JB Hi-Fi Executive Summary
2.4 Main Controlled Entities (as at June 2012)
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(c):
Name of entity Country of incorporation Class of shares Equity holding
2012 2011
% %
Parent entity
JB Hi-Fi Limited (i)
Subsidiaries
JB Hi-Fi Group Pty Ltd (ii) Australia Ordinary 100 100
JB Hi-Fi (A) Pty Ltd (ii) Australia Ordinary 100 100
Clive Anthonys Pty Ltd (ii) Australia Ordinary 100 100
Rocket Replacements Pty Ltd (ii) Australia Ordinary 100 100
JB Hi-Fi Group (NZ) Limited New Zealand Ordinary 100 100
JB Hi-Fi NZ Limited New Zealand Ordinary 100 100
(i) JB Hi-Fi Limited is the head entity within the tax-consolidated group.
(ii) These wholly-owned subsidiaries are members of the tax-consolidated group.
In addition, JB Hi-Fi Limited has effective control over the JB Hi-Fi Limited Employee …show more content…
Share Trust, which administers shares issued through the Company's employee option plan. This entity is also consolidated. http://www.afr.com/rw/Wires/Stories/2012-08-13/ASXAnnouncements/JBH_01322247.pdf 2.5 Geographic Locations
(As at 31 Dec 2012)
Revenue Profit Assets
(AUD’000) (AUD’000) (AUD’000)
Australia 1,724,002 136,843 921,769
New Zealand 92,246 2,967 67,112
(As at 31 Dec 2011)
Revenue Profit Assets
(AUD’000) (AUD’000) (AUD’000)
Australia 1,677,286 133,436 827,593
New Zealand 97,443 2,670 60,695
http://www.jbhifi.com.au/documents/reports/123_2013-02-11_8-08-57.pdf
3.3 Risk and Solutions
(a) Market risk
(i) Foreign currency risk management
The majority of the Group’s operations are denominated in the functional currency of the country of operation and are therefore not exposed to foreign currency risk.
That is, transactions and balances related to the Australian operations are denominated in Australian dollars and transactions and balances related to the New Zealand operations are denominated in New Zealand dollars.
(ii) Cash flow and fair value interest rate risk
The Group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts. 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. Interest rate swap
contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the cash flow exposures on the issued variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using the curves at reporting date and the credit risk inherent in the contract, as disclosed below. The average interest rate is based on the outstanding balances at the start of the financial year.
(b) Liquidity risk
Ultimate responsibility for liquidity risk management rests with the board of directors, who assess the Group’s short, medium and long term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash flows.
(c) Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has endeavoured to minimise its credit risk by dealing with creditworthy counterparties. The Group's exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. The Group does not have any significant credit risk exposure to any single counterparty or any Group of counterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any allowance for impairment, represents the Group’s maximum exposure to credit risk.
(d) Fair value of financial instruments
The only financial liabilities or financial assets carried at fair value are the interest rate swaps. The directors consider the interest rate swaps to be Level 2 financial instruments because, unlike Level 1 financial instruments, their measurement is derived from inputs other than quoted prices that are observable for the assets or liabilities, either directly (as prices) or indirectly (derived from prices). The interest rate swaps fair value's have been calculated and supported by third party valuations. http://www.afr.com/rw/Wires/Stories/2012-08-13/ASXAnnouncements/JBH_01322247.pdf 4.0 Financial analysis
4.1 Structure of Capital
The Board reviews the capital structure on an ongoing basis. The Group’s policy is to maintain an optimal capital structure to reduce the cost of capital and to ensure the Group has access to adequate capital to sustain the future development of the business.
In order to maintain or adjust the capital structure, the Group may adjust the level of dividends paid to shareholders, return capital to shareholders, buy back shares, issue new shares or sell assets to reduce debt. In the prior period, the Group completed a $173,333 thousand off-market share buy-back, refer note 31 for further details.
As part of its capital management program, the Group monitors the return on invested capital and the gearing ratio. The Group defines return on invested capital as earnings before interest and tax (EBIT) divided by the sum of total equity plus net debt and gearing as term debt excluding capitalised borrowing costs, plus bank overdrafts and hire purchase liabilities, divided by earnings before interest, taxation, depreciation and amortisation (EBITDA).
The Board has adopted a policy of monitoring the dividend payout ratio and targeting a payout ratio of 60% of net profit after tax as it seeks to strike a balance between shareholder returns and ensuring adequate capital is retained for the growth of the business so as to maximise long-term shareholder returns.
The Group’s return on invested capital and gearing ratios as at 30 June 2012 and 30 June 2011 were as follows:
Consolidated
2012 2011
$'000 $'000
Profit before tax 148,373 158,581
Net finance costs 13,086 4,033
EBIT 161,459 162,614
Borrowings 149,775 232,582
Cash and cash equivalents 39,710 27,246
Net debt 110,065 205,336
Total equity 184,501 152,313
Invested capital 294,566 357,649
Return on invested capital 54.8% 45.5%
Gearing
Term debt 150,000 233,333
EBIT 161,459 162,614
Depreciation and amortisation 30,754 27,287
EBITDA 192,213 189,901
Net loss on disposal of plant and equipment (i) 755 725
Fixed rent expense (i) 2,117 2,250
Share based payments expense (i) 1,241 4,519
Adjusted EBITDA 196,326 197,395
Gearing 0.76 1.18
(i) As required under the terms of the syndicated facilities agreement, for the purposes of calculating the gearing ratio the impact of loss/gain on disposal of plant and equipment, fixed rent expense and share based payments expense are excluded from the calculation.
There were no changes in the Group’s approach to capital management during the year.
The terms of certain financing arrangements of the Group contain financial covenants that require maintenance of the following ratios: * fixed charge cover ratio (the sum of earnings before interest, tax, depreciation and amortisation excluding any loss/gain on disposal of plant and equipment, fixed rent expense and share based payments expense divided by the sum of interest expense plus operating lease expense plus rent expense) - not less than 1.75:1; and * gearing ratio (outstanding debt divided by earnings before interest, tax, depreciation and amortisation excluding any loss/gain on disposal of plant and equipment, fixed rent expense and share based payments expense) - not greater than 3.25:1.
The Group monitors compliance with its financial covenants on a monthly basis and reports compliance on a quarterly basis. The Group has complied with all such requirements during the current and previous year. http://www.afr.com/rw/Wires/Stories/2012-08-13/ASXAnnouncements/JBH_01322247.pdf 4.2 Short Term liquidity
For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.
4.5 Cash flow
JB Hi-Fi Limited
Statement of cash flows
2012 2011
Notes $'000 $'000
Cash flows from operating activities
Receipts from customers 3,448,130 3,267,490
Payments to suppliers and employees (3,171,643) (3,101,569)
Interest and bill discounts received 568 2,236
Interest and other costs of finance paid (12,765) (6,047)
Income taxes paid (49,283) (52,165)
Net cash (outflow) inflow from operating activities 39 215,007 109,945
Cash flows from investing activities
Payments for property, plant and equipment (46,078) (45,063)
Proceeds from sale of plant and equipment 1,257 1,144
Net cash (outflow) inflow from investing activities (44,821) (43,919)
Cash flows from financing activities
Share issue and buy-back transaction costs (40) (801)
Proceeds / (repayment) of borrowings (84,174) 163,334
Payments for debt issue costs (13) (955)
Proceeds from issues of equity securities 3,514 9,305
Dividends paid to members of the parent entity 31 (77,031) (88,411)
Payments for shares bought back 31 - (173,333)
Net cash (outflow) inflow from financing activities (157,744) (90,861)
Net increase (decrease) in cash and cash equivalents 12,442 (24,835)
Cash and cash equivalents at the beginning of the financial year 27,246 51,735
Effects of exchange rate changes on cash and cash equivalents 22 346
Cash and cash equivalents at end of year 11 39,710 27,246
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(c):
Name of entity Country of incorporation Class of shares Equity holding
2012 2011
% %
Parent entity
JB Hi-Fi Limited (i)
Subsidiaries
JB Hi-Fi Group Pty Ltd (ii) Australia Ordinary 100 100
JB Hi-Fi (A) Pty Ltd (ii) Australia Ordinary 100 100
Clive Anthonys Pty Ltd (ii) Australia Ordinary 100 100
Rocket Replacements Pty Ltd (ii) Australia Ordinary 100 100
JB Hi-Fi Group (NZ) Limited New Zealand Ordinary 100 100
JB Hi-Fi NZ Limited New Zealand Ordinary 100 100
(i) JB Hi-Fi Limited is the head entity within the tax-consolidated group.
(ii) These wholly-owned subsidiaries are members of the tax-consolidated group.
In addition, JB Hi-Fi Limited has effective control over the JB Hi-Fi Limited Employee …show more content…
Share Trust, which administers shares issued through the Company's employee option plan. This entity is also consolidated. http://www.afr.com/rw/Wires/Stories/2012-08-13/ASXAnnouncements/JBH_01322247.pdf 2.5 Geographic Locations
(As at 31 Dec 2012)
Revenue Profit Assets
(AUD’000) (AUD’000) (AUD’000)
Australia 1,724,002 136,843 921,769
New Zealand 92,246 2,967 67,112
(As at 31 Dec 2011)
Revenue Profit Assets
(AUD’000) (AUD’000) (AUD’000)
Australia 1,677,286 133,436 827,593
New Zealand 97,443 2,670 60,695
http://www.jbhifi.com.au/documents/reports/123_2013-02-11_8-08-57.pdf
3.3 Risk and Solutions
(a) Market risk
(i) Foreign currency risk management
The majority of the Group’s operations are denominated in the functional currency of the country of operation and are therefore not exposed to foreign currency risk.
That is, transactions and balances related to the Australian operations are denominated in Australian dollars and transactions and balances related to the New Zealand operations are denominated in New Zealand dollars.
(ii) Cash flow and fair value interest rate risk
The Group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts. 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. Interest rate swap
contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the cash flow exposures on the issued variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using the curves at reporting date and the credit risk inherent in the contract, as disclosed below. The average interest rate is based on the outstanding balances at the start of the financial year.
(b) Liquidity risk
Ultimate responsibility for liquidity risk management rests with the board of directors, who assess the Group’s short, medium and long term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash flows.
(c) Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has endeavoured to minimise its credit risk by dealing with creditworthy counterparties. The Group's exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. The Group does not have any significant credit risk exposure to any single counterparty or any Group of counterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any allowance for impairment, represents the Group’s maximum exposure to credit risk.
(d) Fair value of financial instruments
The only financial liabilities or financial assets carried at fair value are the interest rate swaps. The directors consider the interest rate swaps to be Level 2 financial instruments because, unlike Level 1 financial instruments, their measurement is derived from inputs other than quoted prices that are observable for the assets or liabilities, either directly (as prices) or indirectly (derived from prices). The interest rate swaps fair value's have been calculated and supported by third party valuations. http://www.afr.com/rw/Wires/Stories/2012-08-13/ASXAnnouncements/JBH_01322247.pdf 4.0 Financial analysis
4.1 Structure of Capital
The Board reviews the capital structure on an ongoing basis. The Group’s policy is to maintain an optimal capital structure to reduce the cost of capital and to ensure the Group has access to adequate capital to sustain the future development of the business.
In order to maintain or adjust the capital structure, the Group may adjust the level of dividends paid to shareholders, return capital to shareholders, buy back shares, issue new shares or sell assets to reduce debt. In the prior period, the Group completed a $173,333 thousand off-market share buy-back, refer note 31 for further details.
As part of its capital management program, the Group monitors the return on invested capital and the gearing ratio. The Group defines return on invested capital as earnings before interest and tax (EBIT) divided by the sum of total equity plus net debt and gearing as term debt excluding capitalised borrowing costs, plus bank overdrafts and hire purchase liabilities, divided by earnings before interest, taxation, depreciation and amortisation (EBITDA).
The Board has adopted a policy of monitoring the dividend payout ratio and targeting a payout ratio of 60% of net profit after tax as it seeks to strike a balance between shareholder returns and ensuring adequate capital is retained for the growth of the business so as to maximise long-term shareholder returns.
The Group’s return on invested capital and gearing ratios as at 30 June 2012 and 30 June 2011 were as follows:
Consolidated
2012 2011
$'000 $'000
Profit before tax 148,373 158,581
Net finance costs 13,086 4,033
EBIT 161,459 162,614
Borrowings 149,775 232,582
Cash and cash equivalents 39,710 27,246
Net debt 110,065 205,336
Total equity 184,501 152,313
Invested capital 294,566 357,649
Return on invested capital 54.8% 45.5%
Gearing
Term debt 150,000 233,333
EBIT 161,459 162,614
Depreciation and amortisation 30,754 27,287
EBITDA 192,213 189,901
Net loss on disposal of plant and equipment (i) 755 725
Fixed rent expense (i) 2,117 2,250
Share based payments expense (i) 1,241 4,519
Adjusted EBITDA 196,326 197,395
Gearing 0.76 1.18
(i) As required under the terms of the syndicated facilities agreement, for the purposes of calculating the gearing ratio the impact of loss/gain on disposal of plant and equipment, fixed rent expense and share based payments expense are excluded from the calculation.
There were no changes in the Group’s approach to capital management during the year.
The terms of certain financing arrangements of the Group contain financial covenants that require maintenance of the following ratios: * fixed charge cover ratio (the sum of earnings before interest, tax, depreciation and amortisation excluding any loss/gain on disposal of plant and equipment, fixed rent expense and share based payments expense divided by the sum of interest expense plus operating lease expense plus rent expense) - not less than 1.75:1; and * gearing ratio (outstanding debt divided by earnings before interest, tax, depreciation and amortisation excluding any loss/gain on disposal of plant and equipment, fixed rent expense and share based payments expense) - not greater than 3.25:1.
The Group monitors compliance with its financial covenants on a monthly basis and reports compliance on a quarterly basis. The Group has complied with all such requirements during the current and previous year. http://www.afr.com/rw/Wires/Stories/2012-08-13/ASXAnnouncements/JBH_01322247.pdf 4.2 Short Term liquidity
For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.
4.5 Cash flow
JB Hi-Fi Limited
Statement of cash flows
2012 2011
Notes $'000 $'000
Cash flows from operating activities
Receipts from customers 3,448,130 3,267,490
Payments to suppliers and employees (3,171,643) (3,101,569)
Interest and bill discounts received 568 2,236
Interest and other costs of finance paid (12,765) (6,047)
Income taxes paid (49,283) (52,165)
Net cash (outflow) inflow from operating activities 39 215,007 109,945
Cash flows from investing activities
Payments for property, plant and equipment (46,078) (45,063)
Proceeds from sale of plant and equipment 1,257 1,144
Net cash (outflow) inflow from investing activities (44,821) (43,919)
Cash flows from financing activities
Share issue and buy-back transaction costs (40) (801)
Proceeds / (repayment) of borrowings (84,174) 163,334
Payments for debt issue costs (13) (955)
Proceeds from issues of equity securities 3,514 9,305
Dividends paid to members of the parent entity 31 (77,031) (88,411)
Payments for shares bought back 31 - (173,333)
Net cash (outflow) inflow from financing activities (157,744) (90,861)
Net increase (decrease) in cash and cash equivalents 12,442 (24,835)
Cash and cash equivalents at the beginning of the financial year 27,246 51,735
Effects of exchange rate changes on cash and cash equivalents 22 346
Cash and cash equivalents at end of year 11 39,710 27,246