group renegotiated the syndicated facility in conjunction with the partial sale of the Nixon business and agreed that the net consideration received in connection with this transaction be applied towards a partial repayment and cancellation of this facility.
On 20 June 2012 the Group renegotiated the syndicated facility in conjunction with the equity raising announced on 21 June 2012 and agreed that upon receipt of the equity raising proceeds, the net proceeds be applied towards a further partial repayment and cancellation of this facility.
As at 30 June 2012 the Group had an unsecured Syndicated Revolving Multi-Currency Facility with a limit of US$577.0 million (US$182.0 million due for roll-over on or prior to 28 July 2013 with the remaining US$395.0 million due for roll-over on or prior to 28 July 2014).
In June 2012, the Group renegotiated its banking covenants and undertook to partially repay and partially cancel the Syndicated Revolving Multi-Currency Facility with the proceeds received from the rights issue announced on 21 June 2012. As a result of this commitment to repay these borrowings the amount has been classified as current.
Following receipt of the equity raising proceeds, the Group finalised the partial repayment and partial cancellation of this facility. As at 1 August 2012 the Group had an unsecured Syndicated Revolving Multi-Currency Facility with a limit of US$384.5 million, which is due for roll-over on or prior to 28 July 2014.
Drawdown facility At 30 June 2011 the Group had a US$100.0 million unsecured multi-currency drawdown facility which was due for roll- over on or prior to 28 July 2013.
On 30 January 2012 the Group renegotiated the drawdown facility in conjunction with the partial sale of the Nixon business and agreed that the net consideration received in connection with this transaction be applied towards a partial repayment and cancellation of this facility on a pro rata basis with the reduction in the syndicated facility detailed above.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 70 Note 2. Financial risk management (continued) (c) Liquidity risk (continued) Drawdown facility (continued) On 20 June 2012 the Group renegotiated the drawdown facility in conjunction with the equity raising announced on 21 June 2012 and agreed that upon receipt of the equity raising proceeds, the net proceeds be applied towards a further partial repayment and cancellation of this facility on a pro rata basis with the reduction in the Syndicated Revolving Multi- Currency Facility detailed above.
At 30 June 2012 the Group has a US$78.0 million unsecured multi-currency drawdown facility which is due for roll-over on or prior to 28 July 2013. Following receipt of the equity raising proceeds, the Group finalised the partial repayment and partial cancellation of this facility. As at 1 August 2012 the Group had an unsecured multi-currency drawdown facility with a limit of US$52.0 million, which is due for roll-over on or prior to 28 July 2014.
2011 Less than 6 months $’000 Between 6 and 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total contractual cash flows $’000 Carrying amount (assets) / liabilities $’000 Non-interest bearing trade and other payables 340,671 --- --- --- --- 340,671 340,671 Fixed rate debt 667 600 16 --- --- 1,283 1,241 Variable rate debt 26,147 13,124 25,067 615,250 --- 679,588 611,924 Net settled derivatives (interest rate swaps) 703 1,046 2,093 2,249 --- 6,091 2,371 Net variable rate liabilities 26,850 14,170 27,160 617,499 --- 685,679 614,295 Less: Cash (i) (144,858) --- --- --- --- (144,858) (144,858) Net variable rate liquidity position (118,008) 14,170 27,160 617,499 --- 540,821 469,437 Gross settled derivatives (forward exchange contracts) - (inflow) (90,967) (28,417) --- --- --- (119,384) --- - outflow 93,621 29,269 --- --- --- 122,890 2,812 2,654 852 --- --- --- 3,506 2,812 (i) Cash Cash is considered in managing the Group’s exposure to liquidity and interest rate risks. As at 30 June 2012 the Group held a significant cash balance of $317.3 million (2011: $144.9 million). In order to optimise the cost of funds, the Group has a cash pooling arrangement wherein a portion of the Group’s cash is notionally offset on a daily basis against the outstanding debt drawn under the drawdown facility for the purposes of calculating interest expense payable. At 30 June 2012 the amount of cash included in the notional pooling was $31.3 million (30 June 2011: $18.0 million). Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 71 Note 2. Financial risk management (continued) (d) Fair value measurements The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes.
AASB 7 Financial Instruments: Disclosures requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
(a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1), (b) Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2), and (c) Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3).
The following table presents the Group’s assets and liabilities measured and recognised at fair value at 30 June 2012 and 30 June 2011. At 30 June 2012 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 Assets Forward exchange contracts – cash flow hedges --- 1,879 --- 1,879 Total assets --- 1,879 --- 1,879 Liabilities Forward exchange contracts – cash flow hedges --- 384 --- 384 Contingent consideration --- --- 25,558 25,558 Total liabilities --- 384 25,558 25,942 At 30 June 2011 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 Assets Forward exchange contracts – cash flow hedges --- 551 --- 551 Total assets --- 551 --- 551 Liabilities Forward exchange contracts – cash flow hedges --- 3,363 --- 3,363 Interest rate swap contracts – cash flow hedges --- 2,371 --- 2,371 Contingent consideration --- --- 97,097 97,097 Total liabilities --- 5,734 97,097 102,831 The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. These instruments are included in level 1. The Group does not hold any of these financial instruments at 30 June 2012 or 30 June 2011.
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. Quoted market prices or dealer quotes for similar instruments are used to estimate fair value for long-term debt for disclosure purposes. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the end of the reporting period. These instruments are included in level 2 and comprise derivative financial instruments. In the circumstances where a valuation technique for these instruments is based on significant unobservable inputs, such instruments are included in level 3. This is the case for contingent consideration. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 72 Note 2. Financial risk management (continued) (d) Fair value measurements (continued) The following table presents the changes in level 3 instruments for the years ended 30 June 2012 and 30 June 2011:
Changes in contingent consideration 2012 $’000 2011 $’000 Balance 1 July 97,097 158,380 Transfer into level 3 --- 36,476 Transfer out of level 3 as no longer considered contingent (53,446) (53,708) Other increases/(decreases) 2,763 (20,921) Gains recognised in other income (note 6) (22,522) (1,011) Exchange losses/(gains) 1,666 (22,119) Balance 30 June 25,558 97,097 Total gains for the period included in other income that relate to liabilities held at the end of the reporting period 22,522 1,011 The fair value of the contingent consideration is calculated at present value taking into account the latest Board approved forecasts. A change to the discount rate used to calculate contingent consideration would not change the fair value significantly. Refer to note 28 and 35 for further information.
The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of borrowings is based upon market prices where a market exists or by discounting the expected future cash flows by the current interest rates that are available to the Group for similar financial instruments. Refer to note 15(b) and 25(f) for further information.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 73 Note 3. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Estimated impairment of goodwill and indefinite life intangibles The Group tests annually whether goodwill and indefinite life intangibles have suffered any impairment and if any intangibles cease to have an indefinite life, in accordance with the accounting policy stated in note 1(i). The recoverable amounts of cash-generating units (CGU) have been determined based on value-in-use calculations (VIU). These calculations require the use of estimates and judgements, in particular the achievement of forecast growth rates which are determined through a Board approved budgeting process. Assumptions used in impairment testing are detailed in note 18.
If the VIU of a CGU is lower than its carrying amount, then the CGU’s fair value less costs to sell (FVLCTS) is determined as AASB 136 requires the recoverable amount of a CGU to be the higher of VIU and FVLCTS. In applying the FVLCTS approach, the recoverable amount of a CGU is assessed using market based valuation techniques such as discounted cash flow analysis, comparable transactions and observable trading multiples. Assumptions used in impairment testing are detailed in note 18.
Business combinations and goodwill The Group has made a number of acquisitions during the prior year. Judgements and estimates are made in respect of the measurement of the provisional and final fair values of assets and liabilities acquired and the considerations transferred. The portion of the purchase price not allocated to assets and liabilities has been attributed to goodwill.
Deferred or contingent consideration – acquisitions pre 1 July 2009 In relation to certain acquisitions that have been made by the Group pre 1 July 2009, deferred or contingent consideration may be payable in cash if certain specific conditions are achieved. When the deferred or contingent consideration payable becomes probable and the amount can be reliably measured, the Group brings it to account (refer note 28) and the amount of the contingent liability is disclosed in note 35 if applicable. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange (refer note 35). The discount rate used is the Group’s risk-free rate. The calculation of the payable for each acquisition requires the use of estimates and judgements which are reviewed at each reporting period.
Deferred or contingent consideration – acquisitions post 1 July 2009 In relation to certain acquisitions that have been made by the Group post 1 July 2009, deferred or contingent consideration may be payable in cash if certain specific conditions are achieved. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange (refer note 35). The discount rate used is the Group’s risk-free rate. Amounts classified as a payable are subsequently remeasured to fair value with changes in fair value recognised in the income statement. The calculation of the payable for each acquisition requires the use of estimates and judgements which are reviewed at each reporting period.
Taxation The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is required in determining the worldwide provision for income taxes. There are certain transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group estimates its tax liabilities based on the Group's understanding of the tax law. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. Onerous Lease/Contract and Restructuring provisions During the year the Group initiated a strategic capital structure review for the business. Judgments and estimates are made in respect of the measurement of provisions for costs associated with the execution of initiatives arising from this review.
During the year the Group entered into certain contracts which are considered to be onerous. Judgments and estimates are made in respect of the measurement of provisions for costs associated with the execution of these contracts.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 74 Note 4. Segment information (a) Description of segments Management has determined the operating segments based on the reports reviewed by the CEO. The results of the operating segments are analysed and strategic decisions made as to the future operations of the segment. This review is also used to determine how resources will be allocated across the segments.
The CEO considers the business from a geographic perspective and has identified three reportable segments being Australasia, Americas and Europe. The CEO monitors the performance of these geographic segments separately. Each segment’s areas of operation include the wholesaling and retailing of surf, skate and snow apparel and accessories.
The geographic segments are organised as below:
Australasia This segment includes Australia, New Zealand, Japan, South Africa, Singapore, Malaysia, Indonesia, Thailand, South Korea and Hong Kong.
Americas This segment includes the United States of America, Canada, Brazil, Peru and Chile.
Europe This segment includes Austria, Belgium, the Czech Republic, England, France, Germany, Italy, Luxembourg, the Netherlands and Spain.
Rest of the World This segment relates to royalty receipts from third party operations. Segment Earnings Before Interest, Taxes, Depreciation, Amortisation and Impairment (EBITDAI) excludes inter- company royalties and sourcing fees and includes an allocation of global overhead costs (which include corporate overhead, international advertising and promotion costs, central sourcing costs and foreign exchange movements).
The geographical segment assets exclude deferred tax assets and derivative assets.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 75 Note 4. Segment information (continued) (b) Segment information provided to the CEO The segment information provided to the CEO for the reportable segments for the year ended 30 June 2012 is as follows:
The below shows the total of results from continuing and discontinued operations. For a breakdown of continuing and discontinued operations, refer to (c (iii)) below.
2012 Australasia Americas Europe Other* Rest o f the World Total $’000 $’000 $’000 $’000 $’000 $’000 Total from continuing and discontinued operations Sales to external customers 522,265 750,307 278,064 --- --- 1,550,636 Third party royalties --- --- --- --- 2,608 2,608 Total segment revenue 522,265 750,307 278,064 --- 2,608 1,553,244 EBITDAI (22,471) (39,250) (12,277) 201,741 2,608 130,351 Less: depreciation and amortisation (47,691) Less: impairment charge (342,955) Less: net interest expense (27,883) Loss before income tax (288,178) Segment assets 2,899,228 761,064 228,098 --- --- 3,888,390 Elimination (1,881,498) Unallocated assets: Deferred tax 71,098 Derivative assets 1,879 Total assets 2,079,869 Acquisitions of property, plant and equipment, intangibles and other non-current segment assets 25,427 19,173 20,504 --- --- 65,104 * Included in the ‘Other’ segment for the year ended 30 June 2012 are the following items:
2012 $’000 Share of net profit after-tax of associate accounted for using the equity method (note 16) 293 Gain on sale, net of transaction costs before income tax (note 10) 201,448 201,741 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 76 Note 4. Segment information (continued) (b) Segment information provided to the CEO (continued) 2011 Australasia Americas Europe Rest o f the World Total $’000 $’000 $’000 $’000 $’000 Total from continuing and discontinued operations Sales to external customers 501,904 843,737 337,627 --- 1,683,268 Third party royalties --- --- --- 2,211 2,211 Total segment revenue 501,904 843,737 337,627 2,211 1,685,479 EBITDAI 55,225 80,194 54,246 2,211 191,876 Less: depreciation and amortisation (41,931) Less: net interest expense (23,045) Profit before income tax 126,900 Segment assets 1,938,617 1,115,789 294,948 --- 3,349,354 Elimination (965,903) Unallocated assets: Deferred tax 35,963 Derivative assets 551 Total assets 2,419,965 Acquisitions of property, plant and equipment, intangibles and other non- current segment assets 128,483 230,604 9,628 --- 368,715 (c) Other segment information (i) Segment revenue Sales between segments are carried out at arm’s length and are eliminated on consolidation. The revenue from external parties reported to the CEO is measured in a manner consistent with that in the income statement.
Segment revenue reconciles to total revenue from continuing operations as follows:
2012 $’000 2011 $’000 Total segment revenue 1,553,244 1,685,479 Other revenue, including interest revenue 2,455 2,254 Less: revenue from discontinued operations (111,620) (129,274) Total revenue from continuin g operations 1,444 ,079 1 ,558 ,459 (ii) EBITDAI The CEO assesses the performance of the operating segments based on total revenue and EBITDAI. A reconciliation of EBITDAI to operating profit before income tax is provided in (b) above.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 77 Note 4. Segment information (continued) (c) Other segment information (continued) (iii) Breakdown of segment results between continuing and discontinued operations The below is a breakdown of the total segment results as shown in (b) above between continuing and discontinued operations.
2012 Austral- asia Americas Europe Other * Rest o f the World Total Notes $’000 $’000 $’000 $’000 $’000 $’000 From continuing operations Sales to external customers 5 504,841 675,172 259,010 --- --- 1,439,023 Third party royalties 5 --- --- --- --- 2,608 2,608 Total segment revenue 504,841 675,172 259,010 --- 2,608 1,441,631 EBITDAI (30,074) (62,629) (17,626) 293 2,608 (107,428) Less: depreciation and amortisation 7 (44,575) Less: impairment charge 7 (342,955) Less: net interest expense 5, 7 (27,707) Loss before income tax (522,665) From discontinued operation Sales to external customers 5 17,424 75,135 19,054 --- --- 111,613 Total segment revenue 17,424 75,135 19,054 --- --- 111,613 EBITDAI 7,603 23,379 5,349 201,448 --- 237,779 Less: depreciation and amortisation (3,116) Less: net interest expense (176) Profit before income tax 10 234,487 2011 Australasia Americas Europe Rest o f the World Total Notes $’000 $’000 $’000 $’000 $’000 From continuing operations Sales to external customers 5 486,485 759,247 308,268 --- 1,554,000 Third party royalties 5 --- --- --- 2,211 2,211 Total segment revenue 486,485 759,247 308,268 2,211 1,556,211 EBITDAI 49,663 53,074 44,305 2,211 149,253 Less: depreciation and amortisation 7 (37,809) Less: net interest expense 5, 7 (22,760) Profit before income tax 88,684 From discontinued operation Sales to external customers 5 15,419 84,490 29,359 --- 129,268 Total segment revenue 15,419 84,490 29,359 --- 129,268 EBITDAI 5,562 27,120 9,941 --- 42,623 Less: depreciation and amortisation (4,122) Less: net interest expense (285) Profit before income tax 10 38,216 * Includes gain on sale, net of transaction costs Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 78 Note 4. Segment information (continued) (c) Other segment information (continued) (iv) Other segment revenue information Based on statutory legal entity reporting, segment revenue in relation to Australia represents 65% of Australasia (2011: 63%), segment revenue in relation to the United States of America represents 59% of Americas (2011: 63%) and segment revenue in relation to France represents 83% of Europe (2011: 83%).
Segment revenue in relation to retail represents 46% of the Group's total turnover for the year ended 30 June 2012 (2011: 38%), 67% of Australasia's total turnover for the year ended 30 June 2012 (2011: 56%), 40% of Americas' total turnover for the year ended 30 June 2012 (2011: 35%) and 25% of Europe's total turnover for the year ended 30 June 2012 (2011: 19%).
No single customer represents more than 10% of the Group’s total turnover for the years ended 30 June 2012 and 30 June 2011.
(v) Segment assets The amounts provided to the CEO with respect to total assets are measured in a manner consistent with that of the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. A reconciliation of the segment assets to the total assets is provided in (b) above.
Segment assets, excluding deferred tax assets and derivative assets, in relation to Australia represents 93% of Australasia (2011: 89%), in relation to the United States of America represents 63% of Americas (2011: 77%) and in relation to France represents 83% of Europe (2011: 88%).
Note 5. Revenue 2012 $’000 2011 $’000 From continuing operations Sales revenue Sale of goods 1,439,023 1,554,000 Royalties 2,608 2,211 1,441,631 1,556,211 Other revenue Interest 1,373 1,711 Other 1,075 537 2,448 2,248 Total revenue from continuing operations 1,444,079 1,558,459 From discontinued operation (note 10) Sale of goods 111,613 129,268 Interest 7 6 111,620 129,274 Note 6. Other income 2012 $’000 2011 $’000 Foreign exchange gains 3,867 --- Gain from adjustment to contingent consideration (note 28) 22,522 1,011 Fair value adjustment to derivative liabilities (note 32) 288 1,521 Other 1,185 2,573 27,862 5,105 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 79 Note 7. Expenses 2012 $’000 2011 $’000 Profit before income tax includes the following specific expenses: Expenses Cost of goods sold * 765,313 728,298 Selling, general and administrative expenses ** 644,996 564,661 Employee benefits expense (included in the amounts above)*** 297,627 273,634 Depreciation Buildings 1,522 1,149 Plant and equipment 38,070 34,222 Plant and equipment under finance lease 836 660 Total depreciation 40,428 36,031 Amortisation of finite life intangible assets 4,147 1,778 Interest and finance charges Interest expense 29,080 24,471 Other borrowing costs 8,263 8,060 Provisions: unwinding of discounts 3,630 4,620 Total interest and finance charges 40,973 37,151 Net loss on disposal of property, plant and equipment 6,445 699 Foreign exchange losses --- 3,975 Acquisition related costs 2,381 8,847 Rental expense relating to operating leases Minimum lease payments 112,286 86,081 Contingent rentals 3,365 3,075 Total rental expense relating to operating leases 115,651 89,156 Impairment of other assets Inventories (included in the cost of goods sold amount above) 40,804 6,437 Trade receivables 31,610 4,284 Intangibles 329,934 --- Property, Plant and Equipment 13,021 --- * Included in cost of goods sold are a number of significant items. Refer to note 8 for further information.
** Included in selling, general and administrative expenses are a number of significant items. Refer to note 8 for further information.
*** Included in employee benefits expenses are a number of significant items. Refer to note 8 for further information.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 80 Note 8. Significant items The following significant items impact (loss)/profit before income tax from continuing operations:
2012 $’000 2011 $’000 Significant items included in cost of goods sold (note (a)) Net realisable value shortfall expense on inventory realised / realisable below cost 73,705 --- 73,705 --- Significant items included in other income Gain from adjustment to contingent consideration (note 6) (22,522) (1,011) Fair value adjustment to derivative liabilities (note 6) (288) (1,521) (22,810) (2,532) Significant items included in selling, general and administrative expenses (note (b)) Specific doubtful debts expense 32,925 --- Early termination of leases and onerous lease / restructuring expense 58,021 --- Redundancy costs 9,097 3,450 Acquisition costs (note 38) 2,381 8,847 Interest rate swap termination costs 3,719 --- Indemnities for European agents 3,773 --- Costs associated with inventory clearance 2,743 --- Derek O'Neill termination costs (note 33) 2,510 --- Other significant expenses 2,195 --- 117,364 12,297 Significant items included in other expenses Impairment of goodwill, brands and other intangibles (note 18) 329,934 --- Impairment of property, plant and equipment (note 17) 13,021 --- Asset disposals 5,713 --- 348,668 --- 516,927 9,765 (a) Significant items included in cost of goods sold (i) Net realisable value shortfall expense on inventory realised / realisable below cost As a result of the strategic capital structure review by the Group, a decision was made to liquidate specific parcels of stock below cost to clear inventory in the years ended 30 June 2012 and 30 June 2013.
Also the Group identified a number of loss making or underperforming stores in its portfolio and has closed or intends to close these stores. The inventory in these stores together with any stock in the warehouse relating to these stores has or will be sold below cost in order to clear that inventory before the stores are closed.
(b) Significant items included in selling, general and administrative expenses (i) Specific doubtful debts expense In a number of geographies, the Group will discontinue working with specific wholesale accounts as a result of either their current financial position and/or the decision not to supply product under specific arrangements. As the discontinuation of supply to these accounts may result in recoverability issues arising in the current outstanding amounts due to the Group, a provision was raised against these large outstanding accounts receivable balances. (ii) Early termination of leases and onerous lease / restructuring expense The Group has identified a number of loss making or underperforming stores in its portfolio and intends to close these stores by either early termination or trading the stores to expiry. Actual costs include costs incurred for store closures after the announcement of the strategic capital structure review and costs expected for those store closures to occur post 30 June 2012.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 81 Note 8. Significant items (continued) (b) Significant items included in selling, general and administrative expenses (continued) (iii) Redundancy costs During the financial year, the Group announced to the market and began a strategic capital structure review of the business and flagged significant cost saving activities associated with this initiative. This review has resulted in redundancy costs in relation to store closures and the cost restructuring program. Actual costs include redundancies which have occurred since the announcement of the strategic capital structure review and costs expected for those redundancies to occur post 30 June 2012 in relation to previously announced store closures in future financial years and other restructuring initiatives.
(iv) Interest rate swap termination costs On 29 June 2012 all of the Group’s interest rate swaps were terminated. The termination of the interest rate swap contracts incurred costs of $3.7 million.
(v) Indemnities for European agents Under specific agreements with the agents acting on behalf of the Group in Germany and Italy, payments are required to these parties to terminate the agency agreements under which they operate and accordingly these have been either paid or fully provided for at 30 June 2012. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 82 Note 9. Income tax expense 2012 $’000 2011 $’000 (a) Income tax expense Current tax 4,970 23,168 Deferred tax (21,227) (12,240) Adjustments for current tax of prior periods 4,760 (2,073) (11,497) 8,855 Income tax expense is attributable to: Loss from continuing operations (39,981) (3,849) Profit from discontinued operation 28,484 12,704 Aggregate income tax expense (11,497) 8,855 Deferred income tax revenue included in income tax expense comprises: Increase in deferred tax assets (note 19) (27,806) (18,706) Increase in deferred tax liabilities (note 26) 6,579 6,466 (21,227) (12,240) (b) Numerical reconciliation of income tax expense to prima facie tax payable (Loss)/profit from continuing operations before income tax expense (522,665) 88,684 Profit from discontinuing operation before income tax expense 234,487 38,216 (288,178) 126,900 Tax at the Australian tax rate of 30% (2011: 30%) (86,453) 38,070 Tax effect of amounts which are not (taxable)/deductible in calculating taxable income: Net exempt income (80,911) (15,432) Goodwill impairment 100,014 --- Tax expense on gain on sale 17,186 --- Adjustment to contingent consideration (6,309) --- Sundry items (2,628) (2,761) Other non-deductible permanent differences 5,580 5,018 (53,521) 24,895 Difference in overseas tax rates 14,981 239 Under/(over) provision in prior years 4,760 (2,073) Prior year tax losses previously not recognised (722) (4,077) Tax losses not recognised 23,005 --- Deferred tax on deferred consideration previously not recognised --- (10,129) Income tax (benefit)/expense (11,497) 8,855 (c) Amounts recognised directly in equity Deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited to equity:
Net deferred tax 373 --- 373 --- (d) Tax expense / (income) relating to items of other comprehensive income Cash flow hedges (note 19, note 26) 1,402 (1,411) Investment hedge (note 19, note 26) 1,730 (3,222) 3,132 (4,633) (e) Tax losses Unused tax losses for which no deferred tax asset has been recognised 115,477 40,135 Potential tax benefit @ 30% 34,643 12,041 All unused tax losses were incurred by entities that are not part of the Australian tax consolidated group. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 83 Note 9. Income tax expense (continued) (f) Tax consolidation legislation Billabong International Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as of 1 July 2002. The accounting policy in relation to this legislation is set out in note 1(bb).
On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Billabong International Limited.
The entities have also entered into a tax funding agreement under which the wholly-owned Australian controlled entities fully compensate Billabong International Limited for any current tax payable assumed and are compensated by Billabong International Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Billabong International Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements.
The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current inter-company receivables or payables.
(g) Other matters The income tax benefit for the year ended 30 June 2012 was $11.5 million (tax expense of $8.9 million in the pcp), an effective rate of tax of 4.0% (2011: 7.0%). The lower effective tax rate is driven by the partial sale of Nixon and other non- taxable items including deferred consideration. Adjusting for these significant amounts and also goodwill impairment and non-recognition of losses the effective tax rate for the Group would have been approximately 33.8% (2011: 21.0% adjusting for equivalent amounts). The effective tax rate is dependent on the mix of profit by country and exchange rate fluctuations.
Note 10. Discontinued operation (i) Description On 17 April 2012 the Group sold 51.5% of Nixon with 48.5% being purchased by Trilantic Capital Partners and 3% being purchased by Nixon management. The Group has retained a 48.5% interest in Nixon. The agreement was actioned on 16 April 2012 with effect from 17 April 2012 and Nixon has been reported in these financial statements as a discontinued operation.
Financial information relating to the discontinued operation for the period to the date of disposal is set out below.
(ii) Financial performance and cash flow information The financial performance and cash flow information presented are for the period 1 July 2011 to 16 April 2012 and the year ended 30 June 2011.
2012 $’000 2011 $’000 Revenue (note 5) 111,620 129,274 Expenses (78,581) (91,058) Profit before income tax 33,039 38,216 Income tax expense (11,298) (12,704) Profit after income tax of discontinued operation 21,741 25,512 Gain on sale, net of transaction costs before income tax 201,448 --- Income tax expense (17,186) --- Gain on sale, net of transaction costs after income tax 184,262 --- Profit from discontinued operation 206,003 25,512 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 84 Note 10. Discontinued operation (continued) 2012 $’000 2011 $’000 Net cash inflow from operating activities 19,219 30,953 Net cash inflow/(outflow) from investing activities (2012 includes an inflow of $274.1 million from the partial sale of Nixon) 270,332 (3,929) Net cash outflow from financing activities (2,427) (1,118) Net increase in cash generated by Nixon 287,124 25,906 (iii) Details of the partial sale of Nixon $’000 Consideration received or receivable: Cash net of cash divested and transaction costs 274,136 Working capital adjustment receivable 3,275 Total disposal consideration 277,411 Carrying value of initial investment in Nixon Investments LLC (note 16) 134,286 Present value of onerous contracts (note 24 and 27) (16,739) Foreign currency translation reserve reclassified to income statement (22,721) Carrying value of assets sold (170,789) Gain on sale, net of transaction costs before income tax 201,448 Income tax expense (17,186) Gain on sale, net of transaction costs after income tax 184,262 The carrying value of assets and liabilities as at the date of sale (17 April 2012) were:
17 April 2012 Carrying value $’000 Trade and other receivables 23,014 Inventory 29,320 Plant and equipment (note 17) 8,509 Deferred tax assets (note 19) 1,652 Identifiable intangible assets (note 18) 139,936 Total Assets 202,431 Trade and other payables (12,214) Deferred tax liabilities (note 26) (18,989) Employee entitlements (439) Total liabilities (31,642) Net assets 170,789 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 85 Note 11. Current assets – Cash and cash equivalents 2012 $’000 2011 $’000 Cash at bank and in hand 297,085 141,679 Deposits at call 20,178 3,179 317,263 144,858 (a) Reconciliation to cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the consolidated statement of cash flows as follows:
2012 $’000 2011 $’000 Balances as above 317,263 144,858 Bank overdrafts (note 22) (1,599) (433) Balances per statement of cash flows 315,664 144,425 Interest rate risk exposure The Group’s exposure to interest rate risk is discussed in note 2.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 86 Note 12. Current assets – Trade and other receivables 2012 $’000 2011 $’000 Trade receivables 249,513 361,214 Provision for impairment of receivables (note (a)) (39,551) (19,854) 209,962 341,360 Other receivables (note (c)) 35,073 33,015 245,035 374,375 (a) Impaired trade receivables As at 30 June 2012 current trade receivables of the Group with a nominal value of $51.5 million (2011: $20.8 million) were impaired. The amount of the provision was $39.6 million (2011: $19.9 million). The individually impaired receivables mainly relate to retailers encountering difficult economic conditions. It was assessed that a portion of the receivables is expected to be recovered.
The ageing of these receivables is as follows: 2012 $’000 2011 $’000 Up to 3 months 11,060 6,135 3 to 6 months 3,928 912 Over 6 months 36,531 13,705 51,519 20,752 Movements in the provision for impairment of receivables are as follows: 2012 $’000 2011 $’000 At 1 July 19,854 21,521 Provision for impairment recognised during the year 32,211 5,584 Receivables written off during the year (8,287) (4,816) Disposal of discontinued operation (2,124) --- Exchange differences (2,103) (2,435) At 30 June 39,551 19,854 The creation and release of the provision for impaired receivables has been included in 'other expenses' in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash.
(b) Past due but not impaired As at 30 June 2012, trade receivables of $51.2 million (2011: $67.8 million) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:
2012 $’000 2011 $’000 Up to 3 months 31,205 35,013 3 to 6 months 9,127 13,208 Over 6 months 10,848 19,558 51,180 67,779 The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 87 Note 12. Current assets – Trade and other receivables (continued) (c) Other receivables This amount includes $4.8 million (2011: $12.4 million) relating to amounts recoverable under a debtor factoring arrangement. During the years ended 30 June 2012 and 30 June 2011 North American subsidiaries of the parent entity assigned a portion of their accounts receivable to a factor under an agreement which continues for a specified term. All credit risk passes to the factor at the time of the assignment, such that the North American subsidiaries of the parent entity have no further exposure to default by the trade debtors. The factor charges a commission on the net sales factored and interest (at prime rate plus 1%) on any amounts unpaid from the expiry of the initial term and until all amounts advanced have been repaid to the factor. This is comparable with the terms and conditions of normal North American sales arrangements with its customers. The subsidiaries may repay any unpaid advance on the net sales factored at any time before the expiry of the initial term.
Other amounts included in other receivables generally arise from transactions outside the usual operating activities of the consolidated entity. Collateral is not normally obtained.
(d) Foreign exchange and interest rate risk Information about the Group’s exposure to foreign exchange risk and interest rate risk in relation to trade and other receivables is provided in note 2.
(e) Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value.
The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. The Group does not hold any collateral as security. Refer to note 2 for more information on the Risk Management Policy of the Group and the credit quality of the Group’s trade receivables.
Note 13. Current assets – Inventories 2012 $’000 2011 $’000 Raw materials and stores – at cost 3,842 5,940 Work in progress – at cost 7,734 11,377 Finished goods - at cost 255,821 312,596 - at net realisable value 25,804 18,825 293,201 348,738 Inventory expense Inventories recognised as an expense from continuing operations during the year ended 30 June 2012 amounted to $724.5 million (2011: $721.9 million). Write-downs of inventories to net realisable value recognised as an expense during the year ended 30 June 2012 amounted to $73.7 million (2011: $6.4 million) with $32.9 million representing inventory realised through sale to customers during the year. The expense has been included in ‘cost of goods sold’ in the income statement.
Note 14. Current assets – Other 2012 $’000 2011 $’000 Prepayments 22,921 24,474 Derivative financial assets (note 32) 1,879 551 24,800 25,025 Risk exposure Information about the Group’s exposure to credit risk, foreign exchange and interest rate risk is provided in note 2. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 88 Note 15. Non-current assets – Receivables 2012 $’000 2011 $’000 Other receivables 11,560 14,106 11,560 14,106 Other receivables predominantly relate to store lease deposits.
(a) Impaired receivables and receivables past due None of the non-current receivables are impaired (2011: Nil), and none of the non-current receivables are considered past due but not impaired (2011: $2.6 million or US$2.7 million).
(b) Fair values The fair values and carrying values of non-current receivables are as follows:
2012 2011 Carrying amount Fair value Carrying amount Fair value $’000 $’000 $’000 $’000 Other receivables 11,560 11,560 14,106 14,106 (c) Risk exposure Information about the Group’s exposure to credit risk, foreign exchange and interest rate risk is provided in note 2.
Note 16. Non-current assets – Investment accounted for using the equity method The Group has a 48.5% interest in Nixon Investments LLC, a leader in the premium watch and accessories action sports market. Nixon Investments LLC is resident in the United States of America.
(a) Movements in carrying amounts 2012 $’000 2011 $’000 Carrying amount at the beginning of the financial year --- --- Carrying value of initial investment 134,286 --- Share of profits after income tax 293 --- Carrying amount at the end of the financial year 134,579 --- (b) Summarised financial information of associate 2012 $’000 2011 $’000 Company’s share of: Assets 113,020 --- Liabilities 107,675 --- Revenues 16,847 --- Profit 293 --- (c) Contingent liabilities of associate As at 30 June 2012 Nixon Investments LLC had no contingent liabilities.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 89 Note 17. Non-current assets – Property, plant and equipment Land and buildings Furniture, fittings and equipment Leased plant and equipment Total $’000 $’000 $’000 $’000 At 30 June 2010 Cost or fair value 54,520 258,689 9,690 322,899 Accumulated depreciation (3,541) (144,296) (4,585) (152,422) Net book amount 50,979 114,393 5,105 170,477 Year ended 30 June 2011 Opening net book amount 50,979 114,393 5,105 170,477 Additions from acquisitions (note 38) --- 27,532 --- 27,532 Additions --- 41,858 56 41,914 Disposals --- (1,198) --- (1,198) Depreciation charge (1,149) (38,323) (660) (40,132) Exchange differences (1,535) (11,926) (280) (13,741) Closing net book amount 48,295 132,336 4,221 184,852 At 30 June 2011 Cost or fair value 51,442 291,999 9,083 352,524 Accumulated depreciation and impairment (3,147) (159,663) (4,862) (167,672) Net book amount 48,295 132,336 4,221 184,852 Land and buildings Furniture, fittings and equipment Leased plant and equipment Total $’000 $’000 $’000 $’000 Year ended 30 June 2012 Opening net book amount 48,295 132,336 4,221 184,852 Additions --- 40,787 8,298 49,085 Disposal of discontinued operation (note 10) --- (8,509) --- (8,509) Other disposals --- (4,915) --- (4,915) Depreciation charge (1,522) (41,088) (836) (43,446) Impairment charge --- (13,021) --- (13,021) Exchange differences (841) (2,624) (428) (3,893) Closing net book amount 45,932 102,966 11,255 160,153 At 30 June 2012 Cost or fair value 52,128 278,755 16,457 347,340 Accumulated depreciation and impairment (6,196) (175,789) (5,202) (187,187) Net book amount 45,932 102,966 11,255 160,153 Non-current assets pledged as security Refer to note 25(c) for information on non-current assets pledged as security by the consolidated entity.
Impairment charge As a result of the impairment review of property, plant and equipment, certain assets relating to company owned retail stores have been written down to their recoverable amount being their value-in-use. Value-in-use has been assessed by reference to management’s best estimate of the risk adjusted future earnings performance of each store over the remaining life of the lease. In addition, as a part of the strategic capital structure review a number of stores have been closed during the year and further stores have been flagged for closure in the future resulting in a write-off of non-reusable assets. This resulted in a pre-tax impairment charge in respect of property, plant and equipment in various countries which amounted to $13.0 million. This impairment charge has been included within the other expenses line item in the income statement. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 90 Note 18. Non-current assets – Intangible assets Goodwill Indefinite life Finite life Total Brands Othe r* $’000 $’000 $’000 $’000 $’000 At 30 June 2010 Cost 495,469 619,576 10,642 6,816 1,132,503 Accumulated amortisation (10,148) --- --- (4,047) (14,195) Net book amount 485,321 619,576 10,642 2,769 1,118,308 Year ended 30 June 2011 Opening net book amount 485,321 619,576 10,642 2,769 1,118,308 Additions from acquisitions (note 38) 259,399 22,650 --- 1,184 283,233 Additions ** 5,239 3,184 421 5,549 14,393 Adjustment to contingent consideration (note 28) (12,641) --- --- --- (12,641) Amortisation charge --- --- --- (1,799) (1,799) Exchange differences (100,746) (31,104) (804) (379) (133,033) Closing net book amount 636,572 614,306 10,259 7,324 1,268,461 At 30 June 2011 Cost 646,637 614,306 10,259 12,836 1,284,038 Accumulated amortisation (10,065) --- --- (5,512) (15,577) Net book amount 636,572 614,306 10,259 7,324 1,268,461 Goodwill Indefinite life Finite life Total Brands Othe r* $’000 $’000 $’000 $’000 $’000 Year ended 30 June 2012 Opening net book amount 636,572 614,306 10,259 7,324 1,268,461 Additions ** 2,494 --- 304 15,840 18,638 Disposal of discontinued operation (note 10) (85,871) (53,968) --- (97) (139,936) Adjustment to contingent consideration (note 28) (28,328) --- --- --- (28,328) Disposals --- --- --- (2,296) (2,296) Amortisation charge --- --- --- (4,245) (4,245) Impairment charge (note (a)) (144,340) (182,417) (2,297) (880) (329,934) Exchange differences 7,951 5,497 (1,275) 1,367 13,540 Closing net book amount 388,478 383,418 6,991 17,013 795,900 At 30 June 2012 Cost 541,791 565,835 9,413 28,595 1,145,634 Accumulated amortisation and impairment (153,313) (182,417) (2,422) (11,582) (349,734) Net book amount 388,478 383,418 6,991 17,013 795,900 * Other indefinite life intangible assets relate to key money.
** Additions include other immaterial acquisitions.
Adjustment to contingent consideration on acquisitions which occurred pre 1 July 2009 Information about the adjustment to contingent consideration is provided in note 28.
Amortisation charge Amortisation charge of $4.2 million (2011: $1.8 million) has been included in ‘other expenses’ in the income statement.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 91 Note 18. Non-current assets – Intangible assets (continued) (a) Impairment tests for goodwill and brands Goodwill is allocated to the Group’s cash-generating units (CGU) identified according to brands acquired or geographical regions where operations existed at the time goodwill arose.
Brands are allocated to the Group’s CGUs identified according to individual brands.
The recoverable amount of a CGU is firstly determined based on value-in-use (VIU) calculations. These calculations use cash flow projections based on financial budgets with anticipated growth rates approved by the Board of Directors covering a four year period and include a terminal value based upon maintainable cash flows.
If the VIU of a CGU is lower than its carrying amount, then the CGU’s fair value less costs to sell (FVLCTS) is determined as AASB 136 requires the recoverable amount of a CGU to be the higher of VIU and FVLCTS. In applying the FVLCTS approach, the recoverable amount of a CGU is assessed using market based valuation techniques such as discounted cash flow analysis, comparable transactions and observable trading multiples.
As at 30 June 2012, all of the above CGUs were tested for impairment in accordance with AASB 136. Due to the deterioration in trading conditions in the global retail sector, the Group has experienced significant declines in sales and profitability across a number of regions and brands and as a result impairment charges were recognised for the CGUs set out in the table below. Recoverable amounts for these CGUs were determined using VIU being the calculations which gave a higher recoverable amount.
Goodwill Brands 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Billabong --- 55,083 252,116 434,533 Element 850 850 28,630 28,630 Von Zipper --- --- 1,187 1,187 Kustom 3,746 3,746 10,540 10,540 Palmers --- --- 5,113 5,113 Honolua 6,453 6,180 4,385 4,385 Beachculture --- --- 853 853 Nixon --- 81,579 --- 51,691 Amazon --- --- 1,074 1,059 Xcel 10,920 9,850 3,336 3,195 Tigerlily 1,889 1,889 3,600 3,600 Sector 9 26,613 24,335 8,831 8,459 DaKine 77,719 102,154 44,128 42,264 RVCA 73,943 70,853 19,625 18,797 Australia 57,473 74,864 --- --- New Zealand 8,232 8,202 --- --- South Africa --- 36,971 --- --- North America 114,619 153,371 --- --- Europe 6,021 6,645 --- --- 388,478 636,572 383,418 614,306 Goodwill Brands 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Billabong 55,083 --- 182,417 --- Australia 17,410 --- --- --- South Africa 32,347 --- --- --- North America 39,500 --- --- --- 144,340 --- 182,417 --- Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 92 Note 18. Non-current assets – Intangible assets (continued) (b) Key assumptions used for value-in-use calculations The value-in-use calculations have been based on a four year business plan projecting forecast profitability and cash flows prepared by management and approved by the Board, together with a terminal value. The following key assumptions have been used in the calculations.
Sales are forecast to cumulatively increase over the four year 2013 to 2016 business plan period in a range of 4% to 55% for brand CGUs. EBITDAI is forecast to cumulatively increase over the four year 2013 to 2016 business plan period in a range of 8% to 194% for brand CGUs. Sales are forecast to cumulatively increase over the four year 2013 to 2016 business plan period in a range of 15% to 56% for region CGUs. EBITDAI is forecast to cumulatively increase over the four year 2013 to 2016 business plan period in a range of 41% to 165% for region CGUs. For brand and region CGUs impaired in the year ended 30 June 2012 sales are forecast to cumulatively increase over the four year 2013 to 2016 business plan period in a range of 18% to 33% and EBITDAI is forecast to cumulatively increase over the four year 2013 to 2016 business plan period in a range of 51% to 101%. The relatively strong EBITDAI growth for both brand and region CGUs reflects the expected Group EBITDAI margin expansion to 11.4% by 2016 that the Group plans to achieve based on expected trading conditions and through the implementation of various strategic initiatives. Pre-tax cash flow projections for brand CGUs are discounted using a pre-tax discount rate range between 12.5% and 14.25% (2011: 12.0% and 14.0%).
Pre-tax cash flow projections for regional CGUs with allocated goodwill are discounted using a pre-tax discount rate between 12.5% and 16.3% (2011: 12.5% and 16.3%).
The discount rates used reflect specific risks relating to the relevant region of operation or the brand and are derived from the Group’s weighted average cost of capital.
Terminal growth rates used in the value-in-use calculations are 3.5% for all brands and regions CGUs (2011: range between 4.0% and 5.0%), being lower than the rates used in 2011 reflecting a greater degree of conservatism given the deterioration in trading conditions in the global retail sector. The terminal growth rates used reflect the maturity and establishment of the brand or region. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 93 Note 18. Non-current assets – Intangible assets (continued) (c) Sensitivity The estimates and judgments included in the value-in-use calculations (including the four year projected business plan period and terminal value) are based on historical experience and other factors, including management’s and the Board’s expectations of future events that are believed to be reasonable under the current circumstances.
The inherent nature of future projected results means that, by definition, the resulting accounting estimates will seldom equal the related actual results. The recoverable amount is particularly sensitive to key assumptions including, EBITDAI growth and the long term growth rate. As a result the Group has conducted a range of sensitivities on the recoverable amount: If the long term growth rate were to decrease from 3.5% to 3.0%, goodwill and brands would need to be further impaired by approximately $38 million, with all other assumptions remaining constant; Conversely, having regard to the lower sales and EBITDAI results base in 2012, a more optimistic approach could be adopted using the same long term growth rates that were assumed in 2011 (range between 4.0% and 5.0%), which would result in a reduction in the goodwill / brand impairment charge of $326.8 million in 2012 by an amount of approximately $93 million, with all other assumptions remaining constant; If the EBITDAI margin of 11.4% in the 2016 business plan were to decrease by 10% to 10.3%, goodwill and brands would need to be further impaired by approximately $107 million, with all other assumptions remaining constant; Conversely, if the EBITDAI margin of 11.4% in the 2016 business plan were to increase by 10% to 12.5%, this would result in a reduction in the goodwill / brand impairment charge of $326.8 million in 2012 by an amount of approximately $186 million, with all other assumptions remaining constant.
Management and the Board believe that other reasonable changes in key assumptions on which recoverable amounts have been calculated, would not cause the Group’s carrying amounts for goodwill and brands to exceed their recoverable amounts.
The Group has and continues to undertake a range of strategic reviews to deliver the EBITDAI growth included in the four year 2013 to 2016 business plan.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 94 Note 19. Non-current assets – Deferred tax assets 2012 $’000 2011 $’000 The deferred tax assets balance comprises temporary differences attributable to: Trade and other receivables 14,592 6,758 Employee benefits 5,572 7,845 Inventories 12,246 11,821 Trade and other payables 4,734 2,584 Plant and equipment 8,293 3,961 Rights issue 1,694 1,037 Other 7,316 5,263 Tax losses 30,162 25,066 Finance lease liabilities 4,495 2,046 Cash flow hedges 109 1,909 Provisions 12,728 --- Deferred consideration 2,637 9,474 Total deferred tax assets 104,578 77,764 Set-off of deferred tax assets against deferred tax liabilities pursuant to set-off provisions (note 26) (33,480) (41,801) Net deferred tax assets 71,098 35,963 Movements: Opening balance at 1 July 77,764 60,217 Credited to the income statement (note 9) 27,806 18,706 (Charged)/credited to other comprehensive income (note 9) (2,550) 2,994 Charged to equity (note 9) (373) --- Disposal of discontinued operation (note 10) (1,652) --- Adjustment to prior year tax 610 (2,236) Exchange differences 2,973 (8,607) Acquisition of subsidiary (note 38) --- 6,690 Closing balance at 30 June 104,578 77,764 Deferred tax assets to be recovered after more than 12 months 71,245 46,303 Deferred tax assets to be recovered within 12 months 33,333 31,461 104,578 77,764 Based on the four year business plan prepared by Management and approved by the Board, the Group considers it probable that the carried forward tax losses and temporary differences can be offset against future taxable profits.
Note 20. Non-current assets – Other 2012 $’000 2011 $’000 Prepayments 7,658 7,729 7,658 7,729 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 95 Note 21. Current liabilities – Trade and other payables 2012 $’000 2011 $’000 Trade payables 172,260 195,087 Other payables 146,170 145,584 Derivative financial liabilities (note 32) 1,795 3,363 320,225 344,034 (a) Risk exposure Information about the Group’s exposure to foreign exchange risk is provided in note 2.
(b) Other payables Included in other payables is deferred payments payable of $64.3 million (US$64.4 million and GBP 0.7 million) relating to Quiet Flight, DaKine, Two Seasons and Swell (2011: $86.2 million (US$91.8 million) deferred payment payable to Quiet Flight, Nixon and Xcel). Refer to note 28 for further information on deferred payments.
Note 22. Current liabilities – Borrowings 2012 $’000 2011 $’000 Secured Bank overdrafts --- 433 Total secured current borrowings --- 433 Unsecured Syndicated facility 216,557 --- Bank overdrafts 1,599 --- Bank loans 7,788 13,049 Lease liabilities (note 36) 1,438 1,225 Other loans 1,706 555 Total unsecured current borrowings 229,088 14,829 Total current borrowings 229,088 15,262 (a) Syndicated facility In June 2012, the Group renegotiated its banking covenants and undertook to partially repay and partially cancel the Syndicated Revolving Multi-Currency Facility with the proceeds received from the rights issue announced on 21 June 2012. As a result of this commitment to repay these borrowings the amount has been classified as current.
(b) Bank loans Bank loans represent term loans with variable interest rates.
(c) Other loans Other loans represent term loans with variable interest rates.
(d) Security and fair value disclosures Details of the security relating to each of the secured liabilities, the fair value of each of the borrowings and further information on the bank loans are set out in note 25.
(e) Risk exposure Details of the Group’s exposures to risks arising from current and non-current borrowings are set out in note 2. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 96 Note 23. Current liabilities – Current tax liabilities 2012 $’000 2011 $’000 Income tax 2,953 1,839 As shown on the consolidated balance sheet the current tax receivable is $18.6 million (2011: $15.9 million).
Note 24. Current liabilities – Provisions 2012 $’000 2011 $’000 Employee benefits 10,512 10,333 Provision for contingent tax liabilities (note (a)) 13,077 17,740 Onerous lease/contract and restructuring provisions (note (b)) 35,588 --- 59,177 28,073 (a) Provision for contingent tax liabilities Provision for contingent tax liabilities of $13.1 million (2011: $17.7 million) represents contingent liabilities recognised at fair value as part of the acquisition accounting for the Canadian retail chain West 49. The assessment of the amount of contingent tax liabilities involves the exercise of management judgements concerning potential future events.
(b) Onerous lease/contract and restructuring provisions During the financial year, the Group announced to the market and began a strategic capital structure review of the business and flagged significant costs associated with this initiative including but not limited to retail store closures and cost restructuring. A provision has been recognised for the direct expenditures arising from this review.
A key part of the strategic capital structure review involved identifying a number of loss making or underperforming stores in its portfolio with the intention to close these stores by either early termination or trading the stores to expiry. Provision has been raised for the negotiated and estimated settlement costs of terminating the leases early or the minimum unavoidable costs of trading the stores to lease expiry. The Group have also identified several onerous contracts. A provision has been recognised for the estimated minimum unavoidable costs under a contract and the provision reflects the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil the contract.
(d) Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below:
2012 Contingent tax liabilities Onerous lease/contract and restructuring provisions Total $’000 $’000 $’000 Carrying amount at start of year 17,740 --- 17,740 Additional provisions recognised --- 35,588 35,588 Adjustment to acquisition accounting (note 38) (4,340) --- (4,340) Exchange differences (323) --- (323) Carrying amount at end of year 13,077 35,588 48,665 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 97 Note 25. Non-current liabilities – Borrowings 2012 $’000 2011 $’000 Unsecured Syndicated facility 216,620 564,112 Drawdown facility 25,879 33,775 Lease liabilities (note 36) 6,570 16 Total unsecured non-current borrowings 249,069 597,903 Total non-current borrowings 249,069 597,903 (a) Syndicated facility The syndicated facility is utilised by the Group’s major regions and is a multi-currency facility enabling the Group to borrow in Australian dollars (AUD), United States dollars (USD), Euro (EUR), Great Britain pounds (GBP), Japanese Yen (JPY), New Zealand dollars (NZD), Canadian dollars (CAD), Singapore dollars (SGD) and Hong Kong dollars (HKD). The syndicated facility has funding periods of 1, 2, 3, 4 and 6 calendar months. Interest is payable in arrears and calculated as the benchmark reference rate plus a margin. Applicable benchmark reference rates include: London Interbank Offered Rate (LIBOR); USD LIBOR; and Bank Bill Swap Rate (BBSY). The syndicated facility may be drawn at any time during the term of the facility provided the Company or Group does not trigger an event of default. As at 30 June 2011 the Group had an unsecured Syndicated Revolving Multi-Currency Facility with a limit of US$790.0 million (US$395.0 million due for roll-over on or prior to 28 July 2013 with the remaining US$395.0 million due for roll-over on or prior to 28 July 2014).
On 30 January 2012 the Group renegotiated the syndicated facility in conjunction with the partial sale of the Nixon business and agreed that the net consideration received in connection with this transaction be applied towards a partial repayment and cancellation of this facility.
On 20 June 2012 the Group renegotiated the syndicated facility in conjunction with the equity raising announced on 21 June 2012 and agreed that upon receipt of the equity raising proceeds, the net proceeds be applied towards a further partial repayment and cancellation of this facility.
As at 30 June 2012 the Group had an unsecured Syndicated Revolving Multi-Currency Facility with a limit of US$577.0 million (US$182.0 million due for roll-over on or prior to 28 July 2013 with the remaining US$395.0 million due for roll-over on or prior to 28 July 2014).
Following receipt of the equity raising proceeds, the Group finalised the partial repayment and partial cancellation of this facility. As at 1 August 2012 the Group had an unsecured Syndicated Revolving Multi-Currency Facility with a limit of US$384.5 million, which is due for roll-over on or prior to 28 July 2014.
(b) Drawdown facility The drawdown facility is utilised by the Group’s major regions and enables the Group to borrow in Australian dollars (AUD), United States dollars (USD), Canadian dollars (CAD), Euro (EUR), Great Britain pounds (GBP) and Korean Won (KRW). The facility may be drawn at any time during the term of the facility provided the Company or Group does not trigger an event of default. At 30 June 2011 the Group had a US$100.0 million unsecured multi-currency drawdown facility which was due for roll- over on or prior to 28 July 2013.
On 30 January 2012 the Group renegotiated the drawdown facility in conjunction with the partial sale of the Nixon business and agreed that the net consideration received in connection with this transaction be applied towards a partial repayment and cancellation of this facility on a pro rata basis with the reduction in the syndicated facility detailed above.
On 20 June 2012 the Group renegotiated the drawdown facility in conjunction with the equity raising announced on 21 June 2012 and agreed that upon receipt of the equity raising proceeds, the net proceeds be applied towards a further partial repayment and cancellation of this facility on a pro rata basis with the reduction in the Syndicated Revolving Multi- Currency Facility detailed above.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 98 Note 25. Non-current liabilities – Borrowings (continued) (b) Drawdown facility (continued) At 30 June 2012, the Group has a US$78.0 million unsecured multi-currency drawdown facility which is due for roll-over on or prior to 28 July 2013. Following receipt of the equity raising proceeds, the Group finalised the partial repayment and partial cancellation of this facility. As at 1 August 2012 the Group had an unsecured multi-currency drawdown facility with a limit of US$52.0 million, which is due for roll-over on or prior to 28 July 2014.
(c) Assets pledged as security The carrying amounts of assets pledged as security for current and non-current borrowings are:
2012 $’000 2011 $’000 Current Floating charge Trade and other receivables --- 433 Total current assets pledged as security --- 433 Total assets pledged as security --- 433 (d) Financing arrangements 2012 $’000 2011 $’000 Credit standby arrangements Total facilities Bank overdrafts and at-call facilities 12,224 12,462 Trade finance facilities 69,569 77,495 Cash advance and other facilities 656,263 842,100 738,056 932,057 Used at balance date Bank overdrafts and at-call facilities 1,599 433 Trade finance facilities 44,748 37,728 Cash advance and other facilities 462,924 600,339 509,271 638,500 Unused at balance date Bank overdrafts and at-call facilities 10,625 12,029 Trade finance facilities 24,821 39,767 Cash advance and other facilities 193,339 241,761 228,785 293,557 Bank loan facilities Total facilities 22,252 20,970 Used at balance date 7,788 13,049 Unused at balance date 14,464 7,921 Trade finance facilities, utilised by the Group for the provision of letters of credit to suppliers, may be drawn upon at any time and may be terminated by the bank at any time by way of written notice. Subject to no event of default, the Group may draw down on the syndicated and drawdown facilities at any time over the term of the facilities.
(e) Risk exposure Information about the Group’s exposure to interest rate and foreign currency changes is provided in note 2.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 99 Note 25. Non-current liabilities – Borrowings (continued) (f) Fair value The carrying amounts and fair values of borrowings at balance date are:
2012 2011 Carrying amount Fair value Carrying amount Fair value $’000 $’000 $’000 $’000 On-balance sheet Lease liabilities 8,008 7,138 1,241 1,206 8,008 7,138 1,241 1,206 All other fair values equal the carrying values of borrowings.
Fair value is inclusive of costs which would be incurred on settlement of a liability. The fair value of the borrowings on balance sheet is based upon market prices where a market exists or by discounting the expected future cash flows by the current interest rates for liabilities with similar risk profiles. None of the borrowings are traded.
Note 26. Non-current liabilities – Deferred tax liabilities 2012 $’000 2011 $’000 The deferred tax liabilities balance comprises temporary differences attributable to: Trade and other receivables 130 391 Property, plant and equipment 6,925 5,766 Prepayments 6,455 7,098 Other 2,839 2,040 Intangible assets – brands 60,686 73,208 Cash flow hedges 626 207 Total deferred tax liabilities 77,661 88,710 Set-off of deferred tax assets pursuant to set-off provisions (note 19) (33,480) (41,801) Net deferred tax liabilities 44,181 46,909 Movements: Opening balance at 1 July 88,710 92,376 Charged to the income statement (note 9) 6,579 6,466 Charged/(credited) to other comprehensive income (note 9) 582 (1,639) Disposal of discontinued operation (note 10) (18,989) --- Adjustment to prior year tax 107 (989) Exchange differences 672 (7,517) Acquisition of subsidiary (note 38) --- 13 Closing balance at 30 June 77,661 88,710 Deferred tax liabilities to be settled after more than 12 months 62,449 85,532 Deferred tax liabilities to be settled within 12 months 15,212 3,178 77,661 88,710 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 100 Note 27. Non-current liabilities – Provisions and other payables 2012 $’000 2011 $’000 Employee benefits 3,658 3,580 Derivative financial liabilities (note 32) 24,298 10,501 Onerous lease/contract and restructuring provisions (note (a)) 42,505 --- Other payables 9,885 10,922 80,346 25,003 (a) Onerous lease/contract and restructuring provisions During the financial year, the Group announced to the market and began a strategic capital structure review of the business and flagged significant costs associated with this initiative including but not limited to retail store closures and cost restructuring. A provision has been recognised for the direct expenditures arising from this review.
A key part of the strategic capital structure review involved identifying a number of loss making or underperforming stores in its portfolio with the intention to close these stores by either early termination or trading the stores to expiry. Provision has been raised for the negotiated and estimated settlement costs of terminating the leases early or the minimum unavoidable costs of trading the stores to lease expiry. The Group have also identified several onerous contracts. A provision has been recognised for the estimated minimum unavoidable costs under a contract and the provision reflects the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil the contract.
(c) Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below:
2012 Onerous lease/contract and restructuring provisions $’000 Carrying amount at start of year --- Additional provisions recognised 42,505 Carrying amount at end of year 42,505 Note 28. Deferred payments The non-current deferred payments payable of $67.6 million relates to the Sector 9, RVCA, and SDS/Jetty Surf acquisitions (2011: $164.1 million relates to Sector 9, DaKine, RVCA, Two Seasons, Swell and SDS/Jetty Surf acquisitions). Included in note 21 ‘other payables’ is deferred payments payable of $64.3 million relating to Quiet Flight, DaKine, Two Seasons and Swell (2011: $86.2 million relates to Quiet Flight, Nixon and Xcel). The deferred payments for DaKine, Swell and Two Seasons were reclassified from non-current to current during the 2011-12 financial year, and were also restated taking into account the latest Board approved forecast, resulting in a decrease of approximately US$29.3 million and US$1.4 million in the underlying USD payable for DaKine and Swell respectively, and a decrease of approximately GBP 0.5 million in the underlying GBP payable relating to Two Seasons. The adjustment in relation to Swell has been recognised in the income statement. Refer to note 6.
The non-current deferred payments were restated during the year ended 30 June 2012 taking into account the latest Board approved forecasts. This resulted in an increase of approximately US$1.2 million in the underlying payable relating to Sector 9, and a decrease of approximately US$21.0 million in the underlying USD payable relating to RVCA. The adjustment in relation to RVCA has been recognised in the income statement. Refer to note 6.
As at 30 June 2012 the deferred consideration relating to all acquisitions has been fully recognised at present value taking into account the latest Board approved forecasts. Refer to note 35.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 101 Note 29. Contributed equity Notes 2012 Shares 2011 Shares 2012 2011 ’000 ’000 $’000 $’000 (a) Share capital Ordinary shares Fully paid (b),(c) 410,970 254,038 840,317 675,998 Other equity securities (d) --- --- 2,951 2,951 Total contributed equity 410,970 254,038 843,268 678,949 (b) Movements in ordinary share capital 2011 Date Details Notes Number of shares $’000 1 July 2010 Opening balance 253,122,552 668,810 22 October 2010 Dividend reinvestment plan issue (f) 491,274 3,970 21 April 2011 Dividend reinvestment plan issue (f) 423,761 3,218 30 June 2011 Balance 254,037,587 675,998 2012 Date Details Notes Number of shares $’000 1 July 2011 Opening balance 254,037,587 675,998 23 September 2011 Non-controlling interest (g) 1,064,516 3,960 19 April 2012 Dividend reinvestment plan issue (f) 515,261 1,399 19 April 2012 Dividend reinvestment plan issue (underwritten) (f) 2,270,875 6,246 29 June 2012 Rights issue (h) 153,081,334 156,143 843,746 Less: Transaction costs arising on rights issue (h) (4,898) Deferred tax credit recognised directly in equity (h) 1,469 30 June 2012 Balance 410,969,573 840,317 (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held.
On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote.
Ordinary shares have no par value and the Company does not have a limited amount of authorised capital.
(d) Other equity securities The amount shown for other equity securities is the value of the options issued in relation to the Element acquisition. (e) Executive performance share plan The Billabong Executive Performance Share Plan – Australia trust and the Billabong Executive Performance Share Plan trust holds 2,662,810 (2011: 2,404,551) shares on issue at the end of the year. Refer to note 45 for further information.
(f) Dividend reinvestment plan The Board has not declared a final ordinary dividend for the year ended 30 June 2012 and does not expect to declare an interim ordinary dividend for the half-year ended 31 December 2012. The Board confirms that the dividend policy will be reviewed thereafter. The Dividend Reinvestment Plan (DRP) is suspended until such time as the dividend policy review has been undertaken. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 102 Note 29. Contributed equity (continued) (g) Transactions with non-controlling interests On 23 September 2011 the Group acquired the remaining 50% of the issued share capital of Surfection Pty Ltd for a purchase consideration of $4.0 million issued as ordinary shares of Billabong International Limited. The Group now controls 100% of the issued share capital of Surfection Pty Ltd. The Group recognised a decrease in non-controlling interests of $3.7 million and a decrease in equity attributable to owners of the parent of $0.3 million. The effect of changes in the ownership interest of Surfection Pty Ltd on the equity attributable to owners of the Group during the year is summarised as follows:
2012 $’000 2011 $’000 Carrying amount of non-controlling interests acquired 3,649 --- Consideration paid through the issue of ordinary shares of Billabong International Limited to non-controlling interests (3,960) --- Excess of consideration paid recognised in the transactions with non-controlling interests reserve within equity (311) --- (h) Rights issue Institutional Entitlement Offer On 21 June 2012 the Company invited eligible institutional shareholders to participate in an accelerated non- renounceable pro-rata entitlement offer to subscribe for 6 new ordinary shares for every 7 existing ordinary shares at an issue price of $1.02 per new share with such shares to be issued on, and rank for dividends after 29 June 2012. As a result, 153.1 million new shares were issued, resulting in gross cash proceeds of $156.1 million. The entitlement offer was fully underwritten by Goldman Sachs Australia Pty Ltd and Deutsche Bank AG, Sydney Branch.
Retail Entitlement Offer On 29 June 2012 the Company invited eligible retail shareholders to participate in an accelerated non-renounceable pro- rata entitlement offer to subscribe for 6 new ordinary shares for every 7 existing ordinary shares at an issue price of $1.02 per new share with such shares to be issued on, and rank for dividends after 27 July 2012. The rights issue has therefore not been included in equity as at 30 June 2012. Refer to Note 41 for further information.
Expenses Arising From Rights Issue Costs incurred in relation to the rights issue up to and including 30 June 2012 were $4.9 million ($3.4 million net of deferred tax credits recognised directly in equity). Directly attributable equity raising costs incurred have been recognised net of any tax effects directly in equity, and therefore do not impact earnings for the year ended 30 June 2012.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 103 Note 29. Contributed equity (continued) (i) Capital risk management The Group's policy is to maintain a strong capital base so as to preserve investor, creditor and market confidence and to sustain the future development of the business.
The Group defines capital base as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the balance sheet (including non-controlling interests) plus net debt.
During 2012, the Group’s strategy, which was unchanged from 2011, was to maintain a conservative gearing ratio for the Group. Consistent with this strategy, in 2012 the Group raised approximately $156.1 million via a rights issue, and $274.1 million (net of cash divested and transaction costs) via the sale of 51.5% of Nixon. The proceeds from the sale of 51.5% of Nixon were used to reduce the amount of outstanding drawn debt. This strengthened the Group’s balance sheet in the current operating environment and ensured a conservative gearing ratio is maintained. The gearing ratios at 30 June 2012 and 30 June 2011 were as follows:
Notes 2012 $’000 2011 $’000 Total borrowings 22, 25 478,157 613,165 Less: cash and cash equivalents 11 (317,263) (144,858) Net debt 160,894 468,307 Total equity 1,027,265 1,196,839 Total capital 1,188,159 1,665,146 Gearing ratio 14% 28% The decrease in the gearing ratio during 2012 resulted primarily from the rights issue (included in cash and cash equivalents as at 30 June 2012) and the sale of 51.5% of Nixon.
Billabong International Limited has complied with the financial covenants of its borrowing facilities during the years ended 30 June 2012 and 30 June 2011.
Note 30. Treasury shares, reserves and retained profits 2012 $’000 2011 $’000 (a) Treasury shares (27,935) (30,291) Movement: Balance 1 July (30,291) (30,767) Treasury shares held by employee share plan trusts (2,665) (4,446) Employee share scheme issue 5,021 4,922 Balance 30 June (27,935) (30,291) Treasury shares are shares in Billabong International Limited that are held by the Billabong Executive Performance Share Plan – Australia trust and the Billabong Executive Performance Share Plan trust for the purpose of issuing shares under the Billabong Executive Performance Share Plan (see note 45 for further information).
Date Details Number of shares 1 July 2010 Balance 2,215,751 Acquisition of shares by the employee share plan trusts 570,000 Employee share scheme issue (381,200) 30 June 2011 Balance 2,404,551 Acquisition of shares by the employee share plan trusts 736,139 Employee share scheme issue (477,880) 30 June 2012 Balance 2,662,810 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 104 Note 30. Treasury shares, reserves and retained profits (continued) 2012 $’000 2011 $’000 (b) Reserves Option reserve 9,375 8,814 Other reserves Foreign currency translation reserve (115,395) (112,921) Cash flow hedge reserve (1,006) (5,443) Total other reserves (116,401) (118,364) Other equity reserve (26,706) (8,933) Total reserves (133,732) (118,483) 2012 $’000 2011 $’000 Movements in reserves: Option reserve Balance 1 July 8,814 7,844 Share-based payment expense 5,582 5,892 Employee share scheme issue (5,021) (4,922) Balance 30 June 9,375 8,814 Foreign currency translation reserve Balance 1 July (112,921) (50,652) Net investment hedge 5,299 (10,064) Currency translation differences arising during the year (7,773) (52,205) Balance 30 June (115,395) (112,921) Cash flow hedge reserve Balance 1 July (5,443) (1,991) Revaluation - gross 1,561 (5,332) Deferred tax (536) 1,934 Transfer to inventory - gross 5,069 689 Deferred tax (1,840) (496) Effect of exchange rate changes 183 (247) Balance 30 June (1,006) (5,443) Other equity reserve Balance 1 July (8,933) (9,726) Put/call option in relation to acquisition of non-controlling interest (17,462) --- Transactions with non-controlling interest (311) --- Reclassification of deferred tax --- 793 Balance 30 June (26,706) (8,933) (c) Retained profits Movements in retained profits were as follows:
2012 $’000 2011 $’000 Balance 1 July 663,289 630,290 Net (loss)/profit for the year (275,649) 119,139 Dividends (note 31) (40,670) (86,140) Balance 30 June 346,970 663,289 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 105 Note 30. Treasury shares, reserves and retained profits (continued) (d) Nature and purpose of reserves Option reserve The option reserve is used to recognise:
the grant date fair value of options issued to employees but not exercised; the grant date fair value of shares issued to employees; and the issue of shares held by the Billabong Executive Performance Share Plan – Australia trust and the Billabong Executive Performance Share Plan trust to employees.
Foreign currency translation reserve Exchange differences arising on translation of the foreign controlled entities are taken to the foreign currency translation reserve, as described in note 1(d).
Cash flow hedge reserve The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in equity, as described in note 1(o). Amounts are recognised in the income statement when the associated hedged transaction affects profit and loss.
Other equity reserve This reserve is in relation to the symmetrical put and call options at the present value of the expected redemption amount for the acquisition of the non-controlling interest of Surfstitch Pty Ltd and Surfstitch (Europe) Pty Ltd.
Note 31. Dividends Parent entity 2012 $’000 2011 $’000 (a) Ordinary shares 2011 final dividend of 13.0 cents per fully paid share paid on 21 October 2011 (2010 final dividend of 18.0 cents per fully paid share paid on 22 October 2010) Partially franked to 25% based on tax paid at 30% 33,025 --- Partially franked to 50% based on tax paid at 30% --- 45,562 2012 interim dividend of 3.0 cents per fully paid share paid on 19 April 2012 (2011 interim dividend of 16.0 cents per fully paid share paid on 21 April 2011) Unfranked based on tax paid at 30% 7,645 --- Partially franked to 50% based on tax paid at 30% --- 40,578 Total dividends paid 40,670 86,140 Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the year ended 30 June 2012 is as follows: Paid in cash 39,271 78,952 Satisfied by issue of shares (note 29(b)) 1,399 7,188 40,670 86,140 (b) Dividends not recognised at year end The Board has not declared a final ordinary dividend for the year ended 30 June 2012 (2011: 13.0 cents partially franked to 25% based on tax paid at 30%). --- 33,025 (c) Dividend reinvestment plan The Board has not declared a final ordinary dividend for the year ended 30 June 2012 and does not expect to declare an interim ordinary dividend for the half-year ended 31 December 2012. The Board confirms that the dividend policy will be reviewed thereafter. The Dividend Reinvestment Plan (DRP) is suspended until such time as the dividend policy review has been undertaken. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 106 Note 31. Dividends (continued) (d) Franked dividends The franked portions of the final dividends recommended after 30 June 2012 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 30 June 2013.
Parent entity 2012 $’000 2011 $’000 Franking credits available for subsequent financial years to the equity holders of the parent entity based on a tax rate of 30% (2011: 30%) 1,907 598 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for:
(a) franking credits that will arise from the payment of the amount of the provision for income tax; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date.
As the Board has not declared a final ordinary dividend for the year ended 30 June 2012, there is no impact on the franking account in relation to dividends recommended but not recognised as a liability at year end (2011: reduction of $3.5 million).
Note 32. Derivative financial instruments Notes 2012 $’000 2011 $’000 Current assets Forward foreign exchange contracts – cash flow hedges 14 1,879 551 Total current derivative financial instrument assets 1,879 551 Current liabilities Forward foreign exchange contracts – cash flow hedges 21 384 3,363 Other derivative liability * 21 1,411 --- Total current derivative financial instrument liabilities 1,795 3,363 Non-current liabilities Interest rate swap contracts – cash flow hedges 27 --- 2,371 Other derivative liability * 27 24,298 8,130 Total non-current derivative financial instrument liabilities 24,298 10,501 Net derivative financial instruments (24,214) (13,313) * The other derivative liability relates to the symmetrical put and call options relating to the acquisition of the non- controlling interest of Surfstitch Pty Ltd and Surfstitch (Europe) Pty Ltd. The other derivative liability was restated during the year ended 30 June 2012 taking into account the latest Board approved forecast. This resulted in a decrease of approximately $0.3 million in the underlying other derivative liability relating to Surfstitch Pty Ltd. The adjustment has been recognised in the income statement. Refer to note 6.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 107 Note 32. Derivative financial instruments (continued) (a) Instruments used by the Group The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group’s financial risk management policies (refer to note 2).
(i) Interest rate swap contracts – cash flow hedges On 29 June 2012 all interest rate swaps were terminated. The Group has previously entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. The contracts were settled on a net basis and the net amount receivable or payable at the reporting date was included in other debtors or other creditors. At 30 June 2011 balance date the notional principal amount of the interest rate swap contracts covered 48% of outstanding USD denominated borrowings. The contract required settlement of net interest receivable or payable every three months. The settlement dates coincided with the dates on which interest was payable on the underlying debt.
Details of the interest rate swap contracts outstanding at 30 June 2011 are set out below:
Notional principal amount Expiry Fixed interest rate 90 day bank bill rate at 30 June 2011 US$60 million US$30 million US$100 million July 2013 October 2013 October 2014 1.10% 1.25% 1.63% 0.2% 0.2% 0.2% The gain or loss from remeasuring the hedging instruments at fair value is deferred to equity in the cash flow hedge reserve, to the extent that the hedge is effective, and reclassified into the income statement when the hedged interest expense is recognised. The ineffective portion is recognised in the income statement immediately.
At balance date the fair value of the interest rate swap contracts were nil (2011: US$2.5 million derivative financial instrument liabilities). Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 108 Note 32. Derivative financial instruments (continued) (a) Instruments used by the Group (continued) (ii) Forward exchange contracts – cash flow hedges – product purchases From time to time and in order to protect against exchange rate movements, the Group enters into forward exchange contracts to purchase USD, EUR and AUD. The contracts are hedging highly probable forecast purchases for the upcoming season and are timed to mature when major shipments of inventory are scheduled to arrive.
The cash flows are expected to occur at various dates within one year from the balance date. At balance date, the details of outstanding contracts are:
Buy USD Average exchange rate 2012 US$’000 2011 US$’000 2012 2011 0 – 6 Months Sell Euro 27,000 53,300 1.3355 1.3833 Sell AUD 18,500 25,000 1.0184 1.0360 Sell BRL --- 2,838 --- 0.5857 Sell Yen 5,035 1,194 0.0130 0.0122 Sell ZAR 2,060 2,325 0.1228 0.1396 6 – 12 Months Sell Euro 18,000 22,400 1.2586 1.3932 Sell Yen 4,300 6,867 0.0127 0.0123 Sell ZAR 140 170 0.1222 0.1369 Buy Euro Average exchange rate 2012 EUR’000 2011 EUR’000 2012 2011 0 – 6 Months Sell GBP 6,729 5,996 0.8321 0.8426 Buy AUD Average exchange rate 2012 AU$’000 2011 AU$’000 2012 2011 0 – 6 Months Sell NZD 3,050 3,250 0.7769 0.7760 6 – 12 Months Sell NZD 750 750 0.7844 0.7821 Amounts disclosed above represent currency acquired, measured at the contracted rate.
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity. When the cash flow occurs, the Group adjusts the initial measurement of the inventory recognised in the balance sheet by the related amount deferred in equity.
At balance date these contracts were net assets of $1.5 million (2011: net liabilities of $2.8 million). (iii) Hedge of net investment in foreign entity The foreign exchange gain of $5.3 million (2011: loss of $10.1 million) on translation of inter-company loans to AUD at reporting date is transferred to the foreign currency translation reserve, in equity (note 30(b)). There was no ineffectiveness to be recorded from net investments in foreign entity hedges.
(b) Risk exposures Information about the Group’s exposure to credit risk, foreign exchange and interest rate risk and about the methods and assumptions used in determining fair values is provided in note 2. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 109 Note 33. Key management personnel disclosures (a) Directors The following persons were Directors of Billabong International Limited during the financial year:
(i) Non-Executive Chairman E.T. Kunkel (ii) Executive Directors L. Inman, Managing Director and Chief Executive Officer * D. O’Neill, Chief Executive Officer ** P. Naude, General Manager, Billabong Group President Americas (iii) Non-Executive Directors A.G. Froggatt M.A. Jackson *** F.A. McDonald G.S. Merchant C. Paull S. Pitkin **** * L. Inman was appointed Managing Director and Chief Executive Officer on 14 May 2012.
** D. O’Neill ceased employment effective 12 May 2012.
*** M.A. Jackson resigned effective 25 October 2011.
**** S. Pitkin was appointed as a Director on 28 February 2012.
(b) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the financial year:
Name Position Employer F. Fogliato General Manager, Billabong Group Europe GSM Europe Pty Ltd S. North General Manager, Billabong Group Australasia GSM (Operations) Pty Ltd C. White Chief Financial Officer GSM (Operations) Pty Ltd (c) Key management personnel compensation 2012 $’000 2011 $’000 Short-term employee benefits 5,490 6,964 Long-term employee benefits – long service leave 135 279 Termination benefits 2,510 --- Post-employment benefits 129 177 Share-based payments 48 460 8,312 7,880 Detailed remuneration disclosures are provided in the Remuneration Report. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 110 Note 33. Key management personnel disclosures (continued) (d) Equity instrument disclosures relating to key management personnel (i) Options provided as remuneration and shares issued on exercise of such options Details of options provided as remuneration and shares issued on the exercise of such options, together with the terms and conditions of the options, can be found in the Remuneration Report.
(ii) Options holdings The number of options over ordinary shares in the Company held during the financial year by each Director of Billabong International Limited and other key management personnel of the Group, including their personally related parties, are set out below.
2012 Name Balance at the start of the year Granted during the year as compensation Exercised during the year Other changes during the year Balance at the end of the year Vested and exercisable at the end of the year Directors of Billabong International Limited L. Inman ^ --- --- --- --- --- --- D. O’Neill ^^ 629,007 --- --- (629,007) --- --- P. Naude 524,170 --- --- --- 524,170 --- Other key management personnel of the Group F. Fogliato 314,503 --- --- --- 314,503 --- S. North 314,503 --- --- --- 314,503 --- C. White 314,503 --- --- --- 314,503 --- ^ L. Inman was appointed Managing Director and Chief Executive Officer on 14 May 2012.
^^ D. O’Neill employment ceased on 12 May 2012. 2011 Name Balance at the start of the year Granted during the year as compensation Exercised during the year Other changes during the year Balance at the end of the year Vested and exercisable at the end of the year Directors of Billabong International Limited D. O’Neill 629,007 --- --- --- 629,007 --- P. Naude 524,170 --- --- --- 524,170 --- Other key management personnel of the Group F. Fogliato 314,503 --- --- --- 314,503 --- S. North 314,503 --- --- --- 314,503 --- C. White 314,503 --- --- --- 314,503 --- Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 111 Note 33. Key management personnel disclosures (continued) (d) Equity instrument disclosures relating to key management personnel (continued) (iii) Rights holdings Details of rights provided as remuneration and shares issued on the vesting of such rights, together with the terms and conditions of the rights, can be found in the Remuneration Report. The number of rights over ordinary shares in the Company held during the financial year by each Director of Billabong International Limited and other key management personnel of the Group are set out below.
2012 Name Balance at the start of the year Granted during the year as compensation Exercised during the year Other changes during the year Balance at the end of the year Vested and exercisable at the end of the year Directors of Billabong International Limited L. Inman ^ --- --- --- --- --- --- D. O’Neill ^^ 278,609 118,735 --- (397,344) --- --- P. Naude 241,450 103,168 --- (62,020) 282,598 --- Other key management personnel of the Group ^^^ F. Fogliato 129,884 61,928 --- (35,200) 156,612 --- S. North 131,337 65,803 --- (35,852) 161,288 --- C. White 143,796 63,582 --- (41,440) 165,938 --- ^ L. Inman was appointed Managing Director and Chief Executive Officer on 14 May 2012.
^^ D. O’Neill employment ceased on 12 May 2012. ^^^ Includes rights granted under the Executive Performance Share Plan and the Short Term Incentive Deferral 2011 Name Balance at the start of the year Granted during the year as compensation Exercised during the year Other changes during the year Balance at the end of the year Vested and exercisable at the end of the year Directors of Billabong International Limited D. O’Neill 216,237 118,735 --- (56,363) 278,609 --- P. Naude 187,027 103,168 --- (48,745) 241,450 --- Other key management personnel of the Group F. Fogliato 106,154 51,400 --- (27,670) 129,884 --- C. Kypriotis * 55,042 --- --- (55,042) --- --- S. North 108,119 51,400 --- (28,182) 131,337 --- J. Schillereff 22,931 10,793 (6,518) (8,399) 18,807 --- C. White 124,964 51,400 --- (32,568) 143,796 --- * C. Kypriotis resigned effective 31 January 2011. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 112 Note 33. Key management personnel disclosures (continued) (d) Equity instrument disclosures relating to key management personnel (continued) ^ L. Inman was appointed Managing Director and Chief Executive Officer on 14 May 2012.
^^ D. O’Neill employment ceased on 12 May 2012 – details of D. O’Neill’s share holdings subsequent to his cessation of employment are not required to be disclosed. ^^^ M.A. Jackson resigned effective 25 October 2011 – details of M.A. Jacksons’ share holdings subsequent to her resignation are not required to be disclosed.
^^^^ S. Pitkin was appointed as a Director on 28 February 2012.
* C. Kypriotis resigned effective 31 January 2011 – details of C. Kypriotis’ share holdings subsequent to his resignation are not required to be disclosed.
(iv) Share holdings The numbers of ordinary shares in the Company held during the financial year by each Director of Billabong International Limited and other key management personnel of the Group, including their personally related entities, are set out below.
2012 Name Balance at the start of the year Received on the exercise of rights holdings Received on the exercise of options Other changes during the year Balance at the end of the year Directors of Billabong International Limited E.T. Kunkel 116,435 --- --- --- 116,435 L. Inman ^ --- --- --- --- --- D. O’Neill ^^ 1,362,016 --- --- (1,362,016) --- A.G. Froggatt 7,505 --- --- --- 7,505 M.A. Jackson ^^^ 280,175 --- --- (280,175) --- F.A. McDonald 153,046 --- --- 65,000 218,046 G.S. Merchant 37,770,098 --- --- 31,935,365 69,705,463 P. Naude 1,045,988 --- --- --- 1,045,988 C. Paull 2,973,289 --- --- --- 2,973,289 S. Pitkin ^^^^ --- --- --- --- --- Other key management personnel of the Group F. Fogliato 25,191 --- --- --- 25,191 S. North 45,855 --- --- --- 45,855 C. White 10,000 --- --- --- 10,000 2011 Name Balance at the start of the year Received on the exercise of rights holdings Received on the exercise of options Other changes during the year Balance at the end of the year Directors of Billabong International Limited E.T. Kunkel 116,435 --- --- --- 116,435 D. O’Neill 1,117,516 --- --- 244,500 1,362,016 A.G. Froggatt 7,505 --- --- --- 7,505 M.A. Jackson 275,838 --- --- 4,337 280,175 F.A. McDonald 153,046 --- --- --- 153,046 G.S. Merchant 37,770,098 --- --- --- 37,770,098 P. Naude 1,105,988 --- --- (60,000) 1,045,988 C. Paull 2,973,289 --- --- --- 2,973,289 Other key management personnel of the Group F. Fogliato 25,191 --- --- --- 25,191 C. Kypriotis * 21,211 --- --- (21,211) --- S. North 70,452 --- --- (24,597) 45,855 J. Schillereff 47,548 6,518 --- (23,739) 30,327 C. White 10,000 --- --- --- 10,000 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 113 Note 34. Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditors of the Group, its related practices and non-related audit firms:
2012 $’000 2011 $’000 (a) PwC Australia (i) Audit and other assurance services Audit and review of financial reports 785 736 Other assurance services 150 133 Total remuneration for audit and other assurance services 935 869 (ii) Taxation services International tax consulting together with separate tax advice on acquisitions and disposals 2,106 670 Total remuneration for taxation services 2,106 670 (iii) Other services Due diligence services 389 162 General accounting advice 33 --- Total remuneration for other services 422 162 Total remuneration of PwC Australia 3,463 1,701 (b) Network firms of PwC Australia (i) Audit and other assurance services Audit and review of financial reports 1,153 990 Other assurance services 174 232 Total remuneration for audit and other assurance services 1,327 1,222 (ii) Taxation services International tax consulting together with separate tax advice on acquisitions and disposals 1,360 433 Total remuneration for taxation services 1,360 433 (iii) Other services Due diligence services --- 43 General accounting advice --- 61 Total remuneration for other services --- 104 Total remuneration of Network firms of PwC Australia 2,687 1,759 Total auditors’ remuneration 6,150 3,460 Note 33. Key management personnel disclosures (continued) (e) Other transactions with Directors and other key management personnel Directors of Billabong International Limited During 2011 and 2012 Burleigh Point Limited utilised property of Director P. Naude for use in certain advertising and promotional activities. There was no consideration paid by Burleigh Point Limited to P. Naude for use of the property. A subsidiary of the Company leases a retail store in South Africa from the wife of Director P. Naude. The rental agreement is based on normal commercial terms and conditions. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 114 Note 34. Remuneration of auditors (continued) It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the Group are important. These assignments are principally tax advice and due diligence reporting on acquisitions, or where PricewaterhouseCoopers is awarded assignments on a competitive basis. The Group and its Audit Committee are committed to ensuring the independence of the external auditors, both in appearance as well as in fact. Accordingly, significant attention is directed toward the appropriateness of the external auditors to perform services other than the audit. A formal pre-approval policy of audit and non-audit services provided by the external auditor has been adopted in this regard such that proposed services may either (1) be pre-approved without consideration of specific case-by-case services by the Audit Committee (“general pre-approval”), for example statutory or financial audits/reviews; or (2) require the specific pre-approval of the Audit Committee (“specific pre-approval”), for example taxation and other services. The Audit Committee believes that the combination of these two approaches, and the inclusion of prohibited services, in this policy will result in an effective and efficient procedure to pre-approve services performed by the external auditor.
Note 35. Contingencies Details and estimates of maximum amounts of contingent liabilities as at 30 June 2012 are as follows:
Guarantees For information about guarantees given by entities within the group, including the parent entity, please refer to notes 40 and 46. Contingent Consideration As at 30 June 2012 the deferred consideration relating to the Quiet Flight, Sector 9, DaKine, RVCA, Two Seasons, Swell and SDS/Jetty Surf (2011: Quiet Flight, Nixon, Xcel, Sector 9, DaKine, RVCA, Two Seasons, Swell and SDS/Jetty Surf) acquisitions has been fully recognised taking into account the latest Board approved forecast. Refer to note 28. At future reporting dates the Group will review these payments and restate them should the earnings forecasts change or management retention conditions (if applicable) are not achieved (which may result in additional or reduced consideration being payable).
Trade Letters of Credit The Group had $21.8 million letters of credit in favour of suppliers executed but undrawn as at 30 June 2012 (2011:
$37.6 million). The letters of credit related to the purchase of inventory in the 2012-13 financial year and are part of the ordinary course of business.
No material losses are anticipated in respect of any of the above contingent liabilities.
Note 36. Commitments 2012 $’000 2011 $’000 (a) Lease commitments Commitments in relation to leases contracted for at the reporting date but not recognised as liabilities, payable:
Within one year 100,366 102,277 Later than one year but not later than five years 273,467 300,084 Later than five years 42,559 54,770 416,392 457,131 Representing: Non-cancellable operating leases 415,755 457,089 Future finance charges on finance leases 637 42 416,392 457,131 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 115 Note 36. Commitments (continued) (a) Lease commitments (continued) (i) Operating leases The Group leases various retail stores, offices and warehouses under non-cancellable operating leases. The leases have varying terms, escalating clauses and renewal rights. On renewal, the terms of the leases are renegotiated. In some instances early termination of these operating leases is possible with negotiation with the relevant landlord through payment of an agreed amount.
2012 $’000 2011 $’000 Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year 100,255 102,235 Later than one year but not later than five years 273,024 300,084 Later than five years 42,476 54,770 415,755 457,089 (ii) Finance leases The Group leases various plant and equipment with a carrying amount of $11.3 million (2011: $4.2 million).
2012 $’000 2011 $’000 Commitments in relation to finance leases are payable as follows: Within one year 1,550 1,267 Later than one year but not later than five years 5,975 16 Later than five years 1,120 --- Minimum lease payments 8,645 1,283 Future finance charges (637) (42) Total lease liabilities recognised as a liability 8,008 1,241 Representing lease liabilities: Current (note 22) 1,438 1,225 Non-current (note 25) 6,570 16 8,008 1,241 The present value of finance lease liabilities is as follows: Within one year 1,438 1,225 Later than one year but not later than five years 5,533 16 Later than five years 1,037 --- Minimum lease payments 8,008 1,241 2012 $’000 2011 $’000 (b) Product purchase commitments Contractual obligation for future product purchases – not recognised as a liability:
Within one year 25,167 --- Later than one year but not later than five years 104,648 --- Later than five years 43,842 --- 173,657 --- Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 116 Note 37. Related party transactions (a) Parent entities The ultimate parent entity within the Group is Billabong International Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 39.
(c) Key management personnel Disclosures relating to key management personnel are set out in note 33.
(d) Transactions with other related parties The following transactions occurred with related parties:
2012 $’000 2011 $’000 Purchases of goods Purchases of premium watches, apparel and accessories 2,859 --- (e) Outstanding balances arising from purchases of goods and transactions associated with the sale of Nixon The following balances are outstanding at the end of the reporting period in relation to transactions with related parties:
2012 $’000 2011 $’000 Current receivables 14,785 --- Current payables 18,329 --- There is no allowance account for impaired receivables in relation to any outstanding balances and no expense has been recognised in respect of impaired receivables due from related parties.
(f) Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates.
Outstanding balances are unsecured and are repayable in cash. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 117 Note 38. Business combinations Purchase consideration – cash outflow 2012 $’000 2011 $’000 Outflow of cash to acquire subsidiary, net of cash acquired Cash consideration --- 203,610 Less: Cash balances acquired --- (258) Add-back: Bank overdraft --- 3,461 --- 206,813 Payments relating to prior year acquisitions and other immaterial current year acquisitions 84,232 8,251 Outflow of cash – investing activities 84,232 215,064 Acquisition related costs Acquisition related costs of $2.4 million (2011: $8.8 million) are included in ‘other expenses’ in the income statement.
2012 There were no business combinations that were of a material nature for the year ended 30 June 2012. The payments for purchase of subsidiaries and businesses, net of cash acquired in the consolidated cash flow statement is in relation to the deferred consideration payments for Nixon and Xcel, and other immaterial current year acquisitions.
On 3 August 2011 the majority of the deferred consideration payment in relation to Nixon was paid with the remaining amount outstanding subject to the finalisation of a review of the taxation treatment of the payment in the hands of the recipients. The remaining amount outstanding was paid on 27 January 2012 and therefore no further amounts are due in relation to this acquisition.
On 23 September 2011 the Group acquired the remaining 50% of the issued share capital of Surfection Pty Ltd. The Group now controls 100% of the issued share capital of Surfection Pty Ltd. Refer to note 29(g) for further information.
On 8 June 2012 the deferred consideration payment in relation to Xcel was paid in full and therefore no further amounts are due in relation to this acquisition.
Prior Period (2011) - Update on 30 June 2011 Full Financial Report note 35 West 49 Inc.
(a) Summary of acquisition On 1 September 2010 Billabong International Limited acquired 100% of the shares of West 49 Inc., a leading Canadian specialty retailer of apparel, footwear, accessories and equipment related to the youth action sports lifestyle. The acquisition has increased the Group’s market share in Canada.
Details of the purchase consideration, the net assets acquired and goodwill are as follows:
$’000 Purchase consideration: Cash paid 94,038 Total purchase consideration 94,038 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 118 Note 38. Business combinations (continued) (a) Summary of acquisition (continued) The assets and liabilities recognised as a result of the acquisition are as follows:
Fair value $’000 Other receivables 1,224 Inventory 31,572 Plant and equipment 19,894 Prepayments 704 Deferred tax assets 1,262 Bank overdrafts (3,461) Trade and other payables (54,891) Provision for contingent tax liabilities (14,299) Identifiable intangible assets 286 Net identifiable assets acquired (17,709) Add: goodwill 111,747 Net assets acquired 94,038 Provision for contingent tax liabilities represents contingent liabilities recognised at fair value. The assessment of the amount of contingent tax liabilities involves the exercise of management judgements concerning potential future events.
Goodwill is attributable to the workforce and synergies expected to arise after the acquisition of the business.
The acquired business contributed revenues of $152.8 million and net loss after tax (including $3.2 million of acquisition related costs) of $5.6 million to the Group for the period from acquisition to 30 June 2011.
The ‘West 49 Inc.’ acquisition was disclosed provisionally in the full financial report for the year ended 30 June 2011. As part of the finalisation of the acquisition, the fair value of identifiable assets and liabilities review has now been completed and adjustments were made to inventory, other payables and the provision for contingent tax liabilities, which were the only significant adjustments to the provisional values disclosed in the full financial report for the year ended 30 June 2011.
Bay Action, RVCA, Surfection, SDS/Jetty Surf and Rush Surf (a) Summary of acquisitions On 2 July 2010 GSM (Operations) Pty Ltd and Pineapple Trademarks Pty Ltd acquired the assets and certain liabilities of Bay Action Pty Ltd, Byron Concepts Pty Ltd, Big Kahoona Pty Ltd and the Timperley Partnership, a number of retail stores primarily featuring surf and related lifestyle apparel and accessories. The acquisition has increased the Group’s market share in the Australian retail sector.
On 21 July 2010 Seal Trademarks Pty Ltd, GSM Add 2, Inc. and GSM Investments Ltd acquired the assets and certain liabilities of RVCA Corporation, RVCA Platform, LLC, VASF LLC and RVCA LA, LLC, a progressive art and design-driven brand. The acquisition has provided the opportunity to further expand the North American and international sales representation through the Group’s distribution network.
On 23 September 2010 GSM (Operations) Pty Ltd acquired 50% of the issued share capital of Surfection Pty Ltd, a retail chain primarily featuring surf and related lifestyle apparel and accessories, and control of the entity through the acquisition of greater than 50% of the voting rights. The acquisition has increased the Group’s market share in the Australian retail sector. Surfection Pty Ltd has been fully consolidated from the date on which control was transferred to the Group.
On 8 November 2010 Board Sports Retail Pty Ltd and Pineapple Trademarks Pty Ltd acquired the assets and certain liabilities of Jetty Surf Pty Ltd, a retail chain operating under the banners SDS and Jetty Surf, primarily featuring surf and related lifestyle apparel and accessories. The acquisition has increased the Group’s market share in the Australian retail sector. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 119 Note 38. Business combinations (continued) (a) Summary of acquisition (continued) On 26 November 2010 GSM (Operations) Pty Ltd and Pineapple Trademarks Pty Ltd acquired the assets and certain liabilities of Rush Lifestyle Australia Pty Ltd, Rush Lifestyle Clothing Australia Pty Ltd and W R James Pty Ltd, a retail chain primarily featuring surf and related lifestyle apparel and accessories. The acquisition has increased the Group’s market share in the Australian retail sector.
Details of the aggregated purchase consideration, the net assets acquired and goodwill are as follows:
$’000 Purchase consideration: Cash paid 109,572 Deferred consideration 37,783 Contingent consideration 40,388 Total purchase consideration 187,743 The assets and liabilities recognised as a result of the acquisitions are as follows:
Fair value $’000 Cash and cash equivalents 258 Trade and other receivables 6,200 Inventory 30,776 Plant and equipment 7,638 Prepayments 230 Deferred tax assets 5,428 Employee entitlements (1,248) Trade and other payables (29,064) Deferred tax liabilities (13) Identifiable intangible assets 30,293 Net identifiable assets acquired 50,498 Less: non-controlling interests (3,649) Add: goodwill 140,894 Net assets acquired 187,743 Goodwill is attributable to the workforce and synergies expected to arise after the acquisition of the businesses. Goodwill is only deductible in the United States of America for tax purposes. For acquisitions that occurred in the year ended 30 June 2011, up to $75.8 million will be deductible for tax purposes.
The acquired businesses contributed revenues of $160.5 million and net profit after tax and non-controlling interests (including $5.2 million of acquisition related costs) of $5.2 million to the Group for the period from the date of each acquisition to 30 June 2011. (i) Deferred and contingent consideration In relation to the acquisition of the assets and certain liabilities of RVCA Corporation, RVCA Platform, LLC, VASF LLC and RVCA LA, LLC, additional deferred and contingent consideration will be payable in cash on or after 1 July 2015 based on the earnings achieved for the year ending 30 June 2015. In relation to the acquisition of the assets and certain liabilities of Jetty Surf Pty Ltd, additional pre-determined deferred consideration will be payable in cash from 1 November 2013. As at their respective acquisition dates a present value amount totalling $78.2 million was recognised as a non- current deferred consideration liability for these acquisitions of which $37.8 million is deferred and $40.4 million is contingent consideration. The aggregated range of the contingent consideration is a minimum of nil and there is no prescribed maximum. Refer to note 28 for additional information on deferred and contingent consideration.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 120 Note 38. Business combinations (continued) (a) Summary of acquisitions (continued) (ii) Acquired receivables The fair value of acquired trade and other receivables is $7.4 million. The gross contractual amount of the acquired trade receivables is $9.9 million and an amount of $2.5 million is considered to be uncollectible as at the acquisition date.
(iii) Non-controlling interests The Group elected to recognise the non-controlling interests for Surfection Pty Ltd at fair value.
(iv) Revenue and profit contribution If the acquisitions had occurred on 1 July 2010, consolidated revenue and consolidated net profit after tax and non- controlling interests (including acquisition related costs) for the year ended 30 June 2011 would have been $1,770.5 million and $114.0 million respectively based on best estimates.
Note 39. Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following significant subsidiaries in accordance with the accounting policy described in note 1(b):
Name of entity Country of incorporation Class o f shares Equity holding ** 2012 % 2011 % Amazon (New Zealand) Pty Ltd * Australia Ordinary 100 100 Beach Culture International Pty Ltd Australia Ordinary 100 100 Board Sports Retail Pty Ltd * Australia Ordinary 100 100 Burleigh Point, Ltd USA Ordinary 100 100 GSM (Canada) Pty Ltd * Australia Ordinary 100 100 GSM (Central Sourcing) Pty Ltd * Australia Ordinary 100 100 GSM (Duranbah) Pty Ltd Australia Ordinary 100 100 GSM (Europe) Pty Ltd * Australia Ordinary 100 100 GSM (Japan) Limited Japan Ordinary 100 100 GSM (NZ Operations) Limited New Zealand Ordinary 100 100 GSM (Operations) Pty Ltd * Australia Ordinary 100 100 GSM (Trademarks) Pty Ltd Australia Ordinary 100 100 GSM Trading (South Africa) Pty Ltd * Australia Ordinary 100 100 GSM Brasil Ltda Brazil Ordinary 100 100 GSM England Retail Ltd England Ordinary 100 100 GSM Espana Operations Sociedad Limitada Spain Ordinary 100 100 GSM Retail Inc USA Ordinary 100 100 GSM Rocket Australia Pty Ltd Australia Ordinary 100 100 GSM Trading (Singapore) Pty Ltd Australia Ordinary 100 100 Pineapple Trademarks Pty Ltd * Australia Ordinary 100 100 Rocket Trademarks Pty Ltd Australia Ordinary 100 100 Seal Trademarks Pty Ltd * Australia Ordinary 100 100 Surfection Pty Ltd Australia Ordinary 100 50 Surfstitch Pty Ltd Australia Ordinary 20 20 Surfstitch (Europe) Pty Ltd Australia Ordinary 51 --- West 49 Inc Canada Ordinary 100 100 * These subsidiaries have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to note 40.
** The proportion of ownership interest is equal to the proportion of voting power held, except for Surfstitch Pty Ltd where the Group has a controlling interest. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 121 Note 40. Deed of cross guarantee Billabong International Limited, GSM (Europe) Pty Ltd, GSM (Operations) Pty Ltd, Pineapple Trademarks Pty Ltd, GSM (Central Sourcing) Pty Ltd, Amazon (New Zealand) Pty Ltd, GSM Trading (South Africa) Pty Ltd, Board Sports Retail Pty Ltd, Seal Trademarks Pty Ltd and GSM (Canada) Pty Ltd are parties to a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare a financial report and Directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. (a) Consolidated income statement, statement of comprehensive income and summary of movements in consolidated retained profits The above companies represent a ‘Closed Group’ for the purposes of the Class Order. Set out below are the condensed consolidated income statement, a consolidated statement of comprehensive income and a summary of movements in consolidated retained profits for the year ended 30 June 2012 of the Closed Group, consisting of Billabong International Limited, GSM (Europe) Pty Ltd, GSM (Operations) Pty Ltd, Pineapple Trademarks Pty Ltd, GSM (Central Sourcing) Pty Ltd, Amazon (New Zealand) Pty Ltd, GSM Trading (South Africa) Pty Ltd, Board Sports Retail Pty Ltd, Seal Trademarks Pty Ltd and GSM (Canada) Pty Ltd.
Prior year figures set out below represent the condensed consolidated income statement, a consolidated statement of comprehensive income and a summary of movements in consolidated retained profits for the year ended 30 June 2011 of the Closed Group, at that time consisting of the entities Billabong International Limited, GSM (Europe) Pty Ltd, GSM (Operations) Pty Ltd, GSM (Trademarks) Pty Ltd, Pineapple Trademarks Pty Ltd, GSM (Central Sourcing) Pty Ltd, Amazon (New Zealand) Pty Ltd, GSM Trading (South Africa) Pty Ltd, Board Sports Retail Pty Ltd, Seal Trademarks Pty Ltd and GSM (Canada) Pty Ltd.
2012 $’000 2011 $’000 Income statement Revenue from continuing operations 1,025,541 838,542 Other income 81,268 2,906 Finance costs (25,769) (20,739) Other expenses (933,260) (687,046) Share of net profit after-tax of associate accounted for using the equity method 293 --- Profit before income tax 148,073 133,663 Income tax benefit/(expense) 23,603 (33,020) Profit for the yea r 171,676 100,643 Loss attributable to non-controlling interests 1,032 1,094 Profit for the year attributable to the members of the closed group 172,708 101,737 Statement of comprehensive income Profit for the yea r 171,676 100,643 Other comprehensive income Changes in the fair value of cash flow hedges, net of tax 2,546 (3,340) Exchange differences on translation of foreign operations (7,281) (25,597) Net investment hedge, net of tax (6,010) (10,420) Other comprehensive income for the year, net of ta x (10,745) (39,357) Total comprehensive income for the yea r 160,931 61,286 Loss attributable to non-controlling interests 1,032 1,094 Total comprehensive income for the year attributable to members of the closed group 161,963 62,380 Summary of movements in consolidated retained profits Retained profits at the beginning of the financial yea r 431,769 472,456 Profit for the year 172,708 101,737 Dividends paid (40,670) (86,140) Retained profits at the end of the financial yea r 563,807 488,053 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 122 Note 40. Deed of cross guarantee (continued) (b) Balance sheet Set out below is a consolidated balance sheet as at 30 June 2012 and 30 June 2011 of the Closed Group, consisting of the entities as named above at each point in time.
2012 $’000 2011 $’000 ASSETS Current assets Cash and cash equivalents 238,572 82,918 Trade and other receivables 149,859 199,650 Inventories 153,520 156,537 Current tax receivables 5,813 1,947 Other 8,146 9,940 Total current assets 555,910 450,992 Non-current assets Receivables 182,196 205,271 Other financial assets 775,316 490,440 Investment accounted for using the equity method 134,579 --- Property, plant and equipment 52,190 53,102 Intangible assets 200,548 292,767 Deferred tax assets 55,665 16,327 Other 4,968 5,297 Total non-current assets 1,405,462 1,063,204 Total assets 1,961,372 1,514,196 LIABILITIES Current liabilities Trade and other payables 174,425 135,005 Borrowings 150,831 1,161 Current tax liabilities 428 --- Provisions 21,979 6,006 Total current liabilities 347,663 142,172 Non-current liabilities Borrowings 241,676 245,511 Deferred tax liabilities 13,483 10,337 Provisions 22,682 2,935 Other 43,437 27,088 Total non-current liabilities 321,278 285,871 Total liabilities 668,941 428,043 Net assets 1,292,431 1,086,153 EQUITY Contributed equity 843,268 678,949 Reserves (113,338) (84,224) Retained profits 563,807 488,053 Capital and reserves attributable to members of the closed group 1,293,737 1,082,778 Non-controlling interests (1,306) 3,375 Total equity 1,292,431 1,086,153 Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 123 Note 41. Events occurring after the balance sheet date On 20 July 2012 the Group announced the completion of the retail component of the accelerated non-renounceable pro- rata entitlement offer announced on 21 June 2012. The Group received the proceeds for the retail component on 26 July 2012 and applied these proceeds towards the repayment of debt drawn under its financing facilities.
On 24 July 2012 the Board received an indicative, non-binding and conditional proposal from TPG International LLC (TPG) to acquire all of the shares in the Company for $1.45 cash per share by way of a scheme of arrangement. This follows an earlier indicative, non-binding and conditional proposal received from TPG in February 2012 for $3.00 cash per share, subsequently increased to $3.30 cash per share. The latest TPG proposal follows a trading update to the market on 21 June 2012 and subsequent entitlement offer to shareholders increasing shares on issue from 255.1 million (in February 2012) to 478.9 million (in July 2012). Discussions between TPG and the Board are continuing and the proposal is subject to due diligence and the satisfaction of a number of other conditions. There is no guarantee that, following the due diligence process, a transaction will be agreed or that the Board will recommend an offer at the current proposed offer price. In fact, the Board does not believe that the proposal reflects the fundamental value of the Group in the context of a change of control transaction. Other than the items mentioned above, there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Group, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years.
Note 42. Reconciliation of loss/profit for the year to net cash inflow from operating activities 2012 $’000 2011 $’000 (Loss)/profit for the year, before non-controlling interests (276,681) 118,045 Depreciation and amortisation 47,691 41,931 Impairment of intangibles 329,934 --- Impairment of property, plant and equipment 13,021 --- Share-based payment amortisation expense 5,582 5,892 Deferred consideration unwinding of discount 3,630 4,620 Net loss on sale of non-current assets 6,500 699 Restructuring costs and other non-cash charges 63,732 --- Gain on sale, net of transaction costs (201,448) --- Gain from adjustment to contingent consideration (22,522) (1,011) Fair value adjustment to derivative liabilities (288) (1,521) Share of net profit after-tax of associate accounted for using the equity method (293) --- Net exchange differences 72 (1,469) Change in operating assets and liabilities, excluding effects from business combinations and sale of Nixon:
(Increase)/decrease in trade debtors 109,183 9,440 (Increase)/decrease in inventories 19,984 (69,087) (Increase)/decrease in deferred tax assets (37,835) (16,002) (Increase)/decrease in provision for income taxes receivable (2,942) (12,096) (Increase)/decrease in other operating assets 11,421 (34,006) Increase/(decrease) in trade creditors and other operating liabilities (3,544) (19,800) Increase/(decrease) in provision for income taxes payable (4,941) (5,031) Increase/(decrease) in deferred tax liabilities 17,893 898 Increase/(decrease) in other provisions 740 2,834 Net cash inflow from operating activities 78,889 24,336 Note 43. Non-cash investing and financing activities 2012 $’000 2011 $’000 Acquisition of plant and equipment by means of finance lease 8,298 56 8,298 56 Dividends satisfied by the issue of shares under the Dividend Reinvestment Plan are shown in note 31. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 124 Note 44. Earnings per share The 2011 basic and diluted earnings per share have been restated to reflect the impact of the rights issue in the 2012 financial year (refer to note 29(h)) in order to achieve a comparable calculation to the 2012 basic and diluted earnings per share. This change takes into account the bonus element included in the rights offer for ordinary shares as the offer was made at a discount to market price.
2012 2011 Cents Cents (a) Basic earnings per share From continuing operations attributable to the ordinary equity holders of the Company (158.7) 31.1 From discontinued operation 67.9 8.5 Total basic earnings per share attributable to the ordinary equity holders of the Company (90.8) 39.6 (b) Diluted earnings per share From continuing operations attributable to the ordinary equity holders of the Company (158.7) 30.9 From discontinued operation 67.9 8.4 Total diluted earnings per share attributable to the ordinary equity holders of the Company (90.8) 39.3 (c) Reconciliations of earnings used in calculating earnings per share 2012 $’000 2011 $’000 Basic earnings per share (Loss)/profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share: From continuing operations (481,652) 93,627 From discontinued operation 206,003 25,512 (275,649) 119,139 Diluted earnings per share (Loss)/profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share:
From continuing operations (481,652) 93,627 From discontinued operation 206,003 25,512 (275,649) 119,139 (d) Weighted average number of shares used as the denominato r 2012 2011 Numbe r Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 303,498,081 301,121,050 Adjustments for calculating diluted earnings per share: Performance shares and conditional rights --- 2,170,126 Options --- --- Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 303,498,081 303,291,176 (e) Information concerning the classification of securities Performance shares and conditional rights Performance shares and conditional rights granted to employees under the Billabong Executive Performance Share Plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. These performance shares and conditional rights are anti-dilutive for the year ended 30 June 2012 and therefore have been excluded in the determination of diluted earnings per share. The performance shares and conditional rights have also been excluded in the determination of basic earnings per share.
Details relating to the rights are set out in note 45. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 125 Note 44. Earnings per share (continued) (e) Information concerning the classification of securities (continued) Options Options granted to employees under the Billabong Performance and Retention Plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in note 45.
The 1,153,176 options granted on 31 October 2008 and the 314,503 options granted on 24 November 2008 are not included in the calculation of diluted earnings per share because they are anti-dilutive for the year ended 30 June 2012. These options could potentially dilute basic earnings per share in the future.
Note 45. Share-based payments (a) Billabong Executive Performance Share Plan (EPSP) Following the review of executive remuneration undertaken by the Committee in 2008, the EPSP was restructured into Tier 1 and Tier 2. EPSP – Tier 1 Tier 1 participants comprise the executives of the Group who are directly responsible for driving the growth strategy of the Group. The objectives of the EPSP for Tier 1 participants remain the same i.e. to provide executives with an equity-based reward opportunity that vests based on the achievement of certain performance hurdles. For awards granted up to and including the 2010-11 awards, the performance hurdle is in relation to the Group’s three year EPS performance. For awards granted in 2011-12 and beyond, a second performance hurdle has been adopted so that 50% of awards will be tested on the Group’s three year EPS performance, with the remaining 50% of awards tested on Total Shareholder Return (TSR). The establishment of the EPSP was approved by shareholders at the 2004 Annual General Meeting. Under the EPSP the Group awards the following equity subject to the tax implications in the relevant jurisdiction. Equity vehicle Overview Tier 1 Performance shares An employee awarded performance shares is not legally entitled to shares in the Company before the performance shares allocated under the EPSP vest. For awards granted up to and including the 2010-11 awards, the employee can vote and receive dividends in respect of shares allocated to them. For awards granted in 2011-12 and beyond, the employee cannot vote and EPSP dividends will be held in trust during the performance period and net dividends will be paid to executives only on performance shares that vest. If no shares vest, no dividends are payable. For Australian employees, once the shares have vested they remain in the trust until the earlier of the employee leaving the Group, the tenth anniversary of the date the performance shares were awarded or the Board approving an application for their release. For non-Australian employees, once their performance shares vest the shares are transferred to them (or sold on their behalf if they choose). If the performance shares do not vest, they are forfeited by the employee for no consideration. Tier 1 Conditional rights An employee awarded conditional rights is not legally entitled to shares in the Company before the rights allocated under the EPSP vest. Once vested, each right entitles the employee to receive one share in the Company. For French employees granted rights after 1 July 2005, shares associated with vested rights are automatically transferred to the employee. These shares cannot be disposed of before the end of a 24 month restriction period following the allocation date, except in the event of death. Until such time that the rights have vested the employee cannot use the rights to vote or receive dividends. For all other employees, from the time of the employee receiving notice of the rights having vested they have one month to exercise the rights and either sell the shares or transfer them into their name. If the rights are not exercised by the employee they will automatically exercise and the shares will be transferred to the employee. Until such time that the rights are exercised the employee cannot use the rights to vote or receive dividends. However, if the conditional rights do not vest they are forfeited by the employee for no consideration. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 126 Note 45. Share-based payments (continued) (a) Billabong Executive Performance Share Plan (EPSP) (continued) Note that for the purposes of the remuneration tables in this report, performance shares and conditional rights are collectively referred to as “rights”.
Award, vesting and exercises under the EPSP are made for no consideration.
Awards under the EPSP vest on the third anniversary of grant only if the performance hurdles are satisfied in the relevant performance period. The performance periods are summarised in the table below:
Grant Performance period 2009-10 2008-09 (base year EPS) to 2011-12 2010-11 2009-10 (base year EPS) to 2012-13 2011-12 2010-11 (base year EPS & TSR) to 2013-14 Executive Performance Share Plan (Tier 1) – performance hurdles Year % of award tested on EPS EPS compound growth hurdles % of award that vests % of award tested on TSR TSR performance relative to comparator group* % of award that vests 2008-09 100% 10.0% 50% --- 12.5% 100% 15.0% 120% 2009-10 100% 6.0% 50% --- 8.0% 75% 10.0% 100% 2010-11 100% 6.0% 50% --- 8.0% 75% 10.0% 100% 2011-12 50% 6.0% 50% 50% 8.0% 75% 50 th percentile or above 50% 10.0% 100% 75 th percentile or above 100% * Comparator group comprises Australian companies listed in the S&P/ASX 200 at the beginning of each performance period, excluding those companies classified within the Financials and Energy sectors and the Metals and Mining Industry Group.
The Board selected EPS and TSR (for awards from 2011-12 onwards) as the appropriate hurdles for the EPSP as the EPSP is intended to focus executives on the long-term (three year) earnings performance of the Group, and allows the Group to balance an internal performance metric (EPS) with an external performance metric (TSR). Each year, prior to awards being granted, the Human Resource and Remuneration Committee considers the market environment, the Group’s business strategy and performance expectations and shareholder expectations and sets the performance targets for the awards to be granted that year. Due to the growth of the Group and the challenges of maintaining the high growth rate of earnings from a resulting higher EPS base, the targets set at grant differ for each of the 2008-09, 2009-10, 2010-11 and 2011-12 grants. Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 127 Note 45. Share-based payments (continued) (a) Billabong Executive Performance Share Plan (EPSP) (continued) Details of the awards to Executive Directors, Launa Inman and Paul Naude, in the 2012-13 financial year will be set out for shareholder approval in the Notice of Meeting and Explanatory Memorandum for the Company’s 2012 Annual General Meeting.
At the end of the relevant performance period, in line with its charter, the Human Resource and Remuneration Committee consider the EPS and TSR performance of the Group on an as reported basis and determines to what extent the awards should vest based on the above vesting conditions. EPSP - Tier 2 Tier 2 participants comprise other senior management of the Group. The primary objective of the Tier 2 EPSP is retention. Under the EPSP, Tier 2 participants are awarded performance shares and conditional rights. The awards do not vest unless the employee has completed a period of two years of employment from the date the awards are granted. The Group awards the following equity subject to the tax implications in the relevant jurisdiction: Equity vehicle Overview Tier 2 Performance shares An employee awarded performance shares is not legally entitled to shares in the Company before the performance shares allocated under the EPSP vest. However, the employee can vote and receive dividends in respect of shares allocated to them. Once the shares have vested the shares are transferred to the employee. However, if the performance shares do not vest they are forfeited for no consideration.
Tier 2 Conditional rights An employee awarded conditional rights is not legally entitled to shares in the Company before the rights allocated under the EPSP vest. Once vested, each right entitles the employee to receive one share in the Company. Until such time that the rights are exercised the employee cannot use the rights to vote or receive dividends. However, if the conditional rights do not vest they are forfeited for no consideration.
Set out below is a summary of equity based rights (performance shares and conditional rights) awarded under the EPSP:
Type of right Grant date Performance determination date Balance at start of year Number Granted during the year Number Exercised during the year Number Expired during the year Number Balance at end of year Number 2012 Performance Shares 1 September 2008 30 June 2014 1,813,576 915,389 (380,066) (637,960) 1,710,939 Conditional Rights 1 September 2008 30 June 2014 394,785 272,131 (97,814) (46,955) 522,147 2,208,361 1,187,520 (477,880) (684,915) 2,233,086 2011 Performance Shares 1 November 2007 30 June 2013 1,827,619 981,262 (310,802) (684,503) 1,813,576 Conditional Rights 1 November 2007 30 June 2013 364,814 232,494 (70,398) (132,125) 394,785 2,192,433 1,213,756 (381,200) (816,628) 2,208,361 None of the rights awarded under the EPSP vested or became exercisable during the year.
The total equity based rights that expired during the year ended 30 June 2012 and have not yet been granted under a new award was 392,611 (2011: 196,190). These expired equity based rights are held pending in the EPSP until further awards are made.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 128 Note 45. Share-based payments (continued) (a) Billabong Executive Performance Share Plan (EPSP) (continued) Fair value of rights granted The assessed fair value at grant date of rights granted under the EPSP during the year ended 30 June 2012 was $3.62 per right (2011: $7.80). The fair value at grant date is determined by reference to the Billabong International Limited share price at grant date, taking into account the terms and conditions upon which the rights were granted, the expected dividend yield and the expected price volatility of the underlying share.
(b) Short Term Incentive (STI) deferral Following the review of executive remuneration undertaken by the Committee in 2010, STI deferral was introduced for the STI grants from 2010-11 onwards for GM Europe Franco Fogliato, GM Australasia Shannan North and CFO Craig White. With STI deferral a portion (25% to 30%) of the incentive earned is deferred into equity. This is in the form of either shares or rights depending on the executives’ location (due to tax implications). The deferred equity will vest to participants after a period of two years.
The Group awards the following equity subject to the tax implications in the relevant jurisdiction: Equity vehicle Overview Performance shares An employee awarded performance shares is not legally entitled to shares in the Company before the performance shares allocated under the STI deferral vest. However, the employee can vote and receive dividends in respect of shares allocated to them. Once the shares have vested the shares are transferred to the employee. However, if the performance shares do not vest they are forfeited for no consideration.
Conditional rights An employee awarded conditional rights is not legally entitled to shares in the Company before the rights allocated under the STI deferral vest. Once vested, each right entitles the employee to receive one share in the Company. Until such time that the rights are exercised the employee cannot use the rights to vote or receive dividends. However, if the conditional rights do not vest they are forfeited for no consideration.
Set out below is a summary of equity based rights (performance shares and conditional rights) awarded under STI deferral:
Type of right Grant date Performance determination date Balance at start of year Number Granted during the year Number Exercised during the year Number Expired during the year Number Balance at end of year Number 2012 Performance Shares 1 September 2011 30 June 2013 --- 26,585 --- --- 26,585 Conditional Rights 1 September 2011 30 June 2013 --- 10,528 --- --- 10,528 --- 37,113 --- --- 37,113 There were no STI deferred performance shares or conditional rights allocated as at 30 June 2011.
None of the rights awarded under the STI deferral vested or became exercisable during the year.
Fair value of rights granted The assessed fair value at grant date of rights granted under the STI deferral during the year ended 30 June 2012 was $3.62 per right (2011: Nil). The fair value at grant date is determined by reference to the Billabong International Limited share price at grant date, taking into account the terms and conditions upon which the rights were granted, the expected dividend yield and the expected price volatility of the underlying share.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 129 Note 45. Share-based payments (continued) (c) Billabong Executive Performance and Retention Plan (EPRP) The establishment of the EPRP was approved at the Annual General Meeting of the Company held on 28 October 2008. The EPRP is designed to retain and effectively reward key senior executives over a five year period for growing the market value of the Group and delivering returns to shareholders. Under the EPRP, the executive team are granted options. The options will only vest if certain performance hurdles are met and if the individual is still employed by the Group at the end of the vesting period. Vesting of the options is subject to the Company’s Total Shareholder Return (TSR) performance. TSR measures growth in the Company’s share price, together with the value of dividends received during the relevant period. Two TSR performance hurdles must be achieved in order for awards to vest: A 'gateway' relative TSR hurdle of above median of a comparator group of companies over the five year performance period, measured from start of performance period to end of year five; and Absolute TSR hurdle with a 120% target (equivalent to approximately 12.8% share price growth per annum over five years) to be achieved at any point over the five year performance period.
The comparator group for the relative TSR comparator group is the constituents of the S&P/ASX 100 Index at the start of the performance period (excluding companies in the Global Industry Classification Standard (GICS) name codes: ‘Oil, Gas and Consumable Fuels’ and ‘Metals and Mining’).
The use of a relative TSR hurdle gateway directly aligns executive reward and shareholder return by ensuring that executives are only rewarded for the absolute TSR performance if they are also in the "top half" of ASX 100 (excluding certain GICS industries) performers at the time performance is tested. The use of the stretch absolute TSR performance target focuses executives on significantly growing the business in line with the strategic plan and generating strong returns for shareholders.
An early banking opportunity is also provided to executives where the absolute and relative performance hurdles are satisfied. However, in order for the options to vest the continued employment condition must be satisfied. The banking approach allows for executives to be rewarded for “early” high TSR performance. However, due to the continued employment requirement and the delivery vehicle being options, the EPRP encourages sustained share price performance throughout the five year period and enhances the retention impact of the awards. The performance hurdles and the early banking opportunities are summarised in the table below: Date Year 3 test 30 June 2011 Year 4 test 30 June 2012 Year 5 test 30 June 2013 Absolute TSR 80% TSR achieved at any time during the prior three years. 100% TSR achieved at any time during the prior four years. 120% TSR achieved at any time during the prior five years.
Relative TSR Above median TSR performance achieved against comparator group of companies. Above median TSR performance achieved against comparator group of companies. Above median TSR performance achieved against comparator group of companies.
Banking 1/3 of total options. 2/3 of total options. All options earned.
Once vested the options remain exercisable for a period of two years.
Options granted under the EPRP carry no dividend or voting rights.
When exercisable each option is convertible into one ordinary share upon receipt of funds. The exercise price of options is based on the weighted average price at which the Company's shares are traded on the Australian Securities Exchange during the five trading days immediately before the options are granted. Amounts received on the exercise of options are recognised as share capital.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 130 Note 45. Share-based payments (continued) (c) Billabong Executive Performance and Retention Plan (EPRP) (continued) Set out below are summaries of options granted under the EPRP.
2012 Grant date Expiry date Exercise price Balance at start of year Number Granted during the year Number Exercised during the year Number Forfeited during the year Number Balance at end of year Number Exercisable at end of year Number 31 October 2008 31 October 2015 $11.08 1,782,183 --- --- (629,007) 1,153,176 --- 24 November 2008 24 November 2015 $10.80 314,503 --- --- --- 314,503 --- 2,096,686 --- --- (629,007) 1,467,679 --- Weighted average exercise price $11.04 --- --- $11.08 $11.02 --- 2011 Grant date Expiry date Exercise price Balance at start of year Number Granted during the year Number Exercised during the year Number Forfeited during the year Number Balance at end of year Number Exercisable at end of year Number 31 October 2008 31 October 2015 $11.08 1,782,183 --- --- --- 1,782,183 --- 24 November 2008 24 November 2015 $10.80 314,503 --- --- --- 314,503 --- 2,096,686 --- --- --- 2,096,686 --- Weighted average exercise price $11.04 --- --- --- $11.04 --- Fair value of options granted The assessed fair value at grant date of options granted to the individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are independently determined using the Monte-Carlo simulation option pricing model that takes into account the exercise price, the term of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 131 Note 45. Share-based payments (continued) (c) Billabong Executive Performance and Retention Plan (EPRP) (continued) Grant Date The model inputs for options granted during the year ended 30 June 2009 included: 31 October 2008 24 November 2008 (a) exercise price: $11.43 $10.80 (b) vesting date: 31 October 2013 24 November 2013 (c) expiry date: 31 October 2015 24 November 2015 (d) share price at grant date: $11.92 $9.60 (e) expected price volatility of the Company’s shares: 30% 30% (f) expected dividend yield: 3.80% 4.20% (g) expected life: 6.0 years 6.0 years (h) risk-free interest rate: 4.84% 4.20% (i) options are granted for no consideration and vest based on the Company’s TSR, including share price growth, dividends and capital returns, compared to the TSR of the constituents of the S&P/ASX 100 Index at the start of the performance period (excluding companies under the Global Industry Classification Standard name codes: ‘Oil, Gas and Consumable Fuels’ and ‘Metals and Mining’) over a five year period. Vested options are exercisable for a period of two years after vesting.
The expected volatility is based on the historic volatility (based on the remaining life of the option), adjusted for any expected changes to future volatility due to publicly available information.
Shareholder approval was obtained at the 2009 Annual General Meeting to change the exercise price of options granted during the 2008-09 financial year to take into account the Company’s entitlement offer in May 2009. Previously, the exercise price for the options was the five day volume weighted average price of the Company’s shares up to the date of the grant.
Under the rules of the EPRP, the Board has the power to adjust the exercise price to take account of the entitlement offer. The purpose of this is to ensure that option holders are not unfairly advantaged or disadvantaged by the entitlement offer. Due to the increase in the Company’s share capital as a result of the entitlement offer and the impact on the share price which could potentially affect the options granted under the EPRP, the exercise price has been adjusted in accordance with the ASX Listing Rules.
The formula under the ASX Listing Rules is:
O’ = O – E [P - (S+D)] N + 1 The formula inputs for options granted on 31 October 2008 included:
O’ = the new exercise price of the option O = the old exercise price of the option E = the number of underlying securities into which one option is exercisable P = the volume weighted average market price per security of the underlying securities during the Company’s five trading days ending on the day before the ex-entitlement date S = the subscription price for a security under the entitlement issue D = the dividend due, but not yet paid, on the existing underlying securities (except those to be issued under the pro- rata issue) N = the number of securities which must be held to receive a right to one new security The calculation to determine the reduced exercise price for the options granted on 31 October 2008 is as follows:
O’ = 11.43 – 1 [9.80 – (7.50 + 0)] 5.5 + 1 O’ = 11.08 The options granted on 24 November 2008 relate to Franco Fogliato, General Manager, Billabong Europe who is a French resident and was granted options under a French sub-plan, which complies with French legal and taxation requirements and which therefore restricts the ability to amend the exercise price of options after their grant date. As a result, the exercise price for these options was not adjusted and the terms of these options were not amended.
Notes to the consolidated financial statements 30 June 2012 : : Billabong International Limited 2011-12 Full Financial Report Page 132 Note 45. Share-based payments (continued) (d) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefits expense were as follows:
2012 $’000 2011 $’000 Operating costs of the Billabong Executive Performance Share Plan 25 22 Share-based payment expense 5,582 5,892 5,607 5,914 Note 46. Parent entity financial information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts:
Parent entity 2012 $’000 2011 $’000 Current assets 28,421 41,454 Total assets 1,645,479 1,295,246 Current liabilities 25,080 3,234 Total liabilities 428,132 476,698 Shareholders’ equity Issued capital 843,268 678,949 Reserves Option reserve 29,676 24,094 Retained earnings 344,403 115,505 1,217,347 818,548 Profit for the yea r 269,569 86,446 Total comprehensive income 269,569 86,446 (b) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2012 or 30 June 2011. (c) Contractual commitments for the acquisition of property, plant or equipment As at 30 June 2012 the parent entity had no contractual commitments for the acquisition of property, plant or equipment.
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dards Legislatio n of Billabo n ccordance wit h ncial position a ncluding the A al Financial R e 3 of the Direc t or the prepara t porations Act 2 0 r audit conduc t ited for the ye a n Pa g ng Intern a h the Corpora t as at 30 June 2 Australian A c eporting Stan d tors’ report for tion and prese n 001. Our resp ted in accord a ar ended 30 Ju ge 135 ational tions Act 2012 and ccounting dards as the year ntation of onsibility ance with ne 2012, Shareholder information : : Billabong International Limited 2011-12 Full Financial Report Page 136 The shareholder information set out below was applicable as at 13 August 2012.
Distribution of Equity Securities Analysis of numbers of equity security holders by size of holding:
Ordinary shares Unquoted options Number of share holders Number of shares Number of option holders Number of options 1 1,000 11,552 4,750,564 --- --- 1,001 5,000 6,324 14,895,124 --- --- 5,001 10,000 1,376 10,282,637 --- --- 10,001 100,000 1,111 29,403,739 --- --- 100,001 and over 133 419,612,228 4 1,467,679 20,496 478,944,292 4 1,467,679 There were 5,850 holders of less than a marketable parcel of ordinary shares.
Equity Security Holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities are listed below:
Ordinary shares Name Number held Percentage of issued shares Gordon Merchant 69,705,463 14.55% National Nominees Limited 65,405,980 13.66% J P Morgan Nominees Australia Limited 57,176,571 11.94% HSBC Custody Nominees (Australia) Limited 46,394,544 9.69% Citicorp Nominees Pty Limited 37,409,457 7.81% J P Morgan Nominees Australia Limited 30,978,480 6.47% Citicorp Nominees Pty Limited 21,666,786 4.52% BNP Paribas Noms Pty Ltd 10,281,082 2.15% HSBC Custody Nominees (Australia) Limited-GSCO ECA 6,729,293 1.41% Colette Paul 5,521,824 1.15% Goldman Sachs Australia Pty Ltd 3,841,677 0.80% Bond Street Custodians Limited 3,772,533 0.79% Deep Investments Pty Ltd 2,842,858 0.59% Crownace Pty Ltd 2,785,715 0.58% CS Fourth Nominees Pty Ltd 2,591,629 0.54% Queensland Investment Corporation 2,434,921 0.51% AMP Life Limited 2,390,100 0.50% UBS Wealth Management Australia Nominees Pty Ltd 2,129,176 0.44% Catholic Church Insurances Limited 2,000,000 0.42% CGA No 2 Pty Ltd 1,976,959 0.41% 378,035,048 78.93% Shareholder information : : Billabong International Limited 2011-12 Full Financial Report Page 137 Unquoted Equity Securities Number on issue Numbe r of holders Options issued under the Executive Performance and Retention Plan as approved by shareholders at the Annual General Meeting on 28 October 2008:
Class – BBGAI Class – BBGAK 1,153,176 314,503 3 1 The options listed above are the only unquoted equity securities on issue. The following people hold 20% or more of these securities:
Class – BBGAI Paul Naude Shannan North Craig White Class – BBGAK Franco Fogliato 524,170 314,503 314,503 314,503 Substantial Holders As at 14 August 2012 the names of substantial holders in the Company who have notified the Company in accordance with section 671B of the Corporations Act 2001 are set out below:
Ordinary Shares Number Percentage Gordon Stanley Merchant & Gordon Merchant No. 2 Pty Ltd 75,227,287 15.71% TPG Asia Inc.* 59,618,480 12.45% IOOF Holdings Limited 56,079,308 11.71% Commonwealth Bank of Australia 42,434,108 8.86% Franklin Resources, Inc. 36,551,586 7.63% * TPG Asia, Inc.'s relevant interest arises under share sale agreements. The terms of these agreements were disclosed in a Notice of Initial Substantial Holder filed by TPG Asia, Inc. with ASX on 25 July 2012.
Voting Rights The voting rights attaching to each class of equity securities are set out below:
(a) Ordinary shares On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote.
(b) Options No voting rights.
Stock Exchange Listing The shares of the Company are listed under the symbol BBG on the Australian Securities Exchange. The Company's home branch is Brisbane. Shareholder Enquiries If you are a shareholder with queries about your holdings you should contact the Company’s Share Registry as follows:
Computershare Investor Services Pty Limited GPO Box 2975 MELBOURNE VIC 3001 Telephone Australia: 1300 850 505 Telephone International: +61 3 9415 4000 Fax: +61 3 9473 2500 Email: [email protected] Shareholder information : : Billabong International Limited 2011-12 Full Financial Report Page 138 Become an Online Shareholder You can also access your current shareholding and update your details online. To register, you should visit the share registry at www.computershare.com.au/easyupdate/bbg and enter your personal securityholder information (eg Holder Identification Number (HIN) or Securityholder Reference Number (SRN)) and postcode, then click on 'Submit' and follow the prompts. Change of Address Issuer sponsored shareholders should notify the share registry immediately upon any change in their address quoting their Securityholder Reference Number (SRN) either in writing or online. Changes in addresses for broker sponsored holders should be directed to the sponsoring brokers with the appropriate Holder Identification Number (HIN).
Dividends If a dividend is declared the payments may be paid directly into your nominated financial institution in Australia, New Zealand, United Kingdom or United States. Dividend payments are electronically credited on the dividend payment date and confirmed by payment advices mailed directly to your registered shareholder address. Application forms are available from our Share Registry or update your details online. If you have not provided direct credit instructions to have your dividend paid directly into a nominated financial institution or you do not have your shareholding registered in one of the above four countries, then you will receive an Australian dividend cheque. Billabong International Limited also pays dividends by local currency cheque to shareholders who maintain a registered address in the following jurisdictions: Europe – Euro, Hong Kong - $HK, Japan- Yen, New Zealand - $NZ, United Kingdom – GBP, and United States - $US. Dividend Reinvestment Plan The Board has not declared a final ordinary dividend for the year ended 30 June 2012 and does not expect to declare an interim ordinary dividend for the half-year ended 31 December 2012. The Board confirms that the dividend policy will be reviewed thereafter. The Dividend Reinvestment Plan (DRP) is suspended until such time as the dividend policy review has been undertaken.
Annual Report The latest Annual Report can be accessed from the Company’s corporate website at www.billabongbiz.com. If you are a shareholder and you wish to receive a hard copy of the Annual Report, please contact our Share Registry or update your details online. Tax File Numbers (TFN) Billabong International Limited is obliged to deduct tax from unfranked or partially franked dividends paid to shareholders registered in Australia who have not provided their TFN to the Company. If you wish to provide your TFN, please contact the Share Registry or update your details online. Consolidation of Multiple Shareholdings If you have multiple shareholding accounts that you wish to consolidate into a single account, please advise the Share Registry in writing. If your holdings are broker sponsored, please contact the sponsoring broker directly.
Other Shareholder Information Visit the Company’s corporate website at www.billabongbiz.com for the Company’s latest information.
