20-F 1 a06-11910_120f.htm ANNUAL AND TRANSITION REPORT OF FOREIGN PRIVATE ISSUERS

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 20-F

 

(Mark One)

 

o  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ý  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2006

 

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

o  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number:  001-31823

 

RINKER GROUP LIMITED

ABN 53 003 433 118

(Exact name of Registrant as specified in its charter)

 

New South Wales, Australia

(Jurisdiction of incorporation or organization)

 

Level 8, Tower B, 799 Pacific Highway, Chatswood, NSW 2067, Australia

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Ordinary Shares(1)

 

New York Stock Exchange

American Depositary Shares(2)

 

New York Stock Exchange

 


 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 


 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

 


 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual report:

 

Ordinary shares, fully paid    910,116,219

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes  ý   No  o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes  o   No  ý

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o

 

Indicate by check mark which financial statement item the registrant has elected to follow

 

Item 17  o   Item 18  ý

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o   No  ý

 


(1)  Not for trading but only in connection with the listing of the American Depositary Shares.

 

(2)  Evidenced by American Depositary Receipts, each American Depositary Share representing five Ordinary Shares.

 

 



 

TABLE OF CONTENTS

 

Australian Adoption of A-IFRS

4

 

 

 

 

 

Certain definitions

4

 

 

 

 

 

Where you can find more information about Rinker Group Limited

6

 

 

 

 

 

Forward-Looking Statements

6

 

 

 

 

 

Item 1

Identity of Directors, Senior Management and Advisors

7

 

 

 

 

 

Item 2

Offer Statistics and Expected Timetable

7

 

 

 

 

 

Item 3

Key Information

7

 

Currency of Presentation and Exchange Rates

7

 

A.

Selected Financial Data - US Dollars

8

 

B.

Capitalization and Indebtedness

10

C.

Reasons for the Offer and Use of Proceeds

10

D.

Risk Factors

10

E.

Supplementary Information - Australian Dollar/Exchange Rates

15

 

 

 

Item 4

Information on the Rinker group

16

A.

History and Development of the Rinker group

17

B.

Business Overview

19

C.

Organizational Structure

36

D.

Description of Property, Plant And Equipment

37

 

 

 

Item 5

Operating and Financial Review and Prospects

40

Significant Events in fiscal year 2006

40

 

Events subsequent to March 31, 2006

40

Basis of preparation and presentation

41

Critical accounting policies

41

A.

Management discussion and analysis of the financial results

45

 

B.

Liquidity and Capital Resources

61

C.

Research and Development, Patents and Licenses

67

D.

Trend Information

67

E.

Off-balance sheet financial arrangements

67

F.

Contractual obligations and commercial commitments

68

G.

Major restructuring and rationalization charges

68

H.

Details of defined benefit pension plans

68

 

 

 

Item 6

Directors, Senior Executives, and Employees

71

A.

Details of Directors and Senior Executives

71

B.

Compensation Details of Key Management Personnel

76

C.

Board Practices and Corporate Governance

99

D.

Employees

117

E.

Share Ownership

118

 

 

 

Item 7

Major Shareholders and Related Party Transactions

119

A.

Major Shareholders

119

B.

Related Party Transactions

119

C.

Interests of Experts and Counsel

119

 

 

 

Item 8

Financial Information

120

A.

Consolidated Statements and Other Financial Information

120

 

2



 

B.

Significant Changes

122

 

 

 

Item 9

The Offer and Listing

122

A.

Listing Details

122

B.

Plan of Distribution

123

C.

Markets

123

D.

Selling Shareholders

123

E.

Dilution

123

F.

Expenses of the Issue

124

 

 

 

Item 10

Additional Information

124

A.

Share Capital

124

B.

Overview of the Rinker constitution

124

C.

Material Contracts

127

D.

Exchange Controls

129

E.

Taxation

129

F.

Dividends and Paying Agents

134

G.

Statement by Experts

134

H.

Documents on Display

134

I.

Subsidiary Information

134

J.

Enforcement of Civil Liabilities

134

 

 

 

Item 11

Quantitative and Qualitative Disclosures about Market Risks

134

 

 

 

Item 12

Description of Securities Other Than Equity Securities

135

 

 

 

Item 13

Defaults, Dividend Arrearages and Delinquencies

135

 

 

 

Item 14

Material Modifications to the Rights of Security Holders and Use of Proceeds

136

 

 

 

Item 15

Controls and Procedures

136

 

 

 

Item 16

Other matters

137

A.

Audit Committee Financial Expert

137

B.

Code of Ethics

137

C.

Principal Accountant Fees and Services

137

D.

Exemptions from the Listing Standards for Audit Committee

139

E.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

140

 

 

 

Item 17

Financial Statements

141

 

 

 

Item 18

Financial Statements

141

 

 

 

EXHIBITS

142

 

3



 

Australian Adoption of Australian Equivalents to International Financial Reporting Standards

 

Rinker has adopted Australian Equivalents to International Financial Reporting Standards (A-IFRS) for its current fiscal year ended March 31, 2006.  Accordingly, Rinker’s accounting policies have now been amended to ensure consistency with A-IFRS and results shown for fiscal year 2006 have been prepared under those A-IFRS accounting policies. 

 

In addition, results shown for the year ended March 31, 2005 have been restated to be comparable to the current year. 

 

The principal impact of A-IFRS on reported results is the reduction in goodwill amortization expense to zero.  Prior to the adoption of A-IFRS Rinker’s goodwill amortization expense during the year ended March 31, 2005 was US$56.3 million.  Additional information is included in Note 1 in the financial statements included elsewhere in this annual report.

 

Compliance with A-IFRS ensures compliance with International Financial Reporting Standards. 

 

Certain definitions

 

The fiscal year for Rinker ends on March 31.  As used throughout this annual report, unless otherwise stated or the context otherwise requires, the fiscal year ended March 31, 2006 is referred to as fiscal year 2006 and other fiscal years are referred to in a corresponding manner.  All other references to years are specified and relate to calendar years.

 

References to tonnes herein are to metric tonnes, each of which equals approximately 2,205 pounds or 1.102 short tons.  Certain measures of distance referred to herein are stated in kilometers, each of which equals approximately 0.62 miles.  Certain measures of area referred to herein are stated in square kilometers or hectares; one square kilometer equals 0.3861 square miles and one hectare equals 2.47 acres.  Certain measures of volume referred to herein are stated in cubic meters, each of which equals approximately 1.31 cubic yard.

 

Estimates with respect to market size information represent the judgment of the management of Rinker, based on records and experience of Rinker and its subsidiaries as well as information available from industry and government publications and other sources.

 

Any discrepancies between totals and sums of components in tables contained in this annual report are due to rounding.

 

Unless otherwise indicated, all references in this annual report to:

 

“A-IFRS” means Australian equivalents to International Financial Reporting Standards, which are currently the accounting principles generally accepted in Australia.

 

“ADR” means American Depositary Receipt, evidencing American Depositary Shares.

 

“American Depositary Shares” or “ADSs” each represent five ordinary shares.

 

“associate or associated company” means in relation to Rinker, an entity other than a consolidated entity, where Rinker has the capacity to influence significantly the financial and operating policies of the entity.

 

“ASX” means the Australian Stock Exchange.

 

4



 

 “consolidated entity,” means an entity that Rinker is required to consolidate within the financial statements.

 

“Consolidated” means, in relation to the financial statements for the year ended March 31, 2006 and 2005, the consolidated financial statements for Rinker Group Limited and controlled entities. 

 

 “CSR” means CSR Limited, ABN 90 000 001 276, an Australian company.

 

“CSR group” means CSR and the entities that CSR must consolidate under A-IFRS.

 

“EBIT” means profit before finance and income tax expense in accordance with A-IFRS.

 

“finance” means borrowing costs net of interest income.

 

“financial statements” means: (i) the audited consolidated balance sheets of the Rinker group as at March 31, 2006 and 2005; and (ii) the audited consolidated income statements, statements of recognized income and expense, and cashflow statements of the Rinker group for each of the one-year periods ended March 31 for the years 2006 and 2005, together with accompanying notes included herein at pages F-1 to F-63. 

 

“fiscal year” means financial year ended March 31.

 

“GST” means Australian goods and services tax.

 

“hedge settlement rate” means the 9:55 a.m. hedge settlement rate compiled by the Australian Financial Markets Association at the end of each month in the period, as displayed on the Reuters financial news service.

 

“heritage business” means the business excluding all acquisitions that have not been included in Rinker group companies’ prior year operations for the full prior fiscal year.

 

“Kiewit” means Rinker Materials Western, Inc. (formerly known as Kiewit Materials Company), a company incorporated in Delaware, and its subsidiaries, which was acquired by Rinker Materials in September 2002.

 

“NYSE” means the New York Stock Exchange.

 

“ordinary shares” means fully paid ordinary shares in the issued capital of Rinker.

 

“Readymix” means Rinker Australia Pty Limited, ABN 87 099 732 297, an Australian corporation, and its subsidiaries.

 

 “Rinker” means Rinker Group Limited, ABN 53 003 433 118, an Australian corporation. 

 

“Rinker Materials” means Rinker Materials Corporation, a company incorporated in Georgia, and its subsidiaries.

 

“Rinker group” means Rinker and its consolidated entities.

 

“SEC” means the Securities and Exchange Commission.

 

5



 

“Superseded Australian GAAP” means accounting principles accepted in Australia, prior to the adoption of A-IFRS.

 

 “trading revenue” means revenue received from customers (net of discounts, returns and allowances), including fees for services as agent, rents and royalties.

 

“US GAAP” means accounting principles generally accepted in the United States of America.

 

Where you can find more information about Rinker Group Limited

 

Rinker is subject to the reporting obligations contained in the Securities Exchange Act of 1934.  You may read and copy any document that Rinker files at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549.  Rinker’s filings with the SEC are available over the Internet at the SEC’s website at www.sec.gov.  Copies of these filings can also be obtained from Rinker upon request.  Requests should be directed to Rinker Group Limited, Level 8, Tower B, 799 Pacific Highway, Chatswood, New South Wales 2067, Australia; Attention: Investor Relations.  Telephone requests may be directed to the attention of Investor Relations at  +61 2 9412 6608.

 

Forward-Looking Statements

 

This annual report contains a number of forward-looking statements.  Such statements can be identified by the use of forward-looking words such as “may,” “should,” “expect,” “anticipate,” “estimate,” “scheduled” or “continue” or the negative thereof or comparable terminology.  Rinker can give no assurances that the expected impact on financial condition, anticipated trading results or returns of entities in the Rinker group would not differ materially from the statements contained in this annual report.

 

Such forward-looking statements are not guarantees of future results or performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of Rinker, which may cause actual results of the Rinker group or industry results to differ materially from those expressed or implied in the statements contained in this annual report.  Such factors include, among other things, the following:

 

      general economic and business conditions in the United States (including the regional economies within the United States) and Australia;

 

      trends and business conditions in the United States and Australian building and construction industries;

 

      changes in interest rates;

 

      competition from other suppliers in the industries in which the Rinker group operates;

 

      changes in the Rinker group’s strategies and plans regarding acquisitions, dispositions and business development;

 

      the Rinker group’s ability to efficiently integrate past and future acquisitions;

 

      compliance with, and potential changes to, governmental regulations related to the environment, employee safety and welfare and other matters related to the entities of the Rinker group; and

 

6



 

      changes in exchange rates, in particular the rate of exchange between United States dollars and Australian dollars.

 

The foregoing list of factors is not exhaustive.  When relying on forward-looking statements to make decisions with respect to investing in Rinker shares, a potential investor should carefully consider the foregoing factors and other uncertainties and potential events.  Rinker does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by Rinker or on Rinker’s behalf.  For a discussion of certain of these factors, see “Item 3.D. - Risk Factors,” and see also “Item 3. - Key Information,” “Item 4. - Information on the Rinker group,” “Item 5. - Operating and Financial Review and Prospects,” “Item 8. - Financial Information” and “Item 11. - Quantitative and Qualitative Disclosures about Market Risks.”

 

PART I

 

Item 1           Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2           Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3           Key Information

 

Currency of Presentation and Exchange Rates

 

Rinker Materials maintains its financial records in US dollars and Readymix maintains its financial records in Australian dollars.  Under A-IFRS, Rinker’s presentation currency is US$, although Rinker intends to continue to disclose Readymix results in both US$ and A$.   In this annual report, unless otherwise specified herein or the context requires, references to “US$” or “US dollars” are to United States dollars and references to “A$” or “Australian dollars” are to Australian dollars.  

 

For the year ended March 31, 2006, around 80% of the Rinker group’s trading revenue was generated by Rinker Materials in the United States.  For the years ended March 31, 2006 and 2005 there were virtually no movements of currency between US dollars and Australian dollars that resulted in a material amount of realized exchange gains or losses.  As a result, the only significant impact of changes in the US dollar/Australian dollar exchange rate is one of accounting translation for financial reporting purposes.  An appreciation of the A$ relative to the US$ would be expected to have a favorable impact on the Rinker group’s reported US$ results.

 

The directors believe that the best measure of performance for Rinker Materials in the United States and Readymix in Australia is their respective local currencies in as much as each generates all revenue and incurs all costs in that local currency.  Set out below is selected financial data for the Rinker group in US dollars. 

 

For the purposes of this annual report, A$ transactions are translated into US$ at the average of the hedge settlement rate at the end of each month in the period presented and A$ balances are translated into US$ at the hedge settlement rate at fiscal year end, consistent with the requirements of A-IFRS and US GAAP.

 

7



 

The following are the average of the monthly rates expressed in US dollars per A$1.00 that have been used to translate Readymix A$ transaction amounts in this annual report:

 

Year ended March 31, 2006

 

0.7471

 

Year ended March 31, 2005

 

0.7357

 

 

Unless otherwise stated the following year-end rates, expressed in US dollars per A$1.00 have been used to translate Readymix A$ balances at March 31 into US dollars in this annual report:

 

March 31, 2006

 

0.7155

 

March 31, 2005

 

0.7713

 

 

The Australian dollar is convertible into United States dollars at freely floating rates and there are currently no restrictions on the flow of Australian currency between Australia and the United States.

 

A.    Selected Financial Data

 

The following table presents selected financial data of the Rinker group in United States dollars.  This table should be read in conjunction with “Item 5. - Operating and Financial Review and Prospects,” and the audited financial statements that are included elsewhere in this annual report.

 

The US GAAP financial statements and other information for the fiscal years ended March 31, 2003 and 2002 have been prepared on a carve-out basis and include the balance sheet, income statement and cash flows of Rinker Materials US businesses and the Readymix businesses that were transferred to the Rinker group from CSR prior to the demerger of Rinker group from CSR effective March 28, 2003.  These financial statements have been prepared from historical accounting records of the CSR group and present all of the operations of the business as if the Rinker group had been a separate economic entity inclusive of all of these businesses for all periods presented.  The historical financial information presented for fiscal years prior to 2004 is not indicative of the Rinker group’s future financial performance.

 

The balance sheet data as of March 31, 2006 and 2005 and income statement data for the years ended March 31, 2006 and 2005, set forth below are derived from, and are qualified in their entirety by reference to, the Rinker group’s audited financial statements that are included elsewhere in this annual report. With respect to the US GAAP selected financial data, information for the Rinker group is provided for fiscal years 2006, 2005, 2004, 2003 and 2002. 

 

The Rinker group’s financial statements are prepared in accordance with A-IFRS, which differs in certain material respects from US GAAP.  See Note 40 to the financial statements that are included elsewhere in this annual report for a description of the principal differences between A-IFRS and US GAAP as they relate to the Rinker group and a reconciliation of net profit and shareholders’ equity for the years and as at the dates therein indicated.

 

8



 

As permitted by SEC Form 20-F, historical data for fiscal year 2004 and prior fiscal years has not been prepared under A-IFRS and therefore has not been presented for comparative purposes.

 

 

 

As of and for the year ended March 31

 

 

 

in $ millions except number of shares, per
share data and employees

 

 

 

Note

 

2006

 

2005

 

 

 

 

 

US$

 

US$

 

Amounts in accordance with A-IFRS

 

 

 

 

 

 

 

Balance Sheet Data

 

 

 

 

 

 

 

Total assets

 

 

 

4,457

 

4,419

 

Total liabilities

 

 

 

1,770

 

1,868

 

Contributed equity

 

 

 

1,139

 

1,476

 

Net assets

 

 

 

2,687

 

2,551

 

 

 

 

 

 

 

 

 

Income Statement Data

 

 

 

 

 

 

 

Trading revenue

 

 

 

5,108

 

4,310

 

Profit before finance and income tax expense (“EBIT”)

 

(1)

 

1,146

 

775

 

 

 

 

 

 

 

 

 

Borrowing costs net of interest income (“finance costs”)

 

 

 

(20

)

(32

)

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

(382

)

(245

)

 

 

 

 

 

 

 

 

Net profit attributable to minority interests

 

 

 

3

 

5

 

 

 

 

 

 

 

 

 

Net profit attributable to members of Rinker

 

(2)

 

740

 

493

 

 

 

 

 

 

 

 

 

Per Share Information

 

 

 

 

 

 

 

Weighted average number of ordinary shares (millions)

 

 

 

 

 

 

 

Basic

 

 

 

919.8

 

941.2

 

Diluted

 

 

 

922.6

 

942.2

 

Basic and diluted earnings (US dollars) per share

 

 

 

 

 

 

 

Basic

 

 

 

0.80

 

0.52

 

Diluted

 

 

 

0.80

 

0.52

 

Dividends provided for (US dollars) per share

 

(3)

 

0.21

 

0.11

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Capital Expenditure – Operating

 

(4)

 

198

 

193

 

Capital Expenditure – Development

 

(5)

 

347

 

121

 

Depreciation, depletion and amortization

 

 

 

209

 

195

 

Employees at fiscal year end

 

 

 

14,358

 

13,279

 

 

9



 

 

 

 

 

As of and for the year ended March 31

 

 

 

 

 

US$ in millions
except per share data

 

 

 

Note

 

2006

 

2005

 

2004

 

2003

 

2002

 

Amounts in accordance with US GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

4,535

 

4,581

 

4,206

 

3,815

 

2,845

 

Net assets

 

 

 

2,727

 

2,617

 

2,235

 

1,785

 

1,272

 

Trading revenue

 

 

 

5,108

 

4,312

 

3,706

 

2,956

 

2,577

 

Net profit attributable to members of Rinker

 

(2)

 

738

 

490

 

346

 

259

 

168

 

Basic earnings (US dollars) per share

 

(6) (7)

 

0.80

 

0.52

 

0.37

 

0.27

 

0.18

 

Diluted earnings (US dollars) per share

 

(6) (7)

 

0.80

 

0.52

 

0.37

 

0.27

 

0.18

 

Dividends provided for or paid per share

 

(3)

 

0.21

 

0.11

 

0.09

 

0.01

 

 

 

(1)   Throughout this annual report “EBIT” means profit before finance and income tax expense in accordance with A-IFRS.

 

(2)   Income from continuing operations is the same as net profit attributable to members of Rinker, and income from continuing operations per share is the same as basic earnings per share.

 

(3)   Dividends shown for 2006, 2005 and 2004 represent the amounts provided for.  The dividends in 2003 represent amounts paid to CSR when Rinker was a wholly owned subsidiary.  Dividend per share information for fiscal years 2003 and 2002 has therefore been based on the 944.7 million shares issued and outstanding subsequent to the demerger. These amounts are not necessarily representative of the amounts that would have been paid if Rinker had been a separate publicly listed company.

 

(4)   Operating capital expenditure represents capital expenditure required to maintain existing operating capabilities.

 

 (5)  Development capital expenditure represents capital expenditure to acquire businesses, expand operating capabilities and extend market coverage.

 

(6)   As a result of the demerger from CSR, 944.7 million Rinker ordinary shares were listed on the ASX on March 31, 2003 (on a deferred settlement basis), prior to being issued on April 11, 2003.   Prior to that time Rinker was a 100% owned subsidiary of CSR.  The weighted average number of ordinary shares assumes that same number of shares existed throughout fiscal years 2003 and 2002.

 

(7)   During the year ended March 31, 2005 Rinker issued 0.2 million shares as part of the Employee Universal Share Plan “USP”.  During the year ended March 31, 2006, Rinker purchased 31.1 million shares as part of an on-market buy-back.  See “Item 16E – Purchase of Equity Securities by the Issuer and Affiliated Purchasers” for further details.

 

B.    Capitalization and Indebtedness

 

Not applicable.

 

C.    Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.    Risk Factors

 

Rinker group entities are subject to various risks resulting from changing economic, political, social, industry, business and financial conditions, particularly in the United States and Australia.  Certain of these risks are described below.  Rinker group entities could also be subject to other risks that management has not anticipated.

 

10



 

Rinker group’s operations are dependent to a significant extent on demand across the construction industry economic cycle and the Rinker group’s revenues and profits in future periods may fluctuate with that cycle.

 

The activity of businesses in the Rinker group is dependent on the level of activity in the construction industry in the various regional markets in the United States and in Australia where Rinker group companies operate.  The construction industry in a given geographic market has historically tended to be cyclical.   Within each geographic region construction industry spending can vary significantly from peak to trough through the business cycle.   The construction industry is also very sensitive to fluctuations in general economic activity in the particular economy.  Rinker estimates that a 1% revenue change related to volumes across the Rinker group as a whole, without regard to the different cycles within each industry, region, or market, would have an annual impact on revenue of approximately US$51 million and on EBIT of approximately US$12 million. Rinker is not able to predict the timing, extent or duration of the business cycles or economic downturns in the construction industry in the geographic regions in which Rinker group companies operate.   Because many of Rinker group’s costs are fixed, if an extended downturn in one or more segments of the construction industry occurs, particularly in Florida or Arizona in the US or in Australia, companies in the Rinker group may not readily be able to reduce their costs in proportion to the extent of the downturn.  Any significant or extended downturn in the construction industry in those geographic regions will negatively affect the Rinker group’s financial performance and condition where revenues fail to grow or fall and costs do not move to compensate.  An overview of the United States and Australian markets is included in “Item 4 – Information on the Rinker group”.

 

The Rinker group’s operations are dependent to a significant extent on demand in selected key US states and the Rinker group’s revenues and hence profits in future periods may fluctuate with the underlying industry economic cycle of those states.

 

A significant proportion of the Rinker group’s revenue was generated from Florida (44%) and Arizona (13%) in the year ended March 31, 2006.  As a result, fluctuations in the underlying economic cycle may result in variations in EBIT in similar proportion to the overall margin impact on Rinker as previously described for the construction industry cycle.  The Rinker group is especially dependent on market demand for its heavy building materials products in those markets.  A downturn in demand in the residential or other heavy building materials markets in these states could have a significant adverse impact on the Rinker group’s financial performance and condition where revenues fail to grow or fall and costs do not move to compensate.  Any adverse impacts on the Florida economy arising from the cessation or significant restriction of quarrying operations in the Lake Belt could also have a material adverse effect on Rinker.  See Legal Proceedings in “Item 8.A. Consolidated Statements and Other Financial Information” on page 120.

 

Government funded construction activity in the US may be lower in future periods and the Rinker group’s revenues and profits in future periods may fluctuate depending on the level of Government funding of civil construction.

 

The Rinker group’s largest exposure to the US civil construction sector is in roads, highways and bridges.  Approximately 13% of the Rinker group’s revenue for the year ended March 31, 2006 is estimated to be related to the US civil construction sector.    Any significant decrease in future US federal or state infrastructure funding levels may negatively affect the Rinker group’s financial performance and condition where revenues fall and costs do not move to compensate.

 

11



 

Rinker group’s operations depend on securing and permitting aggregate reserves that can be supplied economically to growing markets.

 

Construction aggregates are bulky and the cost to transport may surpass the cost of material.  Generally, aggregate is supplied from local quarries.  New quarry sites often take a number of years to develop and must be planned well in advance.  As communities grow, existing quarry locations may be depleted, or quarry production may be restricted by additional regulation and some of the most attractive sites for new quarries may be used for other building, or may be difficult to permit for quarrying.  To meet forecasted needs, Rinker’s strategy is to secure additional land and permits in target markets where possible, and to develop the distribution network to transport aggregates by truck, rail and water in order to maintain economic sources of supply.   Certain quarry permits in South Florida are currently being challenged.  See Legal Proceedings in “Item 8.A. Consolidated Statements and Other Financial Information” on page 120.

 

The Rinker group has grown significantly through acquisitions and may be unable to continue its growth by this means if suitable opportunities cannot be identified. The Rinker group’s performance is also affected by its ability to integrate any acquisitions into its existing operations.

 

The Rinker group has grown significantly in recent years through a series of bolt on acquisitions, the most recent major acquisition being Kiewit in September 2002.  A key element of the Rinker group’s growth strategy is to continue its acquisition strategy.  The Rinker group’s ability to realize benefits from future acquisitions depends, in large part, on its ability to integrate the acquired businesses with its existing operations in a timely and effective manner.  The Rinker group’s efforts to integrate any future acquisitions may not be successful.  The Rinker group’s acquisition strategy also depends on its ability to identify and acquire suitable assets at desirable prices.  The Rinker group may not be successful in identifying or acquiring suitable assets at acceptable prices in the future.  To the extent the Rinker group fails to be successful in acquiring suitable assets at acceptable prices in the future, it is unlikely to be able to continue to grow its earnings at the same rate as it has done in the recent past.

 

Rinker may need to pay for all or part of the purchase price for any future acquisitions with its ordinary shares.  These acquisitions and investments, if they were to occur, could have a diluting effect for Rinker’s shareholders and, whether they are paid for in cash or Rinker shares may cause Rinker’s share price to decrease.

 

The Rinker group may be affected by problems in previously acquired businesses or newly constructed plants.  Unforeseen problems may impact future profits.

 

The Rinker group has completed a number of significant acquisitions and plant construction projects as detailed in “Item 4 – Information on the Rinker group.”  The Rinker group may not have anticipated all problems of acquired businesses and plant construction, and losses associated with these acquisitions or projects may come to light prior to the expiration of any warranty and indemnity protections, or the Rinker group may be unable to enforce such provisions against the parties making the indemnities.   If problems arise they may impact the Rinker group’s future profit if the Rinker group is required to extinguish unforeseen liabilities or there is significant impairment of assets requiring write down at some future date.

 

The Rinker group may be subject to competition from existing and new market entrants and products, which could impact future revenues and profits.

 

Each market in which Rinker group companies operate is highly competitive.  The competitive environment can be significantly affected by a number of regional factors, such as the number of competitors, production capacity, economic conditions and product demand in the relevant regional market.  The pricing policies of competitors and the entry of new competitors into the regional markets in which Rinker group companies operate can have an adverse effect on demand for their products and on

 

12



 

their financial performance or condition where revenues fail to grow or fall and profit margins are reduced.

 

Rinker group companies face competition from alternative products.  For example, the concrete pipe products operations of Rinker Materials and Readymix face competition from plastic, metal and fiber cement pipe products in the smaller diameter size segment of the market.  Product substitution of alternative materials for Rinker group products may have an adverse effect on the Rinker group’s financial performance or condition where revenues fail to grow or fall and profit margins are reduced.  In many markets in which the Rinker group operates there are no significant entry barriers that would prevent new competitors from entering the market or existing competitors from expanding in the market.  

 

Rinker group entities are subject to extensive health, environmental, land use, and other governmental laws and regulations, which could have an impact on the Rinker group’s future financial performance.

 

Rinker group entities are subject to extensive health, environmental, land use, and other governmental laws and regulations and increasing regulatory compliance requirements.  Depending on the extent of future regulations that may be enacted, Rinker group entities may be required to invest in preventive or remedial action, which could be significant, in which case it could have an adverse impact on the Rinker group’s financial performance and condition.    

 

Tighter land use or zoning restrictions affecting existing quarry permits or making new quarry permits more difficult to obtain could also restrict the ability of companies in the Rinker group to conduct their businesses economically or restrict some activities altogether.  Legal challenges to existing permits could restrict the ability of the Rinker group to utilize existing quarry reserves.  See Legal Proceedings in “Item 8.A. Consolidated Statements and Other Financial Information” on page 120 for a discussion of a challenge to certain permits issued in South Florida.

 

Environmental liabilities, if incurred, could have an adverse impact on the Rinker group’s financial performance and condition.  Stricter environmental laws and regulations, or stricter interpretation and enforcement of existing laws or regulations, may impose new liabilities on Rinker group companies or result in the need for additional investments in pollution control equipment, either of which could result in a decline in the Rinker group’s profitability.  Further details regarding environmental regulation and certain liability issues affecting companies within the Rinker group are contained in section “Item 4 – Information on the Rinker group.”

 

Occupational health and safety risks and regulations may have an impact on future productivity and financial performance.

 

Rinker group entities are subject to the operating risks associated with construction materials and other manufacturing and handling risks, including the related storage and transportation of raw materials, products and wastes.  These hazards include storage tank leaks and ruptures, explosions, discharges or releases of hazardous substances, manual handling, exposure to dust and the operation of mobile equipment and manufacturing machinery.

 

Such operating risks can cause personal injury and property damage, and may result in the imposition of civil or criminal penalties.  The occurrence of any of these events may have an adverse effect on the productivity and profitability of a particular manufacturing facility and the operating results of Rinker group entities through increased costs or reduced operating flexibility and productivity.

 

Crystalline silica dust and its control have been identified as an occupational health issue in Rinker group entities’ operations in Australia and in the US.  Rinker group entities use raw materials containing

 

13



 

silica in cement manufacturing, concrete plants, concrete products plants and asphalt plants.  Many quarry products also contain silica. Rinker group entities may face future costs of engineering and compliance to meet new standards relating to crystalline silica since regulatory agencies in Australia and the US are re-examining existing standards and considering stricter exposure limits.  Rinker group entities cannot reliably quantify future claims related to crystalline silica.  Any future claims could have an impact on the Rinker group’s profitability.

 

Labor disputes between Rinker group companies and unions could disrupt operations that could have an impact on the Rinker group’s future financial performance.

 

Approximately forty percent of Rinker Materials’ employees and approximately thirty per cent of Readymix employees are covered by bargaining agreements which periodically come up for renegotiation and renewal.  In the next twelve months, 11 contracts, covering approximately 700 employees, are scheduled to expire in the United States.  In Readymix, Australia, 18 agreements are due to be renegotiated in the next twelve months covering approximately 600 employees.

 

Disputes with trade unions could lead to strikes or other forms of industrial action that could disrupt operations within the Rinker group, raise costs and reduce Rinker group’s revenues and profits.  Any such disruptions to operations within the Rinker group may adversely affect the group’s financial performance and condition through increased costs and reduced productivity.

 

The Rinker group may face potential liability for defective products, which could have an impact on future profits.

 

Due to the nature of its operations, claims against Rinker group entities could arise from defects in material or products manufactured and/or supplied by Rinker group entities.   Purchasers and third parties could make claims against Rinker group entities based on their delivery of defective materials or products, or for damage or loss arising from the use of these defective materials or products.  If any claims of this type are determined against Rinker group entities and if the Rinker group’s existing insurance arrangements do not cover the liability, it could have an adverse effect on the financial performance and condition of the Rinker group due to increased rectification costs or liability for compensation.

 

Antitrust (trade practices) risks may restrict the Rinker group’s business activities and its ability to grow.

 

Rinker group entities are subject to antitrust or trade practices laws.  Antitrust or competition considerations may restrict business activities within the Rinker group and the ability to grow through acquisitions or participate in industry rationalization in particular geographic markets.  This could have an adverse impact on the Rinker group’s financial performance where revenues fail to grow or fall and or profit margins are reduced.

 

Operation and supply failures or shortages could have an impact on the Rinker group’s future revenues and profits.

 

The manufacturing facilities and supply of finished products to customers of Rinker group entities could be disrupted for reasons beyond their control.  These disruptions include extremes of weather, fire, natural catastrophes, supplies of materials, transport logistics, services, energy or fuel, system failures, workforce actions or environmental issues.  Any significant disruptions or shortages could adversely affect Rinker group entities’ ability to make, sell and deliver products, which could cause revenues to decline or costs to increase and result in lower profits.

 

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Rinker group entities may be required to provide further funds to cover the defined benefit obligations of those superannuation (pension) funds in which it participates.

 

Superannuation (pension) funds in which Rinker group entities participate provide both defined benefits and accumulation benefits.  Any funding deficits are intended to be funded progressively by Rinker group entities and all minimum funding requirements have currently been satisfied.  The estimated liability for the total defined benefit obligation, including the US$25.7 million funding deficit for US plans under A-IFRS, is accrued on the balance sheet.  There is a risk that, in the future, changes in the value of the funds’ assets, changes in actuarial determinations of the funds’ liabilities or changes to government legislation could require Rinker group entities to increase their current level of contributions to these funds and adversely impact financial performance.  Details of Rinker group entities’ defined benefit plans are included in “Item 5.H. – Details of defined benefit pension plans”.  

 

The Rinker group could be affected by interest rate fluctuations.  If interest rates rise, borrowing costs may be higher, and higher interest rates may adversely affect construction activity levels.

 

The Rinker group’s external borrowings at March 31, 2006 were US$651 million of which, prior to the effect of interest rate swaps, approximately US$356 million or 55% was paying interest at fixed rates.  Taking into account around US$250 million of variable to fixed rate interest rate swaps in place at March 31, 2006, the Rinker group’s net fixed interest rate borrowings were approximately US$606 million or 93% of gross debt.  Accordingly, movements in interest rates may impact the Rinker group’s debt servicing obligations and borrowing costs, impacting its financial performance.  Rinker estimates that based on the amount of its outstanding indebtedness at March 31, 2006, a 1% increase in variable interest rates would have had an insignificant adverse impact on the Rinker group’s net profit for the year ended March 31, 2006.

 

An increase in interest rates may reduce construction activity levels within both the residential and commercial segments of the market.  This could have an adverse impact on the Rinker group’s financial performance where revenues fail to grow or fall and costs do not move to compensate.  Details on interest rate risks are included in “Item 11 - Quantitative and Qualitative Disclosure about Market Risks.”

 

General risks associated with investing in shares may impact the value of Rinker shares and ADRs.

 

The price of Rinker ordinary shares and ADRs is subject to many influences that may affect the broad trend in the stock market or the share prices of individual companies.  The price at which Rinker ordinary shares trade on ASX and at which Rinker ADRs trade on NYSE may be affected by a number of factors unrelated to the Rinker group’s financial and operating performance and over which Rinker has no control.  Factors such as currency exchange rates, product prices, the level of industrial production, changes in government fiscal, monetary and regulatory policy, investor attitudes, stock market fluctuations in Australia and other stock markets around the world, changes in interest rates and inflation, and variations in general market or economic conditions could all have an adverse effect on the price of Rinker ordinary shares and ADRs.

 

E.     Supplementary Information - Australian Dollar/Exchange Rates

 

Currency of Presentation and Exchange Rates

 

Rinker’s US and Australian subsidiaries each generate virtually all revenue and incur all costs in their local currency.  As a result, directors believe their performance is best measured in their local currency.  At the group level, Rinker Materials represents around 80% of earnings.  As a result, US$ performance represents the most appropriate measure of Rinker’s performance and value.  Under A-IFRS, Rinker’s

 

15



 

selected reporting currency is US$, although Rinker group intends to continue to disclose Readymix results in both US$ and A$.

 

Readymix Australian dollar results are translated to US dollar presentation currency using the principles set out in AASB 121 “The Effects of Foreign Exchange Rates.”  Assets and liabilities are translated at the closing rate and income/expense items are translated using an average rate (the closing rate for the month the transactions occurred).  All foreign currency translation adjustments are taken directly to equity through foreign currency translation reserve.  The financial statements of the parent entity (Rinker Group Limited) have been translated into United States dollars using the methodology described above.  This is consistent with both Australian Accounting Standard AASB 121 “The Effects of Changes in Foreign Exchange Rates” and SEC Rule 3-20(d) of Regulation S-X.  The exchange rate used is the Australian 9:55 a.m. hedge settlement rate at the end of each month. 

 

The following table sets forth, for each of the Rinker group’s fiscal years indicated and for the most recent months, the high, low, average and period-end Noon Buying Rates for Australian dollars expressed in United States dollars per A$1.00.

 

Year ended March 31

 

At Period
End

 

Average
Rate(1)

 

High

 

Low

 

2005

 

0.7729

 

0.7423

 

0.7974

 

0.6840

 

2006

 

0.7165

 

0.7531

 

0.7834

 

0.7056

 

Month of

 

 

 

 

 

 

 

 

 

December, 2005

 

0.7342

 

0.7423

 

0.7567

 

0.7261

 

January, 2006

 

0.7572

 

0.7505

 

0.7572

 

0.7379

 

February, 2006

 

0.7430

 

0.7418

 

0.7548

 

0.7363

 

March, 2006

 

0.7165

 

0.7266

 

0.7458

 

0.7056

 

April, 2006

 

0.7593

 

0.7369

 

0.7593

 

0.7177

 

May, 2006 (to May 11)

 

0.7781

 

0.7705

 

0.7781

 

0.7607

 

 

(1)   The average of the Noon Buying Rates on the last day of each month during the year or the average for each day of the month as applicable.

 

On May 11, 2006, the Noon Buying Rate was A$1.00 = US$0.7781.

 

The Australian dollar is convertible into United States dollars at freely floating rates and there are currently no restrictions on the flow of Australian currency between Australia and the United States.

 

Item 4             Information on the Rinker group

 

Estimates with respect to market size information represent the judgment of the management of Rinker, based on records and experience of Rinker and its subsidiaries, as well as information available from industry and government publications and other sources.

 

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A.    History and Development of the Rinker group

 

Background

 

Rinker (formerly HBM International Limited which was formerly CSR Investments Overseas Limited) was incorporated under the laws of the Commonwealth of Australia on December 23, 1987 and operates under the Corporations Act 2001.  From incorporation to the date of the demerger, Rinker operated as a 100% owned subsidiary of CSR, holding principally the CSR group’s non-Australian interests.

 

On March 28, 2003, the Federal Court of Australia approved the demerger of Rinker from CSR. On March 31, 2003, Rinker ordinary shares commenced trading on the ASX (on a deferred settlement basis). In accordance with the terms of the demerger, Rinker issued 944.7 million ordinary shares on April 11, 2003. 

 

The effect of the demerger resulted in Rinker owning the ordinary shares of Rinker Materials and Readymix and becoming a separate company listed on the ASX.  As at March 31, 2006 the Rinker group had total assets of US$4,457 million and generated trading revenue of US$5,108 million in the year ended March 31, 2006.

 

Rinker has its registered office at Level 8, Tower B, 799 Pacific Highway, Chatswood, NSW 2067, Australia, telephone (61-2) 9412 6600.

 

General

 

Rinker group companies are leading manufacturers and suppliers by revenue of heavy building materials in the US and Australia, based on published financial data of the Rinker group’s competitors.  In the US, Rinker’s subsidiary Rinker Materials is one of the largest producers of heavy building materials, also based on published financial data of Rinker Materials’ competitors, with its principal operations in Florida and Arizona, and additional operations in 27 other states.   Products include aggregate, cement, concrete, concrete block, asphalt and concrete pipe.  Rinker Materials also has a gypsum wallboard distribution business in Florida.  Since 1998, the Rinker group has grown through a number of acquisitions, in particular through the following acquisitions by Rinker Materials:

 

American Limestone Company

 

US$211 million

 

June 2000

 

 

 

 

 

 

Florida Crushed Stone Company

 

US$348 million

 

July 2000

 

 

 

 

 

 

Kiewit Materials Company

 

US$540 million

 

September 2002

 

During the year ended March 31, 2005 Rinker Materials divested its non-core Prestress and Polypipe polyethylene pipe businesses for total cash proceeds of US$100 million.

 

In Australia, Rinker’s subsidiary Readymix is one of the leading producers of aggregate, concrete, concrete pipe and other concrete products, based on Readymix’s knowledge of the industry.  Readymix also holds a substantial joint venture interest in an Australian cement manufacturer.  In China, Readymix operates four concrete plants in the northern cities of Tianjin and Qingdao.

 

During the year ended March 31, 2006 Readymix divested its non-core 50% joint venture interest in the Emoleum asphalt and road pavement maintenance business.  Readymix has retained a long term aggregate supply contract with the purchaser, a subsidiary of Downer EDI Limited.

 

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At March 31, 2006 commitments for capital expenditure totaled US$63.8 million. 

 

Rinker is not directly or indirectly controlled by another corporation or by any foreign government and does not know of any arrangement the operation of which may at a subsequent date result in a change of control of Rinker.

 

 

The chart above provides an overview of Rinker group companies’ operations.

 

Business Strategy

 

The Rinker group aims to be in the top quartile of its construction materials industry peers with respect to growth in revenue, profits and shareholder value, and to deliver top quartile shareholder returns.  Rinker group companies’ strategies to achieve these goals include:

 

Achieving the number one or number two market position in each market served in the US

 

The management of Rinker believes that performance is enhanced by holding the number one or number two position by market share in terms of revenue in all of the markets it serves.  Rinker group companies have applied this strategy in most of their acquisitions.   A substantial portion of its revenue is now generated in markets where it has leading positions.  If this objective is not met after specific plans to achieve it have been implemented, the relevant business may be considered for divestment.

 

Overall cost leadership

 

Companies in the Rinker group aim to hold cost leadership positions in the majority of their markets.  Rinker group companies aim to instill a culture of continuous improvement through the benchmarking of performance against competitors as well as the implementation of operational improvement projects.  Businesses within the Rinker group have a track record of generating significant cost savings with total estimated savings from these initiatives for the year ended March 31, 2006 of US$52 million.

 

Continued growth through acquisitions

 

Rinker has grown significantly in recent years through regional and bolt-on acquisitions (acquisitions of businesses which thereafter share existing administration, supply and distribution arrangements).

 

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The Rinker group’s acquisition growth strategy is to:

 

      Hold or develop the number one or number two positions by market share in terms of revenue, in each region, with a focus on Rinker Materials’ growth in US states where population growth is above the national average;

 

      Focus on the acquisition of quarry operations in new regions with the acquisition of integrated operations considered on a case by case basis;

 

      Consider acquisitions, such as concrete, cement and asphalt, to create vertically integrated operations, in markets where Rinker group companies have quarry operations; and

 

      Consider small, value adding expansion opportunities in Australia, and in concrete pipe and gypsum distribution in the US.

 

Rinker Materials is expected to use its regional presence in the south east and western US to pursue bolt-on acquisitions with the current objective of investing an average of US$300 million a year on acquisitions and greenfields expansion.  The Rinker group continues to pursue potential major acquisitions which can generate a positive return for shareholders.

 

A safe workplace

 

Rinker group companies recognize that good safety performance is an integral part of good business performance. The Rinker group is focused on improving the safety of its companies’ workplaces in the interests of all stakeholders.  Rinker group companies’ policies and approaches to managing health and safety are based on the key principles of management accountability, personal responsibility and training.

 

B.    Business Overview

 

1.     Introduction

 

Business segments are reported along geographic lines (Rinker Materials in the United States and Readymix in Australia and China) and within the United States, along product lines.  The business segments for Rinker Materials are Aggregate; Cement; Concrete, concrete block and asphalt; Concrete pipe and products; and Other.  Readymix is one segment.  These segments are the same as those used for internal management as the basis for making decisions regarding the allocation of resources.

 

Rinker Materials business segments:

 

      Aggregate:  Rinker Materials extracts aggregate, which is crushed and sized for delivery to customers, primarily for use in the production of concrete, roadbase and asphalt.  Rinker Materials’ principal operations are in Florida and Arizona.  Overall, Rinker Materials is the fifth largest supplier of aggregate in the US, based on US Geological Survey production output data, with 89 quarries, sand and aggregate plant operations.  Rinker Materials is a market leader, as measured by production, in Florida and Arizona.  Rinker Materials supplied about 101 million tons of aggregate for the year ended March 31, 2006.  For the year ended March 31, 2006, Rinker Materials’ estimated end markets for aggregate by trading revenue were about 40% residential and the balance equally divided between commercial and civil construction.

 

      Cement:  Cement is produced through a highly capital intensive process with limestone as the major raw material.  Rinker Materials is the leading cement supplier in Florida in terms of volume sold,

 

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based on the Portland Cement Association’s production output statistics collected for the industry, operating two plants, which produced about 2.1 million tons for the year ended March 31, 2006.  Rinker Materials also has two strategically located cement import terminals in Florida, which imported 2.1 million tons for the year ended March 31, 2006.   For the year ended March 31, 2006, Rinker Materials’ estimated external end markets for cement by trading revenue were about 65% residential, 30% commercial and 5% civil construction.

 

      Concrete, concrete block and asphalt:  Rinker Materials produces concrete by combining cement, aggregate, water and additives in batch plants for delivery to customers’ sites in mixer trucks.  Rinker Materials produced about 18 million cubic yards of concrete for the year ended March 31, 2006. Rinker Materials is a market leader in Florida, Arizona and Nevada, based on Rinker Materials’ knowledge of the industry, and operated a total of 172 concrete plants at March 31, 2006.  For the year ended March 31, 2006, Rinker Materials’ estimated end markets for concrete by revenue were about 65% residential, 25% commercial and 10% civil construction.

 

Rinker Materials produced around 200 million units of concrete block for the year ended March 31, 2006.  Concrete block is used for residential and commercial building.  Rinker Materials’ concrete block operations are principally located in Florida and Nevada, where it was the market leader in terms of production for the year ended March 31, 2006, based on Rinker Materials’ knowledge of the industry.

 

Rinker Materials also produces asphalt, which is used for roads, highways and airports with plants located in Arizona, northern California, Oregon and Washington state.

 

      Concrete pipe and products:  Concrete pipe is produced by inserting concrete into a mold, which is subsequently removed.  Rinker Materials, through its Concrete Pipe Division, is one of the leading suppliers of reinforced concrete pipe and pre-cast concrete products in the United States, based on Rinker Materials’ knowledge of the industry, with production of around 3.7 million tons for the year ended March 31, 2006 from 49 plants located in 22 states.  The principal product is concrete pipe, which is used for storm water transmission, sewerage and irrigation.  For the year ended March 31, 2006, the estimated end markets for concrete pipe and products by trading revenue were about 45% residential, 20% commercial and 35% civil construction.

 

      Other:  This segment includes gypsum supply.  The pre-stressed concrete products and polyethylene pipe operations were previously included in this segment and were divested during the year ended March 31, 2005.

 

Readymix:

 

In Australia, Readymix operates a vertically integrated heavy building materials business with leading market positions, based on Readymix’s knowledge of the industry.  As at March 31, 2006, Readymix had 348 operating plants including 84 quarries and sand mines, 247 concrete plants and 17 concrete pipe and product plants.  Concrete pipe and products are produced by Readymix’s Humes business.

 

Readymix also holds a 25% interest in Australia’s largest cement manufacturer, the Cement Australia joint venture, which has the capacity to produce over three million tonnes of cement a year from three plants in Gladstone, Queensland; Railton, Tasmania; and Kandos, New South Wales.  The joint venture was formed on June 1, 2003 with the merger of Australian Cement Holdings (50% Readymix, 50% Hanson Australia Pty Ltd) and Queensland Cement Limited (“QCL”) (a 100% owned Holcim Ltd subsidiary).

 

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Rinker group trading revenue:

 

The table below sets out the Rinker group’s trading revenues by segment for the fiscal years 2006 and 2005:

 

 

 

2006

 

2005

 

 

 

(Amounts in US $ millions)

 

Rinker Materials, United States

Aggregates

 

1,074

 

862

 

 

Cement

 

487

 

389

 

 

Concrete, block and asphalt

 

2,180

 

1,635

 

 

Concrete pipe and products

 

576

 

472

 

 

Other

 

371

 

462

 

 

Eliminations(1)

 

(659

)

(501

)

 

Total Rinker Materials

 

4,029

 

3,319

 

Readymix, Australia and China

 

1,079

 

991

 

Total Rinker group

 

5,108

 

4,310

 

 

(1)   Eliminations represent internal revenue derived from sales by Aggregates and Cement to other segments within Rinker Materials, eliminated on consolidation.

 

Volumes for all market segments are sensitive to weather conditions, although historically seasonal patterns have not greatly impacted financial results.  In the United States, most operations of Rinker Materials are located in regions with relatively mild climates and normal weather patterns that have historically resulted in only slightly higher activity during the first half of the fiscal year (April – September) than the second half (October – March).  In Australia, although construction activity slows during the traditional summer holiday period in the months of December and January, this is largely offset by increased volumes during February and March which are historically very busy months.

 

2.     Major Acquisitions

 

On September 26, 2002, Rinker Materials acquired Kiewit for US$540 million (net of cash).  Kiewit was renamed Rinker Materials Western, Inc. (“Rinker Materials West”) in fiscal year 2003.  Rinker Materials West has significant operations in aggregates, concrete and asphalt in Arizona, representing over 75% of Rinker Materials West revenue for the fiscal year 2006.  Other regions in which Rinker Materials West operates include Oregon, Washington state and northern California.  These operations market to a wide variety of customers including highway contractors, commercial, industrial and residential contractors, public works contractors, wholesalers and retailers of decorative rock products, interstate railroads and manufacturers of concrete block products.

 

Similar to Rinker Materials’ other operations, Rinker Materials West’s operating results are primarily impacted by the level of construction activity in the residential, commercial and civil segments of the construction materials markets where it operates.  Rinker Materials estimates that about 55% of Rinker Materials West’s revenue was derived from residential construction, 25% from commercial construction, and 20% from civil construction during fiscal year 2006.

 

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Prior acquisitions

 

The Rinker Materials operations that exist today were built on the substantial integrated quarrying, concrete and cement business in Florida acquired in 1988.  

 

Since 1988, Rinker Materials has made a series of significant acquisitions in addition to Kiewit:

 

      In 1990, it acquired the aggregate, concrete, asphalt and concrete pipe subsidiaries of ARC America Corporation for US$650 million;

 

      In June and July 2000, it acquired American Limestone Company and Florida Crushed Stone Company, for US$211 million and US$348 million, respectively.

 

3.     United States industry overview

 

Based on data compiled by Dodge, a division of the McGraw-Hill Companies, the US construction and building market was estimated to have been about US$595 billion in calendar year 2005 (about 5.3% of the US gross domestic product).  Dodge figures are based on the ‘put-in-place’ value of contracts for new construction projects and include the cost of all types of building and construction materials, some of which are not produced by Rinker Materials, and the cost of labor.  ‘Put-in-place’ figures provided by Dodge are based on data Dodge collects at the time of the contract award and allocated over the course of the performance of the contract.

 

The construction materials industry primarily operates on a regional basis due to significant transportation costs and low value products.

 

The regional markets for Florida and Arizona are particularly important to Rinker Materials, representing about 56% and 17% of its trading revenue, respectively, for the year ended March 31, 2006. Based on industry and Federal Government statistics, both these markets show high levels of activity and growth compared to national averages.

 

The construction materials industry comprises three major segments: residential, commercial (non-residential) and civil (non-building).  Residential construction includes single and multi-dwelling residential housing.  Commercial construction includes office buildings, hotels, shopping malls, sports stadiums, education facilities and hospitals.  Civil construction involves the construction of roads, highways, bridges and dams as well as many other infrastructure projects.  For calendar year 2005, Dodge estimates that the total value of new construction contracts in the US was residential 58%, commercial 27% and civil 15%.  The civil construction activity has been influenced heavily by the Transportation Equity Act for the 21st Century (TEA-21, which covered the 6 year period 1998 to 2003) and the Safe, Accountable, Flexible and Efficient Transportation Equity Act (SAFETEA which covers the 6 year period 2004 to 2009).

 

The construction market is generally cyclical but with a general upward trend.  Based on Dodge estimates, the total value of new construction contracts grew by an annual growth rate of 8.3% between calendar years 1995 and 2005.  Based on Dodge estimates, the total value of new construction contracts in Florida increased by an annual growth rate of 13.0% between calendar years 1995 and 2005 and 10.6% in Arizona in the same period.

 

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The key factors impacting on construction and building activity in the US include:

 

      Population growth;

 

      Economic growth;

 

      Government infrastructure spending;

 

      Interest rates; and

 

      Business and consumer confidence.

 

4.     Australian industry overview

 

For the year ended December 31, 2005, the Australian Bureau of Statistics estimates that total construction and building industry spending was A$97 billion, equivalent to US$74 billion. This comprised expenditure on construction materials such as aggregate, concrete and cement but includes other building materials such as clay bricks, roofing, plasterboard and aluminum doors and windows.   

 

Based on Australian Bureau of Statistics estimates, total Australian construction and building market spending increased by an annual growth rate of 5.4% between the years ended December 31, 1995 and December 31, 2005.  The market segments are similar to those categorized for the US market, namely residential, commercial and civil.

 

 For the year ended December 31, 2005, the Australian Bureau of Statistics estimates that total construction spending by segment was about 40% for residential, 21% for commercial and 39% for civil.

 

For the year ended December 31, 2005, there was a slight increase in spending in the residential segment, however spending across the commercial and civil segments increased significantly.  Total construction spending increased by 12.8% for the year ended December 31, 2005 compared to the previous year.  Residential spending was up by 1.8%, commercial by 17.2% and civil by 24.3%.

 

Over the last three fiscal years, construction activity in the residential segment has been influenced primarily by changes in interest rates and house price affordability.  Following two interest rate rises, in November 2004 and December 2004, there was a gradual decline in residential construction commencements during fiscal years 2005 and 2006.  The decline, however, has been mild by historical standards with the market supported by a relatively strong economy and low levels of unemployment.  According to the Australian Bureau of Statistics, total spending in the residential segment increased slightly to US$29.5 billion (A$38.8 billion) in the year ended December 31, 2005, from US$28.2 billion (A$38.1 billion) in the year ended December 31, 2004.  Spending was US$23.5 billion (A$33.7 billion) in the year to December 2003.

 

The commercial segment of the construction market strengthened during fiscal year 2006 compared to fiscal year 2005.  According to the Australian Bureau of Statistics total spending in the commercial segment has grown from US$13.6 (A$18.4) billion in the year ended December 31, 2004 to US$16.4 (A$21.5) billion in the year ended December 31, 2005, due to higher business investment levels, supported by the relatively strong economy.  Spending was US$11.1 (A$15.9) billion in the year to December 2003.

 

Civil construction in Australia is largely dependent on government infrastructure programs. According to the Australian Bureau of Statistics spending in the civil segment has risen from US$21.8 (A$29.5) billion in the year ended December 31, 2004 to US$27.9 (A$36.7) billion in the year ended December 31, 2005.  Spending was US$18.2 ($26.1) billion in the year to December 2003.

 

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Several large infrastructure projects have contributed to the buoyant activity in the civil segment, including the recently completed A$1.6 billion Westlink (Western Sydney Orbital motorway) project, and two major projects still under construction (the A$1.1 billion Lane Cove tunnel and the A$2.5 billion Eastlink freeway in Victoria).  The level of activity in the civil sector will continue to depend upon large public and private infrastructure projects, such as the yet to be approved A$1.4 billion Brisbane North-South Bypass tunnel. 

 

5.     Rinker Materials

 

Rinker Materials business segments including annual volumes as at March 31, 2006

 

 

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i.      Aggregate

 

Overview

 

Rinker Materials is the fifth largest supplier of aggregate by volume in the US, based on US Geological Survey statistical data, with operations principally in the southeast (Florida, Georgia, Tennessee and Kentucky) and the western US states (Arizona, Nevada, Oregon, Washington state and northern California).  In total, Rinker Materials supplied about 101 million tons of aggregate for the year ended March 31, 2006.

 

In Florida, Rinker Materials is the market leader, based on Rinker Materials’ industry knowledge, by volume sold, with a market share estimated to be more than 30% for the year ended March 31, 2006.   Rinker Materials is also the market leader, by volume sold, in Arizona.

 

Sales

 

Rinker Materials’ aggregate operations are often integrated with Rinker Materials’ downstream concrete and asphalt operations with over one-third of Rinker Materials’ aggregate production supplied for use in Rinker Materials’ manufacture of concrete, concrete block, asphalt and other products.  The balance is supplied to other construction companies primarily for the production of concrete, asphalt and roadbase.   Rinker Materials’ products are generally supplied at a local level directly to a large number of unaffiliated customers that are generally the end users.  Rinker Materials has no material long-term supply contracts for aggregate other than supply contracts to specific construction projects that have been generally subject to a competitive tender process.  These are typically made on the basis of competitive prices in each market area.   For the year ended March 31, 2006, Rinker Materials’ estimated end markets for aggregate by trading revenue were about 40% residential and the balance equally divided between commercial and civil construction.

 

Crushed stone and sand are largely commodity products.  The basis of competition is as the lowest cost delivered supplier into the market.  Distribution logistics are very important, requiring a strong transport and distribution network.

 

Rinker Materials’ major competitors are: Florida Rock Industries, Tarmac Limited (Titan Cement Company), Vulcan Materials Company, Martin Marietta Materials, and Hanson Building Materials America, as well as smaller competitors who compete in certain regions.

 

Facilities, reserves and distribution

 

Aggregate (sand, gravel, crushed stone, and other quarry products) is used for roads, civil construction and building projects and as a raw material in the production of concrete, concrete block, cement and asphalt.  Aggregate production involves extracting quarry material that is then crushed and sized.  The product is then distributed by truck or rail.  The choice of aggregate for a particular purpose also depends largely on the local geology or availability.  As aggregate is expensive to transport relative to its price, the cost of transport will generally limit the availability of aggregate to what is readily accessible in the local area.  In Florida, aggregate is transported greater distances than in other states due to construction grade aggregate only being available in certain areas of the state.  This is primarily achieved using an extensive railway network serving the entire east coast of Florida and into central Florida.  For example, Rinker Materials’ FEC quarry near Miami in southern Florida, transports aggregate up to Jacksonville in northern Florida.

 

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As at March 31, 2006, Rinker Materials operated 89 quarries, sand and aggregate plant operations located in 14 states.  The majority of these are located in Florida (14), Tennessee (10), Arizona (38) and Washington state (12).  Rinker Materials’ total estimated aggregate reserves as at March 31, 2006, were 2,720 million tons with an average reserve life estimated to be 30 years at current usage levels.

 

Rinker Materials’ estimated aggregate reserves by product type as at March 31, 2006

 

Regional Summary

 

Reserves
(million tons)

 

Average life
in years

 

Limestone

 

1,605

 

38

 

Hard rock

 

475

 

32

 

Sand and gravel

 

617

 

19

 

Other (volcanic cinder, gypsum)

 

23

 

80

 

Total

 

2,720

 

30

 

 

Estimates of reserves are of recoverable stone, sand and gravel and other quarry products of suitable quality for economic extraction based on drilling, studies and mine plans reviewed annually by Rinker Materials geologists and engineers, recognizing reasonable economic and operating restraints as to maximum depth of overburden and aggregate excavation.  Reserves are proven (measured) or probable (indicated) based upon inspection, sampling and measurement and the geological character of the resource.

 

In determining the average life of aggregate reserves Rinker Materials management has used the most recent annual production rate at each quarry.  The foregoing life by product type is an overall average.  Certain locations, however, are subject to more limited reserves and have a relatively short life.  Rinker Materials sand and gravel quarries are typically small operations producing from reserves with a shorter life.

 

Rinker Materials’ estimated aggregate reserves by region as at March 31, 2006

 

Regional Summary

 

Reserves
(million tons)

 

Average life
in years

 

Florida

 

793

 

20

 

Southeast (GA, TN, KY, VA)

 

1,166

 

66

 

West

 

761

 

23

 

Total

 

2,720

 

30

 

 

Approximately 70% of quarry reserves are on Rinker Materials owned sites, with the remainder located on leased property.  In Rinker Materials Florida operations, owned reserves constitute approximately 80% of total reserves.  In Arizona, owned reserves comprise approximately 55% of total reserves.  Leasehold reserves are subject to various expiry dates and renewal options.  While not all of the reserves are permitted, it is Rinker’s view that the ultimate permitting of the reserves is probable.

 

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Of Rinker Materials 89 aggregate, sand and gravel quarries, the largest 4 by quarry reserves as at March 31, 2006 were as follows:

 

 

 

Reserves
(million tons)

 

Average life
in years

 

Midway Quarry, Mascot TN

 

274

 

239

 

FEC Quarry, Miami FL

 

261

 

22

 

Macon Quarry, Macon GA

 

153

 

32

 

Dogwood Quarry, Augusta GA

 

143

 

70

 

 

Rinker Materials’ largest quarry in terms of production is the FEC Quarry in Miami, Florida.  The quarry is one of the largest in the US, producing about 12.5 million tons of aggregate each year.  See Legal Proceedings in “Item 8.A. Consolidated Statements and Other Financial Information” on page 120 for additional discussion of Rinker Materials’ reserves.

 

Rinker Materials has a continuing program to identify, acquire or lease replacement reserves and in the case of Florida to pursue offshore reserves.

 

ii.    Cement

 

Overview

 

Rinker Materials cement operations are in Florida where it is a leading cement supplier by volume, based on Portland Cement Association data on supplier output.   For the year ended March 31, 2006, Rinker Materials produced about 2.1 million tons of cement and imported 2.1 million tons of cement through two strategically located terminals.  Rinker Materials supplies grey and white cement and a range of special products.  Rinker Materials estimates the total Florida cement market to be about 13.5 million tons a year.

 

Sales

 

Rinker Materials supplies cement to its concrete businesses as well as to external pre-mix, masonry and pre-cast concrete producers and building supply companies.  For the year ended March 31, 2006, about 55% of Rinker Materials’ cement production was sold internally.

 

Rinker Materials manages its cement business by fully utilizing its own cement production capacity and supplying any additional demand from imports and purchasing cement from other domestic producers.

 

For the year ended March 31, 2006, Rinker Materials’ estimated external end markets for cement by trading revenue were about 65% residential, 30% commercial and 5% civil construction.

 

Rinker Materials’ competitors’ positions in Florida have changed significantly during the past several years.  Tarmac America has been acquired by Titan Cement Company and Southdown by Cemex.  The Eastern Cement terminal on the west coast of Florida has been acquired by Schwab and Florida Rock has acquired the LaFarge import terminals on the west coast of Florida.  Domestic and import capacity has also increased with both Florida Rock Industries and Votorantim (Suwanee) recently constructing new Florida cement plants.  Titan Cement Company has built a new cement import terminal on the west coast of Florida in Tampa and doubled their Miami capacity.  Rinker Materials’ major competitors in cement are Cemex, Lehigh (Heidelberg), Titan Cement Company, and Florida Rock Industries.

 

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Facilities and distribution

 

The production of cement is a highly capital intensive business.  The production process starts by crushing limestone aggregate.  The crushed limestone aggregate and other raw materials, depending on the type of cement to be produced, are fed into a grinding process, which mixes the various materials more thoroughly and reduces them further in size in preparation for the kiln.  In the dry process, the raw materials are calcined or processed at a very high temperature in the kiln to produce clinker.   Clinker is the intermediate product used to manufacture cement.  Finally, clinker and gypsum are fed into a cement grinding mill where they are ground into extremely fine powder to produce finished cement.

 

Rinker Materials has two cement plants, located in Miami and Brooksville in Florida.  The Miami plant was upgraded and commissioned in 2000 for a total cost of US$150 million, which increased annual capacity from 0.6 million tons to about 1.3 million tons.  The Brooksville plant was acquired in 2000 as part of the Florida Crushed Stone acquisition and has an annual capacity of about 0.8 million tons.  Both cement plants are located adjacent to quarries owned and operated by Rinker Materials that provide the limestone raw material.  The estimated limestone reserves owned by Rinker Materials exceed the currently anticipated life of the plants.  Expansion plans at Brooksville have been approved which are expected to increase production by over 1.0 million tons per annum with a target date to complete the project in 2008.  Both plants are dry process technology operations that utilize modern energy efficiency and emission control systems.  The plants source electricity from local utilities at state-regulated prices.

 

The cement produced is delivered to concrete plants and other concrete product manufacturing facilities, normally within a radius of about 125 miles, by bulk cement tankers or in bagged form. 

 

Rinker Materials imports a large volume of cement (fiscal year 2006, 2.1 million tons) through cement import terminals located at Port Everglades in southeastern Florida and Port Canaveral in central Florida.  Cement is sourced primarily from Europe and the Far East on contracts that expire annually. 

 

iii.   Concrete, concrete block and asphalt

 

Overview

 

Rinker Materials produced about 17.8 million cubic yards of concrete in the year ended March 31, 2006, from 172 concrete plants.  In Florida, Rinker Materials’ concrete operations are integrated with its cement and aggregate operations, providing it with a number of supply advantages.  Overall, Rinker Materials is the market leader in Florida with an estimated total market share by volume sold in the year ended March 31, 2006 of around 30%, based on Rinker Materials’ industry knowledge.  Rinker Materials also held market leadership positions, by volume sold, in Arizona and Nevada in the year ended March 31, 2006.

 

In concrete block, Rinker Materials produced about 200 million units for the year ended March 31, 2006, that was used for residential and commercial building. Rinker Materials’ concrete block operations are principally located in Florida where it was the market leader in terms of volumes sold in the year ended March 31, 2006, based on Rinker Materials’ industry knowledge.

 

Rinker Materials also produces asphalt, which is used for roads, highways and airports with plants located in Arizona, northern California, Oregon and Washington state.

 

Sales and facilities

 

As at March 31, 2006, Rinker Materials operated 172 concrete and 29 concrete block plants, with a delivery fleet of over 2,900 company owned vehicles.   These plants are located in Arizona, California,

 

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Florida, Nevada, New Mexico, Oregon, Tennessee and Washington state.   Of the 172 concrete plants, 92 are in Florida and 48 in Arizona.

 

During the last two fiscal years Rinker Materials has invested in an additional 31 concrete plants and 7 block plants.  Eight new readymix plants and five new block plants have been constructed in Florida to meet customer demand in growing regions of that state or to replace facilities to better meet strong demand in existing market areas.  The balance of new plants have been from business acquisitions.  Construction on a further ten plants in Florida is underway with completion expected during fiscal year 2007.

 

Concrete is produced by combining cement, aggregate, water and additives in a batch plant for delivery to the customer’s site in a mixer truck.  For the year ended March 31, 2006, Rinker Materials’ estimated end markets for concrete by trading revenue were about 65% residential, 25% commercial and 10% civil construction. Rinker Materials’ concrete operations provide a full range of products to meet a number of applications, including reinforced slabs for residential construction, high strength concrete for high rise structures and flowable fill concrete for back filling trenches.

 

Concrete block is manufactured in factories by a continuous process of combining cement and aggregate raw materials, which are molded and cured into required dimensions.  Delivery to customers takes place on trucks, which usually have on-board material handling equipment to permit the driver to unload at the job site.  Concrete block customers are primarily residential and commercial building companies.

 

Rinker Materials also manufactures and sells hot-mix asphalt products.  These are a mixture of aggregate and asphalt oil made to the customer’s specification in a batch plant. Rinker Materials produced about 4.3 million tons of asphalt for the year ended March 31, 2006.  All asphalt operations are vertically integrated with Rinker Materials’ aggregate businesses.   In most instances the asphalt plants are located on the site of a Rinker Materials’ quarry, offering significant synergies both in raw material supply and management and administration resources.  Asphalt is sold to road contractors for the construction of highways, driveways and parking lots and directly to state and local authorities. 

 

In concrete, the main competitors are a combination of large publicly listed companies and a number of small privately held regional companies.  In asphalt, competitors vary between regional markets, including large public companies such as Vulcan and Granite Construction, but often include smaller local operations.

 

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Concrete, concrete block and asphalt plants as at March 31, 2006

 

 

 

Number of plants

 

 

 

Concrete

 

Concrete block

 

Asphalt

 

Total

 

Florida

 

92

 

26

 

0

 

118

 

Arizona

 

48

 

0

 

14

 

62

 

Nevada

 

12

 

2

 

0

 

14

 

Washington

 

3

 

0

 

5

 

8

 

Tennessee

 

7

 

0

 

0

 

7

 

California

 

6

 

0

 

1

 

7

 

New Mexico

 

0

 

1

 

0

 

1

 

Oregon

 

3

 

0

 

1

 

4

 

Virginia

 

1

 

0

 

0

 

1

 

Total

 

172

 

29

 

21

 

222

 

 

iv.    Concrete pipe and products

 

Overview

 

Rinker Materials’ Concrete Pipe Division is one of the largest producers by volume of reinforced concrete pipe and concrete products in the US in the year ended March 31, 2006, with a market share in excess of 20% based on Rinker Materials’ industry knowledge.   Products are primarily concrete pipe, concrete box and other pre-cast products used for storm water transmission, sewerage and irrigation.  Auxiliary products include manholes, drainage structures and storm water pollution prevention devices. Rinker Materials has progressively expanded the geographic presence of the concrete pipe and products business since its acquisition in 1990 with a series of small bolt-on acquisitions and investment in new plant and equipment to expand production capacity.

 

Sales

 

Sales demand is driven by the construction of roads and highways, residential and commercial developments and airports.  The primary customers of the business are general and utility contractors that provide services for federal, state and local government agencies and private developers.

 

In most markets Rinker Materials competes with other large companies, including Hanson, CRH plc, and The Cretex Companies, Inc.  Despite substantial consolidation in recent years, the industry remains fragmented and localized, with over 100 producers operating more than 300 plants.  High freight costs for transporting concrete pipe limit most markets to a radius of about 150 miles from the plant site.  On a national basis Hanson is Rinker Materials’ principal competitor.   In addition, producers of alternative plastic, metal, and fiber cement pipe products compete with Rinker Materials particularly in the market for small diameter pipes.

 

For the year ended March 31, 2006, Rinker Material’s estimated end markets by trading revenue were about 45% residential, 20% commercial and 35% civil construction. 

 

 

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Facilities

 

Rinker Materials manufactures concrete pipe primarily using the dry cast, packerhead and wet cast processes.  In the dry cast manufacturing process, a dry formulation of concrete is introduced into a mold.  The concrete is then compacted by an intense mechanical vibration.  The mold is immediately stripped from the product and is reused repeatedly throughout the production run.

 

In the packerhead method, a vertical mold is filled with a dry formulation of concrete.  A revolving trowel packs the concrete outward against the mold, while simultaneously forming the inside wall of the pipe.  As with the dry process, the mold is stripped and reused.  In the wet cast process wet concrete is introduced into a mold.  Unlike the dry and packerhead methods, the product remains in the mold until sufficient strength has developed in the concrete to allow the mold to be removed.

 

As at March 31, 2006, Rinker Materials operated 49 concrete pipe and product plants.  A program of plant upgrades, replacements and rationalization of capacity over the past several years has allowed Rinker Materials to reduce its cost structure through the benefits of more modern technology and economies of scale.  During fiscal year 2006 Rinker Materials commenced construction on a new concrete pipe plant in Central Florida that will replace three aging facilities in that state.  Rinker Materials also acquired the Carder Concrete Products business with locations in Colorado and Wyoming and is consolidating its existing operations with the newly acquired plants.

 

v.     Other businesses

 

Gypsum supply

 

During the period 1992 to 1996, Rinker Materials acquired several wallboard distributors in Florida, becoming one of the state’s leading distributors of gypsum wallboard, based on Rinker Materials’ industry knowledge.   Rinker Materials also acquired Dierco Supply, a ceiling tile and insulation distributor.

 

As at March 31, 2006, Rinker Materials had 30 gypsum supply outlets (in Florida (28), South Carolina (1), and Alabama (1)).  An export operation in Miami sells its products for delivery in the Caribbean, and Central and South America.

 

Rinker Materials’ principal competitor in gypsum supply is L&W Supply, owned by USG Corporation.

 

Pre-stressed concrete products and Polyethylene pipe

 

During the fiscal year 2005, Rinker Materials sold the principal assets of its small prestress concrete products business to Coreslab Structures as well as the stock of its polyethylene pipe and liner business to the Halifax Group.  Both businesses were regarded as “non-core” operations and had been slated for divestment for some time.  During the fiscal year 2006 Rinker Materials continued to deliver and recognize revenue on completed manufactured prestressed concrete components, which were not sold to Coreslab. 

 

6.     Readymix

 

Readymix operates a vertically integrated heavy building materials business in Australia, with about 35% of aggregate production used internally in the concrete and concrete pipe businesses (40% including sales under a long term supply agreement to the Emoleum asphalt business sold in February 2006), which also source about 75% of their cement requirements on the east coast of Australia from the Cement Australia joint venture.  Operations and investments include the production of aggregate, concrete,

 

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cement and reinforced concrete pipe and products.  Readymix subsidiaries also operate concrete businesses in Tianjin and Qingdao, China.  Readymix has been involved in the supply of heavy building materials in Australia, initially through CSR, since 1965 when it and Blue Metal Industries Limited jointly acquired Ready Mixed Concrete Limited.  In 1981, the operations of Ready Mixed Concrete were divided between Readymix and Blue Metal Industries.

 

Readymix (through its predecessor) has made a series of acquisitions to expand into new products:

 

      In 1974, it entered the cement industry in a joint venture with Pioneer Services Limited (since acquired by Hanson), with the acquisition of Australian Cement Holdings Pty Limited (“ACH”);

 

      In 1988, it acquired the reinforced concrete pipes and other concrete products business of Humes Limited;

 

      In 1989, ACH purchased Goliath Cement of Tasmania;

 

      In 1994, established a joint venture in Tianjin, China.  In June 2003, Readymix increased its ownership to 99% with 100% rights to profits and assets in this concrete business; and

 

      In June 2003, ACH merged with QCL to form the Cement Australia joint venture.  Subsequently, Readymix acquired three aggregate operations and six concrete plants from a subsidiary of the joint venture.

 

 

Including joint ventures, Readymix operated 359 plants in Australia and four in China at March 31, 2006.  An overview of Readymix’s current organization structure is provided in the above chart.

 

i .     Aggregate

 

Based on Readymix’s knowledge of the industry, Readymix is one of the leading suppliers of aggregate in Australia, producing a range of gravel, road pavement materials and manufactured and natural sand.  Readymix operates in all mainland states and territories in Australia.   In the year ended March 31, 2006, Readymix produced about 26 million tonnes of aggregate.  As at March 31, 2006 Readymix had estimated aggregate quarry reserves of about 1,073 million tonnes, with an average reserve life of 43 years.

 

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Readymix’s estimated aggregate reserves by product type as at March 31, 2006

 

Total Australia

 

Reserves
(million tonnes)

 

Average life
in years

 

Hard rock

 

1,001

 

 

53

 

 

Sand and gravel

 

72

 

 

12

 

 

Total

 

1,073

 

 

43

 

 

 

Estimates of reserves are of recoverable stone, sand and gravel of suitable quality for economic extraction, based on drilling, studies and mine plans reviewed annually by Readymix geologists and engineers, recognizing reasonable economic and operating restraints as to maximum depth of overburden and aggregate excavation.  Reserves are proven (measured) or probable (indicated) based upon inspection, sampling and measurement and the geological character of the resource.

 

In determining the average life of aggregate reserves Readymix management has used the most recent annual production rate at each quarry.  Certain locations, however, are subject to more limited reserves and have a relatively short life.  The foregoing life by product type is an overall average.

 

Readymix’s largest quarry in terms of annual production is at Penrith, New South Wales and is operated under the Penrith Lakes Development Corporation Limited (PLDC) joint venture with Boral and Hanson.  The operation currently supplies about 4.5 million tonnes of the Sydney market’s estimated 7.7 million tonne annual requirement for concrete aggregates, and has an estimated life of 5 years.  Other quarries in the Sydney basin have limited capacity for expansion.  Readymix sales volumes from Penrith for fiscal year 2006 were 1.5 million tonnes.

 

Readymix has a continuing program to identify, acquire or lease replacement reserves, and during fiscal year 2005 acquired property at Marulan, on the outskirts of Sydney, as a potential replacement for the Penrith quarry.   During fiscal year 2006, Readymix received development consent for a 5 million tonne per annum quarry on the Marulan site.

 

The Australian market for aggregate was estimated to have been over 90 million tonnes in the calendar year 2005, generating in excess of US$1.7 billion (A$2.4 billion) in revenue.  Readymix’s quarry operations are highly integrated with about 40% of aggregate volumes sold internally in the year ended March 31, 2006.   For the year ended March 31, 2006, Readymix’s estimated aggregate end use markets were about 25% residential, 35% commercial and 40% civil construction.  Readymix’s major competitors are Boral and Hanson Australia.

 

ii.    Concrete

 

Readymix manufactures and distributes concrete throughout all states and territories of Australia.  Customers are normally located within a 20 kilometer radius of the plant.   In the year ended March 31, 2006, Readymix produced in excess of 6.9 million cubic meters of concrete from 247 plants.

 

The Australian market for concrete was estimated by the Australian Bureau of Statistics to have been 23.7 million cubic meters in the calendar year 2005, generating about US$2.5 billion (A$3.3 billion) in revenue.  Readymix’s major competitors are Boral and Hanson.  For the year ended March 31, 2006, Readymix’s estimated end use markets were about 40% residential, 35% commercial and 25% civil construction.

 

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iii.   Concrete pipe and reinforced concrete products

 

Readymix produces concrete pipe and reinforced concrete products through its Humes business.  Based on Humes’ knowledge of the industry, Humes is one of the two leading suppliers in Australia with production of over 510 thousand tonnes a year.  As at March 31, 2006 Humes operated 17 plants producing concrete pipe, pre-cast concrete products including pre-stressed beams, storm water pollution prevention devices and other environmental products, concrete sleepers and flooring products.

 

The Australian civil infrastructure market was estimated, based on Humes’ knowledge of the industry to be 1.3 million tonnes in calendar year 2005, generating more than US $365 million (A$480 million) in revenue.  For the year ended March 31, 2006, Humes’ estimated end use markets were about 95% civil and 5% commercial construction.  Humes’ main competitor is Rocla Pipeline Products, and there are also small companies who compete in individual regional sectors of the market. 

 

iv.    Cement

 

At the beginning of fiscal year 2004, Readymix held a 50% interest in ACH, a joint venture with Hanson Australia Pty Ltd.  On June 1, 2003, ACH merged with QCL, a 100% owned Holcim subsidiary, to form Australia’s largest cement manufacturer, based on Readymix’s knowledge of the industry, the Cement Australia joint venture.  Readymix holds a 25% interest in the joint venture, Hanson holds 25%, and QCL holds the remaining 50%.  Annualized production volumes are in excess of 3.5 million tonnes of which approximately 75% is sold internally to shareholders.

 

The size of the Australian market for cement and cement blends was estimated by the Australian Bureau of Statistics to be about 9.3 million tonnes for the calendar year 2005, generating approximately US$890 million (A$1,170 million) in revenue.  Cement Australia’s main competitors in cement are Blue Circle Southern Cement (a 100% owned Boral subsidiary), Adelaide Brighton Limited and imported cement.

 

Additionally, the Cement Australia joint venture owns 100% of Pacific Lime which produces high grade lime products and a 50% interest in Australian Steel Mill Services which is responsible for processing of blast-furnace slag, a by product of iron and steel making at the BHP Steel facility at Port Kembla in New South Wales.

 

v.     Asphalt

 

During the fiscal year 2006 Readymix divested its 50% interest in the Emoleum asphalt pavement and road maintenance joint venture with a subsidiary of Exxon Mobil Australia Pty. Limited to a subsidiary of the engineering services group Downer EDI Limited.  The investment in Emoleum was regarded as non core. Readymix will continue its aggregate supply to the business under a long term supply contract with the purchaser.

 

7.     Government Regulation

 

The business activities of Rinker group companies in each country where they operate are subject to and affected by laws and regulations relating to the environment, health and safety, and other regulatory matters.

 

Environment, health and safety

 

Rinker Materials’ operations are subject to extensive regulation by US federal, state and local environmental control agencies.  Environmental laws and regulations impose requirements on a broad

 

34



 

range of environmental matters including air emissions, effluent limitations, site remediation, the use, handling and disposal of hazardous materials and wastes, employee health and safety, groundwater quality, noise and the protection of wetlands and other natural resources.  These laws require Rinker Materials to obtain and operate in compliance with the conditions of permits and other authorizations and requirements of the relevant governmental authorities.

 

In the United States, environmental, health and safety laws and regulations are promulgated and overseen by a variety of federal, state and local bodies.  Among these are the US Environmental Protection Agency, state environmental protection agencies, the US Army Corps of Engineers, various state water management districts, the US Occupational Safety and Health Administration, the US Mine Safety and Health Administration, various state occupational health and safety agencies, and local zoning boards. 

 

For Readymix, Australia’s principal laws governing environmental and sustainable management of natural and physical resources are contained in legislation and regulations enacted by the Commonwealth Government and the states and territories of the Commonwealth of Australia.  This body of legislation regulates the operations of companies principally in regard to air, water and noise emissions, waste disposal, land contamination, and the handling and storage of environmentally hazardous chemicals and dangerous goods.  The principal environmental regulators in Australia are the state Environmental Protection Agencies/Authorities and, at the federal level, Environment Australia/Department of Environment and Heritage.  The principal safety regulators to which Readymix is subject are the state workers’ compensation authorities and state mine authorities. 

 

Rinker Materials and Readymix have implemented comprehensive safety, health and environmental management systems.  These systems are based on US, Australian and international standards and set out the requirements for managing and monitoring environmental impacts across operations.  Sites are routinely audited for compliance.

 

As with other construction materials companies engaged in similar activities, environmental compliance obligations and liability risks are inherent in many activities within the Rinker group.   From time to time Rinker group companies investigate and remediate contamination at their properties, consisting primarily of petroleum compounds associated with fuel storage and vehicle maintenance and elevated pH levels related to the processing and handling of limestone and concrete products.  In the US certain environmental remediation laws, such as the federal “Superfund” law, can impose joint and several liability for site clean-up, regardless of fault, upon certain statutorily-defined categories of parties, including companies that sent wastes to a contaminated third party site.   Rinker Materials has been named as a potentially responsible party at five sites requiring environmental remediation.  These liability claims are expected to be resolved without having a material effect on Rinker group companies.  The Rinker group holds provisions for anticipated clean up costs and does not expect to incur any additional material remedial obligations.  Although unanticipated and unexpected remedial obligations can always arise in the course of operations, management is not aware of any remedial actions that would be expected to have a material effect on the Rinker group companies’ operations or competitive positions.

 

Following its demerger from CSR, as between Rinker and CSR, Rinker is responsible for any liabilities and costs associated with environmental contamination and compliance in respect of the businesses it owns after the demerger.  CSR has agreed to indemnify the Rinker group, to the maximum extent permitted by law, in respect of the liabilities and costs associated with environmental contamination and compliance in respect of the businesses owned by CSR group companies after the demerger.  In each case, the indemnity applies irrespective of when the contamination occurred or the liabilities or costs arose.

 

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Antitrust (trade practices) laws

 

Rinker group companies in the United States are subject to antitrust laws.

 

Rinker group companies in Australia are subject to regulation by the Australian Competition and Consumer Commission (“ACCC”) which administers the Trade Practices Act 1974.  Rinker group entities are from time to time involved in investigations conducted by the ACCC.

 

Antitrust or competition considerations may restrict business activities within the Rinker group and the ability to grow through acquisitions or participate in industry rationalization in particular geographic markets.

 

8.     Marketing channels and sales methods

 

Details of marketing channels and sales methods are included in the business analysis above. Customers include a range of commercial building and construction companies, government departments and a variety of trades and individuals.  Sales personnel operate from central regional locations or individual operating facilities.

 

Rinker’s management does not believe the loss of any single contract would have a material impact on the Rinker group’s performance.

 

9.     Source and availability of raw materials and inputs

 

A large proportion of the raw materials and inputs used in Rinker group entities’ products are bulk commodities, which are either produced internally or are purchased under contract or agreements with outside vendors.  Rinker’s management is not aware of any restrictions on the availability of raw materials, under normal circumstances and subject to normal competitive forces, which would materially impact the Rinker group’s result.

 

10.  Corporate and securities regulation

 

As an Australian company, Rinker is subject to corporate regulation by (principally) the Australian Securities and Investments Commission.  Because its ordinary shares are listed on the securities exchange operated by ASX, Rinker is also subject to regulation by ASX.

 

Rinker files periodic reports and other information with the SEC, including this annual report on Form 20-F.  Rinker also furnishes to the SEC on Form 6-K its semi-annual consolidated financial statements, prepared in accordance with A-IFRS, and other material information on Form 6-K that Rinker makes public in Australia or provides to its shareholders.  See “Where you can find more information about Rinker Group Limited.”  Furthermore, as its ordinary shares are registered under the Securities Exchange Act of 1934 and American Depositary Shares (“ADSs”) representing its ordinary shares are listed for trading on the NYSE, Rinker is subject to various US corporate governance requirements including those resulting from the enactment of the Sarbanes-Oxley Act of 2002 and those promulgated by the NYSE.

 

C.    Organizational Structure

 

Rinker group has more than 70 subsidiaries in the United States, Australia and China.   The complete list of these entities, with their country of incorporation and percentage of Rinker’s ownership, is listed at Note 37 to the financial statements included elsewhere in this annual report.

 

36



 

D.    Description of Property, Plant And Equipment

 

Rinker’s principal executive offices are located at, Level 8, Tower B, 799 Pacific Highway, Chatswood, New South Wales, 2067, Australia.

 

As at March 31, 2006, Rinker group entities had over 700 production facilities in the United States, Australia and China.

 

These sites include:

 

Facilities

 

Number

 

Concrete (8 are 50% owned)

 

419

 

Quarries and sand (1 is 40% owned, 3 are 50% owned)

 

173

 

Pipe & concrete products

 

66

 

Asphalt

 

21

 

Concrete block

 

29

 

Cement mills (3 are 25% owned)

 

5

 

 

In addition, Rinker group entities have a number of distribution sites.

 

As a result of the demerger, CSR’s beneficial 40% interest in the PLDC joint venture, which extracts the majority of the aggregates for the Sydney region, was transferred to Readymix.  Boral and Hanson own 40% and 20% respectively of PLDC.  Readymix has agreed to share future profits produced from land sales equally with CSR.  A significant portion of the PLDC land holdings have been identified as having potential, subject to planning approvals, for a major urban land development, creating up to 4,900 residential lots.

 

Management believes that the facilities of Rinker group entities are suitable and adequate for its present needs and are well maintained and in good operating condition.  The Rinker group entities carry insurance covering property and casualty and certain other risks to which their facilities and operations may be subject.  The Rinker group entities own most of their principal operating facilities and lease the remainder.  Management does not believe the Rinker group earnings are dependent upon any single operating facility.  The most significant single facility is FEC quarry, which is discussed below.

 

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The following table is a list of the principal facilities in the Rinker group.  This list is not intended to be a complete list of all the Rinker group’s operating locations.  Principal facilities are owned by Rinker group entities unless stated otherwise.

 

RINKER SITE

 

LOCATION

 

PRODUCT SOLD

Chatswood (leased)

 

New South Wales

Australia

 

Administration

 

READYMIX SITE

 

LOCATION

 

PRODUCT SOLD

Chatswood (leased)

 

New South Wales

Australia

 

Administration

Albion Park

 

New South Wales

Australia

 

Aggregates

Gosnells

 

Western Australia

Australia

 

Aggregates

Oaklands

 

Victoria

Australia

 

Aggregates

Pakenham

 

Victoria

Australia

 

Aggregates

Penrith Quarry (1)

 

New South Wales

Australia

 

Aggregates

Blacktown

 

New South Wales

Australia

 

Pipe

Eagle Farm

 

Queensland

Australia

 

Pipe

Petrie

 

Queensland

Australia

 

Pipe

Laverton

 

New South Wales

Australia

 

Pipe

Welshpool

 

Western Australia

Australia

 

Pipe

 

RINKER MATERIALS SITE

 

LOCATION

 

PRODUCT SOLD

West Palm Beach

 

Florida

USA

 

Administration

FEC Quarry (2)

 

Florida

USA

 

Aggregate

Brooksville Quarry

 

Florida

USA

 

Aggregate

Krome Quarry (leased)

 

Florida

USA

 

Aggregate

Macon Quarry (partially leased)

 

Georgia

USA

 

Aggregate

Everett Quarry

 

Washington

USA

 

Aggregate

Alico Quarry (leased)

 

Florida

USA

 

Aggregate

Dogwood Quarry (partially leased)

 

Georgia

USA

 

Aggregate

St Catherine Quarry (leased)

 

Florida

USA

 

Aggregate

Davenport Sand

 

Florida

USA

 

Aggregate

Ft Calhoun (partially leased)

 

Nebraska

USA

 

Aggregates

Glendale (leased)

 

Arizona

USA

 

Aggregates/Concrete/Asphalt

19th Avenue

 

Arizona

USA

 

Aggregates/Concrete/Asphalt

Beeline

 

Arizona

USA

 

Aggregates/Concrete/Asphalt

Cortaro

 

Arizona

USA

 

Aggregates/Concrete/Asphalt

Orchards

 

Washington

USA

 

Aggregates/Concrete/Asphalt

Cache Creek

 

California

USA

 

Aggregates/Concrete/Asphalt

Riviera Beach

 

Florida

USA

 

Block

Crego

 

New Mexico

USA

 

Block

Las Vegas

 

Nevada

USA

 

Block

Miami Cement Mill

 

Florida

USA

 

Cement

Brooksville Cement Mill

 

Florida

USA

 

Cement

Port Everglades Terminal (leased)

 

Florida

USA

 

Cement

Port Canaveral Terminal (leased)

 

Florida

USA

 

Cement

Bonita Springs

 

Florida

USA

 

Concrete/Block

Fort Pierce

 

Florida

USA

 

Concrete/Block

7th Street

 

Arizona

USA

 

Concrete

Miami

 

Florida

USA

 

Pipe

Houston Pipe (partially leased)

 

Texas

USA

 

Pipe

 

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RINKER MATERIALS SITE

 

LOCATION

 

PRODUCT SOLD

Frederick (leased)

 

Maryland

USA

 

Pipe

Dallas

 

Texas

USA

 

Pipe

Littleton

 

Colorado

USA

 

Pipe

Corona (leased)

 

California

USA

 

Pipe

Las Vegas

 

Nevada

USA

 

Pipe

Phoenix

 

Arizona

USA

 

Pipe

Greenfield

 

Indiana

USA

 

Pipe

Albuquerque

 

New Mexico

USA

 

Pipe

Columbia

 

S. Carolina

USA

 

Pipe

Fresno

 

California

USA

 

Pipe

Alexandria

 

Louisiana

USA

 

Pipe

 


(1)   40% beneficial interest in quarry land held through PLDC.  See above.

 

(2)   The FEC quarry near Miami is one of the largest volume quarries in the US, producing about 12.5 million tons of aggregate each year.  Its in-situ reserves are estimated to be about 305 million tons of aggregate, and comprises approximately 10% of Rinker Materials’ total estimated recoverable reserves as at March 31, 2006.  For the fiscal year ended March 31, 2006, aggregate accounted for about 27% of Rinker Materials’ trading revenue. About 13% of Rinker Materials’ total aggregate trading revenue is derived from the FEC quarry in Florida. Accordingly, Rinker Materials’ revenues could be materially adversely affected if its access to the aggregate reserves of FEC quarry for both internal use and external sale were restricted. See Legal Proceedings in “Item 8.A. Consolidated Statements and Other Financial Information”.

 

Environmental issues affecting properties, plant and equipment

 

Certain environmental issues that are potentially material to the operations of businesses in Rinker group companies are discussed below:

 

Lake Belt Permit Challenge.  Rinker Materials holds one and is the beneficiary of one other of 12 federal quarrying permits granted for the Lake Belt area in South Florida.  The permit held by Rinker Materials covers Rinker Materials’ SCL and FEC quarries.  Rinker Materials’ Krome quarry is operated under one of the other permits.  The FEC quarry is the largest of Rinker Materials’ quarries measured by volume of aggregates mined and sold.  The Rinker Materials’ Miami cement mill is located at the SCL quarry and is supplied by that quarry.  See “Item 3.D. Risk Factors – Operation and supply failures or shortages could have an impact on the Rinker group’s future revenues and profits” and “Item 3.D. Risk Factors – Rinker group’s operations depend on securing and permitting aggregate reserves that can be supplied economically to growing markets”.  A ruling was made on March 22, 2006 by a single judge of the U.S. District Court for the Southern District of Florida in connection with litigation brought by environmental groups concerning the manner in which all 12 permits were granted.  Although not named as a defendant, Rinker Materials has intervened in the proceedings to protect its interests.  The judge ruled that there were deficiencies in the procedures and analysis undertaken by the relevant governmental agencies in connection with the issuance of the permits.  The judge has returned the permits to the relevant governmental agencies for further review of the issues raised and has set further proceedings to determine the activities to be allowed during the period of further review, which review the governmental agencies have indicated in recent court filings should take approximately 18 months.  Rinker expects quarrying operations to be unaffected pending the outcome of a court hearing scheduled to commence on June 13, 2006.  While Rinker believes Rinker Materials permits were validly issued, it is not possible to determine the likely outcome of these further proceedings or what impact that will have

 

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on Rinker Materials’ operations.  If the Lake Belt permits, including the key permits for the SCL, FEC and Krome quarries were ultimately set aside or quarrying operations under them restricted, Rinker Materials and the other industry participants with quarries in the Lake Belt region would need to source aggregates, to the extent available, from other locations in Florida or import aggregates.  This would likely affect Rinker Materials’ ability to make, sell and deliver products, which could cause revenues to decline or costs to increase and result in lower profits.  Any adverse impacts on the Florida economy arising from the cessation or significant restriction of quarrying operations in the Lake Belt could also have a material adverse effect on Rinker Materials.

 

Cement Kiln Dust:  Like other cement manufacturing facilities, Rinker Materials’ Miami cement plant has a cement kiln dust (“CKD”) former disposal site that could pose a risk of elevated pH levels and other impacts to surrounding groundwater.  Cement kiln dusts are currently reused in the manufacturing process and as such Rinker Materials does not currently envisage a need to open a new CKD landfill.  If it did so, such a site would require extensive permitting and environmental controls.  

 

Silica Exposure:  Rinker group entities are defendants in silicosis litigation in Florida at present.  See Legal Proceedings in “Item 8.A. Consolidated Statements and Other Financial Information”.  Rinker group has a comprehensive workplace silica exposure monitoring program in place with current exposure action levels in accord with the recommendations of a number of independent occupational health organizations.  Rinker group’s voluntary action levels are 50% below the applicable US and Australian standards.

 

Waste Disposal:  In the United States, regulated solid and hazardous wastes are sent to licensed third party sites.  Rinker Materials also operates permitted inert fill/construction and demolition debris landfills in Arizona, Nevada, Oregon, Washington and Florida.  In Miami, Florida, Rinker Materials operates a facility that receives petroleum contaminated soils from outside sources, burns the soils in a kiln to remove the petroleum and uses the clean soils in its cement manufacturing process.

 

Quarry Reclamation:  Permits for some of the Rinker group’s quarries require reclamation activities to be performed when quarry activities cease.  See critical accounting policies and property plant and equipment for further information and reclamation obligations.

 

Item 5           Operating and Financial Review and Prospects

 

Significant Events in fiscal year 2006

 

In April 2005, Rinker disposed of a property at Buffalo Road, Las Vegas, Nevada for net proceeds of US$33.6 million.  A gain on disposal of US$19.8 million, net of tax, was recognized in the financial statements for the year ended March 31, 2006.

 

In December 2005, Rinker announced the sale of its 50% stake in the Emoleum Australian asphalt joint venture with Exxon Mobil Australia Pty Limited to a subsidiary of the engineering services group Downer EDI Limited.  The sale was completed in February 2006.  A gain on disposal of A$18.2 million (US$15.7 million), net of tax, was recognized in the financial statements for the year ended March 31, 2006.

 

Events subsequent to March 31, 2006

 

On May 11, 2006, the directors proposed a capital return of 50 A$ cents per ordinary share (A$2.50 per ADR), or approximately A$455 million (approximately US$341 million assuming a 0.75 exchange rate).  The return is subject to receiving a favorable class ruling from the Australian Tax Office confirming that

 

40



 

it is a 100% capital return, and majority shareholder approval at the Annual General meeting on July 18, 2006.

 

Additionally, the directors declared a special dividend of 40 A$ cents per ordinary share (A$2.00 per ADR), or approximately A$364 million (approximately US$273 million assuming a 0.75 exchange rate).  This special dividend is unfranked and will be paid on July 4, 2006 with a record date of June 9, 2006.  The entire dividend will be paid from the Rinker group’s conduit foreign income amount, thus eliminating Australian withholding tax for all overseas shareholders.  The special dividend in respect of ordinary shares for the year ended March 31, 2006 has not been recognized in the financial statements because it was declared after March 31, 2006.

 

Basis of preparation and presentation

 

The financial statements for fiscal years ended 2005 and 2006 included elsewhere in this annual report include Rinker and its controlled entities.

 

Rinker group changed its accounting policies on April 1, 2005 to comply with Australian Equivalents to International Financial Reporting Standards (‘A-IFRS’).  The transition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards”, with April 1, 2004 as the date of transition.  The previous policies were in accordance with the now superseded Australian GAAP.  An explanation of how the transition from superseded policies to A-IFRS has affected the consolidated entity’s balance sheet, income statement and cash flows is discussed in Note 1 to the financial statements included elsewhere in this annual report.

 

Critical accounting policies

 

The financial statements included elsewhere in this annual report are prepared under A-IFRS.  A description of the significant accounting policies is included in the financial statements.

 

A US GAAP reconciliation to A-IFRS is provided in Note 40 to the financial statements.  Under superseded AGAAP, the only significant difference in the reconciliation of profit from superseded AGAAP to US GAAP was the amortization of goodwill.  Under A-IFRS, goodwill is no longer amortized, and no significant differences in the reconciliation of profit between A-IFRS and US GAAP remain.

 

The accounting policies under A-IFRS and US GAAP that Rinker management believes are critical to understanding the Rinker group’s financial performance and financial condition are discussed below.

 

Use of estimates and assumptions

 

In applying A-IFRS and US GAAP, Rinker group entities’ management will often be required to make individual estimates and assumptions regarding expected outcomes or uncertainties.  Actual results or outcomes generally differ from estimated or assumed amounts.  In the past, these differences have not been material.  In the future such differences will be included in the financial statements of the Rinker group as soon as they are known.  The individual estimates and assumptions generally do not involve a level of risk or uncertainty that would be material to the financial statements of the Rinker group as a whole because, although numerous, they generally are relatively immaterial in amount.

 

There are estimates and assumptions made by management in preparing the financial statements of the Rinker group for which actual results will emerge over long periods of time.  Although there is greater risk with respect to the accuracy of these long-term estimates and assumptions because of the long period over which actual results will emerge, Rinker group’s management believes that such risk is

 

41



 

mitigated by its ability to closely monitor and periodically adjust these estimates and assumptions over the same long period.

 

Property, Plant and equipment

 

Rinker group entities depreciate their property, plant and equipment over their estimated useful lives.  This requires Rinker group entities’ management to make estimates as to technological and/or market redundancy issues affecting their assets as well as any potential physical asset life.

 

The Rinker group had US$1,963 million of property, plant and equipment in its balance sheet as at March 31, 2006 and depreciation and depletion on those assets totaled US$191 million for the year ended March 31, 2006, or approximately 10% of book asset value.  Depreciation in fiscal year 2005 amounted to US$181 million, or approximately 10% of book asset value.  An annual review of the recoverable value of non-current assets is undertaken to determine whether there are any material errors in judgment in respect of the rate of depreciation of property, plant and equipment impacting the carrying value of those assets.

 

The Rinker group also has recorded obligations of US$55 million in order to retire property, plant and equipment, including quarry reclamation obligations, at the end of their useful lives.  This obligation requires Rinker group entities management to make estimates of future legal rehabilitation obligations.  The associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and amortized over the life of the related asset using the unit-of-production method.  At the end of each year, the liability is increased to reflect the passage of time (accretion expense) and adjusted (increase or decrease) to reflect changes in the estimated future cash flows underlying the initial fair value measurement.  If the obligation is settled for other than the carrying amount of the liability, the Rinker group will recognize a gain or loss on settlement.

 

Impairment and recoverable value of assets, including goodwill

 

Under A-IFRS, the Rinker group reviews the carrying amounts of its tangible and intangible assets at each reporting date to determine whether there are any indications of impairment.  If any such indication exists, the Rinker group is required to write-down these assets to their estimated recoverable amount, generally the higher of fair value less costs to sell and value in use.  Where the asset does not generate cash flows that are independent from other assets, Rinker group estimates the recoverable amount of the cash generating unit to which the asset belongs.

 

Recoverable amounts involve significant judgments by Rinker group entities’ management and represent the estimated current value of the cash flows arising from the continued use or the sale of the assets. In calculating recoverable amounts, Rinker group entities discount cash flows to present value. Management calculates the cash flows utilizing forecasts of how the business is expected to operate based on the current performance and business environment but taking into account expected future changes. Rinker group entities’ management review these cash flow projections at least annually and any assets with a carrying value not supported by their discounted future cash flows are written down to their estimated recoverable amount. Impairment losses are measured as the amount by which the carrying value of the assets exceeds their recoverable amount as calculated above.  Impairment losses are recognized immediately in earnings.  There were no material impairment losses in fiscal years 2006 or 2005.

 

Sensitivity analysis is applied to the calculation of future cash flows to determine whether the asset carrying value is supported under different assumptions.  Key assumptions include discount rates, sales volumes, average selling price and cost assumptions.  Discount rates are based on the estimated cost of capital in the applicable country.  Sales volumes, average selling price and cost assumptions all use

 

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historical results as a base and are adjusted based on forecast assumptions derived from past experience.  Adjustments include approved strategic initiatives by the Rinker group and any expected external factors, such as economic activity levels, degree of competition and the relevant Rinker group entity’s position in the market for the business under review.

 

Goodwill and intangible assets with indefinite lives are tested for impairment annually and whenever there is an indication that the asset may be impaired.  An impairment of goodwill is not subsequently reversed.

 

Goodwill is disclosed by Segment in Note 2 of the financial statements.  Additional risk factors are discussed in item 3. D.  of this annual report.

 

Provision for uninsured losses and future claims

 

Rinker group companies retain significant liability for workers compensation, automobile liability, product, and general liability claims, as well as certain liabilities for employee medical claims under benefit programs.  Rinker group companies have insurance coverage above the retained liability for each claim and an aggregate amount for each year.

 

Management believes that adequate provision has been made for all known claims and for the value of probable future claims to the extent such claims can be measured reliably.  Measurement is based on the annual report of an independent actuary.

 

New accounting standards

 

Australian Standards

 

The consolidated entity changed its accounting policies on April 1, 2005 to comply with Australian Equivalents to International Financial Reporting Standards (‘A-IFRS’).  The transition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards”, with April 1, 2004 as the date of transition.  An explanation of how the transition from superseded policies to A-IFRS has affected the consolidated entity’s financial position, financial performance and cash flows is discussed in Note 1 in the financial statements included elsewhere in this report. 

 

In August 2005, the Australian Accounting Standards Board issued AASB 7, “Financial Instruments: Disclosures”, for application to reporting periods beginning on or after January 1, 2007.  This standard will therefore first apply to the Rinker group for the fiscal year ended March 31, 2008.  AASB 7 requires additional disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments. There will be no material effect on the group’s financial position, results of operations, or cash flows. 

 

In June 2005, the Urgent Issues Group issued UIG Interpretation 4, “Determining whether an Arrangement contains a Lease”, for application to reporting periods beginning on or after January 1, 2006. This standard will therefore first apply to the Rinker group for the fiscal year ended March 31, 2007. The Interpretation specifies criteria for determining whether an arrangement is, or contains, a lease, based on an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset and a right to use that asset.  Rinker group is currently evaluating the impact UIG 4 will have on its consolidated financial position, results of operations and cash flows but does not expect the interpretation to have a material impact.

 

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In April 2006, the Urgent Issues Group issued UIG Interpretation 9, “Reassessment of Embedded Derivatives” for application to reporting periods beginning on or after June 1, 2006. This standard will therefore first apply to the Rinker group for the fiscal year ended March 31, 2008. UIG Interpretation 9 clarifies that an entity reassesses whether an embedded derivative contained in a host contract is required to be separated from a host contract and accounted for as a derivative under AASB 139, “Financial Instruments” only when there is a change in contract terms that significantly modifies the cash flows that otherwise would be required.  The Rinker group does not expect UIG 9 to have a material impact on its financial position, results of operations or cash flows.

 

US Standards

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing” (“ARB No. 43”), to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).  Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43.  Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005.  The Rinker group is therefore required to adopt this standard with effect from April 1, 2006 but does not expect SFAS No. 151 to have a material impact.

 

In December 2004, the FASB, issued SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”), which replaces SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes Accounting Principle Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”.  SFAS 123R, addresses the accounting for share-based payments transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value on the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  This statement eliminates the ability to account for share-based compensation transactions using an intrinsic value method as prescribed under APB 25, and generally requires that such transaction be accounted for using a fair value based method (based on the most appropriate model to calculate the value of the options) and recognized as an expense.  Effective April 1, 2006, Rinker group will adopt SFAS 123 (R) using the modified prospective method.  The Rinker group does not expect the adoption of SFAS 123 (R) to have a material impact on its consolidated balance sheet or income statement.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance.  SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  SFAS 153 is effective for the fiscal periods beginning after June 15, 2005.  Rinker is currently evaluating the effect that the adoption of SFAS 153 will have on its consolidated financial position, results of operations or cash flows but does not expect it to have a material impact.

 

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47).  FIN 47 clarifies that the term “conditional asset retirement obligations” as used in FAS 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing

 

44



 

and/or method of settlement are conditional on a future event that may or may not be within the control of the entity.  An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated, even if there is uncertainty with regards to the timing and/or method of settlement.  Uncertainty about the conditional outcome of the obligation is incorporated into the measurement of the fair value of the liability, not the recognition decision.  FIN 47 is effective for fiscal years ending after December 15, 2005.  The adoption of FIN 47 did not have a material effect on the results of operations, financial position or liquidity of Rinker group.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (FAS 154).   FAS 154 changes the method for reporting an accounting change.  Under FAS 154, accounting changes must be retrospectively applied to all prior periods for which financial statements are presented, unless the change in accounting principle is due to a new pronouncement that provides other transition guidance or unless application of the retrospective method is impracticable.  Under the retrospective method, we will no longer present the cumulative effect of a change in accounting principle in our earnings statements.  FAS 154 carries forward APB Opinion No. 20’s guidance for reporting corrections of errors in previously issued financial statements and for reporting changes in accounting estimates.   FAS 154 is effective for any accounting changes and corrections of errors occurring after March 31, 2006.

 

A.    Management discussion and analysis of the financial results

 

Management discussion and analysis – executive summary

 

During the fiscal year ended March 31, 2006 the Rinker group’s trading revenue increased by 19% from US$4,310 million to US$5,108 million, EBIT increased by 48% from US$775 million to US$1,146 million, and net profit attributable to members of Rinker rose by 50% from US$493 million to US$740 million compared to the fiscal year ended March 31, 2005.

 

This financial performance and the increase over the prior fiscal year has been primarily influenced by the level of activity in the US and Australian construction materials industries, the ability to acquire businesses and expand and improve heritage operations within the Rinker group, and by capitalizing on market leadership and the cost advantages of vertically integrated operations.  The financial results were also assisted by two significant non-recurring transactions:  the sale of a depleted quarry in Las Vegas, Nevada and the sale of the 50% joint venture share in a non-core asphalt business in Australia.  A summary of these factors is contained below with further information in the detailed management discussion and analysis that follows this executive summary.

 

Construction materials industry

 

The level of construction activity in the residential, commercial and civil segments of the US and Australian construction materials industry has created a favorable environment for the Rinker business, supporting high demand for Rinker products.

 

In the US, Dodge estimates that total construction expenditure in calendar year 2005 was US$594 billion, an increase of US$43 billion or 7.8% over calendar year 2004.  The level of activity is 41% higher than 5 years earlier when expenditure was US$423 billion, in calendar year 2000.  In Florida, total construction expenditure is estimated at US$64 billion in calendar year 2005, an increase of US$9 billion over the prior year and US$32 billion or 100% above calendar year 2000.

 

45



 

 Rinker Materials, as one of the largest heavy building materials companies in the US with strong number 1 or 2 market positions in most of its served market areas, has benefited by this expansion with significant growth in volumes, trading revenue and EBIT across each of its business segments.

 

In Australia, the Readymix financial results have similarly benefited from increased construction activity, improving from a trough that occurred following completion of many 2000 Olympic construction projects and implementation of the GST.  Total Australian construction expenditure in calendar year 2005 was A$97.0 billion (US$73.7 billion), an increase of 12.8% over calendar year 2004.  The level of expenditure is 70% higher than 5 years earlier when expenditure was A$57.1 billion (US$31.7 billion).

 

Acquisitions and greenfield expansion

 

A key contributor to the improvement in Rinker’s financial performance has been growth through both acquisition and greenfield expansion of heritage operations.  Major acquisitions are summarized on pages 21 and 22.

 

Bolt-on acquisitions during the year ended March 31, 2006 are summarized on page 50.  These smaller acquisitions have strengthened market positions, provided pull-through profits (from the vertically integrated business), and often represent regional expansion compared to the large step-out growth that was initiated by major acquisitions, such as Kiewit. Acquisitions that had not been included in Rinker results for a full prior fiscal year before fiscal year 2005 contributed US$90 million to fiscal year 2006 trading revenue and US$9 million to fiscal year 2006 EBIT. 

 

During fiscal years 2005 and 2006 Rinker also completed the construction of 9 new concrete plants, 6 new concrete block plant, and expanded production capacity at a number of concrete, concrete block and aggregate facilities. These newly constructed, expanded or upgraded plants contributed US$114 million of trading revenue and US$46 EBIT during the fiscal year ended March 31, 2006. 

 

The contribution from recent acquisitions, greenfield or significantly expanded operations to the increased trading revenues and EBIT during fiscal year 2006 is set out in the following table:

 

 

 

Increase YEM06 v YEM05 (US$ million)

 

 

 

Trading Revenue

 

EBIT

 

 

 

 

 

 

 

Fiscal year 2005

 

4,310

 

 

775

 

 

 

 

 

 

 

 

 

 

Sources of increase:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

58

 + 7

%

5

 + 1

%

 

 

 

 

 

 

 

 

Greenfield & expansion

 

87

 + 11

%

27

 + 7

%

 

 

 

 

 

 

 

 

Heritage

 

653

 + 82

%

339

 + 91

%

 

 

 

 

 

 

 

 

Fiscal year 2006

 

5,108

 

 

1,146

 

 

 

46



 

Managing Rinker’s vertically integrated business

 

A key Rinker Materials operating strategy is to hold a strong number 1 or number 2 market position in terms of revenue in its served markets, and manage the businesses through integrated markets where the company’s concrete, block and asphalt operations source most of their aggregate and, in Florida, cement internally.  This enables operations to take a price leadership role to improve trading revenue and EBIT, offset higher input costs through price increases and create operational efficiencies across the integrated system.

 

During fiscal year 2006 pricing initiatives have generally achieved increases above inflation levels, and have offset significant cost increases, particularly for fuel and energy, freight and raw materials. Operating cost increases associated with the increased volumes have been minimized, and in most cases EBIT margins have improved. 

 

In Australia, Readymix is one of the top three companies in terms of revenue in most of its markets.  Following a long period of inability to recover cost inflation in selling prices and insufficient profitability, Readymix now also maintains a strategy of price leadership which has preserved operating margins and the returns on the capital invested in the business despite steep cost increases and relatively flat construction activity during fiscal year 2006.

 

Further detail of the contribution of price improvement to results is outlined in the segment review that follows this summary.

 

Operational efficiencies have also been achieved by a culture of continuous improvement through the benchmarking of performance against competitors, internal benchmarking, the sharing and application of best practices, as well as the implementation of operational improvement projects.  Businesses within the Rinker group have a track record of generating significant cost reduction through operational improvement with total savings for the fiscal year 2006 estimated at US$52 million. 

 

There are currently more than 1,000 active operational improvement projects across the Rinker group, supported by 10 employees primarily responsible to facilitate improvement teams.

 

The following table highlights the Rinker group’s ability to improve costs as a percentage of trading revenue during the last two fiscal years:

 

 

 

2006

 

2005

 

Trading revenue

 

100.0

%

100.0

%

Cost of sales

 

52.2

%

55.7

%

Gross margin

 

47.8

%

44.3

%

Warehouse and distribution

 

19.9

%

19.1

%

Selling, general & admin

 

7.3

%

8.0

%

Other

 

1.8

%

0.7

%

Profit before finance and income tax expense

 

22.4

%

18.0

%

 

While warehouse and distribution costs have increased, this reflects an increased proportion of Rinker operations in aggregate and concrete where the freight cost in delivered product trading revenue is relatively high compared to higher priced manufactured goods, such as concrete pipe, prestressed concrete products and building materials.  Fuel and ocean freight costs have also increased at a faster rate than price increases.

 

47



 

The following discussion of the Rinker group’s operating results uses financial data prepared under A-IFRS.  See Note 40 to the financial statements included elsewhere in this annual report for a description of the principal differences between A-IFRS and US GAAP as they relate to the Rinker group and a reconciliation of net profit and shareholders’ equity for the years and as of the dates therein indicated.

 

Significant non-recurring transaction

 

In April 2005 Rinker Materials completed the sale of its 147-acre former Buffalo Road quarry in Las Vegas, Nevada to one of the major homebuilders in the United States, D.R Horton for total consideration of US$34 million and a pre-tax gain of US$31 million.

 

In February 2006 Readymix completed the sale of its 50% joint venture interest in the Emoleum Australian asphalt joint venture with Exxon Mobil Australia Pty Limited to a subsidiary of the engineering services group Downer EDI Limited.  The sale included a long-term aggregate supply agreement to the new owners.  The investment in Emoleum was a non-core operation for Readymix and the sale will not materially impact the ongoing results of the business.  A pre-tax gain of US$22 million was recorded on the sale.

 

1.     General factors affecting the financial results of the Rinker group

 

Overview

 

Rinker group entities are manufacturers and suppliers of heavy building materials primarily in the US and Australia.  In the US, Rinker’s subsidiary, Rinker Materials, has five reporting segments: Aggregates; Cement; Concrete, concrete block and asphalt; Concrete pipe and products; and Other, which includes gypsum supply, prestressed concrete (sold in December 2004), polyethylene pipe (sold in February 2005), Rinker Materials’ corporate overheads.

 

In Australia, Rinker’s subsidiary, Readymix, produces aggregate, concrete, concrete pipe and other concrete products.  Readymix also holds a substantial joint venture interest in a cement manufacturer and operates a concrete business in China.  A joint venture interest in asphalt operations was sold in February 2006.

 

Rinker Materials

 

Rinker Materials’ operating results are primarily impacted by the level of construction activity in the residential, commercial and civil segments of the construction materials industry.  For the year ended March 31, 2006, approximately 55% of Rinker Materials’ trading revenue was estimated by Rinker Materials’ management to have been derived from residential construction, 30% from commercial construction, and 15% from civil construction.

 

Economic and population growth, coupled with rising personal incomes and low mortgage rates, have resulted in substantial growth in US residential construction over the last five years. Residential housing starts in the US in calendar years 2005, 2004, 2003, 2002, 2001 and 2000 were estimated by the US Department of Commerce to have been 2.07, 1.96, 1.85, 1.71, 1.60 and 1.57 million respectively, which compares to an average annual rate of 1.61 million starts between calendar years 1994 and 2004.

 

In Florida, which accounted for about 55% of Rinker Materials’ trading revenues for the year ended March 31, 2006, the residential construction market has outperformed the US national average. Between calendar years 1999 and 2005, Dodge estimated an average annual growth of 19.8% in Florida residential construction and building spending, compared to a US average of 11.3%.

 

48



 

Growth in the US economy and falling interest rates resulted in strong growth in commercial construction between 1999 and 2001.  Dodge estimates that total commercial construction and building spending increased from US$132.6 billion in calendar year 1999 to US$139.9 billion in calendar year 2001. In calendar years 2002 and 2003, commercial construction activity softened to US$134.2 billion and US$126.4 billion respectively due to a number of factors principally related to the weaker economic climate, but strengthened in calendar 2004 to US$131.0 billion and in calendar year 2005 to US$134.0 billion.  Florida construction expenditure has increased, from US$8.9 billion in calendar year 1999 to US$9.2 billion in calendar year 2005.

 

Rinker Materials’ exposure to the civil construction sector primarily relates to the construction of roads, highways and bridges.  Civil construction activity in the US has increased over the last six years with spending as estimated by Dodge, increasing from US$74.6 billion in calendar year 1999 to US$97.5 billion in calendar year 2005.  This was primarily due to TEA-21 (which covered the 6 year period 1998 to 2003) and SAFETEA (which covers the 6 year period 2004 to 2009), the legislated federal government infrastructure spending program.

 

Between the fiscal years ended 2003 and 2006, Rinker Materials’ volumes have increased as a result of acquisitions, underlying growth in key residential and non residential construction markets, and the expansion of manufacturing and delivery capacity to strengthen market positions.

 

The acquisition of Kiewit in September 2002 provided step-out growth for Rinker Materials into the very strong Arizona construction market, and has become a regional platform for further expansion in western US states.  Arizona now accounts for approximately 17% of Rinker Materials revenue and growth in construction activity in that state continues to be high compared to national averages.  Smaller regional and bolt-on acquisitions have expanded the Rinker Materials footprint and provided volume growth for the businesses in Nevada, Tennessee and Florida.

 

Capital investment in new manufacturing facilities has also expanded production capacity in heritage operations.  In the Florida operations in particular, during the last two years Rinker Materials has constructed eight new concrete plants, five new block manufacturing lines, and has significantly expanded the fleet of concrete mixers and block delivery trucks to strengthen market positions and supply growing demand.  Rinker Materials has also invested to expand quarry production capacity to supply the increased aggregate and sand requirements of the internal concrete and block operations, external manufacturers, and the buoyant road construction market.

 

Rinker Materials’ financial performance is impacted by changes in prices for its products.  Pricing is determined by the level of demand and supply and the competitive environment in the various geographic and product markets in which Rinker Materials operates.  Price growth in excess of inflation has generally been achieved for the majority of products and in most markets.  Price increases have been particularly strong in fiscal year 2006, including initiatives to recover steep increases in raw material, freight, fuel and energy costs.

 

Readymix

 

For the fiscal year ended March 31, 2006, Readymix’s trading revenue was estimated to have been derived approximately 25% from residential construction, 45% from civil construction and the remaining 30% from commercial construction.

 

Over the last three years construction activity in the residential segment has been influenced primarily by changes in interest rates and housing price affordability.  Following two interest rate rises, in November 2004 and December 2004, there was a gradual decline in residential construction commencements during fiscal years 2005 and 2006. The decline, however, has been mild by historical

 

49



 

standards with the market supported by a relatively strong economy and low levels of unemployment.  According to the Australian Bureau of Statistics, total spending in the residential segment increased slightly to A$38.8 billion (US$29.5 billion) in the year ended December 31, 2005, from A$38.1 billion (US$28.2 billion) in the year ended December 31, 2004.  Spending was A$33.7 billion (US$23.5 billion) in the year to December 2003.

 

The commercial segment of the construction market strengthened during fiscal year 2006 compared to fiscal year 2005.  According to the Australian Bureau of Statistics total spending in the commercial segment has grown from US$13.6 billion (A$18.4 billion) in the year ended December 31, 2004 to US$16.4 billion (A$21.5 billion) in the year ended December 31, 2005 due to higher business investment levels, supported by the relatively strong economy.  Spending in the year to December 2003 was estimated at US$11.1 billion (A$15.9 billion).

 

Civil construction in Australia is largely dependent on government infrastructure programs. According to the Australian Bureau of Statistics spending in the civil segment has risen from US$21.8 billion (A$29.5 billion) in the year ended December 31, 2004 to US$27.9 billion (A$36.7 billion) in the year ended December 31, 2005.  Spending in the year to December 2003 was estimated at US$18.2 billion (A$26.1 billion).

 

Acquisitions

 

As discussed in “Item 4 – Information on the Rinker group”, the Rinker group has grown by acquisition and particularly in Rinker Materials through a number of major acquisitions between June 2000 and September 2002. 

 

Smaller “bolt-on” acquisitions are also regularly undertaken as part of the Rinker group’s growth strategy.  For the year ended March 31, 2006 bolt-on acquisitions included:

 

FCCI Readymix and Brooksville Concrete – concrete operations in Florida

 

Infiniton Sand – a sand supply source for the Las Vegas, Nevada market

 

Carder Concrete Products – a concrete pipe operation with plants in Colorado and Wyoming

 

Charter Materials – a concrete plant and sand operations in Prescott, Arizona

 

Numix and Harrington Concrete, on the north coast of New South Wales, Australia

 

Keys Concrete – one of the largest independent concrete and block manufacturers in Florida

 

Acquisitions are integrated into Rinker Materials, as part of the Aggregate, Cement, Concrete, concrete block and asphalt, and concrete pipe and products segments, and Readymix, and included in the discussion of results that follows.

 

2.     Exchange rates

 

For the year ended March 31, 2006, around 80% of the Rinker group’s trading revenue was generated by Rinker Materials in the US.  For the years ended March 31, 2006 and 2005, there were virtually no movements of currency between US dollars and Australian dollars that resulted in a material amount of realized exchange gains or losses.  As a result, the only significant impact of changes in the US

 

50



 

dollar/Australian dollar exchange rate is one of accounting translation for financial reporting purposes.  An appreciation of the A$ relative to the US$ would be expected to have a favorable impact on the Rinker group’s reported US$ results.

 

The directors believe that the best measure of performance for Rinker Materials in the US and Readymix in Australia is their respective local currencies in as much as each generates all revenue and incurs all costs in that local currency.  Set out below is performance information in US$.  Supplementary performance information for Readymix in Australian dollars, is set out starting at page 60.

 

The average month end exchange rates used for translation of the Readymix A$ transactions into US$, for the years ended March 31, 2006 and 2005 are set out in “Item 3.E. Supplementary Information – Australian Dollar/Exchange Rates”.

 

3.     Overview — Year ended March 31, 2006 compared to the year ended March 31, 2005

 

The Rinker group’s trading revenue and EBIT for the years ended March 31, 2006 and 2005 are set out below in United States dollars.  A further breakdown of the Rinker group’s results to net profit is included in Note 2 to the financial statements, which are presented elsewhere in this annual report.

 

 

 

Rinker group
Trading revenues and EBIT
US$ millions
Year Ended March 31,

 

 

 

2006

 

2005

 

 

 

Trading
revenues

 

EBIT

 

Trading
revenues

 

EBIT

 

Rinker Materials

 

4,029

 

979

 

3,319

 

640

 

Readymix

 

1,079

 

179

 

991

 

147

 

Corporate costs

 

 

(12

)

 

(11

)

Total Rinker group

 

5,108

 

1,146

 

4,310

 

775

 

 

As previously defined under “Certain definitions,” “EBIT” means Profit before finance and income tax expense in accordance with A-IFRS.

 

Trading revenue

 

The Rinker group’s trading revenues for the fiscal year ended March 31, 2006 were US$5,108 million compared to US$4,310 million for the fiscal year ended March 31, 2005.  This represented an increase of US$798 million, or 19%.  In Rinker Materials an increase in trading revenue of US$710 million was primarily due to improved prices, which increased compared to fiscal year 2005 in all product categories and in most markets.  Favorable economic conditions also resulted in increased volumes in most business segments.  Reported US$ trading revenues in Readymix increased by US$88 million, reflecting a US$75 million movement in constant currency from higher volumes due to continued growth in construction markets in Australia and China and price improvement in Australia.  In addition, an increase of US$13 million was caused by the 1.0% change in the A$/US$ exchange rate.

 

51



 

Cost of Sales

 

Cost of sales for the Rinker group increased by 11% to US$2,666 million in fiscal year 2006 from US$2,399 million in fiscal year 2005. In Rinker Materials, cost of sales increased by US$210 million, or 12%, in fiscal year 2006, due principally to higher trading volumes, and higher costs for fuel, steel, imported cement and ocean freight which have increased at rates above general inflation.

 

Warehouse and distribution costs

 

Warehouse and distribution costs rose 23% to US$1,015 million in fiscal year 2006 from US$825 million in fiscal year 2005. In Rinker Materials, the increase in costs of US$175 million in fiscal year 2006 was due principally to higher fuel costs and increased distribution costs on the higher volumes sold.

 

In fiscal year 2006 warehouse and distribution costs represented 19.9% of trading revenue compared to 19.1% in fiscal year 2005. The increase in warehouse and distribution costs as a percentage of trading revenue compared to the fiscal year 2005 reflects an increased proportion of Rinker operations in aggregate and concrete where the freight cost in delivered product revenue is relatively high compared to higher priced manufactured goods, such as concrete pipe, concrete products and building materials. Fuel and ocean freight costs have also increased at a faster rate than price increases.

 

Selling, general and administrative costs

 

Selling, general and administrative costs rose 9% to US$374 million in fiscal year 2006 from US$343 million in fiscal year 2005. Selling, general and administrative costs were 7.3% of trading revenue in fiscal year 2006 compared to 8.0% in fiscal year 2005. Increased prices and trading volumes and the integration of business acquisitions within existing administration cost structures have reduced administration and other operating costs as a percentage of trading revenue. Operating cost improvements have also contributed to offsetting upward cost pressures in existing businesses and from the addition of new businesses.

 

Other income and expenses

 

Other income and other expenses primarily relate to the divestment of non-core businesses and the disposal of property, plant and equipment and other assets. Other income was US$68 million in fiscal year 2006, an increase from US$21 million in fiscal year 2005. In fiscal year 2006, Rinker Materials disposed of a property at Buffalo Road, Las Vegas, Nevada for net proceeds of US$34 million. The gain on disposal of US$31 million was included in other income. In Readymix, the investment in the Emoleum joint venture was sold for a gain on disposal of US$22 million, also included in other income.

 

In fiscal year 2005, the Prestress business was divested by Rinker Materials in December 2004 with proceeds on disposal of US$33 million, and the Polypipe business was divested in February 2005 with proceeds on disposal of US$67 million. All other transactions in fiscal year 2006 and 2005 related to the disposal of surplus property, plant and equipment, primarily in Rinker Materials, and were all individually less than US$10 million.

 

EBIT

 

The Rinker group’s EBIT of US$1,146 million for the year ended March 31, 2006 represented a US$371 million, or 48%, increase compared to EBIT for the year ended March 31, 2005 of US$775 million. The increase was due primarily to a US$339 million increase in Rinker Materials and a US$32 million increase in Readymix. The increase in Rinker Materials principally reflects continuing increases in volumes and prices in the aggregate and concrete and block operations, improved gross margins in concrete pipe, and

 

52



 

strong volume growth in cement. The increase in Readymix principally reflects the gain on the sale of the joint venture interest in Emoleum and good returns from large project work.

 

Borrowing costs

 

Borrowing costs were US$42 million in fiscal year 2006 and US$54 million fiscal year 2005. Average outstanding debt was lower in fiscal year 2006 from fiscal year 2005 which resulted in the lower borrowing costs. Rinker debt is predominantly borrowed by Rinker Materials and borrowing costs are predominantly incurred in Rinker Materials.

 

Interest income

 

Interest income was unchanged at US$22 million in both fiscal year 2006 and fiscal year 2005. Cash balances have been invested in short-term interest-bearing investments pending investment in acquisition opportunities. At the end of fiscal year 2006 Rinker had approximately US$289 million on short-term deposit, principally in A$ accounts earning approximately 5.5% interest.

 

Income tax expense

 

Income tax expense increased by US$137 million to US$382 million in fiscal year 2006, compared to US$245 million in fiscal year 2005. The Rinker group’s effective tax rate increased from 33.0% in fiscal year 2005 to 33.9 % in fiscal year 2006. The increase in the Rinker Group’s effective tax rate in fiscal year 2006 principally reflects a higher proportion of the Rinker Group’s EBIT being derived in the United States, where the federal rate of 35% plus state tax on earnings is higher than the corporate rate of 30% in Australia.

 

Net profit attributable to members of Rinker

 

The net profit attributable to members of Rinker increased by US$247 million or 50% to US$740 million for fiscal year 2006 from US$493 million for fiscal year 2005.

 

Net profit attributable to members of Rinker of US$740 million in fiscal year 2006 comprised EBIT of US$1,146 million plus interest income of US$22 million less borrowing costs of US$42 million, tax expense of US$382 million, and minority interests of US$3 million.

 

Net profit attributable to members of Rinker of US$493 million in fiscal year 2005 comprised EBIT of US$775 million plus interest income of US$22 million less borrowing costs of US$54 million, tax expense of US$245 million, and outside equity interests of US$5 million.

 

4.              Results of operations for Rinker Materials segments

 

Rinker Materials has five business segments: Aggregate; Cement; Concrete, concrete block and asphalt; Concrete pipe and products; and Other. Rinker Materials records its transactions in its own financial statements in US dollars. Results of operations in US$ for Rinker Materials for the years ended March 31, 2006 and 2005 are set out below.

 

53



 

 

 

Rinker Materials
Business Segment Trading revenues and EBIT (3)
US$ millions
Year Ended March 31,

 

 

 

2006

 

2005

 

 

 

Trading
revenues

 

EBIT

 

Trading
revenues

 

EBIT

 

Aggregates

 

1,074.1

 

262.5

 

861.9

 

195.4

 

Cement

 

487.0

 

142.4

 

389.4

 

117.7

 

Concrete, concrete block and asphalt

 

2,180.3

 

374.4

 

1,634.9

 

212.4

 

Concrete pipe and products

 

575.8

 

133.3

 

472.0

 

89.5

 

Other (1)

 

370.9

 

66.4

 

461.6

 

24.6

 

Eliminations (2)

 

(658.8

)

 

(501.0

)

 

Total Rinker Materials in US$

 

4,029.3

 

979.0

 

3,318.8

 

639.6

 

 


(1)          Other includes Gypsum Supply, Prestressed concrete (sold in December 2004), Polypipe (sold in February 2005), Rinker Materials corporate costs and unallocated divestment gains and losses.

 

(2)          Aggregates and Cement sell products to other Rinker Materials segments. This internal revenue is eliminated on consolidation.

 

(3)          EBIT means profit before finance and income tax expense in accordance with A-IFRS.

 

i.                 Aggregates

 

The results of operations for the Aggregates segment for the years ended March 31, 2006 and 2005 are set out below.

 

 

 

Year ended March 31

 

US$ million

 

2006

 

2005

 

External revenue (1)

 

664.3

 

553.9

 

Inter segment revenue (2)

 

409.8

 

308.0

 

Trading revenue

 

1,074.1

 

861.9

 

EBIT

 

262.5

 

195.4

 

EBIT margin % (3)

 

24.4

 

22.7

 

 


(1)          External revenue means revenue from customers not part of the Rinker group

 

(2)          Inter segment revenue means revenue from customers within the Rinker group

 

(3)          EBIT margin % is EBIT divided by trading revenue

 

Aggregates trading revenue has increased as a result of both volume and price increases. Volumes have increased with the growth of residential construction particularly in Florida and Arizona, and growth in highway spending particularly in Florida and Georgia. Prices have improved due to strong demand, a scarcity of aggregates in Florida, and initiatives to recover recent steep cost increases.

 

54



 

Year ended March 31, 2006 compared to the year ended March 31, 2005

 

Trading Revenue:  Trading revenue of US$1,074.1 million for the year ended March 31, 2006 represented a US$212.2 million, or 25%, increase compared to trading revenue for the year ended March 31, 2005 of US$861.9 million.

 

The increase principally reflects:

 

                  Increased prices and volumes in the Florida market, which accounted for increased trading revenue of approximately US$107 million, including the pull through impact from recent acquisitions and greenfields expansion in the concrete, concrete block and asphalt segment;

 

                  Price improvement across all Rinker Materials western markets, particularly Arizona, Portland, Nevada and Everett in Washington state, with an overall increase in trading revenue of US$86 million; and

 

                  Increased prices and volumes in Georgia, Kentucky and Tennessee where trading revenue increased by US$19 million.

 

EBIT:  EBIT of US$262.5 million for the year ended March 31, 2006 represented a US$67.1 million, or 34%, increase compared to EBIT for the year ended March 31, 2005 of US$195.4 million. This was due principally to an increase in average prices of 16%, with improvement generally achieved across most markets and in excess of the steep increase in fuel and energy costs ahead of cost inflation. The EBIT margin increased by 1.7 percentage points to 24.4%.

 

ii.             Cement

 

The results of operations for the Cement segment for the years ended March 31, 2006 and 2005 are set out below.

 

 

 

Year ended March 31

 

US$ million

 

2006

 

2005

 

External revenue (1)

 

238.0

 

196.4

 

Inter segment revenue (2)

 

249.0

 

193.0

 

Trading revenue

 

487.0

 

389.4

 

EBIT

 

142.4

 

117.7

 

EBIT margin% (3)

 

29.3

 

30.2

 

 


(1)          External revenue means revenue from customers outside the Rinker group

 

(2)          Inter segment revenue means revenue from customers within the Rinker group

 

(3)          EBIT margin % is EBIT divided by trading revenue

 

Trading revenue growth was driven principally by volume increases and strong price growth during the year ended March 31, 2006.

 

Year ended March 31, 2006 compared to the year ended March 31, 2005

 

Trading Revenue:  Trading revenue of US$487.0 million for the year ended March 31, 2006 represented a US$97.6 million, or 25%, increase compared to the trading revenue for the year ended

 

55



 

March 31, 2005 of US$389.4 million. The increase in trading revenue reflected a 14% average increase in prices and a 7% increase in volumes.

 

Price improvement was facilitated by the strong construction market in Florida and high demand for cement, but also includes cost recovery with electricity, coal, fuel and imported cement costs all increasing above inflation. Volume increased following severe cement shortages in fiscal year 2005. Shipping shortages, which had been experienced in the prior year, were not repeated and both Rinker Materials cement mills increased production. Other major producers were also able to increase supply, increasing traded volumes.

 

EBIT:  EBIT of US$142.4 million for the year ended March 31, 2006 represented a US$24.7 million, or 21%, increase compared to EBIT for the year ended March 31, 2005 of US$117.7 million.

 

The increased EBIT was due to the volume increase, although margins declined, particularly in the first half of the fiscal year when cost increases outpaced price improvement.

 

iii.         Concrete, concrete block and asphalt

 

The results of operations for the Concrete, concrete block and asphalt segment for the years ended March 31, 2006 and 2005 are set out below.

 

 

 

Year ended March 31

 

US$ million

 

2006

 

2005

 

Trading revenue

 

2,180.3

 

1,634.9

 

EBIT

 

374.4

 

212.4

 

EBIT margin % (1)

 

17.2

 

13.0

 

 


(1)          EBIT margin % is EBIT divided by trading revenue

 

Trading revenue and EBIT increased significantly in fiscal year 2006 driven by strong demand in the Florida, Arizona and Nevada residential markets, reflected in higher prices and volumes, and the expansion of operations through both “bolt-on” acquisitions and greenfields expansion.

 

Year ended March 31, 2006 compared to the year ended March 31, 2005

 

Trading Revenue:  Trading revenue of US$2,180.3 million for the year ended March 31, 2006 represented a US$545.4 million, or 33%, increase compared to trading revenue for the year ended March 31, 2005 of US$1,634.9 million. Approximately two thirds of the increased revenue was in the Florida market, where both concrete and block volumes were at record levels, mainly due to growth in the Florida residential market.

 

During the last two years Rinker Materials has expanded its operations in Florida to keep up with customer demand in fast growing regions of the State, through both “bolt-on” acquisitions and greenfields expansion, particularly in south west Florida and the Florida Panhandle.

 

Overall, concrete volumes were ahead of the previous year by 12% and average prices were up 20%. Average block prices increased by 25% and volumes were up by 11%.

 

56



 

 EBIT:  EBIT of US$374.4 million for the year ended March 31, 2006 represented a US$162.0 million, or 76%, increase compared to EBIT for the year ended March 31, 2005 of US$212.4 million.

 

Approximately 70% of the EBIT increase was in the Florida market, where housing activity remained very strong and the results include a full year contribution from fiscal year 2005 acquisitions and greenfields expansions and a part year contribution from fiscal 2006 acquisitions and new plant start-ups. Operations in Arizona, Nevada, and the Pacific Northwest were also strongly ahead of the previous year.

 

iv.           Concrete pipe and products

 

The results of operations for the Concrete pipe and products segment for the years ended March 31, 2006 and 2005 are set out below.

 

 

 

Year ended March 31

 

US$ million

 

2006

 

2005

 

Trading revenue

 

575.8

 

472.0

 

EBIT

 

133.3

 

89.5

 

EBIT margin % (1)

 

23.1

 

19.0

 

 


(1)          EBIT margin % is EBIT divided by trading revenue

 

EBIT lifted sharply and margin growth in the concrete pipe and products segment continued during the year end March 31, 2006 with favorable market conditions and a mild winter, along with significant operational cost improvements.

 

Year ended March 31, 2006 compared to the year ended March 31, 2005

 

Trading Revenue:  Trading revenue of US$575.8 million for the year ended March 31, 2006 represented a US$103.8 million, or 22%, increase compared to trading revenue for the year ended March 31, 2005 of US$472.0 million. This improvement was principally due to a 12% increase in price combined with a 9% increase in volumes compared to the previous year.

 

EBIT:  EBIT of US$133.3 million for the year ended March 31, 2006 represented a US$43.8 million, or 49%, increase compared to EBIT for the year ended March 31, 2005 of US$89.5 million.

 

This reflects principally:

 

                  Improved margins, with price increases and operational improvement more than offsetting higher costs for steel, cement, power and fuel (US$33 million); and

 

                  Increased volume, from both improved economic conditions across most states and market share gains (US$11 million);

 

v.                                       Other

 

The results of operations for the Other segment for the years ended March 31, 2006 and 2005 are set out below. This segment includes gypsum supply, Rinker Materials’ corporate unallocated costs and

 

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unallocated divestment profits, and the pre-stressed concrete and polyethylene pipe businesses, which were divested during the fiscal year ended March 31, 2005.

 

 

 

Year ended March 31

 

US$ million

 

2006

 

2005

 

Trading revenue

 

370.9

 

461.6

 

 

 

 

 

 

 

EBIT excluding Rinker Materials corporate unallocated costs and unallocated divestment profits

 

55.1

 

37.8

 

 

 

 

 

 

 

Rinker Materials corporate unallocated costs and divestment profits

 

11.3

 

(13.2

)

 

 

 

 

 

 

EBIT

 

66.4

 

24.6

 

 

Year ended March 31, 2006 compared to the year ended March 31, 2005

 

Trading Revenue:  Trading revenue of US$370.9 million for the year ended March 31, 2006 represented a US$90.7 million or 20% decrease compared to the trading revenue for the year ended March 31, 2005 of US$461.6 million, reflecting businesses divested in fiscal year 2005 partly offset by increased revenue in gypsum supply.

 

Gypsum supply trading revenue increased by 21%, primarily due to price increases across the range of building materials sold by the business, which include wallboard, metal framing, stucco cement and accessories. Volumes also increased, with wallboard volume 7% higher than the previous fiscal year.

 

Trading revenue in Prestress decreased by US$57 million following divestment of the business in December 2004. Prior to the sale the business had contributed revenue of US$58 million, and during the last quarter of the year ended March 31, 2005 additional revenue of US$9 million was recorded from delivery of product manufactured prior to divestment and included in retained working capital. A further US$11 million of trading revenue has been recorded during the year ended March 31, 2006 from the delivery of remaining product.

 

The Polypipe polyethylene pipe and pipe liners business was divested in February 2005 for sale proceeds of US$67 million. Prior to the sale the business had contributed revenue of US$96 million during the year end March 31, 2005.

 

EBIT:  Excluding Rinker Materials corporate unallocated costs and unallocated divestment profits, EBIT was US$55.1 million for the year ended March 31, 2006 representing a US$17.3 million increase compared to EBIT of US$37.8 million for the year ended March 31, 2005.

 

The segment EBIT includes the trading results from the gypsum supply business in fiscal years 2006 and 2005, and in fiscal year 2005 the trading results of the prestress and polypipe operations before their sale, as well as the gain/loss on their divestment during that year.

 

Gypsum Supply EBIT increased by 34% during the year ended March 31, 2006, primarily due to improved margins as selling prices increased faster than increasing product costs in the strong Florida residential market, and from the higher volume.

 

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Prestress was divested for an amount below book value during the year ended March 31, 2005, resulting in a non-cash pre-tax book loss of approximately US$16 million. The operations were incurring trading losses prior to the sale. During fiscal year 2006 the delivery of product made prior to the sale continued for a break-even EBIT result.

 

The divestment of Polypipe realized a book gain before tax of around US$7 million during the fiscal year ended March 31, 2005. Trading operations prior to the divestment had been favorable, assisted by strong demand from the oil and gas industry for pipeline products. There was no further impact on Rinker Materials results from Polypipe during fiscal year 2006.

 

Rinker Materials’ corporate unallocated costs and unallocated divestment profits was a net gain of US$11.3 million for the year ended March 31, 2006 compared to net costs of US$13.2 million for the prior fiscal year. Included in fiscal year 2006 results is a pre-tax book gain of around US$31 million from the sale of the former Buffalo Road quarry in Las Vegas, Nevada.

 

5.              Results of the Readymix segment

 

Impact of currency exchange rate

 

As Readymix records its transactions in its own financial statements in Australian dollars and these results are translated into US dollars for the purposes of combination into the financial statements of the Rinker group, the Rinker group is then susceptible to changes in the exchange rate between the US dollar and the Australian dollar. An appreciation of the A$ relative to the US$ has a favorable impact on the Rinker group’s reported US$ results.

 

Given that Readymix records its transactions in its own financial statements in Australian dollars, the following management discussion and analysis of the financial results also identifies the impact of currency exchange rates on results.

 

 

 

Year ended March 31

 

US$ million

 

2006

 

2005

 

Trading revenue

 

1,079.1

 

990.9

 

EBIT

 

179.1

 

146.9

 

EBIT margin % (1)

 

16.6

 

14.8

 

 


(1)          EBIT margin % is EBIT divided by trading revenue

 

Year ended March 31, 2006 compared to the year ended March 31, 2005

 

Trading Revenue:  Trading revenue of US$1,079.1 million for the year ended March 31, 2006 represented a US$88.2 million, or 9%, increase compared to trading revenue for the year ended March 31, 2005 of US$990.9 million. This reflected a US$75.0 million movement in constant currency and an increase of US$13 million caused by the 1.0% change in the A$/US$ exchange rate.

 

The increase in constant currency trading revenue was due to price improvement in all Australian product lines, increased concrete volumes due to strong construction activity in the civil and commercial sectors, and higher concrete products sales to major infrastructure projects.

 

59



 

Australian concrete prices increased by 4%, aggregate by 6%, and concrete pipe and product prices by 3% during the fiscal year ended March 31, 2006. Price increases reflect both the recovery of cost inflation, particularly in fuel and raw materials, and the favorable market conditions in regional areas and from large infrastructure projects.

 

Australian concrete volumes increased by 4%, concrete pipe and products volumes by 4%, while aggregate volumes were flat in fiscal 2006. Volumes were assisted by continued growth in the Australian construction sector, especially from major road and infrastructure projects.

 

In China, revenue was flat with the previous year. Concrete volumes increased by 5% reflecting large project work, but intense competition resulted in a decline in average prices of 2%.

 

EBIT:  EBIT of US$179.1 million for the year ended March 31, 2006 represented US$32.2 million, or 22%, increase compared to EBIT of US$146.9 million for the year ended March 31, 2005. This reflected a US$29.9 million movement in constant currency and an increase of US$2.3 million caused by the 1.0% change in the A$/US$ exchange rate.

 

The increase in constant currency reflects principally:

 

                  Improvement in each of the Australian concrete, aggregate and concrete pipe and products operations from the achievement of volume and price growth (US$4 million);

 

                  Divestment of Readymix’s 50% share in the Emoleum (asphalt) joint venture giving rise to a gain of US$22 million.

 

Results of operation for the Readymix segment — Australian Dollars

 

Readymix operations in Australia generate all revenue and incur all costs in A$. As a result, the only impact of changes in the US dollar/Australian dollar exchange rate is one of accounting translation for financial reporting purposes. For the convenience of readers interested in Readymix results of operations in Australian dollars, set out below is management discussion and analysis of the financial results of the Readymix segment in Australian dollars.

 

 

 

Year ended March 31

 

A$ million

 

2006

 

2005

 

Trading revenue

 

1,440.5

 

1,340.7

 

EBIT

 

236.7

 

199.7

 

EBIT Margin%(1)

 

16.4

 

14.9

 

 


(1)          EBIT margin % is EBIT divided by trading revenue

 

Year ended March 31, 2006 compared to the year ended March 31, 2005

 

Trading Revenue:  Trading revenue of A$1,440.5 million for the year ended March 31, 2006 represented an A$99.8 million, or 7%, increase compared to trading revenue for the year ended March 31, 2005 of A$1,340.7 million. The increase was due to price improvement in all Australian product lines, increased concrete volumes due to strong construction activity in the civil and commercial sectors, and higher concrete product sales to major infrastructure projects.

 

60



 

Australian concrete increased by 4%, aggregate by 6%, and concrete pipe and products prices by 3% during the fiscal year ended March 31, 2006. Price increases reflect both the recovery of cost inflation, particularly in fuel and new materials, and favorable market conditions in regional areas and from large infrastructure projects.

 

Australian concrete volumes increased by 4%, concrete pipe and product volumes by 4%, while aggregate volumes were flat in fiscal 2006.

 

In China revenue was flat with the previous year. Concrete volumes increased by 5% reflecting large project work, but intense competition resulted in a decline in average prices of 2%.

 

EBIT:  EBIT of A$236.7 million for the year ended March 31, 2006 represented an A$37.0 million, or 19%, increase compared to EBIT of A$199.7 million for the year ended March 31, 2005.

 

The increase reflects principally:

 

                  Improvement in each of the Australian concrete, aggregate and concrete pipe and products operations from the achievement of strong volume and price growth (A$6 million);

 

                  Divestment of Readymix’s 50% share in the Emoleum (asphalt) joint venture giving rise to a gain of A$26 million

 

B.            Liquidity and Capital Resources

 

Liquidity

 

The Rinker group meets its funding requirements through a combination of operating cash flows and external debt raising. In management’s opinion, the Rinker group’s cash flows and funding arrangements are sufficient to meet the Rinker group’s current liquidity requirements.

 

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The table below sets out the Rinker group’s cash flow statements for the years ended March 31, 2006 and 2005.

 

Cash flow Statements (1)

 

 

 

Year ended March 31

 

US$ millions

 

2006

 

2005

 

Net cash from operating activities

 

942.4

 

678.8

 

Net cash (used in) investing activities

 

(410.3

)

(177.6

)

Net cash (used in) financing activities

 

(814.3

)

(257.0

)

Net increase (decrease) in cash held

 

(282.2

)

244.2

 

 


(1)          A reconciliation of net profit to net cash from operating activities (including movements in working capital) is set out in the financial statements included elsewhere in this annual report.

 

Cash flows from operating activities in the year ended March 31, 2006 of US$942.4 million represented a US$263.6 million, or 38.8%, increase compared to US$678.8 million in the year ended March 31, 2005. This was principally due to improved EBIT of US$370.5 million with increases in all segments primarily from selling price and volume growth, partly offset by US$74.4 million increase in working capital and US$129.7 million increase in income tax payments compared with the year ended March 31, 2005. Net investing cash flows consist primarily of capital expenditure necessary to maintain the productive capacity of the Rinker group, outflows relating to acquisitions (net of cash acquired), and net proceeds from divestments.

 

Net cash used in investing activities increased to US$410.3 million in the year ended March 31, 2006 from the US$177.6 million for the year ended March 31, 2005. Purchase of property plant and equipment increased by US$102.6 million compared to the year ended March 31, 2005. Purchase of controlled entities and businesses increased by US$127.6 million compared to the year ended March 31, 2005 primarily from the Keys Concrete acquisition in March 2006.

 

Net cash used in financing activities increased to US$814.3 million in the year ended March 31, 2006 from US$257.0 in the year ended March 31, 2005. The three largest increases included in the total US$557.3 million increase were US$155.5 million for net repayment of borrowings, US$89.4 million in dividends paid, and US$315.3 for Rinker Group on market share buyback.

 

Capital expenditure including purchases of controlled entities and businesses, were as follows:

 

 

 

Year ended March 31

 

US$ millions

 

2006

 

2005

 

Rinker Materials

 

488

 

239

 

Readymix

 

57

 

75

 

Total Rinker group

 

545

 

314

 

 

Acquisitions, particularly large ones, have been slow across the industry during the last two years, and Rinker’s capital expenditure has mainly comprised, “bolt-on” acquisitions and expansion of the heritage operations, as well as operating capital expenditure to maintain capacity. In fiscal year 2006 Rinker acquired Keys Concrete, one of the largest independent concrete and block manufacturers in Florida, and six smaller concrete or concrete and quarry operations – two each in Florida and New South Wales, Australia, one in Arizona and another in Nevada. Rinker also acquired Carder Concrete Products with concrete pipe plants in Colorado and Wyoming.

 

62



 

Heritage operations were expanded with the completion or expansion of nine concrete plants and five block plants in Florida and associated expenditure to expand aggregate capacity and concrete mixer and block truck fleets to service these plants. Operations were also expanded in Nevada with the completion of a new concrete plant and new block manufacturing line for the fast growing Las Vegas market.

 

At March 31, 2006, the Rinker group had capital expenditure commitments of US$63.8 million outstanding.

 

Capital resources

 

The Rinker group’s debt profile during fiscal years 2006 and 2005 has been as follows:

 

Group Debt Profile as at March 31

 

US$ millions, except percentage and
times indicated

 

2006

 

2005

 

Long-term debt (1)

 

645.2

 

610.9

 

Total debt (2)

 

650.6

 

868.0

 

Net debt (3)

 

361.5

 

279.8

 

Net debt to EBITDA (times) (4)

 

0.3

 

0.3

 

EBIT to Net Interest Expense (times) (5)

 

77.5

 

32.6

 

Net debt to capitalization (6)

 

11.9

%

9.9

%

 


(1)          Debt maturing in excess of 12 months from period end.

 

(2)          Long-term debt plus short-term debt (including bank overdrafts).

 

Total Debt as at March 31

 

US$ millions

 

2006

 

2005

 

Current interest-bearing debt

 

5.4

 

257.1

 

Non-current interest-bearing debt

 

645.2

 

610.9

 

Total debt

 

650.6

 

868.0

 

 

(3)          Total debt less cash assets.

 

Net Debt as at March 31

 

US$ millions

 

2006

 

2005

 

Total debt

 

650.6

 

868.0

 

Cash assets

 

(289.1

)

(588.2

)

Net debt

 

361.5

 

279.8

 

 

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(4)          Ratio of net debt to EBITDA (EBITDA represents EBIT before Depreciation and Amortization)

 

Net debt to EBITDA as at March 31

 

US$ millions, except times indicated

 

2006

 

2005

 

Net debt

 

361.5

 

279.8

 

EBITDA

 

1,354.5

 

970.1

 

Net debt to EBITDA (times)

 

0.3

 

0.3

 

 

 

 

 

 

 

EBIT

 

1,145.6

 

775.1

 

Depreciation and Amortization

 

208.9

 

195.0

 

EBITDA

 

1,354.5

 

970.1

 

 

(5)          Ratio of EBIT to net interest expense (interest expense less interest income)

 

EBIT to Net Interest Expense (or “interest cover”) as at March 31

 

US$ millions, except times indicated

 

2006

 

2005

 

EBIT

 

1,145.6

 

775.1

 

Net Interest Expense

 

14.8

 

23.8

 

EBIT to Net Interest Expense (times)

 

77.5

 

32.6

 

 

(6)          Ratio of net debt to net debt plus total shareholders equity

 

Net debt to capitalization as at March 31

 

US$ millions, except percentage
indicated

 

2006

 

2005

 

Net debt

 

361.5

 

279.8

 

Total shareholders’ equity

 

2,687.3

 

2,551.1

 

Net debt to capitalization

 

11.9

%

9.9

%

 

Rinker’s management uses net debt to EBITDA, interest cover and net debt to capitalization information to assess the financial position of the Rinker group and believes these ratios are useful to investors because they relate the net debt levels of the group to the cash flows, earnings and equity of the business. Management believes the primary determinant of Rinker’s debt capacity is cash flow and earnings, and therefore has greater regard to measures of Rinker’s capital resources calculated using cash flow and earnings – such as net debt to EBITDA and interest cover – than those calculated using balance sheet measures, such as net debt to capitalization. Net debt does not include off balance sheet financial commitments, such as operating leases or other commitments. The net debt to EBITDA and net debt to capitalization calculations do not represent a measure of solvency, nor liquidity, nor Rinker’s ability to pay debts or make other required payments as they fall due. These non-GAAP measures should not be considered a substitute for the balance sheet included elsewhere in this annual report.

 

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Debt facilities

 

As at March 31, 2006 the Rinker group had debt facilities comprised as follows:

 

Type

 

Maturing

 

Limits /
Outstanding
US$ million

 

Uncommitted bank letters of credit, guarantees and loan

 

Annual review

 

153.1

 

Bank loans

 

December 2006 – April 2010

 

1,177.5

 

Commercial Paper

 

No fixed maturity

 

400.0

 

Rinker Materials Private Placement

 

August 2010

 

100.0

 

Rinker Materials Private Placement

 

December 2010

 

100.0

 

Rinker Materials Bonds

 

July 2025

 

149.9

 

 

As of March 31, 2006, the Rinker group is in compliance with all debt covenants.

 

Bank loans

 

Rinker Materials has established banking credit facilities of US$1,177.5 million at March 31, 2006 (of which US$892.5 million were undrawn at March 31, 2006). These are revolving cash advance facilities provided by the Rinker group’s eight relationship banks on a bilateral basis. The borrowings under each of these bilateral facilities are guaranteed by Rinker. In total, the facilities provided have five maturities as follows:

 

                  US$237.5 million, which mature 364 days from initial draw down notice date ranging from December 2006 to April 2007;

 

                  US$185.0 million, which mature in April 2008.

 

                  US$112.5 million which matures December 2008.

 

                  US$487.5 million, which mature in April 2009.

 

                  US$155.0 million, which mature in April 2010.

 

Interest is payable by Rinker Materials on amounts drawn under the facilities at LIBOR plus a margin. The margins payable under the facilities are generally consistent with that which an A-/BBB+ rated entity would expect to obtain for facilities of this size and nature and vary by tranche for each individual bank. Facilities totaling US$595.0 million feature credit margins that are fixed over the life of the agreement, while facilities totaling US$582.5 million feature margins that are set by reference to the actual levels of gearing (defined as net debt divided by “EBITDA” which means consolidated profit from ordinary activities before finance, income tax, depreciation and amortization, in accordance with A-IFRS) or interest cover (defined as EBITDA divided by net interest expense) reported by Rinker and calculated on a rolling 12 month basis, using publicly reported consolidated half yearly and annual results. Based on Rinker’s results at March 31, 2006, the overall weighted average margin over LIBOR across all facilities was approximately 0.32% per annum.

 

65



 

The facilities contain customary provisions relating to events of default, which could trigger early repayment. The facilities also contain certain restrictive covenants and financial covenants that are customary for facilities of this nature. The restrictive covenants limit the addition of new secured debt (generally not to exceed 10% of consolidated assets of Rinker group) and the amount of debt permitted to be incurred by entities other than Rinker and Rinker Materials (not to exceed 15% of consolidated assets of Rinker group). The financial covenants specify a maximum net debt to EBITDA ratio (3 times) and a minimum EBITDA divided by net interest expense ratio (3.25 times) that must be maintained, with both covenants calculated on a rolling 12 month basis using publicly reported consolidated half yearly and annual results. Other than the requirements to comply with the limitations and satisfy the ratios set forth above, the facility agreements do not restrict the borrowing of additional amounts of unsecured debt by companies in the Rinker group as long as the loans under the credit facilities have at least the same preference in the sharing of assets upon liquidation as any additional unsecured obligations. There are no credit rating downgrade triggers that could cause early repayment under these facilities.

 

Commercial Paper

 

Rinker Materials can issue from time to time commercial paper under a US commercial paper program that was established in April 2006. This program replaces a US$400 million commercial paper program, established in 1991, under which Rinker Materials previously issued commercial paper, which has since been terminated.

 

The program has no maturity and allows for a maximum of US$1 billion of notes to be issued and outstanding at any one time. The notes have maturities up to 365 days (366 days in leap year) from the date of issuance and are issued at par less a discount representing an interest factor or, if interest bearing, at par. As at March 31, 2006, there were no notes issued and outstanding under the program.

 

US$ Bonds

 

Rinker Materials has issued US$149.9 million in bonds paying interest of 7.70% per annum due on July 21, 2025 guaranteed by Rinker.

 

The indenture governing the 2025 bonds contains customary provisions relating to events of default, which could trigger early repayment. The indenture also contains certain restrictive covenants that are customary for financings of this nature. The restrictive covenants limit the addition of new secured debt (generally not to exceed 10% of consolidated net tangible assets of Rinker group) and restrict any merger of Rinker or Rinker Materials with another party unless the bonds are assumed by the entity resulting from such merger. The indenture does not restrict the borrowing of additional amounts of unsecured debt by companies in the Rinker group. There are no credit rating downgrade triggers that could cause early repayment of the bonds.

 

Private Placements

 

Rinker Materials has privately placed US$200 million in senior notes, in two series of US$100 million each, maturing on August 8, 2010 and December 1, 2010, guaranteed by Rinker.

 

The notes contain customary provisions relating to events of default, which could trigger early repayment. The notes also contain certain restrictive covenants and financial covenants that are customary for financings of this nature. The restrictive covenants limit the addition of priority debt (generally not to exceed 25% of consolidated assets of Rinker group), where priority debt is defined as debt secured in priority to the notes and debt incurred by entities other than Rinker and Rinker Materials. The financial covenants specify a maximum net debt to EBITDA ratio (3.5 times) and a minimum EBITDA divided by net interest expense ratio (2.75 times) that must be maintained, with both covenants calculated

 

66



 

on a rolling 12 month basis using publicly reported consolidated half yearly and annual results. Other than the requirements to comply with the limitations and satisfy the ratios set forth above, the notes do not restrict the borrowing of additional amounts of unsecured debt by companies in the Rinker group as long as the notes have at least the same preference in the sharing of assets upon liquidation as any additional unsecured obligations. There are no credit rating downgrade triggers that could cause early repayment of the notes.

 

Other borrowings

 

At March 31, 2006 Rinker group entities had in place uncommitted facilities available for short-term cash advances and the issuance of letters of credit and bank guarantees which totaled US$153 million. US$91 million in letters of credit and bank guarantees were issued against these facilities at March 31, 2006.

 

There are no legal or economic restrictions on the ability of its subsidiaries to transfer funds to Rinker in the form of cash dividends, loans or advances. The previously existing 15 percent US dividend withholding tax was eliminated effective July 1, 2003.

 

Rinker is not aware of any restrictions on the use of committed borrowing facilities other than as detailed. Borrowing requirements are not normally subject to any seasonal factors.

 

C.            Research and Development, Patents and Licenses

 

The dollar amounts are not significant.

 

D.            Trend Information

 

Relevant industry and market trends for the Rinker group as a whole and for Rinker Materials and Readymix are discussed in “Item 5.A. - Management discussion and analysis of the financial results”.

 

Rinker is not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the Rinker group’s trading revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition, other than as described in this annual report, including the proposed capital return and special dividend disclosed in “Item 5- Events subsequent to March 31, 2006”.

 

E.              Off-balance sheet financial arrangements

 

The Rinker group does not use special purpose vehicles or any other significant form of off-balance sheet financing. Details of the Rinker group’s use of financial instruments are included in “Item 11 - Quantitative and Qualitative Disclosures about Market Risks” and Note 28 of the financial statements included elsewhere in this annual report.

 

Guarantees have been made in respect of self-insured workers compensation obligations and in lieu of contract retention payments, deposits for rehabilitation of quarry sites and for insurance policy deductible amounts, with the majority of terms up to one year as described in Note 38 of the financial statements, included elsewhere in this annual report.

 

The Rinker group has certain off-balance lease obligations in the form of operating leases as outlined in the table of “Contractual Obligations and Commercial Commitments” below.

 

67



 

F.              Contractual obligations and commercial commitments

 

The Rinker group’s short-term and long-term obligations and commitments are detailed below:

 

 

 

Payments Due by Period