Cardno Limited
Annual Report 2017

Plain-text annual report

CARDNO 2017 ANNUAL REPORT for the year ended 30 June 2017 Cardno Limited ABN 70 108 112 303 and its controlled entities Chairman’s Letter Dear Shareholder, This time last year I set out that FY17 would be a rebasing year for Cardno and in essence a review year to recalibrate the business away from past financial performance and practice. In addition I explained that alongside conducting a complete balance sheet review, Cardno needed to push decision making back down to divisional management, rebuild the trust of its staff and invest in business development. I explained that there were a number of business and office consolidations that were required and that there was the need to review the balance sheet, both from a leverage perspective as well as a general review of the carrying value of assets. I am pleased to report that your company has made significant progress in completing this restructure. Cardno achieved an underlying profit of $19.9 million in FY17 and an underlying EBITDA from continuing operations of $44.0 million. This performance was consistent with the guidance provided at our AGM in October 2016. The business returned to growth at both the fee revenue and EBITDA level for the first time since 2015. The balance sheet of Cardno is now one of the strongest in the industry, with effectively no (net) debt, appropriate provisioning on outstanding contracts and debtors and assets that reflect what the board believes is realisable value. The balance sheet review has led to considerable one off expenses that have gone through at the half year and full year. FY17 FINANCIAL PROGRESS The restructure of the business is starting to be reflected in the financial results of the business. Notable financial achievements in FY17 include: > The business achieved fee revenue growth of 0.8% to $788.2m; > EBITDA growth of 4.8% to $44.0m. In the second half, the business achieved EBITDA of $20.8m, which was more than 3x the EBITDA in the second half of FY16. The predictability of Cardno performance is improving: Cardno’s financial results were in line with guidance for the first time in 3 years; > Cardno has systematically worked through its balance sheet. This balance sheet review has resulted in:  Business review and restructure costs of $56.0m in the year including $9.0m of costs associated with redundancy and restructure, $10.7m of costs associated with closing or consolidation of 32 offices, $23.3m provision related to business reviews including the closure of a number of loss making divisions and realisable value of assets on the balance sheet, $11.5m associated with debtor provisions and $1.5m indirect tax;  A significant decrease in aged debtors and work in progress (WIP). The value of >60 day debtors has decreased from $36m to $23m over the past 12 months and WIP has decreased from $115.3m to $96.9m through faster billing cycles. > Post this review, Cardno’s balance sheet is now both fit-for-purpose for our business and, we believe, amongst the strongest in our industry. Net debt is now $15.3m, down from $49.6m at 30 June 2016 and $311.3m at June 2015. Furthermore, the historical issues that have affected performance over the past three years have now been dealt with. The company does not believe there is any further restructure or impairment costs to take up of a material nature; > The Australian engineering division has continued to perform strongly with fully allocated EBITDA margins of 10.9%. This division has successfully managed the challenging market conditions in Queensland and Western Australia while capturing the opportunities in the NSW market. It has continued to achieve results that are stronger than our peers; > Backlog grew by 5.3% on prior year to $846m; > From a cash perspective, net cash provided by operating activities was negative $3.8m driven by a $42m negative working capital movement. This negative operating cash flow was reflective of Cardno managing its balance sheet in a more conservative and sustainable way going forward. Page | 1 Chairman’s Letter (continued) Although we believe the company has made material strides in every facet of the company, there remain a number of areas in the financial results that the board is focused on. These include: > The America’s engineering division continues to “under earn”. Growing the America’s EBITDA margin through revenue growth and pricing discipline, not by further operating cost cuts, is the most significant opportunity for Cardno over the next three years; and > The oil and gas operations continue to operate at or below break even. Over the past 12 months, this division has exited its operations in Nigeria, and significantly refocused its workforce onto quality assurance work. These actions are consistent with Cardno’s long term strategy in oil and gas and are expected to decrease the cyclicality of this division. This division has recently won a number of significant contracts with major oil companies and remains focused on returning to growth and profitability. The board remains confident in the potential of this division and the senior leadership team in place. FY17 OPERATIONAL PROGRESS The financial progress of Cardno has been underpinned by a parallel effort to reset the organisation operationally and significant progress has been achieved in all divisions. Key achievements in the past 12 months: > Completed a review of the corporate head office which has narrowed the role and size of the head office and eliminated the regional management layer. The board has put in place clear delegations of authority to ensure that divisional management and operational staff have clear decision making ability and accountability for their cost structures. This is flowing through into cost savings on a real time basis and has empowered decision making at the division and client level; > Increased our investment in people. Cardno implemented consistent employee contracts for senior managers and put in place realistic and achievable short term and long term incentive goals and bonus structures based on what staff were able to influence and outcomes created at a local level. In addition Cardno’s refocus on accountability and local decision making has seen a marked improvement in staff engagement which has translated in a much lower staff turnover than prior years; > I am pleased to say the senior management team in place today across all divisions has a strong sense of ownership and personal accountability and the board is proud to have seen this develop; > Investment in business development and growth. Cardno has made a number of significant hires in business development, both in Australia and in the America’s. In Australia, Cardno has invested in a dedicated major projects team and is supporting investment in longer term growth; > Improvement in the transparency and governance within the business. Cardno has established consistent reporting and benchmarking throughout the organisation. We have also recruited a Chief Risk Officer and re-established the Internal Audit function in the company which had disappeared under the previous board; > Closing out small or loss making operations. Cardno has sold its Nigerian operations, closed a loss making drone operation in the America’s, sold a small coal focused consulting operation and a non-core software division. Cardno is now focused on acquiring rather than divesting businesses and has completed two bolt- on acquisitions. One in WA, to complement our existing business and to allow us to move to a scale operation in that geography. The second, has expanded our presence in Canada by taking 100% ownership of T2, our Canadian business focussed on underground surveying which was previously a 50/50 joint venture with AECOM. Page | 2 Chairman’s Letter (continued) OUTLOOK AND GUIDANCE Going forward there are a number of longer term investments that Cardno intends to make. Cardno needs to build out the breadth of its service offerings in the Americas as it remains subscale in a number of service lines. This will involve bolt on acquisitions and investment in key hires. This will be a multi-year program to ensure that over time we are best placed to mirror the scale and profitability of our Australian operations. In line with previous statements Cardno does not intend to restart a dividend program. The Board’s view is dividends should be considered only when the Company does not have a better use of funds for shareholders. Given Cardno’s historic losses, the company has limited available franking credits and the Board believes reinvesting in growth (either through expanding service lines with bolt on acquisitions or investing in business development resources) or the company’s current share buy back program is a better use of capital at this time. In regards to financial guidance for FY18, the Board believes the company has turned a corner. Based on our performance exiting FY17, we believe that Cardno’s performance over FY18 should be a material increase over FY17 and Underlying Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) should be in the order of $55 to $60 million. This guidance is predicated on the current momentum continuing throughout the FY18 year. The Board has commenced the process to recruit a permanent CEO. This process is being managed by a leading International Recruitment Adviser. Whilst timelines in such processes are difficult to estimate we are hopeful we will find a suitable candidate in a timely fashion. The board is very alive to the issue that the person we appoint has to be one that embraces the new Cardno, especially the cultural realignment that the company has undergone in terms of transparency, accountability and peer support. We would rather the process take longer and make sure the fit is right than rush an appointment for a false deadline. Whilst on this subject, I feel it is very important to call out the effort and performance of our interim Chief Executive, Neville Buch. He has very much led the organisation from the front over the last 12 months, and has been behind the operational restructure and success we are now beginning to see in the business. In that same vein, I would like to thank the whole senior management team for their efforts over the past 12 months and in turn each level of the organisation which has not only continued to deliver outstanding work for clients but has approached the turmoil over the last few years with great patience. On behalf of the Board, I would like to thank our staff, clients, banking partners and shareholders for their support. MICHAEL ALSCHER Chairman Page | 3 Consolidated Financial Statements for the year ended 30 June 2017 CONTENTS Directors’ Report ......................................................................................................................................................... 05 Auditor’s Independence Declaration ........................................................................................................................... 25 Consolidated Statement of Financial Performance .................................................................................................... 26 Consolidated Statement of Comprehensive Income .................................................................................................. 26 Consolidated Statement of Financial Position ............................................................................................................ 27 Consolidated Statement of Changes in Equity ........................................................................................................... 28 Consolidated Statement of Cash Flows ..................................................................................................................... 29 Notes to the Consolidated Financial Statements........................................................................................................ 30 Directors’ Declaration ................................................................................................................................................. 68 Independent Auditor’s Report ..................................................................................................................................... 69 Additional Shareholder Information ............................................................................................................................ 75 Corporate Directory .................................................................................................................................................... 77 The Company’s Corporate Governance Statement can be viewed on the website at www.cardno.com/corporategovernance Page | 4 Directors’ Report The Directors present their Report together with the Consolidated Financial Statements of Cardno Limited (the Company) being the Company and the entities it controlled at the end of, or during the year ended 30 June 2017. DIRECTORS The names of Directors of the Company at any time during or since the end of the financial year are set out below. Directors were in office for this entire period unless otherwise stated. M Alscher N Buch S Sherman J Forbes Non-Executive Director, Chairman Executive Director and acting Chief Executive Officer (appointed 29 August 2016) Non-Executive Director Non-Executive Director G Jandegian Non-Executive Director R Prieto N Thomson Non-Executive Director Non-Executive Director FORMER DIRECTORS R Wankmuller Chief Executive Officer and Managing Director (resigned 29 August 2016) COMPANY SECRETARIES Courtney Marsden Legal Counsel & Joint Company Secretary (appointed 8 November 2016) Peter Barker Chief Financial Officer & Joint Company Secretary (appointed 31 December 2016) Michael Pearson General Counsel & Joint Company Secretary (resigned 31 December 2016) Qualifications of Company Secretaries Courtney Marsden – BAppSc, LLB (Hons), LLM Peter Barker – BComm, MBA, FCPA, MAICD Michael Pearson – LLB, BA, ACIS, GAICD Particulars of Directors’ qualifications, experience and special responsibilities are listed on the next page. Page | 5 Directors’ Report (continued) Director Experience Michael Alscher Michael Alscher joined as a Non-Executive Director of Cardno Limited in November 2015. He then became Chairman in January 2016. He is the Managing Partner and founder of Crescent Capital Partners, a leading Australian based private equity firm with $1.5 billion in funds under management, specialising in high growth companies and certain industries such as healthcare and the services sector across multiple disciplines. Prior to founding Crescent in 2000, Michael was a strategy consultant at Bain International and the LEK Partnership as well as holding several senior operating roles. Michael is currently a Non-Executive Director of ClearView Limited. He is also the Non- Executive Chair of Australian Clinical Labs and National Dental Care. Michael is also a former Chairman and Director of Cover-More Group Limited and a former Director of Gowings Bros Limited, LifeHealthCare Group Limited, and Metro Performance Glass Limited. Michael holds a Bachelor of Commerce (Finance & Mathematics) from the University of New South Wales. Special Responsibilities Chairman Member of Audit, Risk & Compliance Committee Chairman of Remuneration Committee Neville Buch Neville Buch became a Non-Executive Director of Cardno Limited in November 2015 and acting joint CEO on 29 August 2016. He is a Partner of Crescent Capital Partners where he heads Crescent’s Operating Improvement Practice. He brings expertise in operational management and strategic planning. Executive Director and Acting Chief Executive Officer Prior to joining Crescent in 2009, Neville was the Chief Executive Officer of Wormald Australia and a Senior Executive of Tyco, where he was the Global Deputy Chairman of the Fire and Safety Division. He spent twelve years in senior management with Tyco, both in Australia and overseas and has significant experience in the United States, Europe and Asia. Neville is the Non-Executive Chair of GroundProbe, PrimePanels NZ, Steel-Line Garage Doors and Nude By Nature. Neville holds a Bachelor of Science in Electronic Engineering (Hons Computer Design) and a Masters of Business Administration from the University of Witwatersrand, South Africa. Steven Sherman Steve Sherman joined Cardno Limited as a Non-Executive Director in January 2016. He is a Chartered Accountant with more than 30 years’ experience in corporate restructuring and insolvency. His experience ranges from advising on and facilitating restructuring and turnaround strategies, to the re-engineering of entire businesses. Jeffrey Forbes Steve is a former National Managing Partner of Ferrier Hodgson based in Sydney. He practices in the area of financial and operational restructuring and provides professional advice to financiers and lending syndicates, as well as company Boards and executives. Steve has a Bachelor of Commerce from the University of New South Wales. He is a Fellow of the Chartered Accountants Australia & New Zealand, a member of the Australian Institute of Company Directors and the Australian Restructuring and Turnaround Association. Jeff Forbes joined Cardno Limited as a Non-Executive Director in January 2016. Jeff is an experienced Finance Executive and Company Director with over 30 years’ merger and acquisition, equity and capital markets and project development experience. He has significant expertise in the financing and development of resource projects in both Australia and in the Asia-Pacific region. Jeff previously worked at Cardno as CFO and Company Secretary before leaving to commence non-executive director roles. He has spent time as a member of the remuneration and audit and risk committees of both listed and unlisted companies in a variety of sectors. Prior to first joining Cardno in 2006, Jeff was the CFO, Company Secretary and Executive Director at Highlands Pacific Limited, a PNG-based mining and exploration company. He has significant experience in capital raisings and during his career has worked for a number of major companies including Rio Tinto, BHP and CSR. Jeff is the Non-Executive Chair of Herron Todd White Group and Non-Executive Director of PWR Holdings Ltd, Horizon Housing Company and Australian Affordable Member of Remuneration Committee Non-Executive Director Member of Audit, Risk & Compliance Committee Member of Remuneration Committee Non-Executive Director Audit, Risk & Compliance Committee Chairman Member of Remuneration Committee Page | 6 Directors’ Report (continued) Director Experience Housing Solutions. Previously Jeff was a Non-Executive Director of Talon Petroleum Limited, Exoma Energy Limited, Affinity Education Limited and CMI Limited. Jeff holds a Bachelor of Commerce from the University of Newcastle and is a Graduate of the Australian Institute of Company Directors. Gary Jandegian Gary Jandegian became a Non-Executive Director of Cardno Limited in March 2016 and acting joint CEO for the period 29 August 2016 to 29 November 2016. He has more than 35 years’ experience in a range of executive and leadership roles in the engineering and construction industry. Gary spent 24 years at leading engineering, design and construction firm, URS Corporation, where he led the company’s Infrastructure and Environment Division for more than a decade. This generated annual revenues approaching US$4 billion with more than 20,000 employees across almost 50 countries. Gary was a key member of the URS executive management and risk management committees and worked across investor relations, mergers and acquisitions and change management. He was also responsible for an Executive Account Management sales model resulting in several multi-hundred million dollar accounts in the energy sector which was fundamental to URS’s growth strategy. He has served as a member of the Environment & Energy Committee, U.S. Chamber of Commerce, the Silicon Valley COO Roundtable and the Industry Leaders Council, American Society of Civil Engineers, Washington DC. Robert Prieto Bob Prieto became a Non-Executive Director of Cardno Limited in March 2016. He has more than 40 years’ experience in the engineering, construction and infrastructure industries. Bob worked for 12 years as Senior Vice President at Fluor Corporation, a multinational engineering and construction firm, where he was executive sponsor for multiple national and international transportation programs and advised C-suite and “giga” project teams on programs totaling US$50 billion. Prior to this, he spent more than 20 years with professional services firm Parsons Brinckerhoff, where he worked in a range of executive positions focusing on corporate development and management, before spending six years as Chairman. Bob is active with a number of infrastructure and engineering industry councils, including the World Economic Forum, Millennium Challenge Corporation Advisory Council, National Academy of Construction, American Society of Civil Engineers (ASCE) Industry Leaders Council, Construction Management Association of America (CMAA) Fellow and previously as a Presidential Appointee to the Asia-Pacific Economic Cooperation (APEC) Business Advisory Council. He also serves as an Independent Member of the Mott MacDonald Shareholder’s Committee. Special Responsibilities Non-Executive Director Member of Remuneration Committee Non-Executive Director Member of Audit, Risk & Compliance Committee Member of Remuneration Committee Nathanial Thomson Nathanial joined as a Non-Executive Director of Cardno Limited in November 2015 before resigning in January 2016 and being reappointed in May 2016. Non-Executive Director Nathanial holds a Bachelor of Laws and a Bachelor of Finance from the University of Western Australia. Nathanial is a partner of Crescent Capital Partners and has more than 15 years of experience in strategy, investment and business management. Nathanial is currently a director of ASX listed ClearView Ltd and National Home Doctor Service Pty Ltd and has previously been a Director of NZX listed Metro Performance Glass Ltd, ASX listed Cover-More Ltd and ASX listed LifeHealthcare Ltd. Prior to joining Crescent Capital Partners, Nathanial worked at McKinsey & Co. Member of Remuneration Committee Page | 7 Directors’ Report (continued) PRINCIPAL ACTIVITIES The principal activity of the consolidated entity during the financial year was operating as a professional infrastructure and environmental services company, with expertise in the development and improvement of physical and social infrastructure for communities around the world. There were no changes to the principal activities of the Cardno Group during the financial year under review. DIVIDENDS No dividends declared for the financial years ended 30 June 2017 or 30 June 2016. EVENTS SUBSEQUENT TO REPORTING DATE There has not arisen in the interval between the end of the year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the company, to affect significantly the operations of the Group or the results of those operations. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Cardno will continue to manage its global business in physical and social infrastructure and pursue its policy of growing both organically and by acquisition during the next financial year. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Other than as disclosed elsewhere in this Directors’ Report, there have been no significant changes in the state of affairs. INDEMNIFICATION AND INSURANCE OF OFFICERS The Company has agreements with each of the Directors and Officers of the Company in office at the date of this report indemnifying them against liabilities to any person other than the Company or a related body corporate that may arise from their acting as Directors or Officers of the Company. The indemnity continues to have effect when the Directors and Officers cease to hold office other than where such liabilities arise out of conduct involving a wilful breach of duty by the Officers or the improper use by the Directors or Officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the Directors’ and Officers’ liability, as such disclosures are prohibited under the terms of the contract. Page | 8 Directors’ Report (continued) REVIEW OF RESULTS PERFORMANCE ($m) Gross Revenue from continuing operations Fee Revenue Underlying EBITDA 1 Underlying NOPAT 2 Net Profit / (Loss) after Tax Operating Cash Flow EPS - basic (cents) from continuing and discontinued operations NOPAT EPS - basic (cents) 2017 1,182.0 788.2 44.0 19.9 8.6 (3.8) 1.79 4.16 2016 1,164.6 781.8 42.0 6.2 (194.9) 56.4 (79.19) 2.52 1 Underlying EBITDA = EBIT plus underlying adjustments, depreciation and amortisation and impairment losses 2 Underlying NOPAT = NPAT plus underlying adjustments and tax effected impairment losses EBITDA and EBIT are unaudited. However, they are based on amounts extracted from the audited financial statements as reported in the consolidated statement of financial performance on page 26. These metrics provide a measure of Cardno’s performance before the impact of non-cash expense items, such as depreciation and amortisation and impairment losses, as well as interest costs associated with Cardno’s external debt facility and hire purchase arrangements. NOPAT is unaudited. However, it is based on amounts extracted from the audited financial statements. This metric provides a measure of Cardno’s operating performance before the impact of non-cash adjustments such as impairment losses of goodwill and other assets. Balance Sheet During the year the company sold its specialty software business XP Solutions for US$49 million ($56.4 million after transaction costs). All of the funds received from this sale, together with all of the funds from the capital raise in late June 2016 were used to pay down the company’s debt facilities. Net debt (debt less cash on hand) at end of June 2017 is $15.3 million, down from $49.6 million at June 2016 and down from $311.3 million at end of June 2015. Cash Flow The company recorded a net operating cash outflow for the year of $3.8 million (inflow $56.4 million FY16). This is primarily driven by the timing of debtor receipts and creditor payments over the end of reporting period. Page | 9 Directors’ Report (continued) SEGMENT OVERVIEW Asia Pacific (APAC) The APAC business provides services in civil, structural, water, environmental, coastal, bridge, geotechnical, subsurface utility, traffic and transport engineering as well as environmental science, surveying, landscape architecture, planning and asset management. Asia Pacific business revenue for the year was $275.9 million, an increase on the prior comparative period (PCP) of 3.9%. Underlying EBITDA for the division is also up on prior year comparative with a number of restructure actions completed starting to show benefits. The business is investing significantly in major projects expertise with a new dedicated business development team to assist long-term growth in backlog and revenues. Americas The Americas business delivers expertise to private and public sector clients across the environmental, water, transportation, energy and resources, land, buildings and management services sectors. The Americas’ business revenue is down on PCP by 4.7% and underlying EBITDA down on PCP by 16.9%, reflecting both challenges in the external market place and legacy issues. The business was restructured in 1H17 with the resultant removal of substantial overhead. Both revenue and underlying EBITDA have increased in the second half of FY17 as the benefits of the restructure began to take effect, and the work from a number of key project wins got underway. International Development (ID) The ID business designs and implements large-scale sustainable solutions for both development assistance agencies and private clients. By its nature, the ID business generally has long term high value contracts, which have a high ‘pass through’ component, meaning that Cardno will project manage the contract and receive a management fee for doing so – a large portion of the project involves the management of contractors and specialist consultants. Hence the ID business generally operates on lower revenue margins than our other divisions. ID revenue is up on PCP by 14.0% on the back of some key project wins commencing during the year. Portfolio Portfolio businesses includes Construction Sciences, Latin America and PPI, which while an integral part of the Group’s suite of services, are not considered to be core engineering or science and environment businesses and hence have slightly different operating methodologies, or environments and markets. Portfolio revenues are down on prior year with continuing challenging market conditions in the Oil & Gas sector, in Latin America and the tightening construction market in Australia. All three businesses have also made improvements in operating and business disciplines. For example, the PPI business suspended its loss making operations in Nigeria and Singapore. The full year benefits of these actions will be felt in FY18. Page | 10 Directors’ Report (continued) SEGMENT OVERVIEW CONTINUED Statutory1 Financial year Underlying Adjustments2 Financial year Underlying1 Financial year 2017 2016 2017 2016 2017 2016 275,944 265,548 410,957 431,224 329,967 289,510 165,162 178,331 1,182,030 1,164,613 23,898 889 (12,551) (64,498) 7,565 (221) (17,726) (82,657) 1,186 (146,487) - - - - - - - - - - 6,199 19,160 (1,589) 24,313 48,083 28,154 72,457 - 86,762 187,373 (13,190) 6,845 7,926 (5,695) 275,944 265,548 410,957 431,224 329,967 289,510 165,162 178,331 1,182,030 1,164,613 30,097 29,043 6,609 5,976 6,587 49,269 (5,264) 44,005 7,959 (221) 4,105 40,886 1,150 42,036 (23,590) (25,802) 7,115 - (16,475) (25,802) (35,594) (165,444) 63,124 181,678 27,530 16,234 (7,230) (12,532) 1,179 - (6,051) (12,532) AUD ’000 Asia Pacific Americas ID Portfolio Gross Revenue Asia Pacific Americas ID Portfolio Corporate Depreciation and amortisation expenses EBIT Net finance costs Profit/(loss) from continuing operations before income tax Continuing Operations EBITDA (12,004) (139,642) 56,009 181,678 Income tax (expense)/benefit 23,455 28,004 (24,998) (25,493) (42,824) (177,976) 64,303 181,678 21,479 (1,543) 3,702 2,511 Profit/(Loss) Before Gain on sale of Discontinued Operations (19,369) (149,972) 39,305 156,185 19,936 6,213 Discontinued operations, net of tax 27,948 (44,947) (27,948) 44,947 - - Profit/(loss) after income tax 8,579 (194,919) 11,357 201,132 19,936 6,213 Attributable to: Ordinary Equity holders 8,579 (194,919) 11,357 201,132 19,936 6,213 1. 2. 3. 4. 5. The use of the term ‘Statutory’ refers to IFRS financial information and ‘Underlying’ refers to non-IFRS financial information. Underlying earnings are categorised as non-IFRS financial information and therefore have been presented in compliance with ASIC Regulatory Guide 230 – Disclosing non-IFRS information and are unaudited. Underlying adjustments have been considered in relation to their size and nature and have been adjusted from the Statutory information, for disclosure purposes, to assist readers to better understand the financial performance of the underlying business in each reporting period. These adjustments include transactions or costs that on their own or in combination with a number of similar transactions contribute to more than five percent of profit/(loss) after tax. Underlying adjustments are assessed on a consistent basis year-on-year and include both favourable and unfavourable items. The exclusion of these items provides a result which, in the Directors’ view, more closely reflects the ongoing operations of the Group. Details of adjustments from Statutory to Underlying financial information are set out on page 12. EBITDA represents earnings before interest, income tax, and depreciation and amortisation. EBIT represents earnings before interest and income tax. EBITDA and EBIT are unaudited. However, they are based on amounts extracted from the audited financial statements as reported in the consolidated statement of financial performance on page 26. These metrics provide a measure of Cardno’s performance before the impact of non-cash expense items, such as depreciation and amortisation, as well as interest costs associated with Cardno’s external debt facility and hire-purchase arrangements. Page | 11 Directors’ Report (continued) SEGMENT OVERVIEW CONTINUED Underlying Profit From Continuing and Discontinued Operations After Income Tax (Attributable to Ordinary Equity Holders) Underlying Adjustments to EBITDA: Redundancy costs associated with restructuring Onerous lease provision and other costs associated with office rationalisation and consolidation Business review costs Debtor provision Indirect tax – in dispute Sale and lease back Close out of USPP and interest rate swap Impairment of intangible assets Total Underlying Adjustments to EBITDA Underlying Adjustments to Depreciation: Accelerated depreciation on software assets Total Underlying Adjustments to Depreciation Underlying Adjustments to Finance Costs: Provision for interest and penalties – tax related Total Underlying Adjustments to Finance Costs Underlying Adjustments to Income Tax: Provision for taxes Structure rationalisation Tax effect of underlying adjustments Total Underlying Adjustments to Income Tax Results and Gain on sale of XP Solutions Results and Loss on sale of Mining business Result and Loss on sale of ATC Result and Loss on sale of ECS Total Discontinued Operations Statutory Profit / (Loss) After Income Tax (Attributable to Ordinary Equity Holders) Note 2017 AU $’000 2016 AU $’000 1 2 3 4 5 6 7 8 9 9 9 10 11 11 11 11 19,936 6,213 8,968 4,270 10,673 23,329 11,539 1,500 - - - 56,009 7,115 7,115 1,179 1,179 2,554 (8,504) (19,048) (24,998) (30,924) 2,100 - 876 (27,948) 479 12,066 - - (1,162) (12,257) 178,282 181,678 - - - - 1,048 - (26,541) (25,493) (3,614) 1,918 35,531 11,112 44,947 8,579 (194,919) Termination and redundancy costs associated with the group restructure. 1. 2. Onerous lease provisions and other costs associated with the group wide office rationalisation and consolidation project. 3. Costs associated with the closure of developmental drones business and balance sheet provisions related to the Petroleum and Gas business, the Nigeria business, multi-year projects, litigation and work in progress. Prior year includes legal fees and receivables relating to Caminosca business, target defence costs and one off project costs in Manila. Specific debtors now viewed as uncollectable due to country specific conditions. 4. Indirect tax provision currently in dispute. 5. 6. Proceeds recognised from the sale and lease back of equipment. 7. Gain on close out of the USPP debt and associated interest rate swap. 8. 9. Impairment of intangible assets due to a downturn in the mining and oil and gas sector in prior year. Accelerated amortisation on software assets following a review of group systems and income tax expense, penalties and interest provided for where previously considered to be exempt currently in dispute. 10. Tax effect of rationalisation of US capital structure. 11. Result and subsequent gain or loss on disposal of discontinued operations including XP Solutions and Mining in the current year and ATC and ECS sold in the prior financial year. Page | 12 Directors’ Report (continued) OUTLOOK Cardno staff make a difference every day for our clients and our stakeholders around the world. Key areas of focus for the next twelve months are: > Growing revenue and rebuilding EBITDA margins by investing in growth initiatives and building the business development pipeline > Improve revenue per client by stronger focus on cross selling of all Cardno services > Continued focus on operational efficiencies and conservative fiscal and balance sheet management > Delivering small carefully considered ‘bolt-on’ style acquisitions to supplement existing divisional businesses DIRECTORS’ MEETINGS Attendance at Board meetings and Board Committee meetings for the year ended 30 June 2017 is set out below: No. of Meetings Held M Alscher N Buch S Sherman J Forbes G Jandegian R Prieto N Thomson R Wankmuller (i) Board of Directors Audit, Risk & Compliance Committee Remuneration Committee A 10 10 9 10 10 10 10 2 B 10 10 10 10 10 10 10 2 A 3 - 4 4 - 4 - - B 4 - 4 4 - 4 - - A 6 6 6 6 6 6 6 - B 6 6 6 6 6 6 6 - A = number of meetings attended B = number of meetings held during the time the Director held office during the year or was a committee member (i) Richard Wankmuller resigned as Chief Executive Officer and Managing Director on 29 August 2016 DIRECTORS’ INTERESTS As at the date of this report, the interests of the Directors in the shares of Cardno Limited were: M Alscher N Buch S Sherman J Forbes G Jandegian R Prieto N Thomson Ordinary Shares Performance Options Performance Rights - - - 148,619 200,000 - - - - - - - - - - - - - - - - Page | 13 Remuneration Report (Audited) This Remuneration Report (Report) outlines the remuneration arrangements for Key Management Personnel (KMP) of the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. The information in this Report has been audited as required by section 308(3C) of the Corporations Act 2001. CONTENTS The Report contains the following sections: A. Key Management Personnel B. Role of the Remuneration Committee C. Non-Executive Directors’ Remuneration D. Executive Remuneration Strategy and Structure E. Executive Key Management Personnel – Contract Terms F. Executive Key Management Personnel – Remuneration Tables G. LTI Share Plans H. The Group’s Performance I. Other Related Party Transactions A. KEY MANAGEMENT PERSONNEL Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including any Director (whether Executive or otherwise) of the Company. For the purposes of this Report, the Chief Executive Officer and Chief Financial Officer are considered KMP. The KMP disclosed for the financial year ended 30 June 2017 are detailed in the following table. Period KMP (if less than full year) Name Title NON-EXECUTIVE DIRECTORS M Alscher S Sherman J Forbes G Jandegian1 R Prieto N Thomson EXECUTIVES N Buch1 P Barker FORMER EXECUTIVES Chairman and Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Chief Executive Officer and Executive Director Chief Financial Officer R Wankmuller Executive Director and Chief Executive Officer Until 29 August 2016 1 N Buch and G Jandegian became joint interim CEO on 29 August 2016. G Jandegian transitioned back to non-executive director on 30 November 2016. Page | 14 Remuneration Report (Audited) (continued) B. ROLE OF THE REMUNERATION COMMITTEE The remuneration of Directors, the CEO, KMP, managers and staff is reviewed by the Remuneration Committee. Board decisions on the remuneration of the Chief Executive Officer and Key Management Personnel are made in the absence of the CEO and KMP. When required, the Committee obtains independent advice from remuneration consultants on the appropriateness of remuneration based trends in comparative countries, both locally and internationally. No advice was obtained during the year ended 30 June 2017. The Committee met six times during the year and committee members’ attendance record is disclosed in the table of Directors’ meetings. C. NON-EXECUTIVE DIRECTORS’ REMUNERATION Non-Executive Directors’ are paid a fee for being a Director of the Board and an additional fee if they chair certain Board Committees. Non-Executive Director fees are not linked to the performance of the Group and Non-Executive Directors do not participate in any of the Company’s incentive plans. Non-Executive Director fees are reviewed annually, and are determined within an aggregate Directors’ fee pool limit, which is periodically recommended for approval by shareholders. The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain Directors of appropriate calibre, whilst incurring a cost that is acceptable to shareholders. The current aggregate fee limit of $1,150,000 was approved by shareholders at the Company’s 2014 Annual General Meeting. There is no intention to increase Non-Executive Directors’ fees for the 2018 financial year. The fee structure (which is inclusive of superannuation contributions (where compulsory) for Non-Executive Directors) is detailed in the following table. Australian based Board members (AUD) Chairman Non-Executive Director US based Board members (USD) Non-Executive Director Board $ Audit, Risk & Compliance Committee $ 200,000 100,000 27,273 13,500 100,000 11,000 Remuneration Committee $ - - - Gary Jandegian and Robert Prieto also have agreements with Cardno Limited to provide project specific consultancy advice for which they may receive remuneration not exceeding US$50,000 per annum. These amounts are included in their remuneration in the following table. Page | 15 Remuneration Report (Audited) (continued) C. NON-EXECUTIVE DIRECTORS’ REMUNERATION CONTINUED The remuneration received by Non-Executive Directors for the years ended 30 June 2017 and 30 June 2016 is set out in the following table. NON-EXECUTIVE M Alscher N Buch1 S Sherman J Forbes G Jandegian2 R Prieto N Thomson Total 2017 Total 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Salary and Fees $ 200,000 130,411 - 65,205 103,652 41,062 116,231 46,045 482,145 51,268 213,403 55,028 100,000 33,151 Superannuation Benefits $ - - - - 9,487 3,901 11,042 4,374 - - - - - - Total $ 200,000 130,411 - 65,205 113,139 44,963 127,273 50,419 482,145 51,268 213,403 55,028 100,000 33,151 1,215,431 422,170 20,529 8,275 1,235,960 430,445 1 N Buch became joint interim CEO on 29 August 2016. His salary and fees paid during the year are included in the executive remuneration table. 2 G Jandegian transitioned from joint interim CEO back to Non-Executive Director on 30 November 2016. Included in his salary and fees is US$240,000 received from his time as joint interim CEO. Page | 16 Remuneration Report (Audited) (continued) D. EXECUTIVE REMUNERATION STRATEGY AND STRUCTURE The Board, has developed and adopted a remuneration structure driven by criteria which comprises a mix of fixed and variable remuneration components as outlined below. Total Fixed Remuneration (TFR) Consists of base salary plus statutory superannuation contributions and other benefits. KMP and senior managers receive a fixed remuneration package which is reviewed annually by the Remuneration Committee and the Board taking into consideration the responsibilities of the role, the qualifications and experience of the incumbent and benchmark market data including those companies with which the Group competes for talent. In reviewing TFR the Committee and the Board takes into consideration business and individual performance as well as the factors outlined above. There are no guaranteed base pay increases included in any KMP contract. Short-Term Incentive (STI) Target STI opportunities are expressed as a percentage of TFR. For the year ended 30 June 2017, STI payments were determined by achievement of financial and non-financial performance targets. The Committee and the Board are responsible for reviewing the achievement of targets. Long-Term Incentive (LTI) For KMP’s STI was assessed 100% against achievement of budgeted EBITDA for the year. This result was achieved. For FY18 the strategy is to link STI to the financial performance of the business in the form of achievement of scorecards with specific key financial performance indicators (KPI’s) set as targets. It is planned that these KPI’s will be based primarily on financial measures such as EBITDA targets. Target LTI opportunities are expressed as a percentage of TFR. Performance Rights issued under the previous LTI plan are tested against the relevant performance hurdles at the end of the performance period. Refer section G for the terms and conditions of the Performance Rights. For FY18 the focus of the LTI scheme will aim to ensure an incentive program that fundamentally underpins sustained improved performance of the business and restoration and creation of shareholder value. The scheme will provide for the issue of Performance Rights for nil consideration to KMP and senior management who contribute to the achievement of performance hurdles over a three-year period related to targeted EBITDA levels (adjusted for acquisitions and divestitures) and share price levels that focus on rebuilding shareholder value and profit expectations. Subject to meeting the relevant performance hurdles, upon vesting, the Performance Rights will be converted into ordinary shares in the Company. Page | 17 Remuneration Report (Audited) (continued) E. EXECUTIVE KEY MANAGEMENT PERSONNEL - CONTRACT TERMS KMP are employed on the basis of Executive Service Agreements (Agreements). These Agreements contain a range of terms and conditions including remuneration and other benefits, notice periods and termination benefits. The key contract terms are as follows: > Contract term: no fixed term. > Notice Period: (resignation or termination without cause) 3 or 6 months. The Company may terminate Agreements immediately for cause, in which case the Executive is not entitled to any payment in lieu of notice or contractual compensation. The Agreements also provide for an Executive’s participation in the STI and LTI plans subject to Board approval of their eligibility and in accordance with the terms and conditions of the respective plans. On 29 August 2016, CEO and Managing Director Richard Wankmuller resigned. Mr Wankmuller received 12 months’ salary in lieu of notice in accordance with his contract as well as accrued annual leave. Mr Wankmuller was also paid the first instalment of his FY16 STI totalling $475,000. No other STI is payable. All unvested LTI in the form of Performance Rights lapsed on the cessation of his employment. F. EXECUTIVE KEY MANAGEMENT PERSONNEL - REMUNERATION TABLES The remuneration received by Executive KMP for the years ended 30 June 2017 and 30 June 2016 is set out in the following table. The share-based payments reflect the amounts required under the Australian Accounting Standards to be expensed by the Company in relation to any long term incentives and the deferral component of any short-term incentives. It represents the value of vested and unvested equity expensed during the period including reversal for forfeited equity incentives and the probability of the incentives vesting. These figures are accounting values and not the amounts actually received by Executive KMP. Whether or not Executive KMP realise any value from these share based payments will depend upon the satisfaction of the applicable performance conditions. Page | 18 Remuneration Report (Audited) (continued) n o i t a n m r e T i n o i t a u n n a r e p u S e c n a m r o f r e P y r a t e n o M - n o N s t i f e n e B s t i f e n e B s t h g R i s t i f e n e B h s a C I T S T S O P T N E M Y O L P M E - E R A H S D E S A B S T N E M Y A P I S T F E N E B M R E T - T R O H S $ l a t o T - 6 8 9 , 2 3 5 8 0 0 , 6 2 7 4 2 1 , 2 7 1 2 $ - - - - 1 0 4 , 9 2 1 , 2 - 0 9 7 , 5 6 1 , 1 5 5 6 , 4 1 0 , 1 4 8 7 , 4 2 4 , 2 5 2 5 , 1 0 3 , 2 - 5 5 6 , 4 1 0 , 1 $ - - 6 1 6 , 9 1 3 6 5 , 6 8 8 3 , 3 2 3 1 3 , 1 1 4 0 0 , 3 4 6 7 8 , 7 1 . s e e f d n a y r a a s l i s h n i $ - - - 6 4 0 , 8 5 2 7 9 , 2 3 1 ) 2 7 9 , 2 3 1 ( ) 6 2 9 , 4 7 ( 2 7 9 , 2 3 1 $ - - - - 9 3 6 , 1 8 7 7 6 , 5 9 3 6 , 1 8 7 7 6 , 5 $ - - 4 5 6 , 2 2 2 7 6 6 , 9 2 $ s e e F d n a y r a l a S - 6 8 9 , 2 3 5 2 9 6 , 5 2 4 4 9 8 , 5 3 1 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 1 h c u B N r e k r a B P L E N N O S R E P T N E M E G A N A M Y E K E V T U C E X E I 4 5 6 , 2 2 2 7 6 6 , 4 0 5 8 5 7 , 7 3 1 , 1 3 3 3 , 0 4 6 , 1 - 0 8 0 , 9 7 1 0 0 0 , 5 7 4 9 3 4 , 4 0 5 , 1 7 1 0 2 6 1 0 2 r e l l u m k n a W R 7 1 0 2 l a t o T 6 1 0 2 l a t o T L E N N O S R E P T N E M E G A N A M Y E K E V T U C E X E R E M R O F I d e d u c n l i s i i h c h w O E C g n m o c e b i o t r o i r p r o t c e r i d e v i t u c e x e - n o n a s a 6 8 9 , 6 1 $ i d a p s a w h c u B N . 6 1 0 2 t s u g u A 9 2 n o O E C m i r e t n i t n o i j e m a c e b h c u B N 1 i . n o i t e r c s d s d r a o B e h t t a d e d r a w a I T L r o I T S y n a d n a s e c n a a b l e v a e l d e u r c c a , e c n a r e v e s y c n a d n u d e r , e c i t o n f o u e i l n i i d a p s t n u o m a e d u c n l i s t i f e n e b i n o i t a n m r e T 2 Page | 19 Remuneration Report (Audited) (continued) Proportion of Performance Related Remuneration Percentage of Target STI Received1 Percentage of Remuneration Performance Related2 EXECUTIVE KEY MANAGEMENT PERSONNEL N Buch P Barker 2017 2016 2017 2016 FORMER EXECUTIVE KEY MANAGEMENT PERSONNEL R Wankmuller 2017 2016 - - 100% 50% - 33% 1 Calculated based on STI as a percentage of pro-rata target for 2016. 2 Calculated based on STI cash, other cash bonuses and share based payments as a percentage of total remuneration. - - 38.7% 17.2% - 28.6% Performance Rights Granted and Movement During the Year The aggregate number of Performance Rights in the Company that were granted as compensation, exercised and lapsed to each Executive KMP for the year ended 30 June 2017 is set out in the following table. Balance at 1 July 2016 Rights Granted During the Year as Remuneration Value of Right Granted During the Year Rights Exercised During the Year Value of Rights Exercised During the Year1 Lapsed / Cancelled During the Year Value of Lapsed / Cancelled2 Balance at 30 June 2017 Maximum Total Yet to Vest No. No. EXECUTIVE KEY MANAGEMENT PERSONNEL N Buch P Barker - - - 316,143 291,907 $ - FORMER EXECUTIVE KEY MANAGEMENT PERSONNEL R Wankmuller 250,549 - - No. - - - $ - - - No. - - $ - No. No. - - - 316,143 316,143 250,549 518,636 N/A N/A 1. 2. Calculated per Performance Right as the market value of Cardno shares on the date of exercise. Value is calculated at fair market value of the performance right on date of grant. Details of vesting profiles of Performance Rights granted as remuneration to Key Management Personnel of Cardno and still outstanding at 30 June 2017, including those granted during the financial year are as follows in the table below: Outstanding Performance Rights Grant Date Vesting Date % Vested in Year % Forfeited in Year Fair Value at Grant Date EXECUTIVE KEY MANAGEMENT PERSONNEL N Buch P Barker - - - 34,801 1-Mar-16 1-Nov-18 281,342 1-Nov-16 1-Nov-19 - 0.0% 0.0% - 0.0% 0.0% - 2.07 0.78 FORMER EXECUTIVE KEY MANAGEMENT PERSONNEL R Wankmuller - - - - - - Page | 20 Remuneration Report (Audited) (continued) The number of Performance Rights included in the balance at 30 June 2017 for the Executive KMP is set out in the following table. Balance at 30 June 2017 Vested & Exercisable at the End of the Year ISSUED 2017 EXECUTIVE KEY MANAGEMENT PERSONNEL N Buch P Barker LTI - 316,143 316,143 - FORMER EXECUTIVE KEY MANAGEMENT PERSONNEL R Wankmuller - N/A - - N/A Subsequent to year end, no Performance Rights have been issued to KMP. No terms of Performance Rights transactions have been altered by the Company during the reporting period. The Board has not exercised its discretion to allow the early vesting of any Performance Rights under any of the incentive plans. Securities Trading Policy The Company prohibits KMP from entering into any hedging arrangements or acquiring financial products (such as equity swaps, caps and collars or other hedging products) over unvested Performance Rights which have the effect of reducing or limiting exposure to risks associated with the market value of the Company’s securities. No Directors or Senior Executives may directly or indirectly enter into any margin loan facility against the Company’s securities unless the prior written consent of the Chairman of the Board is obtained. G. LTI SHARE PLANS Existing LTI plans are delivered through the Performance Equity Plan (PEP). Under this plan any LTI award is paid in Performance Rights. Performance Period: The performance period for Performance Rights issued under the PEP is three years and the rights vest subject to the achievement of Performance Hurdles detailed below. The issue of Performance Rights is discretionary and applied to eligible staff considered to have been high performers in their respective roles. All Performance Rights expire on the earlier of their expiry date or termination of employment. There are no voting or dividend rights attached to the Performance Rights. 2017 LTI Plan Performance Hurdles: Performance Rights issued were allocated in two equal tranches: 50% is subject to the achievement of a Share Price performance hurdle and 50% is subject to a Group EBITDA performance hurdle. These conditions are tested independently. The Performance Rights are subject to performance hurdles of Share Price (Tranche 1: 50%), the volume weighted average price of Shares at the close of trading over a 20 day trading period immediately prior to the Company’s 2019 AGM, must be at least $1.00 per share, and Group underlying EBITDA (Tranche 2: 50%) for the full 2019 financial year must exceed $54 million. 2016 and 2015 LTI Plan Performance Hurdles: Performance Rights issued were allocated in two equal tranches: 50% is subject to the achievement of a relative Total Shareholder Return (TSR) performance hurdle and 50% is subject to an Earnings Per Share (EPS) performance hurdle. These conditions are tested independently. Page | 21 Remuneration Report (Audited) (continued) The Performance Rights are subject to performance hurdles of TSR (Tranche 1: 50%) and EPS growth (Tranche 2: 50%) in accordance with the following scale: TSR of Cardno Relative to TSRs of Companies in Comparator Group Over 3 Years <50th percentile 50th percentile >50th & <75th percentiles 75th percentile and above % of Performance Rights to Vest (Tranche 1 50%) EPS Growth Over 3 Years % of Performance Rights to Vest (Tranche 2 50%) 0% 50% Pro rata 100% <12.5% (<4% pa) 12.5% (4% pa) >12.5% (4% pa) & <26% (8% pa) 26% (8% pa) >26% (8% pa) & <40% (12% pa) >40% (12% pa) 0% 30% Pro rata 70% Pro rata 100% Under Tranche 1 – up to 50% of the Performance Rights will vest if the Group achieves a certain TSR ranking within the S&P/ASX 300 Industrial Sector Index (excluding companies involved in financial, energy, metals and mining). Under Tranche 2 – up to 50% of Performance Rights vest if the Group achieves certain EPS performance targets. Number of Performance Rights: There are currently 4,962,639 Performance Rights on issue at 30 June 2017. As a share-based payment, these Performance Rights were valued for accounting and reporting purposes using the Monte Carlo simulation and Black Scholes method. H. THE GROUP’S PERFORMANCE The Group’s performance in respect of the current financial year and the previous four financial years is summarised in the following table. 2017 2016 2015 2014 2013 Gross Revenue – Continuing Operations (000’s) $1,182,030 $1,164,613 $1,185,949 $1,309,597 $1,195,352 Net Profit / (Loss) After Tax (000’s) $8,579 ($194,919) ($245,068) $78,134 $77,639 Dividends Paid or Provided (000’s) - $11,548 $49,452 $56,530 $50,766 Change in Share Price – year on year ($ per share) $0.64 ($1.18) ($3.09) $1.14 ($2.38) Page | 22 Remuneration Report (Audited) (continued) I. OTHER RELATED PARTY TRANSACTIONS Share Holdings The movement for the year ended 30 June 2017 in the number of ordinary shares in the Company held, directly or indirectly or beneficially, by each KMP, including their related parties, is detailed in the following table. Balance at the Start of the Year Received During the Year on the Exercise of Rights Other Changes During the Year Balance at the End of the Year Name NON-EXECUTIVE DIRECTOR M Alscher S Sherman J Forbes G Jandegian1 R Prieto N Thomson EXECUTIVE KEY MANAGEMENT PERSONNEL N Buch P Barker - - 148,619 - - - - - FORMER EXECUTIVE KEY MANAGEMENT PERSONNEL R Wankmuller 853,583 1. G Jandegian was joint interim CEO from 29 August 2016 to 30 November 2016. Loans to Executive Key Management Personnel - - - - - - - - - - - - - - 148,619 200,000 200,000 - - - - - - 44,500 44,500 - N/A There were no loans to Executive KMP made during the period and no outstanding balances at reporting date. Other key management personnel transactions with the Company or its controlled entities A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. None of these entities transacted with the Company or its subsidiaries in the reporting period. Page | 23 Directors’ Report (continued) NON-AUDIT SERVICES The Company’s auditor may perform certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the Audit, Risk and Compliance Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: > All non-audit services were subject to the corporate governance procedures adopted by the Board and have been reviewed by the Audit, Risk and Compliance Committee to ensure they do not impact the integrity and objectivity of the auditor; and > The non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for Cardno, acting as an advocate for Cardno or jointly sharing risks and rewards. Details of the amounts paid to the auditor and its related practices for audit and non-audit services provided during the year are set out in Note 33. LEAD AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2011 The lead auditor’s independence declaration is set out on page 25 and forms part of the Directors’ report for the year ended 30 June 2017. ROUNDING OF AMOUNTS The Company is of a kind referred to in ASIC Corporations Instrument 2016/191 issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report. Amounts in the Directors’ Report have been rounded off in accordance with that Class Order to the nearest thousand dollars or, in certain cases, to the nearest dollar. This Report is made in accordance with a resolution of the Directors. MICHAEL ALSCHER Chairman 21 August 2017 Page | 24 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Cardno Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Cardno Limited for the financial year ended 30 June 2017 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 Simon Crane Partner Brisbane 21 August 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Page | 25 Consolidated Statement of Financial Performance Cardno Limited and its Controlled Entities for the year ended 30 June 2017 Revenue from continuing operations Other income Employee expenses Consumables and materials used Sub-consultant and contractor costs Impairment losses Depreciation and amortisation expenses Net financing costs Other expenses Loss before income tax Income tax benefit Loss for the year from continuing operations Profit/ (Loss) for the year from discontinued operations, net of tax Profit/ (Loss) for the year Profit/ (Loss) attributable to: Owners of the Company Continuing Operations Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Continuing and Discontinuing Operations Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Note 2017 $’000 Restated* 2016 $’000 5 5 7 6 8 4 28 28 28 28 1,182,030 1,164,613 2,455 (547,838) (392,103) (194,687) - (23,590) (7,230) (61,861) (42,824) 23,455 (19,369) 27,948 8,579 8,579 8,579 (4.05) (4.05) 1.79 1.79 16,406 (565,907) (363,811) (176,484) (178,282) (25,801) (12,532) (36,178) (177,976) 28,004 (149,972) (44,947) (194,919) (194,919) (194,919) (60.93) (60.93) (79.19) (79.19) Consolidated Statement of Comprehensive Income Cardno Limited and its Controlled Entities for the year ended 30 June 2017 Profit/ (Loss) for the year Items that may be subsequently reclassified to profit or loss: Exchange differences on translation of foreign operations Reclassification of exchange differences on disposal of subsidiary 4 Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income attributable to: Owners of the Company * See Note 4 for details about restatement of comparative information. Note 2017 $’000 Restated* 2016 $’000 8,579 (194,919) (17,381) 1,793 20,447 (5,204) (15,588) 15,243 (7,009) (179,676) (7,009) (7,009) (179,676) (179,676) Page | 26 The statement of financial performance and statement of comprehensive income should be read in conjunction with the notes to the financial statements. Consolidated Statement of Financial Position Cardno Limited and its Controlled Entities as at 30 June 2017 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Work in progress Other current assets Current tax receivable Assets held for sale TOTAL CURRENT ASSETS NON-CURRENT ASSETS Other financial assets Property, plant and equipment Deferred tax assets Intangible assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Loans and borrowings Current tax liabilities Employee benefits Provisions Other current liabilities Liabilities held for sale TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Loans and borrowings Deferred tax liabilities Employee benefits Other non-current liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained earnings / (losses) TOTAL EQUITY Note 2017 $’000 2016 $’000 10 11 12 25 3 26 13 9 14 15 16 17 18 3 16 9 18 19 80,028 218,749 96,882 13,696 - - 105,613 191,053 115,305 11,276 4,819 10,233 409,355 438,299 1,323 35,593 142,127 295,873 474,916 3,770 47,310 118,580 322,604 492,264 884,271 930,563 144,327 125,115 615 3,614 31,758 4,857 46,888 - 2,795 - 33,216 3,139 40,691 10,233 232,059 215,189 94,708 152,425 290 4,937 7,000 106,935 338,994 545,277 815,563 61,737 531 4,545 776 158,277 373,466 557,097 820,374 77,325 (332,023) (340,602) 545,277 557,097 The statement of financial position should be read in conjunction with the notes to the financial statements. Page | 27 Consolidated Statement of Changes in Equity Cardno Limited and its Controlled Entities for the year ended 30 June 2017 Note Share Capital Ordinary $’000 Retained Earnings / (losses) $’000 Foreign Translation Reserve $’000 Reserve for Own Shares* $’000 Total $’000 BALANCE AT 1 JULY 2015 641,661 (134,135) 76,693 (14,611) 569,608 BALANCE AT 30 JUNE 2016 820,374 (340,602) 91,936 (14,611) 557,097 Loss for the year Exchange differences on translation of foreign operations Reclassification of exchange difference on disposal of subsidiary 4 Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued Employee share based payments Dividends paid or provided Profit/(Loss) for the year Exchange differences on translation of foreign operations Reclassification of exchange difference on disposal of subsidiary 4 Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued Employee share based payments Share buy-back (net of income tax) - - - - (194,919) - - - 20,447 (5,204) (194,919) 15,243 19 19 19 176,923 1,790 - - - (11,548) 178,713 (11,548) - - - - - - - - 8,579 - - - (17,381) 1,793 8,579 (15,588) 19 19 19 9 850 (5,670) (4,811) - - - - - - - - - - - - - - - - (194,919) 20,447 (5,204) (179,676) 176,923 1,790 (11,548) 167,165 - - - - - - - - 8,579 (17,381) 1,793 (7,009) 9 850 (5,670) (4,811) BALANCE AT 30 JUNE 2017 815,563 (332,023) 76,348 (14,611) 545,277 * Shares held in trust by the Cardno Limited Performance Equity Plan Trust are for the purpose of subscribing for, acquiring and holding shares for the benefit of employees participating in the Performance Equity Plan (PEP) of Cardno Limited. Shares are transferred to PEP participants on exercise of Performance Options. The statement of changes in equity should be read in conjunction with the notes to the financial statements. Page | 28 Consolidated Statement of Cash Flows Cardno Limited and its Controlled Entities for the year ended 30 June 2017 CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers Interest received Finance costs paid Cash paid to suppliers and employees Income tax refund received / (paid) NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Proceeds on disposal of subsidiaries Acquisition of subsidiaries, deferred consideration paid Payments for intangible assets Proceeds from sale of property, plant and equipment Payments for property, plant and equipment NET CASH PROVIDED BY INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares Share issue transaction costs Share Buy-Back (Cancellation of shares) Proceeds from borrowings Repayment of borrowings Proceeds from termination of interest rate swap Finance lease payments Dividends paid NET CASH USED IN FINANCING ACTIVITIES Note 2017 $’000 2016 $’000 27 4 1,257,701 1,372,935 665 1,196 (5,385) (11,583) (1,255,426) (1,311,859) (1,388) (3,833) 57,977 (6,180) - 932 5,698 56,387 85,943 (23,857) (1,122) 9,826 (12,280) (19,312) 40,449 51,478 - - (5,670) 38,250 177,038 (5,648) - 444,598 (93,719) (706,749) - (2,059) - 11,761 (1,305) (7,693) (63,198) (87,998) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS HELD (26,582) 19,867 CASH AND CASH EQUIVALENTS AT 1 JULY Reclassification of cash included in disposal group held for sale Effects of exchange rate changes on cash and cash equivalents at the end of year CASH AND CASH EQUIVALENTS AT 30 JUNE 10 105,613 1,512 (515) 80,028 84,750 77 919 105,613 The statement of cash flows should be read in conjunction with the notes to the financial statements. Page | 29 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 Set out below is an index of the notes to the financial statements, the details of which are available on the pages that follow: GROUP STRUCTURE Explains aspects of the Group structure and how changes have affected the financial position and performance of the Group KEY FINANCIAL STATEMENT ITEMS Provides a breakdown of individual line items in the financial statements RISKS Discusses exposure to various financial risks and how these are managed UNRECOGNISED ITEMS Provides information about items that are not recognised in the financial statements OTHER INFORMATION Provides information not considered to be significant in the context of the main operations of the Group or not directly related to specific items in the financial statements 1. Segment information 2. Business combinations 3. Disposal group held for sale 4. Discontinued operations 5. Revenue and other income 6. Net finance costs 7. Expenses 8. Income tax expense 9. Deferred tax assets and liabilities 10. Cash and cash equivalents 11. Trade and other receivables 12. Work in progress 13. Property, plant and equipment 14. Intangible assets 15. Trade and other payables 16. Loans and borrowings 17. Provisions 18. Other liabilities 19. Issued capital 20. Critical estimates and judgements 21. Financial risks 22. Commitments 23. Contingent liabilities 24. Subsequent events 25. Other current assets 26. Other financial assets 27. Notes to the cash flow statement 28. Earnings per share 29. Related party disclosures 30. Controlled entities 31. Parent entity disclosures 32. Deed of cross guarantee 33. Auditor’s remuneration 34. Statement of significant accounting policies PAGE 31 33 34 35 36 36 37 37 38 39 39 39 40 41 43 43 45 46 46 48 48 52 52 52 53 53 53 54 55 56 58 59 61 61 Page | 30 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 GROUP STRUCTURE 1. SEGMENT INFORMATION On 1 July 2016, the Group changed its operating structure and as a result reportable segments have changed since the 2016 Annual report. Comparative information has been restated to reflect the new structure. Cardno has four reportable segments managed separately by location and services provided. Internal management reports on the performance of these reportable segments are reviewed monthly by the Group’s Chief Executive Officer (CEO). The following summary describes the operations in each of Cardno’s reportable segments. > Asia Pacific Engineering and Environmental – provides services in civil, structural, water, environmental, coastal, bridge, geotechnical, subsurface utility, traffic and transport engineering as well as environmental science, surveying, landscape architecture, planning and asset management. > Americas Engineering and Environmental – delivers expertise to private and public sector clients across the environmental, water, transportation, energy and resources, land, buildings and management services sectors. International Development (ID) – the ID business designs and implements large-scale sustainable solutions for both development assistance agencies and private clients. > > Other – includes Portfolio Companies including Construction Sciences (materials testing), LATAM (engineering, consulting operations in Latin America) and PPI (quality testing and services to the Oil and Gas sector) and Group Head Office. Segment results that are reported to the CEO include items directly attributed to the segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise head office expenses, financing costs, and income tax expense. 2017 $’000 Asia Pacific Engineering & Environmental Americas Engineering & Environmental ID Other Total SEGMENT REVENUE – Continuing Operations Fees from consulting services Fees from recoverable expenses Inter-segment revenue Segment Revenue Other revenue Total Segment Revenue Inter-segment elimination Total Revenue from continuing operations Segment Result Redundancy costs Office consolidation Business review costs Debtor provisioning Indirect tax in dispute 230,619 43,525 274,144 1,800 275,944 30,097 - (2,495) (161) (3,543) - 281,584 129,185 146,811 128,150 200,700 15,447 6,850 788,199 387,822 6,850 409,734 329,885 169,108 1,182,871 1,223 82 2,904 6,009 410,957 329,967 172,012 1,188,880 6,609 5,976 1,323 - (8,178) - - (8,968) (6,850) 1,182,030 44,005 (8,968) - (10,673) (10,982) 3,089 (15,275) (23,329) - - - (7,996) (11,539) (1,500) - (1,500) Depreciation and amortisation expense (2,836) (4,004) (384) (16,366) (23,590) Profit/(loss) from continuing operations before interest and income tax Finance costs and interest income Loss from continuing operations before income tax Income tax benefit Loss from continuing operations after income tax Net profit from discontinued operations after income tax Profit from continuing and discontinuing operations after income tax 21,062 (16,555) 7,181 (47,282) (35,594) (7,230) (42,824) 23,455 (19,369) 27,948 8,579 Page | 31 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 1. SEGMENT INFORMATION CONTINUED 2016 $’000 Asia Pacific Engineering & Environmental Americas Engineering & Environmental ID Other Total SEGMENT REVENUE – Continuing Operations Fees from consulting services Fees from recoverable expenses Inter-segment revenue Segment Revenue Other revenue Total Segment Revenue Inter-segment elimination Total Revenue from continuing operations Segment Result Redundancy costs Office consolidation Sale and lease back Close out of USPP Business review costs Impairment losses Depreciation and amortisation expense Profit/(loss) from continuing operations before interest and income tax Finance costs and interest income Loss from continuing operations before income tax Income tax benefit Loss from continuing operations after income tax Net loss from discontinued operations after income tax Loss from continuing and discontinuing operations after income tax GEOGRAPHICAL INFORMATION Australia & New Zealand Americas United Kingdom Canada Singapore Africa Latin America Indonesia Other Countries 217,931 47,237 265,168 380 265,548 29,043 (1,039) - 619 - (1,000) (26,734) (5,155) 291,876 107,359 164,594 137,666 182,149 13,422 26,693 781,760 380,474 26,693 429,542 289,508 204,709 1,188,927 1,682 2 315 2,379 431,224 289,510 205,024 1,191,306 (26,693) 1,164,613 42,036 (4,270) (479) 1,162 (221) 5,255 (2,615) (479) - - - - - - - 12,257 12,257 (11,066) (12,066) (79,498) (178,282) (436) (5,157) (25,802) 7,959 (616) - 543 - - (72,050) (15,054) (4,266) (79,218) (657) (81,303) (165,444) (12,532) (177,976) 28,004 (149,972) (44,947) (194,919) 2017 Revenues $’000 523,261 510,507 27,357 7,363 6,924 23,921 25,251 51,000 6,446 Non-Current Assets $’000 260,100 205,504 3,124 2,304 - 43 3,356 328 157 2016 Revenues $’000 429,133 548,182 31,549 980 23,438 25,678 27,974 70,444 7,235 1,182,030 474,916 1,164,613 Non-Current Assets $’000 246,979 215,815 24,374 1,930 - 1,212 - 770 1,184 492,264 Page | 32 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 2. BUSINESS COMBINATIONS On the 2 December 2016, the Group acquired an engineering company who provide global building information modelling management, modelling, digital engineering and detailing services, with head office based in Western Australia. This acquisition is not considered to be material to the Group. On the 31 March 2017, the Group acquired the remaining 50% of T2 Utility Engineers, previously a joint venture shared with AECOM, based in Canada. From the date of acquisition to 30 June 2017, the T2 business contributed $7,028,000 of revenue and $1,775,000 to profit before tax from continuing operations of the Group. If the business combination had taken place at the beginning of the year, the consolidated Group’s revenue from continuing operations would have been $1,191,689,000 and loss before tax from continuing operations for the consolidated Group would have been $40,978,000. The aggregated fair value of the identifiable assets and liabilities as at the date of acquisition were: Cash Trade and other receivables Work in progress Property, plant and equipment Other current assets Trade and other payables Employee benefits Current tax liabilities Total identifiable net assets at fair value Investment previously held in other financial assets equity accounted for Goodwill arising on acquisition Purchase consideration transferred 2017 $’000 406 6,491 1,692 166 147 8,902 (3,558) (197) (20) (3,775) 5,127 2,564 2,143 4,707 The fair value of receivables acquired is $6,491,000. The gross amount due is $6,685,000 of which $194,000 is considered doubtful. Goodwill is allocated entirely to the Americas segment. The goodwill recognised is attributable to the skills and technical talent of the employees of the acquisition and the synergies expected to be achieved from integrating the business into the Group's existing operations. Goodwill is not expected to be deductible for tax. Purchase consideration of CAD $4,800,000 was paid in cash. Analysis of cash flows on acquisition: Cash paid Cash balance acquired Net cash flow on acquisition Transaction costs of the acquisition are included in other expenses in the Consolidated Statement of Financial Performance. There were no acquisitions made during the year ended 30 June 2016. 2017 $’000 4,707 (406) 4,301 Page | 33 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 3. DISPOSAL GROUP HELD FOR SALE In May 2015, management committed to a plan to sell Caminosca S.A., a controlled entity based in Ecuador and part of the Other segment. Assets and liabilities of disposal group held for sale At 30 June 2016, the disposal group was stated at fair value less costs to sell. Whilst at 30 June 2017 the entity is still available for sale, it is no longer classified as held for sale due to the reduced likelihood of a sale in the near future. Cash and cash equivalents Trade and other receivables Property, plant and equipment Deferred tax assets Other current assets Assets held for sale Trade and other payables Interest bearing loans and borrowings Employee benefits Unearned Revenue Current tax liabilities Liabilities held for sale 2016 $’000 1,513 6,612 1,595 164 349 10,233 2,988 52 2,095 - 5,098 10,233 The non-recurring fair value measurement for the disposal group is classified as a Level 3 fair value and is based on management’s estimate of expected cash flows adjusted for risk and uncertainty associated with the sale process. Non-current assets, or disposal groups comprising assets and liabilities, are classified as held for sale if it is highly probable that they will be recovered primarily through sale rather through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no impairment loss is allocated to work in progress, financial assets, deferred tax assets or employee benefit assets, which continue to be measured in accordance with the Group’s other accounting policies. Impairment losses on initial classification as held-for- sale and subsequent gains or losses on re-measurement are recognised in profit and loss. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortised or depreciated. Page | 34 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 4. DISCONTINUED OPERATIONS On the 19 September 2016, the Group signed an agreement for the sale of its software business, XP Solutions, for US $49 million. The net proceeds of the sale were used to strengthen the Group’s capital structure and to further reduce net debt. In December 2016 the Group sold its US mining business for US $0.9 million. XP Solutions and mining were not previously classified as held-for-sale or as a discontinued operation. The comparative consolidated statement of financial performance has been reclassified to show the discontinued operations separately from continuing operations. (a) Results of discontinued operation Revenue Expense Results of operating activities Income tax Results from operating activities, net of tax Profit/(loss) on disposal of subsidiary Impairment losses (Refer to Note 7) Reclassification of foreign currency differences and reserves Profit/(loss) for the period Basic earnings (loss) per share Diluted earnings (loss) per share 2017 $’000 9,312 (9,986) (674) 330 (344) 30,085 - (1,793) 27,948 5.84 5.84 2016 $’000 137,159 (144,179) (7,020) 3,343 (3,677) (9,620) (36,854) 5,204 (44,947) (18.26) (18.26) The profit from discontinued operations of $27.9 million (2016: loss of $44.9 million) is attributable entirely to the owners of the company. (b) Cash flows from (used in) discontinued operation Net cash from (used in) operating activities Net cash from (used in) investing activities Net cash flow for the period (c) Effect of disposal on the financial position of the Group Property, plant and equipment Intangibles Trade and other receivables Bank Deferred tax liabilities Trade and other payables Net assets and liabilities Consideration received, satisfied in cash Bank account disposed of Net cash inflow 2017 $’000 1,866 547 2,413 2016 $’000 (2,765) 3,989 1,224 2017 $’000 224 25,629 5,388 922 (375) (1,759) 30,029 57,055 922 57,977 Page | 35 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 KEY FINANCIAL STATEMENT ITEMS 5. REVENUE AND OTHER INCOME REVENUE FROM CONTINUING OPERATIONS Fees from consulting services Fees from recoverable expenses Other OTHER INCOME Non-refundable R&D tax incentives Gain on termination of interest rate swap Gain on repayment of fixed rate long term notes Gain on disposal of property, plant and equipment Foreign exchange gains Other Income 2017 $’000 788,199 387,822 6,009 2016 $’000 781,760 380,474 2,379 1,182,030 1,164,613 1,995 - - 460 - 2,455 2,202 5,218 7,039 1,355 592 16,406 Accounting for Revenue from Continuing Operations and Interest Income Revenue is recognised at fair value of the consideration received net of the amount of goods and services tax (GST) payable to the taxation authority. Revenue from consulting services which are provided on a time and material basis is recognised at the contractual hourly rates as labour hours are delivered and recoverable expenses are incurred. For long term contracts, revenue and expenses are recognised in accordance with the percentage of completion method. Where a loss is expected to arise from a contract, the loss is recognised immediately as an expense. The percentage of completion is determined by costs to date versus estimated total project costs. 6. NET FINANCING COSTS Interest paid Amortisation of borrowing costs Financing Costs Interest income Net Financing Costs 2017 $’000 6,133 1,762 7,895 665 7,230 2016 $’000 8,669 5,055 13,724 1,192 12,532 Accounting for Net Finance Costs Finance costs are recognised as expenses in the period in which they are incurred. Borrowing costs are calculated using the effective interest method and include costs incurred in connection with arrangement of borrowings. There have been no qualifying assets and related debt to which borrowing costs could have been applied, and as a result no borrowing costs have been capitalised to qualifying assets. Interest income is recognised in profit or loss as it accrues, using the effective interest method. Page | 36 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 7. EXPENSES Bad and doubtful debts Rental expense relating to operating leases Impairment Losses Impairment of goodwill and other intangible assets (Refer Note 14) Impairment loss on re-measurement of disposal group (Refer Note 4) Impairment losses have been classified in the consolidated statement of financial performance as: Continuing operations Discontinued operations (refer Note 4) 8. INCOME TAX EXPENSE (a) The components of tax expense comprises: Current tax expense Current year Adjustments for prior years Deferred tax expense Current year Adjustments for prior years Total income tax expense / (benefit) (b) Numerical reconciliation between tax expense and pre-tax profit Profit / (loss) before tax from continuing operations Income tax using the Australian corporation tax rate of 30% (2016: 30%) Increase (decrease) in income tax expense due to: Non-deductible expenses Effect of tax rates in foreign jurisdictions Allowances for R&D expenditure Non-deductible portion of goodwill impairment Structure rationalisation Sundry items Under / (over) provided in prior years Income tax expense / (benefit) (c) Amounts recognised directly in equity Tax benefit on equity raising costs Foreign exchange 2017 $’000 22,868 41,189 - - - - - - 2016 $’000 3,947 36,160 178,282 36,854 215,136 178,282 36,854 215,136 2017 $’000 2016 $’000 1,701 1,728 3,429 (22,885) (3,999) (26,884) (23,455) 20,099 (361) 19,738 (46,049) (1,693) (47,742) (28,004) (42,824) (12,847) (177,976) (53,393) 1,650 2,078 (598) - (10,302) (1,165) (21,184) (2,271) (23,455) 106 2,149 4,246 (9,069) (2,508) 41,499 - (6,725) (25,950) (2,054) (28,004) 1,678 26,104 The effective tax rate for FY17 was 54.8% as compared to 15.7% in FY16. The tax benefit recognised includes the tax effect of a structure rationalisation. Page | 37 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 9. DEFERRED TAX ASSETS & LIABILITIES Recognised deferred tax assets and liabilities Assets Accruals Provisions Intangibles Tax losses Property, plant and equipment Other Total deferred tax assets Set-off of deferred tax liabilities Net deferred tax assets Liabilities Work in progress Property, plant and equipment Prepayments Other Total deferred tax liabilities Set-off against deferred tax assets Net deferred tax liabilities 2017 $’000 2016 $’000 5,437 19,035 39,834 76,875 2,576 12,291 156,048 (13,921) 142,127 11,815 - 1,276 1,120 14,211 (13,921) 290 34,391 17,874 53,242 1,105 - 32,089 138,701 (20,121) 118,580 10,576 1,788 2,123 6,165 20,652 (20,121) 531 NET DEFERRED TAX ASSETS (LIABILITIES) 141,837 118,049 The Group has unrecognised deferred tax assets from capital loss carryforwards in the United States of $40.2 million as at 30 June 2017 (2016: $38.1million) which will expire if not used to offset capital gains derived by 30 June 2021 ($34.7 million) and 30 June 2022 ($5.5 million). Movement in temporary differences during the year: 30 June 2017 Accruals Provisions Sundry items Prepayments Work in progress Goodwill on acquisition (USA) 30 June 2016 Accruals Provisions Sundry items Prepayments Work in progress Goodwill on acquisition (USA) 1 July 2016 $’000 Recognised in profit or loss $’000 Adjustments to prior years $’000 34,390 17,874 25,303 (2,122) (10,576) 53,180 118,049 (24,346) 6,620 49,268 227 (1,252) (7,632) 22,885 (1,500) 2,044 593 9 - 2,853 3,999 1 July 2015 $’000 Recognised in profit or loss $’000 Adjustments to prior years $’000 24,517 21,773 4,650 (1,047) (21,313) 35,116 63,696 10,173 (420) 18,144 (986) 302 20,675 47,888 (535) (217) 851 (34) 543 907 1,515 Other* $’000 (3,107) (7,503) 15,459 610 12 (8,567) (3,096) Other* $’000 235 (3,262) 1,658 (55) 9,892 (3,518) 4,950 * Other adjustments relate to impacts of translating foreign operations, acquisitions and divestments, and amounts booked to equity. 30 June 2017 $’000 5,437 19,035 90,623 (1,276) (11,816) 39,834 141,837 30 June 2016 $’000 34,390 17,874 25,303 (2,122) (10,576) 53,180 118,049 Page | 38 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 10. CASH AND CASH EQUIVALENTS Cash at bank and on hand Restricted cash (project advances) Bank short term deposits 2017 $’000 2016 $’000 76,957 102,862 2,680 391 2,628 123 80,028 105,613 Accounting for Cash and Cash Equivalents Cash and cash equivalents comprise cash on hand and investments in money market instruments which are at call or with an original term of three months or less. Bank overdrafts are shown with interest-bearing loans and borrowings in current liabilities on the statement of financial position. 11. TRADE & OTHER RECEIVABLES Trade debtors Provision for doubtful debts Sundry debtors 2017 $’000 245,503 (38,626) 206,877 11,872 218,749 2016 $’000 192,587 (11,090) 181,497 9,556 191,053 Accounting for Trade and Other Receivables Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. The recoverability of trade receivables is reviewed on an ongoing basis and a provision for impairment determined at both a specific and collective level. All individually significant receivables are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical trends of the probability of default adjusted for management’s judgement around current economic and credit conditions. Bad debts are written off as incurred. 12. WORK IN PROGRESS Work in progress Accounting for Work in Progress 2017 $’000 2016 $’000 96,882 115,305 Work in progress is stated at the aggregate of contract costs incurred to date plus recognised profits less recognised losses and progress billings. If there are contracts where progress billings exceed the aggregate costs incurred plus profits less losses, the net amounts are presented as unearned revenue under other liabilities. Contract costs include all costs directly related to specific contracts, costs that are specifically chargeable to the customer under the terms of the contract and an allocation of overhead expenses incurred in connection with Cardno’s activities in general. The recoverability of work in progress is reviewed on an ongoing basis. Amounts assessed as not recoverable from future billings are written off when identified. Page | 39 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 13. PROPERTY, PLANT & EQUIPMENT Land & buildings Land & buildings Less accumulated depreciation Carrying amount at the beginning of the year Additions Disposals Depreciation expense Foreign exchange Carrying amount at the end of the year Office Furniture & Equipment Laboratory equipment, instruments & amenities Less accumulated depreciation Carrying amount at the beginning of the year Additions Increase through acquisition Reinstate previously held for sale assets Disposals Depreciation expense Foreign exchange Transfer between classes Carrying amount at the end of the year Motor vehicles Motor vehicles Less accumulated depreciation Carrying amount at the beginning of the year Additions Increase through acquisition Reinstate previously held for sale assets Disposals Depreciation and amortisation expense Foreign exchange Transfer between classes Carrying amount at the end of the year Total property, plant & equipment Property, plant & equipment Less accumulated depreciation Carrying amount at the beginning of the year Additions Increase through acquisition Reinstate previously held for sale assets Disposals Depreciation expense Foreign exchange Carrying amount at the end of the year 2017 $’000 2,859 (1,383) 1,476 1,493 136 - (104) (49) 1,476 129,393 (98,068) 31,325 44,019 10,961 99 280 (1,941) (21,460) (633) - 31,325 14,840 (12,048) 2,792 1,798 2,177 66 246 (261) (1,188) (46) - 2,792 147,092 (111,499) 35,593 47,310 13,274 165 526 (2,202) (22,752) (728) 35,593 2016 $’000 2,799 (1,306) 1,493 2,423 34 (926) - (38) 1,493 142,592 (98,573) 44,019 52,617 20,033 - - (12,141) (17,857) 1,469 (102) 44,019 15,149 (13,351) 1,798 9,811 476 - - (5,144) (3,602) 156 101 1,798 160,540 (113,230) 47,310 64,851 20,543 - - (18,211) (21,459) 1,586 47,310 Page | 40 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 13. PROPERTY, PLANT & EQUIPMENT CONTINUED Accounting for Property, Plant and Equipment Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Cardno and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Depreciation is calculated on the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that Cardno will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: > Buildings > motor vehicles > office furniture and equipment 40 years 4-7 years 3-11 years Depreciation methods, useful lives and residual values are reviewed at each reporting date. 14. INTANGIBLE ASSETS Reconciliation of movement in carrying amounts from the beginning of year to end of year: Goodwill Works Contracts Patents and Trademarks Software Intangibles $’000 $’000 $’000 $’000 Customer Relation- ships $’000 Total $’000 2017 Balance at the beginning of year 317,498 75 2,081 2,749 201 322,604 Acquired through business combination Disposal of subsidiary Amortisation charges Effect of foreign exchange Closing value at 30 June 2017 2016 2,504 (23,699) - (3,078) 293,225 - - (41) (5) 29 538 - - - 2,619 Balance at the beginning of year 520,504 284 2,081 Internally generated Impairment losses Impairment on re-measurement of disposal group Disposal of subsidiary Amortisation charges Effect of foreign exchange Closing value at 30 June 2016 - (161,076) (36,676) (11,312) - 6,058 317,498 - - - (51) (170) 12 75 - - - - - - 2,081 - (1,930) (596) (223) - 3,859 1,122 (749) - - (1,516) 33 2,749 - - (201) - - 3,042 (25,629) (838) (3,306) 295,873 21,356 548,084 - 1,122 (16,457) (178,282) - (664) (4,154) 120 201 (36,676) (12,027) (5,840) 6,223 322,604 Page | 41 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 14. INTANGIBLE ASSETS CONTINUED The carrying amount of goodwill allocated to each of the cash generating units (CGUs) for impairment testing is as follows: Americas Asia Pacific (APAC) Construction Sciences (CS) International Development (ID) Impairment Testing 2017 $’000 86,630 176,958 23,904 5,733 2016 $’000 111,837 205,661 - - 293,225 317,498 After initial recognition, goodwill acquired in a business combination is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is subject to impairment testing. In accordance with Cardno’s accounting policies, the Group performs its impairment testing annually or more frequently if required. For the purposes of impairment testing, goodwill is allocated to Cardno’s management divisions which represent the lowest level within Cardno at which the goodwill is monitored for internal management purposes. During the year the Group reviewed its business structure and identified portfolio companies, being businesses considered to be outside of the core operating model of Americas and APAC, which due to the nature of the business and the way in which management were reviewing the business should be identified as separate CGUs. These included Construction Sciences, ID, PPI and LATAM. Goodwill was allocated based on their relative fair value. The PPI and LATAM CGUs have been fully impaired in prior years and as a result do not have any goodwill remaining. The Group uses the value in use method to estimate the recoverable amount of each CGU. Value in-use is calculated based on the present value of cash flow projections over a five-year period and includes a terminal value at the end of year five. The cash flow projections over the five-year period are based on the Group’s budget for 2018 and year on year growth rates over the forecasted period based on management’s estimates of underlying economic conditions, past performance and other factors anticipated to impact the CGU’s performance. The long term growth rate used in calculating the terminal value is based on long term growth estimates for the countries and industries in which the CGU operates. The cash flows are discounted to their present value using a pre-tax discount rate on a weighted average cost of capital adjusted for country and industry specific risks associated with the CGU. Group overhead and corporate costs are allocated to the individual CGUs for impairment testing purposes. Results of Impairment Testing No impairment was recognised during the year as all CGU recoverable amounts were in excess of carrying values. IMPAIRMENT LOSSES Goodwill Other intangible assets Total impairment losses from impairment testing 2017 $’000 2016 $’000 - - - 161,076 17,206 178,282 Impairment losses were recognised in the prior year relating to the Americas CGU of $72.1 million, APAC CGU of $26.7 million and PPI CGU of $79.5 million (representing all intangible assets of the CGU). Page | 42 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 14. INTANGIBLE ASSETS CONTINUED Key Assumptions The key assumptions used in the estimation of recoverable amount are set out below. The values assigned to the key assumptions represent management’s assessment of factors impacting the relevant regions and industries in which the CGUs operate and have been developed taking into consideration relevant forecast and historical data from both external and internal sources. EBITDA Margins 1 Terminal Growth Rate Pre-Tax Discount Rate 2017 2016 Americas 6.2% - 8.5% 5.5% - 9.1% APAC 11.5% - 13.5% 11.8% - 13.9% PPI CS ID - 0.0% - 4.1% 8.3% - 10.0% 2.1% - 4.0% - - 1 EBITDA margins are applied to net fee revenue. 15. TRADE & OTHER PAYABLES Trade payables & accruals Vendor liability 2017 2.70% 2.70% - 2.70% 2.70% 2016 2.70% 2.70% 2.70% - - 2017 14.42% 14.86% - 14.86% 13.14% 2016 12.70% 14.80% 14.50% - - 2017 $’000 2016 $’000 142,496 122,854 1,831 2,261 144,327 125,115 Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to Cardno, and are stated at cost. Trade accounts payable are normally settled within 60 days. 16. LOANS & BORROWINGS CURRENT Lease and hire purchase liabilities Bank loans NON-CURRENT Lease and hire purchase liabilities Bank loans TOTAL CURRENT & NON-CURRENT LOANS & BORROWINGS 2017 $’000 615 - 615 725 93,983 94,708 95,323 2016 $’000 2,158 637 2,795 1,146 151,279 152,425 155,220 Page | 43 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 16. LOANS & BORROWINGS CONTINUED Interest Bearing Borrowings Interest bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the profit and loss over the period of the borrowings on an effective interest rate basis. Bank Loans The Group has bank loans of $94.0 million (2016: $151.9 million) as at 30 June 2017 with a weighted average interest rate of 2.65% (2016: 2.48%). Funding available to the Group from undrawn facilities is $23.7 million (2016: $134.3 million). The Group’s facility limits comprise working capital facility US $5.0 million (2016: US $5.0 million) as well as a multi-currency bilateral revolving term facility of US $86.6 million (2016: US $210.0 million). The Group’s debt facilities include certain financial covenants which are tested semi-annually at 30 June and 31 December each year. A breach of a financial covenant would represent an event of default under the terms of the debt facilities. At 30 June 2017, the Group was in compliance with all financial covenants. During the 2017 year the Group permanently reduced the size of its debt facilities as the Board felt the facilities in place were greater than the future requirements of the business. There were no bank overdrafts in existence at 30 June 2017 (2016: Nil). Under the terms of the agreements, the Company and a number of its wholly-owned subsidiaries jointly and severally guarantee and indemnify the banks in relation to each borrower’s obligations. Lease and Hire Purchase Liabilities The Group leases office premises under non-cancellable operating leases, with terms varying from three to ten years. The majority of leases provide for an option of renewal at the end of the lease term. Premise leases are subject to annual review for changes in the CPI index and contain restrictions on sub-leasing. The Group also leases various plant & equipment under terms between two and five years as well as software licenses with a term of three years’ subject to annual review based on the number of licences exercised. Leases in terms of which Cardno assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. The corresponding rental obligations, net of finance charges, are included in current and non-current interest-bearing loans and borrowings. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Page | 44 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 16. LOANS & BORROWINGS CONTINUED Finance leases and hire purchase Commitments in relation to finance leases are payable as follows: > Within one year > Later than one year but not later than 5 years > Later than 5 years Minimum lease payments Less: Future finance charges Recognised as a liability Present value of minimum lease and hire purchase payment Commitments in relation to finance leases are payable as follows: > Within one year > Later than one year but not later than 5 years > Later than 5 years Recognised as a liability 17. PROVISIONS CURRENT Provision for legal claims 2017 $’000 2016 $’000 655 784 - 1,439 (99) 1,340 615 725 - 1,340 2017 $’000 4,857 4,857 2,308 1,205 - 3,513 (209) 3,304 2,158 1,146 - 3,304 2016 $’000 3,139 3,139 Accounting for Provisions The Group makes provision for legal claims not covered by the Group’s professional indemnity policy and as at 30 June 2017 an estimate of the potential impact of these claims has been provided for. A provision is recognised in the Statement of financial position when Cardno has a present legal, equitable or constructive obligation as a result of a past event, and it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing or amount of which is uncertain. If the effect is material, provisions are determined by discounting the expected future cash flows at the pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for dividends payable is recognised in the reporting period in which the dividends are declared. Page | 45 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 18. OTHER LIABILITIES CURRENT Unearned revenue Deferred rent NON CURRENT Deferred rent Other 2017 $’000 45,024 1,864 46,888 6,703 297 7,000 2016 $’000 39,380 1,311 40,691 540 236 776 19. ISSUED CAPITAL Balance at the beginning of the year 479,040,905 820,374 165,633,532 641,661 30 June 2017 30 June 2016 No. of shares $’000 No. of shares $’000 Shares issued during the year: > Dividend reinvestment scheme - > Shares issued for cash (net of transaction costs) 549,024 > Employee share based payments > Own shares issued (i) > Share buy-back (ii) - - (4,634,652) (5,670) - 9 850 - 1,471,163 311,936,210 - - - 3,854 173,069 1,790 - - Balance at the end of the year 474,955,277 815,563 479,040,905 820,374 (i) (ii) Shares issued are held in trust by the Cardno Limited Performance Equity Plan Trust which has been formed solely for the purpose of subscribing for, acquiring and holding shares for the benefit of employees participating in the Performance Equity Plan (PEP) of Cardno Limited. As part of the capital management program, on 28 February 2017 the Group announced the implementation of an on-market buyback commencing 15 March 2017. A total of 4,634,652 ordinary shares were bought back at an average rate of $1.22 per share (being the average price of shares bought back since commencement of the buyback in March). The Company does not have authorised capital or par value in respect of its issued shares. All shares are ordinary shares and have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the process from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of members. Dividends Paid or Provided for on Ordinary Shares (a) Dividends paid during the year (2017: nil) (2016: 7 cents per share, 100% franked at 30%) (i) (b) Franking account balance The amount of franking credits available for the subsequent financial year are: franking account balance as at the end of the financial year at 30% > franking credits/(debits) that will arise from the payment/(receipt) of income > tax payable/(receivable) as at the end of the financial year (i) Relates to final dividend paid for the 2015 financial year. 2017 $’000 2016 $’000 - 11,548 17 172 (2,947) (2,930) (3,800) (3,628) Page | 46 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 19. ISSUED CAPITAL CONTINUED Performance Equity Plan (PEP) The PEP is designed to reward strong performance by individuals within the Cardno Group of companies. Performance Options and Performance Rights are issued under the PEP (made in accordance with thresholds set in the plan approved at the 2009 AGM) which provides certain employees (as determined by the Board) with the right to acquire shares in the Company, or the option to acquire shares in the Company. Each right or option is granted to the employee for no consideration and vest upon the achievement of specified performance hurdles. At 30 June 2017, there are no Performance Options on issue (2016: nil) and no options were issued during the year (2016: nil). 2017 LTI Plan Performance Hurdles: Performance Rights issued were allocated in two equal tranches: 50% is subject to the achievement of a Share Price performance hurdle and 50% is subject to a Group EBITDA performance hurdle. These conditions are tested independently. The Performance Rights are subject to performance hurdles of Share Price (Tranche 1: 50%) where the volume weighted average price of Shares at the close of trading over a 20 day trading period immediately prior to the Company’s 2019 AGM, must be at least $1.00 per share, and Group EBITDA (Tranche 2: 50%) for the full 2019 financial year must exceed $54 million. 2016 and 2015 LTI Plan Performance Hurdles: The performance rights are subject to performance hurdles measured over three financial years. There are two tranches, each being 50%. Tranche 1 is subject to achieving certain TSR (total shareholder return) hurdles, while Tranche 2 is subject to achieving certain EPS (earnings per share) hurdles in accordance with the following scale: TSR of Cardno Relative to TSRs of Companies in Comparator Group % of Performance Rights to Vest EPS Growth % of Performance Rights to Vest Over 3 Years (Tranche 1 50%) Over 3 Years (Tranche 2 50%) <50th percentile 50th percentile >50th & <75th percentiles 75th percentile and above 0% 50% Pro rata 100% <12.5% (<4% pa) 12.5% (4% pa) 0% 30% >12.5% (4% pa) & <26% (8% pa) Pro rata 26% (8% pa) 70% >26% (8% pa) & <40% (12% pa) Pro rata ≥40% (12% pa) 100% The movements in the performance rights are as follows: Outstanding at the beginning of the period Granted during the period Exercised during the period Vested during the period Cancelled/lapsed during the period Outstanding at the end of the period Exercisable at the end of the period Number of Performance Rights 2017 Number of Performance Rights 2016 4,023,392 3,540,023 - - (2,600,776) 4,962,639 - 6,286,494 346,373 - - (2,609,475) 4,023,392 - Page | 47 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 RISKS 20. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. Cardno makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: > Estimating impairment of goodwill – refer to Note 14. > Revenue recognition in relation to long term contracts including estimating stage of completion and total contract costs – refer Note 5. > Recognition of deferred tax assets – refer to Note 9 and 34(e). > Assessing the recoverability of trade receivables and work in progress – refer to Note 11, 12 and 21. 21. FINANCIAL RISKS Determination of fair values In determining fair value measurement for disclosure purposes, the Group uses the following fair value measurement hierarchy that reflects the significance of the inputs used in making the measurements: Level 1: Quoted market price (unadjusted) in an active market for an identical instrument. Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. Fair values of financial instruments The Group’s financial assets and liabilities at 30 June 2017 and 30 June 2016 are included in the balance sheet at amounts that approximate fair values. The Group does not have any derivative financial instruments at 30 June 2017 (2016: nil). Financial risk management The main risks arising from Cardno’s financial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. Cardno uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risks and ageing analysis for credit risk. The Board through the Audit, Risk & Compliance Committee (ARCC) reviews and agrees policies for managing these risks and ensures that risk management strategies are implemented in the business. A Quality Management System supports consistent risk mitigation practices and procedures in order to maintain a consistent level of quality across Cardno which includes the minimisation of risk. The policies for managing each of Cardno’s financial risks are summarised below and remain unchanged from the prior year. Credit risk Credit risk is the risk of financial loss to Cardno if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Cardno’s receivables from customers. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised above. Page | 48 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 21. FINANCIAL RISKS CONTINUED Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on customers in accordance with the policy. Cardno does not require collateral in respect of financial assets. In line with the Group’s Treasury policy, investments are allowed only in liquid securities and only with counterparties that have a credit rating equal to or better than a rating approved by the ARCC. The Treasury policy is reviewed by the ARCC annually. There are no material concentrations of credit risk (2016: nil). Trade receivables The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Australia & New Zealand Americas Asia Pacific Europe & Africa 2017 $’000 71,634 111,032 15,411 8,800 2016 $’000 54,670 99,757 12,566 14,504 206,877 181,497 The ageing of Cardno’s trade receivables at the reporting date was: Not past due (current) Past due 0-30 days (30 day ageing) Past due 31-60 days (60 day ageing) Past due more than 60 days 2017 2016 Gross $’000 129,355 33,595 20,711 61,842 245,503 Impairment $’000 - - - 38,626 38,626 Gross $’000 100,173 29,865 15,287 47,262 192,587 Impairment $’000 - - - 11,090 11,090 Cardno establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The movement in the provision for impairment in respect of trade receivables of Cardno during the year was as follows: Balance at 1 July Impairment loss recognised Reinstate previously held for sale assets Receivables written off Sale of subsidiary Effect of foreign exchange Balance at 30 June 2017 $’000 11,090 22,868 13,387 (8,588) - (131) 38,626 2016 $’000 16,252 3,947 - (6,830) (2,695) 416 11,090 Page | 49 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 21. FINANCIAL RISKS CONTINUED Liquidity risk Liquidity risk is the risk that Cardno will not be able to meet its financial obligations as they fall due. Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, Cardno aims to maintain flexibility in funding by keeping sufficient committed credit lines available to meet Cardno’s requirements. The following are the contractual maturities of financial liabilities at the reporting date, including estimated interest payments and excluding the impact of netting agreements: 30 June 2017 Carrying amount $’000 Contractual cash flows $’000 Less than 1 year $’000 1 – 5 years $’000 Over 5 years $’000 Non-derivative financial liabilities Trade and other payables 144,327 144,327 144,327 Finance leases & hire purchase Bank loans 30 June 2016 Non-derivative financial liabilities 1,340 93,983 239,650 1,439 102,378 248,144 655 2,831 147,813 Trade and other payables 125,115 125,115 125,115 Finance leases & hire purchase Bank loans 3,304 151,916 280,335 3,513 165,374 294,002 2,308 5,205 132,628 Bank loans are term facilities with three banks maturing in December 2019. Hedge of net investment in foreign operation - 784 99,547 100,331 - 1,205 160,169 161,374 - - - - - - - - Foreign currency differences arising on the translation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised in other comprehensive income to the extent that the hedge is effective, and are presented within equity in the FCTR. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged part of a net investment is disposed of, the relevant amount in the FCTR is transferred to profit or loss as part of the profit or loss on disposal. Foreign exchange risk Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the functional currency of the respective Group entities. Cardno operates internationally and is exposed to foreign exchange risk arising from the currency exposure to the Australian dollar. Cardno does not engage in any transactions which are of a speculative nature. Cardno borrows funds in foreign currencies to hedge its net investments in foreign operations. Cardno has loans totalling $17.5 million (2016: $59.7 million) denominated in US dollars (USD) and nil (2016: $11.3 million) denominated in pounds sterling (GBP) which have been designated as hedges of Cardno’s net investments in subsidiaries with functional currencies in those currencies. As at 30 June 2017, a 10 per cent strengthening of the Australian dollar against the USD and GBP would have increased equity by $1.6 million (2016: $5.4 million) and nil (2016: $1.0 million) respectively. A 10 per cent weakening of the Australian dollar against the USD and GBP would have decreased equity by $1.9 million (2016: $6.6 million) and nil (2016: $1.3 million) respectively. There would be no impact on profit and loss as the loans are designated as net investment hedges. Other than interest bearing liabilities, there are no other significant foreign currency exposures in relation to financial instruments at year end. Page | 50 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 21. FINANCIAL RISKS CONTINUED Interest rate risk Cardno manages its exposure to interest rate fluctuation by continuously monitoring its debt to ensure any significant movement would not have a material impact on the performance of Cardno. Cardno does not engage in any transactions which are of a speculative nature. At the reporting date the interest rate profile of Cardno’s interest-bearing financial instruments was: 2017 2016 Effective Interest Rate Balance $’000 Effective Interest Rate Balance $’000 Variable rate instruments Cash assets Bank loans Fixed rate instruments 0.40% 2.65% Finance leases & hire purchase 3.72% 80,028 (93,983) (13,955) (1,340) (1,340) 0.62% 2.48% 4.48% 105,613 (151,916) (46,303) (3,304) (3,304) Group sensitivity Cash flow sensitivity analysis for variable rate instruments At 30 June 2017, if interest rates had changed by -/+ 50 basis points from the year-end rates with all other variables held constant, profit after tax for the year would have been $49,000 higher/lower (2016: $162,000 higher/lower), mainly as a result of lower/higher interest expense on variable term debt partially offset by higher/lower interest income from cash and cash equivalents. There have been no changes in the underlying assumptions from the previous year. Capital management Cardno’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that the Company can maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, Cardno may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Board of Directors monitors the return on capital, which Cardno defines as net operating income divided by total shareholders’ equity. Page | 51 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 UNRECOGNISED ITEMS 22. COMMITMENTS Operating Leases > Within one year > Later than one year but not later than 5 years > Later than 5 years Commitments not recognised in the financial statements 2017 $’000 29,298 57,520 11,005 97,823 2016 $’000 38,298 65,018 13,909 117,225 Operating leases are not recognised in Cardno’s statement of financial position. Payments made under operating leases which are subject to fixed annual increments are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the profit or loss as an integral part of the total lease expense and are spread over the lease term. 23. CONTINGENT LIABILITIES Cardno had contingent liabilities at 30 June 2017 in respect of: Bank guarantees 2017 $’000 60,160 2016 $’000 66,485 Cardno had, at 30 June 2017, bank guarantee facilities/bond facilities with financial institutions denominated in Australian dollars, United States dollars and Great British pounds. The guarantee facilities available to Cardno total $73.0 million (2016: $81.4 million). These facilities are secured by an unlimited interlocking guarantee and indemnity or a parent company guarantee. Matters Relating to Cardno Caminosca S.A (“Caminosca”) In December 2015 a claim was filed and served on Caminosca in Ecuador alleging cost overruns relating to design and project management work performed by Caminosca during the period from 2008 to 2013. While the damages claimed would be material if awarded against Caminosca, the claim remains at the preliminary stages and the Company believes is spurious in nature. Caminosca has filed an initial response and will defend the claim. In February 2015, the Group announced it was investigating a series of transactions involving Caminosca which are still ongoing. There remains the potential that a penalty or sanction could be imposed on Cardno. Members of the Cardno Group are defendants in proceedings instituted in FY15 in relation to a large infrastructure project. While the damages claimed would be material if awarded against Cardno, the proceedings are ongoing and Cardno intends to continue defending the claim. Other than the above, the Directors are not aware of any current material litigation involving Cardno. The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. 24. SUBSEQUENT EVENTS There were no significant events subsequent to year-end. Page | 52 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 OTHER INFORMATION 25. OTHER CURRENT ASSETS Prepayments Project advances Security deposits 26. OTHER FINANCIAL ASSETS Investments in non-related entities 27. NOTES TO THE CASH FLOW STATEMENT Reconciliation of Net Cash from Operating Activities to Net profit for the year Net profit for the year Adjust for non-cash items Depreciation and amortisation Impairment loss Gain/(loss) on sale of property, plant & equipment Gain/(loss) on discontinued operations Gain on repayment of USPP loan notes Unrealised foreign exchange (gain)/loss Net (gain)/loss on interest rate swap Share of associates net profits Share based remuneration Adjust for changes in assets and liabilities: (Increase) / decrease in assets: Work in progress Deferred tax assets Trade receivables Provision for doubtful debts Other receivables Prepayments Other assets Increase / (decrease) in liabilities: Trade payables Income tax payable Employee provisions Unearned revenue Other liabilities Deferred tax liabilities 2017 $’000 10,607 720 2,369 13,696 2017 $’000 1,323 1,323 2016 $’000 8,308 1,484 1,484 11,276 2016 $’000 3,770 3,770 2017 $’000 2016 $’000 8,579 (194,919) 23,590 - 1,285 (27,948) - (281) - 64 850 18,523 (27,437) (16,919) 6,139 (4,856) (1,984) 1,108 6,267 1,355 (3,676) 5,079 8,357 (1,928) (3,833) 25,801 178,282 (1,896) 44,947 (7,039) (590) (5,218) - 1,790 1,530 (29,764) 33,034 2,933 7,360 (623) 2,102 9,768 (219) 1,285 (7,124) (2,775) (2,278) 56,387 Page | 53 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 28. EARNINGS PER SHARE The calculation of basic earnings per share was based on the following: Profit/ (Loss) attributable to ordinary shareholders 2017 $ 2016 $ 8,579,000 (194,919,000) Loss from continuing operations attributable to ordinary shareholders (19,369,000) (149,972,000) Weighted average number of ordinary shares Number of ordinary shares at 1 July Effect of share buy back Effect of bonus element of rights issues Effect of shares issued during the year No. No. 479,040,905 165,633,532 (1,103,017) - 446,740 - 30,099,492 50,408,183 Weighted average number of ordinary shares at 30 June 478,384,628 246,141,207 Earnings per share Earnings per share - continuing operations Cents 1.79 (4.05) Cents (79.19) (60.93) Performance Options and Performance Rights are considered to be potential ordinary shares and are therefore excluded from the weighted average number of ordinary shares used in the calculation of basic earnings per share. Where dilutive, potential ordinary shares are included in the calculation of diluted earnings per share. The calculation of diluted earnings per share was based on the following: 2017 $ 2016 $ Profit/ (Loss) attributable to ordinary shareholders (diluted) 8,579,000 (194,919,000) Loss from continuing operations attributable to ordinary shareholders (diluted) (19,369,000) (149,972,000) Weighted average number of ordinary shares (diluted) No. No. Weighted average number of ordinary shares at 30 June (basic) 478,384,628 246,141,207 Effect of Performance Options and Performance Rights on issue - - Weighted average number of ordinary shares (diluted) at 30 June 478,384,628 246,141,207 Diluted Earnings per share Diluted Earnings per share – continuing operations Cents 1.79 (4.05) Cents (79.19) (60.93) Cardno presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, for the effects of all dilutive potential ordinary shares, which comprise share Performance Options and Performance Rights granted to employees. The bonus element in a rights issue to existing shareholders increases the number of ordinary shares outstanding without a corresponding change in resources. In this case, the number of ordinary shares outstanding before the event is adjusted for the proportionate change in the number of ordinary shares outstanding as if the event had occurred at the beginning of the earliest period presented. If the changes occur after the reporting period but before the financial statements are authorised for issue, the per share calculations for those and any prior period financial statements presented is based on the new number of shares. Page | 54 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 29. RELATED PARTY DISCLOSURES Key management personnel Key management personnel compensation included in employee benefits are as follows: Short-term employee benefits Post-employment benefits Equity compensation benefits Termination benefits 2017 $ 2016 $ 2,657,482 4,716,551 63,533 107,747 (74,926) (425,984) 1,014,655 1,024,404 3,660,744 5,422,718 No Director has entered into a material contract with the Company or the consolidated entity since the end of the previous financial year and there were no material contracts involving Directors’ interests existing at year-end. Other key management personnel transactions with the Company or its controlled entities A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. None of these entities transacted with the Company or its subsidiaries in the reporting period. Page | 55 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 30. CONTROLLED ENTITIES Cardno’s significant subsidiaries are listed below. The XP Software group was divested during the financial year. In addition, as part of ongoing efforts to streamline the group, a number of dormant subsidiaries were dissolved or closed. Name Cardno Holdings Pty Ltd Cardno (Qld) Pty Ltd Cardno Staff Pty Ltd Cardno Staff No. 2 Pty Ltd Cardno Operations Pty Ltd Cardno International Pty Ltd Cardno (WA) Pty Ltd Cardno CCS Pty Ltd Cardno Lawson Treloar Pty Ltd Cardno (NSW/ACT) Pty Ltd Cardno Willing Pty Ltd Cardno Victoria Pty Ltd Cardno Emerging Markets (Australia) Pty Ltd Cardno UK Limited Cardno Emerging Markets (UK) Limited Cardno Emerging Markets (East Africa) Limited Cardno (NZ) Limited Cardno Holdings New Zealand Limited Cardno USA, Inc. Cardno, Inc. Cardno Emerging Markets Belgium s.a. Cardno (NT) Pty Ltd Cardno (PNG) Ltd XP Software Pty Ltd XP Software, Inc. XP Software Solutions Ltd Cardno Construction Sciences Pty Ltd Cardno ITC Pty Ltd Country of Incorporation Equity Holding 2017 Equity Holding 2016 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia United Kingdom United Kingdom Kenya New Zealand New Zealand 100% 100% 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% United States of America 100% United States of America 100% Belgium Australia Papua New Guinea Australia United States of America United Kingdom Australia Australia 100% 100% 100% - - - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Page | 56 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 30. CONTROLLED ENTITIES CONTINUED Name Cardno Australian Underground Services Pty Ltd ENTRIX Americas, SA J.F. New & Associates, Inc. Cardno Roadtest Pty Ltd Cardno BEC Pty Ltd Cardno BEC (Qld) Pty Ltd Cardno (Colombia) S.A.S. Country of Incorporation Australia Ecuador United States of America Australia Australia Australia Colombia Cardno Emerging Markets (USA), Ltd United States of America Cardno Humphrey Reynolds Perkins Pty Ltd Cardno Humphrey Reynolds Perkins Jewell Pty Ltd Cardno Humphrey Reynolds Perkins Gold Coast Pty Ltd Cardno Humphrey Reynolds Perkins Sunshine Coast Pty Ltd Cardno Chenoweth Environmental Planning & Landscape Architecture Pty Ltd Cardno LP Pty Ltd Moriedale Holdings Pty Ltd Geotech Solutions Pty Limited Cardno GS, Inc. Marshall Miller & Associates, Inc. Cardno EM-Assist, Inc. Cardno BTO Limited Cardno Hard & Forester Pty Ltd Cardno ChemRisk, LLC Caminosca S.A.S Cardno Geotech Pty Ltd Cardno Haynes Whaley, Inc. Cardno Canada Limited T2 Utility Engineers, Inc Cardno PPI, LLC Cardno PPI Quality & Asset Management, LLC Cardno PPI Technology Services, LLC PPI Australia Pty Ltd PPI Quality & Asset Management (Singapore) Pte Ltd PPI Quality & Asset Management (Malaysia) Sdn Bhd PPI Technology Services Nigeria Limited Cardno South Africa (Pty) Ltd I.T. Transport Limited Australia Australia Australia Australia Australia Australia Australia Australia United States of America 100% United States of America - United States of America New Zealand Australia United States of America South America Australia United States of America Canada Canada United States of America United States of America United States of America Australia Singapore Malaysia Nigeria South Africa United Kingdom 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - 100% 100% 100% 100% 100% 100% Equity Holding 2017 Equity Holding 2016 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - - 100% - - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% Page | 57 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 31. PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ending 30 June 2017 the parent Company of Cardno was Cardno Limited. Results of the parent entity Profit / (Loss) for the year Other comprehensive income Total comprehensive income for the year Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Reserves Retained earnings Total equity Parent entity contingencies Bank guarantees Company 2017 $’000 2016 $’000 (162,366) 36,107 - - (162,366) 36,107 534,571 892,695 225,809 226,220 719,388 1,023,810 190,106 190,158 815,563 820,374 - (149,088) 666,475 - 13,278 833,652 26,574 32,023 A multiple guarantee facility is available to Cardno totalling $40 million (2016: $35 million). The facility is secured by an unlimited interlocking guarantee and indemnity. The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Parent entity guarantees in respect of debts of its subsidiaries The parent entity has entered into a Deed of Cross Guarantee with the effect that the Company guarantees debts in respect of its subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed, are disclosed below in Note 32. Page | 58 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 32. DEED OF CROSS GUARANTEE Pursuant to ASIC Corporations (Wholly owned Companies) Instrument 2016/785, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Directors’ reports. It is a condition of the Class Order that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full for any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are: > Cardno Holdings Pty Ltd > Cardno (Qld) Pty Ltd > Cardno Staff Pty Ltd > Cardno Bowler Pty Ltd > Cardno Emerging Markets (Australia) Pty Ltd > Cardno (NSW/ACT) Pty Ltd A consolidated statement of comprehensive income and consolidated statement of financial position, comprising the Company and controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, for the year ended 30 June 2017 is set out as follows: Statement of comprehensive income and retained earnings Revenue Employee expenses Consumables and materials used Sub-consultant and contractor costs Depreciation and amortisation expenses Impairment losses Finance costs Other expenses Profit / (loss) before income tax Income tax (expense)/benefit Profit / (loss) from continuing operations Profit for the year from discontinued operations Net profit/(loss) for the year Other comprehensive income for the year Total comprehensive income for the year Retained earnings at the beginning of the year Transfers to and from reserves Dividends recognised during the year Retained earnings at the end of the year Attributable to: Owners of the Company 2017 $’000 2016 $’000 528,622 508,669 (198,745) (204,620) (185,383) (185,022) (80,297) (7,945) (420,010) (6,607) (26,098) (396,463) 25,197 (371,266) 38,009 (333,257) 7,251 (326,006) (29,666) (7,251) - (362,923) (76,418) (77) - (12,800) (15,881) 13,851 (5,296) 8,555 - 8,555 24,006 32,561 (26,674) (24,006) (11,547) (29,666) (362,923) (29,666) Page | 59 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 32. DEED OF CROSS GUARANTEE CONTINUED Statement of financial position CURRENT ASSETS Cash and cash equivalents Trade and other receivables Work in progress Current tax receivables Other current assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Other financial assets Property, plant and equipment Deferred tax assets Intangible assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Short term provisions Other current liabilities TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing loans and borrowings Deferred tax liabilities Employee benefits TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained earnings TOTAL EQUITY 2017 $’000 2016 $’000 15,849 726,672 21,085 2,891 2,558 2,301 978,087 36,858 4,878 820 769,055 1,022,944 392,823 354,477 8,691 85,433 41,943 134 61,103 41,849 528,890 457,563 1,297,945 1,480,507 672,305 448,059 7,970 7,634 14,924 11,320 687,909 474,303 94,505 7,750 10,626 112,881 800,790 497,155 815,584 44,494 (362,923) 497,155 151,280 6,301 8,441 166,022 640,325 840,182 818,102 51,745 (29,665) 840,182 Page | 60 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 33. AUDITOR’S REMUNERATION 2017 $ 2016 $ Audit services Auditors of the Company KPMG Australia: > Audit and review of financial reports 794,500 483,000 Overseas KPMG firms: > Audit and review of financial reports Other services Auditors of the Company KPMG Australia: > Assurance services provided in relation to the Group’s equity raisings 139,608 785,845 934,108 1,268,845 - - 620,471 620,471 34. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES Cardno Limited (the “Company”) is a company incorporated and domiciled in Australia. The consolidated financial report of the Company for the year ended 30 June 2017 encompasses the Company and its subsidiaries (together referred to as “Cardno” or the “Group”). Cardno is a for-profit entity that operates as a professional infrastructure and environmental services company, with expertise in the development and improvement of physical and social infrastructure for communities around the world. The financial report was authorised for issue by the Board of Directors on 21 August 2017. (a) Statement of compliance The consolidated financial statements are general purpose financial statements which has been prepared in accordance with Australian Accounting Standards adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The financial statements of the consolidated entity also comply with International Financial Reporting Standards (IFRSs) adopted by the International Accounting Standards Board (IASB). (b) Basis of Preparation The financial report has been prepared on a historical cost basis except where otherwise noted. Certain comparative amounts in the consolidated financial statements have been reclassified as a result of operations discontinued during the current year (see Note 4). The consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. The Company is of a kind referred to in ASIC Legislative Instrument 2016/191 dated 1 April 2016 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. Standards and Interpretations Affecting Amounts Reported in the Current Period There are no new and revised Standards and interpretations adopted in these Consolidated Financial Statements that have affected the amounts reported. Page | 61 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 34. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Standards and Interpretations Adopted with no Effect on Financial Statements The following new and revised Standards and interpretations have been adopted in the current year and have no material impact on the amounts reported in these Consolidated Financial Statements. > AASB 1057 Application of Australian Accounting Standards; > AASB 2015-2 Amendments to AAS - Disclosure Initiative: Amendments to AASB 101; > AASB 2015-1 Amendments to AAS - Annual Improvements to Australian Accounting Standards; > AASB 2014-9 Amendments to AAS - Equity method in Separate Financial Statements; > AASB 2014-4 Amendments to AAS - Clarification of Acceptable Methods of Depreciation and Amortisation’ > AASB 2014-3 Amendments to AAS - Accounting for Acquisitions of Interest in Joint Operations. Standards Issued not yet Effective At the date of this report the Standards and Interpretations listed below were issued but not yet effective and were not adopted in preparing these consolidated financial statements. Standard/Interpretation Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending AASB 9 Financial Instruments 1 January 2018 30 June 2019 AASB 15 Revenue from Contracts with Customers 1 January 2018 30 June 2019 AASB 16 Leases AASB 2014-10 Amendments to AAS - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture 1 January 2019 30 June 2020 1 January 2018 30 June 2019 AASB 2016-5 Amendments to AAS - Classification and Measurement of Share-based Payment Transactions 1 January 2018 30 June 2019 AASB 2016-6 Amendments to AAS - Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts 1 January 2018 30 June 2019 The new standards not yet effective which may have a significant impact on the Group’s consolidated financial statements when adopted include: AASB 9 Financial Instruments AASB 9 replaces the existing guidance in AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets and new general hedge accounting requirements. It also carries forward the guidance on recognition and de-recognition of financial instruments from AASB 139. At 30 June 2017, the Group continues to assess the potential impact on its consolidated financial statements resulting from the application of AASB 9 however does not anticipate it will have a material financial impact given the current balance of financial instruments held within the Group. AASB 15 Revenue from Contracts with Customers AASB 15 establishes a comprehensive framework for determining whether, how much, and when revenue is recognised. It replaces existing revenue recognition guidance, including AASB 118 Revenue, AASB 111 Construction contracts and AASB Interpretation 13 Customer Loyalty Programmes. During the financial year 30 June 2017, the Group has established a project team to assess the impacts of the new standard. Areas potentially resulting in a change to current revenue recognition treatment (the financial impact of which requires further analysis) include: > Determination of performance obligations; > > Treatment of contract modifications; and > Treatment of costs. Identification and determination of variable consideration; Page | 62 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 34. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED AASB 15 Revenue from Contracts with Customers Continued A decision on transition has not yet been determined because the outcome of assessment activities and the resultant impact on revenue (if any) will invariably impact the transition method adopted. The Group will provide further information as the project progresses. AASB 16 Leases AASB 16 removes the lease classification test and requires all leases (including operating leases) to be brought onto the balance sheet. The definition of a lease is also amended and is now the new on/off balance sheet test for lessees. The Group has started an initial assessment of the potential impact on its consolidated financial statements with the following impacts expected: > additional lease assets and liabilities recorded in the Statement of Financial Position; > removing lease payments as an operating expense and replacing this amount with a depreciation and finance cost expense in the Statement of Financial Performance; and > a reclassification in the Statement of Cash Flows for lease payments from operating cash outflows to financing cash outflows. The full quantum of financial and disclosure impacts are yet to be determined with the choice of transition yet to be decided. (c) Basis of Consolidation Subsidiaries Subsidiaries are entities controlled by Cardno. Control exists when the Company is exposed to, or has rights to, variable returns from its involvement with an entity and has the ability to affect those returns through its power over the entity. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by Cardno. A list of the significant subsidiaries is contained in Note 30 to the financial statements. All controlled entities have a June financial year-end. Transactions eliminated on consolidation Intra-group balances and transactions, unrealised gains and losses and inter-entity balances resulting from transactions with or between controlled entities are eliminated in full on consolidation. (d) Foreign Currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the translation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, (see (ii) below) or qualifying cash flow hedges, which are recognised in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Page | 63 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 34. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (d) Foreign Currency Continued (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. The revenue and expenses of foreign operations are translated to Australian dollars at rates approximating the foreign exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income in the foreign currency translation reserve (FCTR). When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to profit or loss. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and are presented within equity in the FCTR. (e) Income Tax Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting or taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. (f) Intangible Assets Business combinations and goodwill Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to Cardno. Cardno measures goodwill at the acquisition date as: > the fair value of the consideration transferred; plus > the recognised amount of any non-controlling interests in the acquiree; plus, if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less > the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. Page | 64 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 34. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (f) Intangible Assets Continued The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that Cardno incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. When share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards) and relate to past services, then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared with the market-based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service. Works contracts, software intangibles and customer relationships Works contracts, software intangibles and customer relationships are acquired by Cardno and are stated at cost less accumulated amortisation and impairment losses. Amortisation is calculated based on the timing of projected cash flows of the contracts over their estimated useful lives, which currently vary from 1 to 7 years. Patents and trademarks Patents and trademarks acquired by Cardno are considered to have indefinite useful lives and are stated at cost less any impairment losses. Patents and trademarks are not amortised but tested for impairment annually. Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation Amortisation is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. Amortisation is charged to the profit and loss on a systematic basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite life are not amortised but are systematically tested for impairment each year at the same time. Works contracts which are assigned a value are amortised over the life of the contract from the date they are available for use. Amortisation methods, useful lives and residual values are reviewed at each reporting date. (g) Impairment The carrying amount of Cardno’s assets, other than work in progress and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, an impairment test is performed. Cardno performs impairment testing of goodwill and intangibles with indefinite useful lives annually. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit and loss unless the asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the profit and loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Page | 65 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 34. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (g) Impairment Continued Calculation of recoverable amount The recoverable amount of Cardno’s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. Reversals of impairment An impairment loss in respect of receivables carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (h) Employee Benefits Wages, salaries and annual leave Liabilities for employee benefits for wages, salaries and annual leave expected to be settled within 12 months of the period end represent present obligations resulting from employees’ services provided to reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that Cardno expects to pay as at reporting date including related on-costs. Long-term service benefits The provisions for employee entitlements to long service leave and other deferred employee benefits represent the present value of the estimated future cash outflows to be made by the employer resulting from employees’ services provided up to the balance date and include related on-costs. In determining the liability for long service leave, consideration has been given to future increases in wage and salary rates, and the consolidated entity’s experience with staff departures. Liabilities for employee entitlements which are not expected to be settled within 12 months are discounted using the rates attached to corporate bonds at balance date, which most closely match the terms of maturity of the related liabilities. Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value. Page | 66 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2017 34. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (h) Employee Benefits Continued Share-based payment transactions The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non- market performance conditions at the vesting date. (i) Reserves Foreign Currency Translation Reserve The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign Group entities where their functional currency is different to the presentation currency of the reporting entity as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary. Reserve for Own Shares The reserve for the Company’s own shares comprises the cost of the Company’s shares held by the Group. The shares are held in trust by the Cardno Limited Performance Equity Plan Trust which has been formed solely for the purpose of subscribing for, acquiring and holding shares for the benefit of employees participating in the Performance Equity Plan (PEP) of Cardno Limited and its associates employees. At 30 June 2017 the Group held 357,716 of the Company’s shares (2016: 357,716). Page | 67 Directors’ Declaration Cardno Limited and its Controlled Entities for the year ended 30 June 2017 1. In the opinion of the Directors of Cardno Limited (the Company): (a) the consolidated financial statements and notes set out on pages 26 to 67 and the Remuneration Report of the Directors’ Report, set out on pages 14 to 23, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of Cardno’s financial position as at 30 June 2017 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. There are reasonable grounds to believe that the Company and Cardno entities identified in Note 32 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those Group entities pursuant to ASIC Corporations (Wholly Owned Companies) Instrument 2016/785. 3. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2017. 4. The Directors draw attention to Note 34 to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Dated at Brisbane on the 21st day of August 2017. Signed in accordance with a resolution of the Directors. MICHAEL ALSCHER Chairman Page | 68 Independent Auditor’s Report To the shareholders of Cardno Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Cardno Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises the: • consolidated statement of financial position as at 30 June 2017; • consolidated statement of financial performance, consolidated statement of comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended; • notes including a summary of significant accounting policies; and • Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Page | 69 Key Audit Matters The Key Audit Matters we identified are: • valuation of intangible assets; • • revenue recognition – fees from consulting services; and recognition of deferred tax assets for tax losses. Valuation of intangible assets ($295.9m) Refer to Note 14 to the Financial Report Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matter How the matter was addressed in our audit Valuation of intangible assets is a key audit matter due to: • the size of the balance (being 33% of total assets); • significant impairment losses having been recognised in respect of intangible assets in the past two financial years; • • restructuring of the Group’s operations in July 2016 necessitating a reassessment of cash generating units (CGUs); and the judgements required by us in auditing the Group’s estimate of the value in use of the CGUs that intangible assets have been allocated to. The Group’s assessment of the valuation of intangible assets, through its value in use model, applies significant judgements including: • determination of CGUs, following the restructuring of the Group’s operations during the year; • • forecast cash flows; and revenue growth, EBITDA margin growth, terminal growth and discount rates applied. In assessing this key audit matter, we involved senior audit team members, including valuation specialists, who understand the Group’s business. Our procedures included: • assessing the Group’s determination of CGUs based on our understanding of the business and the impact of the Group restructure in July 2016. We also considered the Group’s internal monthly management reporting to assess how earnings are monitored and reported and the implications on CGU determination in accordance with the accounting standards; • comparing the forecast cash flows contained in the value in use models to Board approved budgets; • assessing the accuracy of the Group’s previous cash flow forecasts by comparing actual past performance with previous forecasts noting trends for further testing; • assessing key assumptions included in the approved budget and the model including the revenue growth, EBITDA growth, terminal growth and discount rates applied by comparing to external data, such as peer group forecasts, and our own assessments based on historical and industry experience and knowledge of the Group; and • performing sensitivity analysis on key assumptions such as EBITDA margins, terminal growth rates and discount rates to identify those CGUs at higher risk of impairment and to further challenge the Group’s assumptions. Page | 70 Revenue recognition - fees from consulting services ($788.2m) Refer to Note 5 to the Financial Report The key audit matter How the matter was addressed in our audit We focused on fees from consulting services as a key audit matter due to the significant amount of audit effort required in testing it. 67% of the Group’s revenue relates to fees from consulting services. Our audit attention focused on revenue recognition applicable to the two primary contracting bases: • • fees from consulting services which are provided on a time and materials basis; and fees from consulting services where services are provided under a long term contract or fixed fee arrangement. Revenue generated from consulting services provided on a time and materials basis is recognised as the services are provided. Contracts of this type are generally short term in nature. Our audit effort reflects the large volume of projects and transactions for this contract type. Revenue generated from consulting services provided under long term and fixed fee arrangements are accounted for using contract accounting, which is based on the Group’s calculation of the expected total time and costs to complete a project. Our procedures included: • evaluating the Group’s revenue accounting processes. We tested key controls in this process including: - - - - - review and approval of project initiation and subsequent contract variations within the accounting system; approval of timesheets by project managers; review and approval of the billing rates used when invoicing customers; periodic review and approval of expected total time and costs to complete a project; and relevant IT systems controls within the accounting system; and • selecting a risk based sample of projects representing the two primary contracting bases. The sample was based on projects with significant revenues in the current year and included new contracts entered into during the year. For the sample selected we: - - - compared key terms of the contract with the revenue recognition basis applied by the Group and the revenue recognition criteria of accounting standards; compared the key terms of the contract with the project details recorded in the accounting system, including contract start date and contract amount; and critically evaluated the expected total time and costs to complete the project by comparing it to our understanding of the project and project activities completed obtained from project reports and information provided by the project manager. Page | 71 Recognition of deferred tax assets for tax losses ($76.9m) Refer to Note 9 to the Financial Report The key audit matter How the matter was addressed in our audit The Group operates in multiple tax jurisdictions and its corporate structure reflects the nature of global operations which is driven by acquisitions, divestments, transactions and the execution of the Group’s global strategy. During the year the Group completed a restructure of entities within the Group which resulted in substantial tax losses being recognised as deferred tax assets at 30 June 2017. Working with our tax specialists our procedures included: • evaluating the Group’s assumptions and estimates of deferred tax assets recognised in relation to tax losses against transaction documents and other documentation prepared by the Group. Our evaluation was based on application of our knowledge of tax legislation; court rulings and accounting standards relevant to the transactions; and Recognition of deferred tax assets for these tax losses is a key audit matter due to the Group making judgements about the interpretation of tax legislation and the application of accounting requirements, particularly in Australia and the United States of America. • reading reports prepared by the Group’s external advisers and evaluating their conclusions for consistency with our understanding of the transactions, tax legislation and other information available to us. We used judgment, including involvement of our tax specialists, to assess the Group’s position with reference to tax legislation and the requirements of accounting standards. Other Information Other Information is financial and non-financial information in Cardno Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Page | 72 Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001; • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and • assessing the Group and Company’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report. Page | 73 Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Cardno Limited for the year ended 30 June 2017, complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 14 to 23 of the Directors’ Report for the year ended 30 June 2017. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Simon Crane Partner Brisbane 21 August 2017 Page | 74 Additional Shareholder Information DISTRIBUTION OF ORDINARY SHAREHOLDERS The number of shareholders, by size of holding, as at 31 July 2017 were: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over Total Ordinary Shares Number of 6,838 2,619 999 Number of Shares 2,016,921 6,553,722 7,423,285 1,378 37,586,260 143 421,375,089 11,977 474,955,277 As at 31 July 2017 there were 3,933 shareholders who held less than a marketable parcel of 399 shares. TWENTY LARGEST ORDINARY SHAREHOLDERS The names of the twenty largest holders as at 31 July 2017 were: Listed Ordinary Shares Number Held Percentage CRESCENT CAPITAL INVESTMENTS HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINESS PTY LTD NATIONAL NOMINEES LIMITED BNP PARIBAS NOMS PTY LTD HALJAN MANAGEMENT LP TREVOR JOHNSON UBS NOMINEES PTY LTD BOND STREET CUSTODIANS LIMITED ALLEGRA VENTURES PTY LTD ANNE FELICITY PHILLIPS HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED – A/C 2 BNP PARIBAS NOMINEES PTY LTD MR MALCOLM DAVID POUND ASGARD CAPITAL MANAGEMENT LTD <3502008 THE GARDINER FAM A/C> TAMBLYN INVESTMENTS PTY LTD PEDERICK ENTERPRISES PTY LTD BRISPOT NOMINEES PTY LTD 215,178,846 101,882,935 33,174,185 21,056,539 5,956,022 3,890,691 2,040,353 1,686,192 1,487,779 1,479,822 1,460,118 1,250,000 1,101,378 973,765 955,174 809,490 800,000 800,000 762,736 530,799 45.31 21.45 6.98 4.43 1.25 0.82 0.43 0.36 0.31 0.31 0.31 0.26 0.23 0.21 0.20 0.17 0.17 0.17 0.16 0.11 Total 397,276,824 83.65 Page | 75 Additional Shareholder Information SUBSTANTIAL SHAREHOLDERS The names of substantial shareholders who have notified the company in accordance with section 671B of the Corporations Act 2001 are: StatePlus in Association with FSS Trustee Corporation Invesco Australia Limited Number Held Percentage 224,161,888 61,040,283 46.74 12.73 VOTING RIGHTS All ordinary shares (whether fully paid or not) carry one vote per share without restriction. ESCROWED SHARES There are currently no shares held in escrow. RIGHTS As at 31 July 2017 the details of Performance Rights on issue are as follows: Number of Rights Holders Number of Rights on Issue 502 4,955,639 VOTING RIGHTS OF RIGHTS The ordinary shares issued on exercise of the rights will rank equally with all other ordinary shares. Page | 76 BOARD OF DIRECTORS AUDITORS KPMG Level 16, Riparian Plaza 71 Eagle Street Brisbane QLD 4000 Phone +61 7 3233 3111 Fax +61 7 3233 3100 www.kpmg.com.au LAWYERS Gilbert + Tobin Lawyers Level 35, Tower Two International Towers Sydney 200 Barangaroo Avenue Barangaroo NSW 2000 Phone +61 2 9263 4000 Fax +61 2 9263 4111 www.gtlaw.com.au BANKERS HSBC Bank Australia Limited Commonwealth Bank of Australia Standard Chartered Bank Chairman Michael Alscher Directors Neville Buch (Interim CEO) Steve Sherman Jeffrey Forbes Gary Jandegian Robert Prieto Nathanial Thomson Chief Financial Officer Peter Barker Company Secretaries Courtney Marsden Peter Barker REGISTERED OFFICE Cardno Limited ABN 70 108 112 303 Level 11, North Tower Green Square 515 St Paul’s Terrace Fortitude Valley QLD 4006 Australia Phone + 61 7 3369 9822 Fax + 61 7 3369 9722 cardno@cardno.com www.cardno.com SHARE REGISTRY Computershare Investor Services Pty Limited 117 Victoria Street West End QLD 4101 Phone 1300 552 270 (within Australia) +61 3 9415 4000 (outside Australia) www.computershare.com.au Page | 77 This page is left intentionally blank Page | 78 This page is left intentionally blank Page | 79 This page is left intentionally blank Page | 80 Registered office Cardno Limited ABN 70 108 112 303 Level 11, North Tower Green Square 515 St Paul’s Terrace Fortitude Valley QLD 4006 Australia Phone + 617 3369 9822 Fax + 617 3369 9722 cardno@cardno.com www.cardno.com Follow us on www.linkedin.com/company/cardno Follow us on www.twitter.com/cardno Join us on www.facebook.com/CardnoGlobal Watch us on www.cardno.com/youtube 

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