Directors' Report

A review of the Group’s operations during the Financial Year and of the results of those operations is contained in the Overview section of this Concise Annual Report.

Significant changes in the state of affairs of the Group during the Financial Year were as follows:

• Record work in hand of $41.5 billion with over $6 billion of preferred tender positions at year end;
• Record profit of $612 million with return on Shareholders’ Funds of 25%;
• Record contributions from Thiess, Leighton Contractors and Leighton Asia;
• No contribution from Al Habtoor Leighton Group in Leighton International results;
• Leighton Properties loss recorded on continuing commercial/industrial market weakness;
• Restructure of Group borrowings to longer term maturity of up to 10 years;
• Completion of a US$280 million Medium Term Notes issue with maturity of 5-7 years;
• Continued expansion of overseas operations (including Mongolia and Oil and Gas) with record work in hand of $14.5 billion; and,
• Increased investment in Devine Ltd to 49.7%.

Further details regarding these significant changes in the state of affairs of the Group are provided throughout this Concise Annual Report and the Full Financial Report.

Total revenue, including joint venture and associates revenue for the Group for the Financial Year was up by 2% to $18.6 billion. Net profit after tax and minority interests attributable to members of the Company was $612 million, compared to the 2009 result of $440 million.

A final fully franked dividend of 85 cents per share was announced on 16 August 2010 and will be paid on 30 September 2010. Together with the fully franked interim ordinary dividend of 65 cents per share, which was paid on 31 March 2010, the total dividend payment for the financial year will be $1.50 per share and will amount to $451 million.

The 2009 final fully franked dividend of 55 cents per share, referred to in the Directors’ statutory report for the financial year ended 30 June 2009 and payable out of the profits for that financial year, was paid on 30 September 2009.

During the Financial Year there were no significant changes in the nature of the Group’s principal activities which were building, civil engineering construction, contract mining, telecommunications, environmental services, property development and project management in Australia, the Gulf region and selected parts of Asia.

The Directors are not aware of any specific developments, not outlined in the 2010 Concise Annual Report, that have or may have a significant effect on the Group’s state of affairs, its operations or its expected results in future financial years.

Note 9 of this Concise Annual Report outlines events which have occurred since the end of the financial year, including the issue of US$350 million Guaranteed Senior Notes by Leighton Finance (USA) Pty Limited, a wholly owned subsidiary of the Company, and the declaration of a final fully franked dividend of 85 cents per share.

Likely developments in the operations of the Group in future financial years and their anticipated results are referred to in the Overview section of this Concise Annual Report. Further information on likely developments in the operations of the Group, including the expected results of those operations in future financial years, would in the Directors’ opinion result in unreasonable prejudice to the Group and has therefore not been included in this report.

The Concise Annual Report contains the information that members of the Company would reasonably require to make an informed assessment of the Group’s operations, financial position and business strategies and prospects for future financial years other than any information relating to the Group’s business strategies and prospects for future financial years which would, in the Directors’ opinion, result in unreasonable prejudice to the Group.

The Group operating companies utilise a standard Environmental Incident Severity Classification, which categorises incidents into 12 types of impacts. The severity of the impact is reported as high (Level 1), medium (Level 2) or low (Level 3).

There were no Level 1 incidents occurring in our Australian or International operations during the year.

There was a slight increase in the number of Level 2 incidents in our Australian operations and a significant decrease from eight to two Level 2 incidents for our International operations.

The Group’s Environmental Incident Frequency Rate (EIFR) - the frequency of Level 1 and 2 incidents occurring on projects under the control of a Group operating company improved from 0.27 to 0.25 in our Australian operations. The EIFR in our International operations has improved sharply from 0.11 to 0.03.

In accordance with Leighton Holdings’ Environmental Framework, each operating company reports on a quarterly basis to the Company’s Ethics and Compliance Committee on their policies, systems, processes and performance.

During the year, the Group submitted its first report under the National Greenhouse and Energy Reporting Act 2007 (NGER). The report includes only data for Australian facilities of which the Group has operational control, not the entire Group footprint. The Leighton Group’s total emissions will vary from year to year in line with the volume and value of work undertaken and better data captured and reported on by the operating companies. The major source of greenhouse gas emissions is through diesel consumed in operating heavy mining and construction machinery.

The Leighton Group’s reported greenhouse gas emissions in 2008-09 were:

The combined emissions represent less than 0.15% of the total Scope 1 and Scope 2 emissions reported by 238 Australian corporations under NGER. The report for the 2009-10 year is due to be submitted by 31 October 2010.

The total greenhouse gas emissions figures reported here are updated figures which are different from those published by the Commonwealth Department of Climate Change and Energy Efficiency (DCCEE) in early 2010. The Company commissioned an independent third-party review of its NGER data methods and processes in March 2010, and resubmitted its NGER report following this review, and also addressed certain questions asked by the DCCEE in their review of the Group’s original report submission.

While the introduction of an emissions trading scheme is uncertain, the Government has advised that scope 1 and scope 2 emissions, as published by the Greenhouse and Energy Data Officer (GEDO), should not be used individually, or added together, to estimate a corporation’s potential liability under the proposed Carbon Pollution Reduction Scheme (CPRS).

The potential liability of the Group for any carbon costs will depend on the final design of any scheme and the decision as to who has operational control of any particular facility, which will be negotiated on a case by case basis.

State and Federal Governments are also responding to climate change with a wide variety of policies and measures, such as renewable energy targets and energy efficiency programs.

As a builder and maintainer of assets rather than a significant owner of assets, the Group’s exposure to many of the potential physical hazards associated with climate change is somewhat reduced and adaptation is considered as part of our usual business risk management process. Indeed, many climate change impacts are already generating opportunities for new business, with projects including wave and solar power, waste-to-energy landfill facilities and hydro-electricity power generation from treated sewage. Related to this, the Group’s clients are increasingly demanding that operating companies provide evidence of their environmentally sustainable practices when tendering for contracts, such as strategies to reduce greenhouse gas emissions and water usage in project life cycles.

Over the past year the Group’s safety performance – as measured by Lost Time Injury Frequency Rate (LTIFR) per million man-hours worked – improved from 2.5 to 1.6 in Australia and from 0.9 to 0.8 in our International operations. LTIFR measures the occurrence rate of lost time injuries or industrial disease.

The Group’s Lost Time Injury Severity Rate (LTISR) – also measured per million man-hours worked – decreased from 38.8 to 28.0 for our Australian operating companies and decreased from 46.3 to 43.3 in our International operations. LTISR is an indicator of the severity of the lost time injuries that occur.

Notwithstanding these improved statistics, it has been a very disappointing year because four workplace fatalities occurred at or in connection with Group operating company projects or joint ventures. Two fatalities were associated with International operations and two occurred within Australia.

The Board expresses its deep regret over these fatalities and assures shareholders that the risk of fatalities within our business is being rigorously addressed. Each of these fatalities has been fully investigated by the relevant operating company and a full report has been made to the Board by the relevant Managing Director. Those reports have addressed not only what occurred, but what action is recommended to prevent a recurrence.

As can be seen from the graphs above, the Group has been successful over recent years in reducing the incidence of injuries that result in lost time and successful generally in reducing the severity of injuries in our workplaces. However that is small comfort when the Group still has fatal accidents occurring. The following tables show the fatalities per million man-hours worked.

Accordingly at Company-level and across the whole Group, programs have been put in place that are focused specifically on prevention of what are called Potential Class 1 incidents, those incidents that could result in a fatality or some form of permanent disability.

The Leighton Holdings Safety Framework, which sets down the minimum safety standards required across our business and which provides a basis for the Board to monitor progress in achieving those standards, has been reviewed. The Framework now identifies, as the key goal, the elimination of fatalities and permanent disabilities. New guidelines have been put in place that require the operating companies to specifically address those project risks that can result in these Class 1 incidents. The operating companies are also developing programs to ensure “safer construction through design” on our projects and to increase the use of what are known as “hard engineering controls” that physically isolate areas of risk. These measures and a number of others are specifically designed to eliminate risks that might lead to fatalities and disabling injuries, in addition to pursuing better statistics in relation to minor injuries.

The Board notes that the occurrence of Class 1 incidents is an issue across the whole industry, as well as within our Group. Accordingly Group operating companies are active, and in a number of cases have taken the lead, in working with contractors, industry organisations, clients, professional organisations and consultants to find solutions. There is no easy answer but shareholders can be assured that the Board is committed to achieving real and sustained improvement in the Group’s performance in this critical area.

The Group experienced employment growth across its project workforce both within Australia and internationally, reflecting the underlying workload demand. Total Group workforce numbers (excluding the Al Habtoor Leighton Group) were up by 15% to 45,340. Of those employees, approximately 56% are engaged in our Australian and New Zealand projects and approximately 44% are employed across our international projects.

The workforce is diverse in age, experience and ethnicity. Staff are predominantly aged 25-45 (approximately 64%) and the majority of employees work in manual trades (58%) and operational and engineering roles (approximately 26%). International operations are a melting pot of nationalities, with employees drawn from more than 24 countries of birth. Australian operations are actively recruiting Indigenous employees and the Group has achieved 19% of its target of 1000 new jobs for Indigenous job seekers under the Australian Employment Covenant (AEC). The AEC is a joint initiative of Australian employers, the Australian Government and Indigenous people aimed at securing 50,000 sustainable jobs for Indigenous Australians. Indigenous Australians currently comprise 1.6% of the Group’s Australian workforce.

The number of women employed across the workforce increased by 2% to 5,150, with 75% of them based in Australia. Women now comprise 11% of total employees, however in Australia female participation remained constant at 15%. The majority of women work in administration (33%) or functional roles including finance and commercial (32%). 15% of women are employed in operations and engineering roles across the Group and these women represent 7% of the total employees in operations and engineering roles. 4% of the Group’s trades workforce are women.

The Leighton Group is developing a framework Workforce Diversity Policy which aims to reaffirm its commitment to diversity as a means to enhance productivity and team performance and reflect the diverse communities in which it operates. This Policy comes from a belief that diversity underpins the sustainability of the business. The Group also adopted an Indigenous Participation Policy in 2008 to help guide and drive its commitment to improve Indigenous employment outcomes across the operating companies and also to support the communities in which they operate. These policy commitments will enable the Group to win more work, with clients increasingly demanding evidence of the Group’s sustainability credentials in tenders and expressions of interest. For example, the Australian Government mandated in July 2010 that construction projects worth more than $6 million in regions with significant Indigenous populations must have plans for employing and training local Indigenous people and for using Indigenous suppliers.

The Group engages with the community at many levels and the relationships it has with its stakeholders are fundamental to the ongoing success of the business. The Group’s key stakeholders are its more than 45,000 employees, its shareholders, customers and suppliers, and the communities in which it delivers projects. Some of these stakeholders, such as shareholders, investors and analysts, interact primarily with the Company. However the majority have interaction with the Company and the operating companies at a corporate, business unit and/or project level. Dealing with some issues, such as a major legislative change like the introduction of an emissions trading scheme or an overhaul of workplace relations laws, requires a level of cooperation and coordination within the Group.

The Group uses a range of mechanisms to engage with stakeholders – from employee surveys which shape human resources policies and practices, to community relations strategies to respond to concerns or create opportunities on projects, and government relations campaigns to shape policy and legislation. As a publicly listed company, the Company communicates with shareholders, regulators, the financial community, the media and other stakeholders in an open and timely manner to ensure that financial markets have sufficient information to make informed investment decisions.

Governments at various levels are important clients and the Group’s reputation and standing with government and other groups within the political process has the potential to impact on its operations.

The Group’s government relations strategy is to develop positive relationships with members of Parliament at the State and Federal level, their staff, departmental officials, political parties and others involved in the political and policy development process. Key principles include:

• Monitoring, influencing and responding to public policy and political issues which may impact on business opportunities or major projects; and
• Maintaining a transparent and bi-partisan approach to political donations within approved budgets.

The Group maintains a transparent and bi-partisan approach to political donations and these donations - which totalled $277,133 in 2009/10 - are fully disclosed to the Australian Electoral Commission on an annual basis, and State electoral commissions when directed.

The Company has an active Corporate Community Investment program, spending almost $1 million in 2009-10 through a mix of major partnerships, sponsorships and charitable donations and our workplace giving program. We continue to encourage our employees in their community endeavours and support their fundraising efforts for causes that are important to them. Group wide, the total investment is over $4 million this Financial Year.

Our partnerships include scholarships for rural and regional students to study engineering or commerce degrees at the University of NSW. We also have a long-standing partnership with the Sydney Symphony Orchestra where we support the youth mentoring orchestra.

We have proudly strengthened our support of Engineering Aid Australia’s Australian Indigenous Engineering Summer School which provides an opportunity for 20 Indigenous students from around Australia to spend a residential week at university learning about life as an engineer. In 2010 this summer school operated in Western Australia for the first time and the Company is looking to provide work experience and study opportunities to the young Indigenous students who participate.

The Company has renewed its partnership with Primary Science Matters. The program called ‘Science in a Box’ provides science materials and training for primary school students. This program was very successful in the pilot schools from 2007 to 2009 and over the next two years, our sponsorship will provide science resources to schools in Southern NSW and the Northern Territory that they could otherwise not afford. It is hoped that with the introduction of a national curriculum this program will be adopted across the country in the near future.

In 2010 we again partnered with Landcare Australia as a major sponsor of the National Landcare Awards, sponsoring the ‘Leighton Indigenous Landcare Award’.

The Company joined the Indigenous Enterprise Partnership program in 2010, with the support and involvement of each of the Australian based operating companies. This program provides Group employees with an opportunity to be placed in Cape York, Redfern or the East Kimberley region to work with Indigenous communities and businesses to transfer skills and capability to these communities.

During the year, the Company supported a workplace giving program which allowed staff to make pre-tax payroll deductions to a range of charities. Staff choose from charities already established under the program, or donate to the charity of their choice through the program. The Company matches donations by staff on a dollar-for-dollar basis.

The Directors in office at the date of this report are listed below together with details of their relevant interest in the securities of the Company at that date.

¹ R L Seidler is the alternate director for Dr Herbert H Lütkestratkötter and holds 100 ordinary shares and 0 options over unissued ordinary shares in the Company.

² Dr K Reinitzhuber is the alternate director for Dr Peter M Noé and holds 0 ordinary shares and 0 options over unissued ordinary shares in the Company.

Details of the membership of the Board and Board Committees as well as relevant company officers are shown on the Directors' Resumes page of this Concise Annual Report. Details of the qualifications and experience of each Director and Secretary, including the period for which they have held office and their directorships of other listed companies, are also disclosed on the Directors' Resumes page of this Concise Annual Report.

Details of the Company’s remuneration policy in respect of the Directors and Group and Company executives are detailed in the Remuneration Report here. The Remuneration Report includes details of the remuneration paid to each Director and each named company and Group executive.

The Chief Executive Officer and Chief Financial Officer have given a declaration to the Board concerning the Group’s financial statements in accordance with Section 295A of the Corporations Act 2001 and recommendation 7.3 of the ASX Council’s Corporate Governance Principles and Recommendations.

The number of Directors’ meetings (including meetings of Committees of Directors) and number of meetings attended by each Director of the Company during the Financial Year are:

* Reflects the number of meetings held during the time the Director held office during the Financial Year.

¹ Reflects the number of meetings attended until his resignation as Director and appointment as Chief Financial Officer on 14 October 2009.

² Two Directors’ meetings were attended in person and seven by his alternate.

³ Seven Directors’ meetings were attended in person and two by his alternate.

⁴ Reflects the number of meetings attended following his appointment on 21 December 2009.

The Company’s constitution includes indemnities in favour of persons who are, or have been, an Officer or auditor of the Company.

To the extent permitted by law, the Company indemnifies every person who is or has been:

• an Officer against any liability to any person (other than the Company or a related entity) incurred while acting in that capacity and in good faith; and
• an Officer or auditor of the Company, against costs and expenses incurred by that person in that capacity in successfully defending legal proceedings and ancillary matters.

‘Officer’ for this purpose means any Director or Secretary of the Company and includes any other person who is concerned, or takes part, in the management of the Company.

The current Directors and Secretaries of the Company are named in the Directors' Resumes page of this Concise Annual Report and the Company’s current auditors are KPMG.

In prior financial years, the Company has entered into Deeds of Indemnity with particular Officers or former Officers of the Company or a subsidiary. These Deeds give similar indemnities in favour of those Officers or former Officers in respect of liabilities incurred by the Officers while acting as an Officer of the Company or any subsidiary or while acting at the request of the Company or any subsidiary as an Officer of a non-controlled entity.

The Officers who have the benefit of such a Deed of Indemnity are, or were at the time, a Director of the Company, a Secretary of the Company, Directors of a subsidiary, or a General Manager or Senior Manager within the Group.

Consistent with the shareholder approval obtained at the 1999 AGM, the Company has entered into a Deed of Indemnity, Insurance and Access (“Director’s Deed”) with current and former Directors of the Company. These Deeds formalise the arrangements between the Company and the Directors as to indemnities, insurance and access to board records. Under each Director’s Deed the Company indemnifies the Director to the extent permitted by law against any liability (including liability for legal defence costs) incurred by the Director as an Officer or former Officer of the Company or any subsidiary or while acting at the request of the Company or any subsidiary as an Officer of a non-controlled entity.

No claims under the indemnities have been made against the Company during or since the end of the financial year.

During and since the end of the financial year the Company has paid or agreed to pay premiums in respect of contracts insuring persons who are or have been a Group Officer against certain liabilities incurred in that capacity. ‘Group Officer’ for this purpose means any Director or Secretary of the Company or any subsidiary and includes any other person who is concerned, or takes part, in the management of the Company or of any subsidiary.

Under the above mentioned Deeds of Indemnity and Directors’ Deeds, the Company has undertaken to the relevant Officer or former Officer that it will insure the Officer against certain liabilities incurred in his or her capacity as an Officer of the Company or any subsidiary or as an Officer of a non-controlled entity where the office is or was held at the request of the Company or any subsidiary.

The insurance contracts entered into by the Company prohibit disclosure of the specific nature of the liabilities covered by the insurance contracts and the amount of the premiums.

The LSEOP was approved by shareholders at the 2006 AGM. Options over shares in the Company were first granted under the LSEOP in 2006 (‘2006 Options’) and subsequently in 2008 (‘2008 Options’) and 2009 (‘2009 Options’). Each option entitles the holder to one fully paid ordinary share upon exercise (subject to satisfaction of exercise conditions). The total number of options over unissued ordinary shares in the Company outstanding under the LSEOP at the date of this report are detailed in the table below.

*Date of 2009 Concise Annual Report.

Details of the exercise conditions of options under the LSEOP are contained in the Remuneration Report here. The names of the persons who currently hold options under the LSEOP are entered in the register of options kept by the Company pursuant to Section 170 of the Corporations Act 2001.

These options do not entitle the holder to participate in any share issue prior to exercise.

There are no unissued shares in the Company under option as at the date of this report, other than those issued under the LSEOP referred to above.

No options have been issued since the end of the financial year over unissued shares in the Company.

The declaration by the Group’s external auditor to the Directors of the Company in relation to the auditor’s compliance with the independence requirements of the Corporations Act 2001 and the professional code of conduct for external auditors is set out below.

No person who was an Officer of the Company during the financial year was a director or partner of the Group’s external auditor at a time when the Group’s external auditor conducted an audit of the Group.

Details of the amounts paid or payable to the auditor (KPMG) for non-audit services provided during the year to entities within the Group are set out below.

The Company’s Board of Directors has considered the position and, in accordance with the advice received from the Audit Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:

• all non-audit services have been reviewed by the Audit Committee and the Committee believes that they do not impact the impartiality and objectivity of the auditor because of the nature of the services provided during the year and the quantum of the fees which relate to non-audit advisory services compared to the overall fees; and
• the Directors believe none of the services undermine the general principles relating to auditor independence, including reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as advocate for the Group or jointly sharing economic risk and rewards.

The non-audit services supplied to entities within the Group by the Group’s external auditor, KPMG, and the amount paid or payable by type of non-audit service during the year to 30 June 2010 are as follows:

Lead Auditor's Independence Declaration under Section 307C of the Corporations Act 2001

To the Directors of Leighton Holdings Limited: I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2010 there have been:

– no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and

– no contraventions of any applicable code of professional conduct in relation to the audit.

KPMG

A W Young
Partner, Sydney
6 September 2010

As the Company is a company of the kind referred to in ASIC Class Order 98/100 dated 10 July 1998, the Directors have chosen to round off amounts in this report and the accompanying Concise Financial Report to the nearest thousand dollars, unless otherwise indicated.