Key Concepts & Questions

Wow, I must say reading the Financial Report does not come easily to me.  I am better with the text than the figures but am still not an expert on all of the terminology.  I do not find it particularly easy and so I hope that my ideas are relative and useful to the continued assignment and the eventual outcomes.

Key Concepts –

1.     Revenue increased.  This was driven by the infrastructure division.

2.     Expenses increased.  Mainly related to salaries and wages and this is AFTER the corporate restructure.

3.     Group earnings increased.

4.     Operating cash flows increased – this was due to a drive to ensure payment terms were met (is there more to this ‘drive’ or is it simply a wise business procedure being amped up?).

5.     Net capital decreased.

6.      

7.     General consulting business is down in Aus and NZ due to larger competition.

8.     Commodity prices (particularly coal) have decrease putting pressure on companies to reduce ancillary production.

9.     Downer Rail revenue fell.  There is little information provided regarding the Rail division.

10.  The majority of Downer Infrastructure’s work comprises contracts that are valued at less than $30 million and are recurring in nature. This makes the business more resilient through economic cycles.

11.  After several years of very strong growth, current market conditions are challenging for Downer Mining with customers reviewing their operations and seeking to reduce costs.

12.  Debt and liabilities decreased.

13.  Shareholder equity increased, mainly due to capital being raised.

14.  The outcomes of the troublesome Waratah train productions is being carefully managed and could have significant impacts on the Rail division if not delivered according to scheduled time frames.

15.  During the financial year, the Company paid a premium in respect of a contract insuring the Directors of the Company (as named above), the Company Secretary, all officers of the Company and of any related body corporate against a liability incurred as a Director, secretary or executive officer to the extent permitted by the Corporations Act 2001 (Cth). The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium.

16.  Tighter controls are enforced regarding remuneration and the withholding of payments dependent on ‘actual’ performance.  Policy changes have taken effect to provide framework for measuring outcomes of key personnel.

17.  Between 30 – 50% of executive salaries are based on key performance outcomes

18.  In determining revenues and expenses for construction contracts, Management makes key assumptions regarding estimated revenues and expenses over the life of the contracts. Where contract variations are recognised in revenue, assumptions are made regarding the probability that customers will approve those contract variations and the amount of revenue arising from contract variations. In respect of costs, key assumptions regarding costs to complete contracts may include estimation of labour, technical costs, impact of delays and productivity. Changes in these estimation methods could have a material impact on the financial statements of Downer.

19.  In relation to tenders - Judgement is exercised by Management in determining whether it is probable that the contract will be awarded. An error in judgement may result in capitalised tender/bid costs being recognised in the statement of profit or loss in the following financial year.

20.   The Downer Asia business had not performed to the expectations of the Group, as a consequence of increased competition from other Asian contractors who have commenced operations in Singapore and had not secured sufficient future work to support the carrying value of the goodwill in the business. Management has decided to impair goodwill of Downer Asia by $9.3 million in the prior year.

21.  The Spiire business in Australia had underperformed as a result of challenging economic conditions and scarcity of work to support its operational and overhead structure. Management had decided to impair goodwill of Spiire Australia by $8.7 million.

22.  The Group did not acquire any businesses during the financial year ended 30 June 2013.

23.  The Group disposed the Spiire Australia business by way of a management buy out (MBO) to three of its senior executives for $1.8 million. The sale transaction was completed on 30 June 2013.

24.  Downer suffered a workplace fatality in New Zealand in October 2012. The Group has embarked on an analysis, assessment and response at every level of the organisation on critical risk management where hazards are identified and known controls are applied. An example of this is the introduction of a set of Group-wide Cardinal Rules, which address ten of the most significant areas of risk for harm to employees.

Key Questions –

1.  What does this statement mean?  Footer of page.

Total revenue is a non-statutory disclosure and includes revenue, other income and notional revenue from joint ventures and other alliances not proportionally consolidated.

2.  What does this mean, another notation.

-  Numbers are underlying, i.e. excluding Individually Significant Item.

-  Interest and other costs of finance paid minus interest received.

-  Unaudited.

3.  What does this mean?

Downer’s weighted average debt maturity has been extended.

4.  This statement is interesting and I’m not entirely sure I understand it.  Modest expectation?

With Downer having made substantial progress rebuilding its balance sheet, in February 2013 the Downer Board elected to recommence the distribution of dividends on its ordinary shares electing a “cents per share” policy rather than a fixed payout ratio. This allows Downer to set a modest expectation that can be achieved in terms of available capital and franking credits. Once Downer returns to an Australian tax paying position, a fixed payout ratio policy will be reassessed.

5. The company is looking to outsource more and use contractors so as not to be ‘fixed’ long term to wages or salaries (in particular operations).  Is this to warrant future issues?

6.  Don’t completely understand the Fit 4 Business component and what is this about?

7.  Accounting policies are selected and applied in a manner that ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported. 

What is the above statement really saying?  ‘Substance of the underlying transaction’?  Meaning what?  Meaning that information of substance is reported or meaning that information is withheld?

8.  Wondering if the below statement is a good or bad thing for the company.  Does the fact they don’t have big contributors mean they are constantly competing in an uncertain industry/future?

There is no single customer that contributed 10 per cent or more to the Group’s revenue in FY13. Sales arising from the Group’s largest customer in FY12 are related to rendering of services and mining services totalling $45.2 million and $780.7 million respectively.