CODAN Limited Annual Report 2019

Plain-text annual report

A n n u a l R e p o r t 2 0 1 9 Innovation wherever you are At Codan, our purpose is to create long-term shareholder value through the design, development and manufacture of innovative technology solutions. We work with customers in over 150 countries, providing communications, metal detecting, security and productivity solutions for some of the harshest environments on earth. A n n u a l R e p o r t 2 0 1 9 Innovation wherever you are CONTENTS FY19 SUMMARY CHAIRMAN’S LETTER TO SHAREHOLDERS CEO’S REPORT OUR PEOPLE AND VALUES GLOBAL LOCATIONS OPERATIONS BOARD OF DIRECTORS LEADERSHIP TEAM CORPORATE GOVERNANCE STATEMENT FINANCIAL REPORT ASX ADDITIONAL INFORMATION CORPORATE DIRECTORY Codan Limited ABN 77 007 590 605 Annual General Meeting 2 4 6 8 10 11 30 32 34 35 94 96 The Annual General Meeting of Codan Limited will be held at 11:00 am on Wednesday, 30 October 2019 at Codan Limited, 2 Second Avenue, Mawson Lakes, South Australia. 1 ANNUAL REPORT 2019FY19 SUMMARY Record revenue $270.8m Underlying net profit after tax $45.7m Annual ordinary dividend 9.0¢ Annual special dividend 5.0¢ fully franked (interim 4.0, final 5.0) fully franked (interim 2.5, final 2.5) Record statutory net profit after tax of $45.7 million Base-business sales re-rated to $200-220 million up from $180-200 million Base-business NPAT re-rated to $28-33 million up from $25-30 million Strong balance sheet continues $37.5 million net cash CODAN LIMITED Founded in 1959 and headquartered in South Australia, Codan Limited (ASX:CDA) is an international company that develops rugged and reliable electronics solutions for government, corporate, NGO and consumer markets across the globe. Codan’s technologies include radio communications, metal detection and tracking solutions. We have approximately 450 employees located in Australia, Canada, the USA, Ireland, the UAE, Brazil and South Africa. Our marketing reach embraces activity in over 150 countries, with exports accounting for more than 85% of our sales. 2 CODAN Operating revenue $270.8m Underlying EBITDA* $78.6m Underlying NPAT* $45.7m Underlying results for the year ended 30 June Revenue Communications Metal Detection Tracking Solutions Other Note 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 $143.9m $169.5m $226.1m $229.9m $270.8m $29.9m $41.9m $12.7m $21.1m $75.6m $70.4m $78.6m $44.7m $39.8m $45.7m % of sales 2019 % of sales % of sales 2017 % of sales 2016 % of sales 2015 2018 $77.6m 29% $56.5m 25% $70.9m 31% $65.0m 38% $63.8m 44% $182.1m 67% $164.0m 71% $148.0m 66% $99.2m 59% $73.3m 51% $11.1m 4% $9.4m 4% $7.2m 3% $5.3m 3% $4.8m $2.0m 3% 2% Total revenue $270.8m 100% $229.9m 100% $226.1m 100% $169.5m 100% $143.9m 100% EBITDA EBIT Interest $78.6m 29% $70.4m 31% $75.6m 33% $41.9m 25% $29.9m 21% $63.4m 23% $53.7m 23% $61.5m 27% $29.2m 17% $19.3m 13% ($0.1)m ($0.5)m ($0.8)m ($1.7)m ($2.5)m Net profit before tax $63.3m 23% $53.2m 23% $60.7m 27% $27.5m 16% $16.8m 12% Taxation ($17.6)m ($13.4)m ($16.0)m ($6.4)m ($4.1)m Net profit after tax $45.7m 17% $39.8m 17% $44.7m 20% $21.1m 12% $12.7m 9% Earnings per share Ordinary dividend per share Special dividend per share Return on equity Gearing 1 2 25.3c 9.0c 5.0c 23% 0% 22.1c 8.5c 4.0c 23% 0% 24.9c 7.0c 6.0c 29% 0% 11.9c 6.0c 16% 8% 7.1c 3.5c 10% 22% Notes: 1. Return on equity is calculated as net profit after tax divided by average equity 2. Gearing is calculated as net debt divided by the sum of net debt and equity * The financial information shown above reflects the underlying business performance. Non-underlying income/(expenses) are considered to be outside of the normal business activities of the group. For 2019, there were no non-underlying items. For the prior year, non-underlying items related to a property tax benefit. 3 ANNUAL REPORT 2019CHAIRMAN’S LETTER TO SHAREHOLDERS It is pleasing to be able to comment on another very successful year for Codan. The profit achieved in FY19 was an all-time record for your company. At the AGM last year, I said that we were focused on achieving sustainable profit growth and slowly increasing what we have defined as our base (generally predictable) level of business. Donald has explained that we have again increased our base-level business and that we have laid the foundations for further increases. During the course of the year, Donald and I visited most of our operations around the world. We attended the Minelab dealer conference in Italy, where I was able to meet many of our key international customers. I was truly impressed with their commitment to the Minelab product range and saw at first hand their excitement when we talked about some of our planned new product platforms. The level of enthusiasm and professionalism of our key staff who presented at that conference was outstanding. The pre-release of our new VANQUISH™ product (coin and treasure detector) was a highlight. We have a new management team in Canada driving the staged release of Cascade™, our new Land Mobile Radio (LMR) infrastructure platform. Cascade™ will change our LMR business from being totally product reliant to a combination of product sales and systems sales. Having spoken individually to every employee in Canada during our visit, I am confident that our new technology platform will be the catalyst for real growth in this business unit. Like our LMR business, our Tactical Communications business is slowly changing from the supply of High Frequency (HF) radio products to the supply of complete communications solutions. Donald has covered off on some of the initiatives that have been put in place to achieve this outcome in his report. I continue to be impressed with the market-focused product development across our Tactical Communications business and with the enthusiasm and dedication of our front-line sales teams. These men and women identify and close opportunities in some of the toughest markets in the world. As our systems capabilities in LMR and tactical communications develop, our pipeline of opportunities will grow. Success in larger systems-based projects will continue to lift our base-level business and our profitability over time. We made great advances in the development of our technology in our Minetec business last year; however, sales were not delivered at the expected levels. We believe some near-term, significant opportunities will kick-start the Minetec business this year. 4 We again invested heavily in R&D and new product development in FY19. We must have a continuous stream of new products entering our markets, so we remain committed to this strategy of investing in ourselves. In the past, Codan has been perceived to be a complicated company. Donald and his management team have worked really hard to simplify the way we explain our business to potential investors, brokers and analysts. More and more, people now “get” our story and understand what drives our sales and profitability. Share markets can be fickle, but our share-price performance over the last 12 months would suggest that our stock is slowly being re-rated, even given recent share market volatility. Consistent results in the future will hopefully support a further re-rating, closer to the multiples being achieved by our peers. We continue our search for a replacement director for Jim McDowell. We have a very specific skill set in mind, which has made this task difficult. The rise and rise of litigation funders and class actions has also reduced the pool of talent prepared to take on public roles. In my opinion, this is an issue that will eventually require a level of government intervention. We really appreciate your support of Codan. I look forward to welcoming you to our AGM in October, at which time we will provide an update on our current-year trading. David Simmons Chairman CODANWe again invested heavily in R&D and new product development in FY19. We must have a continuous stream of new products entering our markets, so we remain committed to this strategy of investing in ourselves. 5 ANNUAL REPORT 2019CEO’S REPORT On the 60th anniversary of the founding of Codan, I am very pleased to report that the company achieved its highest ever sales and profitability, with a range of successful strategic initiatives driving an increase to the base-level performance of the business. We remain focused on developing innovative solutions that solve our customers’ safety, security and productivity problems, wherever they are. During FY19, we invested $29 million in engineering to develop new products, and continued our expansion into new markets in order to broaden the company’s sales and reduce earnings volatility. of $270.8 million. The company declared a fully franked final dividend of 5.0 cents per share, following on from the 4.0 cents per share fully franked interim dividend. This resulted in a total dividend of 9.0 cents for the full year, an increase of 6% over FY18. Underlying net profit after tax was $45.7 million for the year on group sales In recognition of continuing outperformance of the company, the directors also announced a final special dividend of 2.5 cents per share for the second half, fully franked, bringing the full-year special dividend to 5.0 cents. Strong cash generation again during FY19 resulted in a net cash position of $37.5 million at 30 June 2019. In LMR, our strategy is to grow the business by transitioning into larger systems projects and offering ongoing service and support. This will be enabled by the North American release of our new Cascade™ software-defined, networked communications solution, an interoperable first-responder radio with excellent performance at a competitive price point. Cascade™ is scheduled for full release in FY21. In February, we appointed Scott French, an LMR-industry executive with more than 20 years of experience, to lead the LMR business from Codan’s office in Victoria, Canada. We remain confident about the medium to long-term growth potential of this division. The Communications division has a strong order book, and we expect it to deliver FY20 sales in line with our increased base- business range. Communications Codan Communications designs and manufactures mission- critical communications equipment for global military and public safety applications. Our solutions allow customers to save lives, enhance security and support peacekeeping activities worldwide. The division had an excellent year in FY19. Sales increased 37% to $78 million and segment profit increased 147% to $16.7 million as our sales of tactical communications solutions significantly increased. In the past, Communications has had base-business sales in the range of $w65 million to $75 million per annum, with large tactical communications projects potentially taking us to the top of this range. Successful expansion into the global military market has increased the base business to a sales range of $70 million to $80 million per annum. We continue to execute our strategy of transitioning the Communications division from a product-centric business to a full solutions provider. Ongoing product development is being complemented by strategic partnerships with key suppliers in order to further broaden our solutions offering. In FY19, we completed development of the new Sentry® Military Manpack which will be available for shipment in FY20. This product strengthens our offering to the tactical military radio market and, combined with the Codan RIOS™ interoperability platform, allows us to offer communications solutions into mixed and legacy networks. Tactical Communications is specifically targeting the global military market, with a focus on developing-world militaries in Africa, the Middle East, Asia, Eastern Europe and Latin America. 6 CODANDuring FY19, we invested $29 million in engineering to develop new products. Metal Detection Minelab is the world leader in handheld metal detecting technologies for recreational, gold mining, demining and military markets. Over the past 30 years, Minelab has introduced more innovative technology than any of its competitors and has taken the metal detection industry to new levels of technological excellence. Minelab’s base business is comprised of recreational products sold primarily into Australia, Europe and the USA, a level of gold detector sales into Africa, Latin America and Asia Pacific, and sales of countermine products (detecting and clearing explosive devices) globally. During FY19, Minelab had base-business sales of around $110 million per annum. I am pleased to report that continuing strong sales of the EQUINOX® coin and treasure product, coupled with the imminent release of the new VANQUISH™ coin and treasure detector and increasingly diversified gold detector sales, have resulted in an increase in base-business sales to a range of $120million to $130 million per annum. As we have noted in the past, periods of stronger demand for gold detectors in Africa and new product introductions have the potential to push Minelab’s revenues above the base. This happened during the first half of FY19 as Minelab opened new gold markets in the Middle East. We also had the benefit of the first full year of EQUINOX® coin and treasure detector sales. As a result, the division had its best year ever in FY19, with sales increasing 11% to $182 million and segment contribution increasing 5% to $67 million. In Africa, Minelab dominates the artisanal gold mining market, with the GPZ 7000®, SDC 2300® and Gold Monster® covering all price points. Existing customers are upgrading their GPX® gold detecting equipment and new customers are entering the market with the Gold Monster®. The SDC 2300® detector is exceptionally good at discovering fine-particle gold in mineralised soil and has become the replacement detector for the GPX 5000®. In Minelab’s established recreational markets, the EQUINOX® detector continues to take market share. During FY19, Minelab also progressed development of the new VANQUISH™ coin and treasure detector, which, like the EQUINOX®, draws on Minelab’s proprietary simultaneous multi-frequency technology (Multi-IQ®) to make deep detecting easier and more efficient. It will be released to the market in the first half of FY20, and we believe it will take market share from competitors. In May 2019, Minelab delivered its first shipment of the new MDS-10® mine clearance detector, a dual-sensing detector which combines Minelab’s leading metal detection technology with ground-penetrating radar. It provides superior results in the detection of minimal-metal landmines and improvised explosive devices. Given Minelab’s increasingly diversified sales mix, new products and improving retail distribution, we remain confident of continued success in FY20. 7 ANNUAL REPORT 2019Tracking Solutions – Minetec Minetec provides unique, high-precision tracking, productivity and safety solutions for underground hard-rock mines. Minetec’s technology allows real-time monitoring and control of mining operations in order to optimise productivity and enhance safety. It is an enabling technology required for mining automation. As previously announced, in 2018, Minetec entered into an exclusive global licensing, technology development and marketing agreement with Caterpillar Inc. During FY19, we worked closely with Caterpillar’s development team to integrate Minetec’s high-precision tracking capability into the Caterpillar MineStar® solution for underground hard-rock mines. As a result of this agreement, the division is now leveraging Caterpillar’s global dealer network to expand sales. During FY19, there were delays in securing contracts for the operational deployment of MineStar®, and therefore Minetec did not meet its revenue target of $15 million for the year. Revenue increased marginally to $11.1 million, and the division recorded a small loss. Management is working closely with Caterpillar to improve this situation and is confident that these issues will be rectified in the near future. During the second half, Minetec and Caterpillar partnered with Newmont Goldcorp to demonstrate the value of the combined MineStar® system at their Tanami mine in the Northern Territory. This partnership allowed the team to commission MineStar® for Underground in an operational mine and quantify the benefits with real data. Separate to the Caterpillar agreement, Minetec has continued to install and commission the underground Fleet Management System in BHP’s Olympic Dam mine in South Australia. Vehicle installations are complete across some 650 machines, and we are working through the detailed process of site and user acceptance of the new system. Our strategy for Minetec continues to focus on working with Caterpillar in order to leverage their global distribution capability, thereby increasing Minetec’s sales and profitability to a level that is significant to the Codan group. Codan Defence Electronics Codan Defence Electronics was established to offer advanced manufacturing and through-life support to the Australian defence industry. Following three years of intensive business development and bidding activity, Codan has become an approved partner for two defence programmes, however no Australian supply contracts have yet been awarded. Given the very long decision cycles in defence, we do not expect this division to generate significant revenue again in FY20. Our People The record result achieved this year is due solely to the collective efforts of our people as they continually strive to provide exceptional customer experiences. Codan operates right across the world, and our people travel to some of the most remote and hazardous places on the planet in order to better understand and support our customers. On behalf of the board, I would like to again thank our people for going that extra mile and for making sacrifices in order to better serve the company, our customers and, ultimately, our shareholders. Donald McGurk Managing Director and CEO Our Core Values are: Can-Do High Performing Customer Driven Openness & Integrity OUR PEOPLE AND VALUES Codan’s core values are a shared set of values that shape our company culture and ultimately enable us to achieve our organisational goals. Our core values are embodied in the strong culture of our organisation. We strive for our values to help guide our day-to-day decisions and provide the framework for not only what we do, buwt more importantly, how we do it. Codan seeks to employ individuals who align to and genuinely relate to our core values, and encourages all staff to help bring these values to life through their everyday interactions with one another. We hold all of our staff accountable to our values and, most importantly, our senior leaders of the business, who play a significant part in shaping our core values. Our company’s core values underpin our core purpose of delivering superior shareholder value by growing a lasting and innovative organisation that consistently creates outstanding customer experiences. 8 CODAN9 ANNUAL REPORT 2019GLOBAL LOCATIONS VICTORIA WASHINGTON DC CORK DUBAI PENANG NAMPA CHICAGO JOHANNESBURG PERTH ITAJAI ADELAIDE CODAN OFFICES MANUFACTURING OPERATIONS ENGINEERING TEAMS 10 Selling into 150 countries with operations across the globe CODANOPERATIONS COMMUNICATIONS 12 METAL DETECTION 16 DEFENCE ELECTRONICS 26 TRACKING SOLUTIONS 22 ENGINEERING AND OPERATIONS 28 11 ANNUAL REPORT 2019COMMUNICATIONS Codan Communications is a leading international designer and manufacturer of premium communications solutions for Tactical and Land Mobile Radio (LMR) applications. We deliver our capability worldwide for military, defence, humanitarian, peacekeeping, commercial, security and public-safety markets. Our mission is to provide communications solutions that allow our customers to be heard so that they can save lives, create security and support their local needs. With 60 years in the business, Codan Communications has earned a reputation for quality, reliability and customer satisfaction, producing innovative and industry-leading technology solutions. With deployments in more than 150 countries, Codan Communications continues to enhance its world-class product and solutions design, development and implementation capability. Our focus is firmly on delivery to our customers as we enable them to be heard in the most testing conditions in the moments that matter. During FY19, we completed development of the new Sentry® Military Manpack which will be available for shipment in FY20. This product strengthens our offering to the tactical military radio market and, combined with the Codan RIOS™ interoperability platform, allows us to offer communications solutions in mixed and legacy networks. The 2019 financial year was a very strong one for Codan Communications. Sales increased 37% to $77.6 million and segment contribution increased 147% to $16.7 million. Tactical Communications is targeting the global military market, with a focus on developing-world militaries in Africa, the Middle East, Asia, Eastern Europe and Latin America. The division experienced strong growth in its core tactical markets after successfully expanding into the military communications sector, with significant contract wins from its Asia-Pacific, Middle East and African defence-based customers. In the past, Communications has had base- business sales in the range of $65 million to $75 million per year, with large tactical communications projects potentially taking us to the top of this range. Successful expansion into military markets has increased this base-business to $70 million to $80 million sales per annum. We remain focused on increasing and broadening the earnings base for this division by providing scalable and flexible communications solutions. The combination of sophisticated technology needed for modern military operations, the robustness to ensure survivability in combat conditions and the interoperability necessary for multifaceted operations with forces from different countries and agencies will be critical to our success. In LMR, our strategy is to transition to a larger-project systems business and build a compelling services portfolio sustaining long-term growth. This will be enabled by the release of our new Cascade™ software-defined networked communications solution, an interoperable first-responder solution with excellent performance at a competitive price point in the North American market. Cascade™ is scheduled for full release in FY21. In February, we appointed Scott French, an LMR industry veteran with more than 20 years of experience, to lead the LMR business from Codan’s office in Victoria, Canada. We remain optimistic about the medium to long-term growth potential of this business. The Communications division has a strong order book entering FY20, and we expect it to deliver FY20 sales in line with our increased base-business range. 12 CODANFY19 SUMMARY • A very strong year; sales increased 37% to the highest level since FY08 • Completed development of the new Sentry® Military Manpack • Successfully expanded into the tactical military sector • Progressed development of the Cascade™ LMR solution for planned release in FY21 • Appointed Scott French to lead the LMR business FY20 OBJECTIVES • Continue to transition into the tactical communications market • Partner with key equipment suppliers to broaden our tactical communications offering • Complete the Cascade™ development programme 13 ANNUAL REPORT 2019COMMUNICATIONS “Codan’s ability to support partner forces is second to none because of the reliability, sustainability and ease of use of its products.” Lieutenant General Charles Cleveland, US Army retired, Commander US Army Special Operations Command 2012‑2015 14 CODANCodan Communications supports a secure countrywide interoperable communications platform for Afghanistan. Communications are the backbone of military operations and the glue that binds a military force together. Military communications equipment is subject to demanding physical and user requirements over and above its technical demands. It must be sufficiently robust to withstand rough handling in the battlefield as well as survive in extreme environments. Afghanistan government agencies work to secure the country’s 5,500 kilometre border and its international airports. They need a communications platform that provides secure, no-gaps communication and has proven reliability in the field. Codan Communications provided them with communications solutions to support their countrywide, secure, interoperable communications platform for voice and data transmissions in an area of austere terrain and lacking infrastructure. The multi-year project procured over 8,000 Codan Base/Mobile and Manpack radio systems and services to support secure voice and data communications. The Codan solution provided a common communications platform, enabling them to coordinate operations between remote border locations and the agency headquarters, and supported communications with other government organisations. 15 ANNUAL REPORT 2019METAL DETECTION 16 CODANFY19 SUMMARY • Another record year, highest sales ever • EQUINOX® coin and treasure detector grew sales in traditional markets FY20 OBJECTIVES • Continue to maximise and diversify gold detector sales globally • Release the VANQUISH™ coin and treasure • Dominated the African artisanal gold market with detector our range of detectors • Delivered first shipment of the new MDS-10® countermine detector • Progressed development of the new VANQUISH™ coin and treasure detector • Build on EQUINOX® success to continue growing coin and treasure market share globally • Increase sales in Latin America • Further expand our retail distribution channels in USA and Europe Minelab is the world leader in providing metal detection technologies for consumer, gold prospecting and military needs. Through our dedication to research, development and innovative design, Minelab is the major world-leading manufacturer of handheld metal detection products. Over the past 30 years, Minelab has introduced more innovative and practical technology than any of our competitors and has taken metal detection technology to new levels of excellence. We continue to retain tight control and a good understanding of our distribution channels in Africa and, as a result, are selling our products into more African countries. The establishment of our distribution facility in Dubai continues to be a great success for Minelab. Minelab employs the largest and world’s best metal detection research and development team, developing technologies that are consistently superior to those of our competitors. Our new products, including the EQUINOX® series with innovative Multi-IQ® technology for coin and treasure detecting, are a reflection of the world-leading engineering development that is undertaken at Minelab. While we are confident of continued success in FY20, the unpredictable nature of our sales into Africa makes forecasting difficult for this business. In the past, Minelab has had base-business sales of around $110 million per year. Continuing strong EQUINOX® sales, the imminent arrival of the new VANQUISH™ detector and increasingly diversified gold detector sales have resulted in an increase in base-business sales to a range of $120 million to $130 million per annum. Recreation – finding treasure Minelab is built on the success of selling metal detectors into the major economies of Australia, North America, Europe and Russia. Our customers metal detect for the fun of it, with metal detecting being an interest, a hobby and passion, a sport, or in some cases, a source of income. Minelab’s worldwide network of Authorised Dealers gives customers the most up-to-date knowledge in products and techniques to help them improve their success rate in the field. Our comprehensive range includes gold detectors, and coin and treasure detectors used to find jewellery and artefacts. This part of the business represents a significant portion of the total Minelab business and is well placed for growth as Minelab continues to release new and improved technology and products into this market. Minelab’s established recreational markets performed extremely well in FY19, with sales increasing by over 30% across Australia, North America, Europe and Russia. The revolutionary new EQUINOX® multi-frequency detector had its first full year of sales in FY19, and coin and treasure hunters have found it to be adaptable for all target types and ground conditions. The EQUINOX® series redefines all-purpose detecting for the serious enthusiast through its simultaneous multi-frequency technology, waterproof design and accurate target identification. With a recommended retail price of US$649 to US$899, this new product has contributed significantly to growing Minelab’s base business. Minelab continues to invest in product development for recreational markets and has a number of new, improved metal detectors in the pipeline. The VANQUISH™ coin and treasure detector is the next release, an introductory multi-frequency detector with a recommended retail price of US$199 to US$499. It will be released to the market in the first half of FY20, and we believe it will take market share from competitors. 17 ANNUAL REPORT 2019METAL DETECTION Small-scale gold mining – striking gold Minelab’s world-leading gold detection technology continues to revolutionise the way small-scale gold miners around the world prospect for gold. During FY19, Minelab established a similar structure in Brazil, with the objective of increasing distribution and, ultimately, sales into Latin America. We continue to invest in the development of small-scale gold mining markets worldwide. The strongest demand for gold detectors comes from Africa, with the primary drivers being the adoption of metal detection technology by a large number of small- scale gold miners and the demonstrated success they have in finding gold with our detectors. These small-scale gold miners have previously used traditional and often environmentally damaging mining techniques to find gold. Minelab’s metal detectors are changing the way gold is found by these miners. In recent years, the company has successfully re- established its position as the dominant player in the African gold detecting market. We released the top-of- the-range GPZ 7000® gold detector, took control of our distribution channels and broadened our product range with the release of the entry-level Gold Monster 1000®, a gold detector that is fully automatic and easy to use. The GPZ 7000® gold detector was released into the African market in 2016 and, over time, has become widely accepted as the best detector for finding gold in Africa. Our engineering team went to great lengths to protect this technology from counterfeiting, and sales have exceeded our expectations. In FY19, sales continued to be relatively consistent, driven in part by customers upgrading their gold detecting equipment. Minelab made a critical move in 2015 by establishing a showroom and distribution centre in Dubai to service the large African market. This has continued to pay dividends; we have much greater control of our distribution channels and have continued to broaden our customer base. We are now closer than ever to the end users of our detectors. The establishment of this facility and the customer relationships we are developing are critical to ensuring that Minelab succeeds in the African region over the medium term, and this is a major contributor to our success. With a complete range of gold detectors priced from US$799 to US$7,999, Minelab has seen existing customers upgrading their gold detecting equipment, while new customers are buying the entry-level Gold Monster®. This has significantly diversified the Minelab business and increased the division’s base-business sales. Countermine – all mines, all soils, all conditions Minelab’s detectors are widely recognised for locating landmines and the explosive remnants of war. The Countermine business is strategically important to Minelab, with our continual development of leading-edge technology to rid the world of landmines and improvised explosive devices carrying over to the business’s other products. The world-leading engineering capability of the Countermine team is highlighted by the fact that Minelab won funding of $6.7 million from the Australian Army to fast-track the development of the next-generation, dual-sensing countermine detector. This programme to incorporate metal detection with ground-penetrating- radar technology was completed in FY19, and the first units of the MDS-10® were shipped in late FY19. Minelab’s Countermine detectors are manufactured in Adelaide and exported to more than 55 countries around the world where landmines remain a threat. These include Cambodia, Angola, Sri Lanka, Vietnam, Mozambique, Colombia, Lebanon and Afghanistan, to name but a few. 18 CODAN19 ANNUAL REPORT 2019METAL DETECTION 20 CODANMinelab is known the world over for its metal detecting technology, and has now developed an everyday alternative to a single- frequency detector. The VANQUISH™ series is a lightweight, collapsible, fully adjustable, waterproof/rainproof and affordable metal detector for the coin and treasure market, utilising Minelab’s revolutionary Multi-IQ ® technology. Multi-IQ ® was introduced to the market by Minelab in 2017 with the EQUINOX ® series detector. What is the advantage of Multi-IQ®? Minelab’s revolutionary Multi-IQ® technology combines the power of multiple detectors in one – all working at the same time. The VANQUISH™ can unearth coins, silver and gold jewellery, and other metal items of interest across terrains such as the park, in fields and at the beach, uniquely performing in wet beach sand. The VANQUISH™ series offers three metal detectors and a special Pro Pack, all of which include three turn-on-and-go detecting modes: COIN, JEWELLERY, and ALL METAL. The VANQUISH 340™ is a great starter coin and treasure detector that includes a 10" coil. The VANQUISH 440™ offers all the detecting essentials, including a set of wired headphones and a 10" coil. The VANQUISH 540™ and 540™ Pro Pack offer the most versatility, with the added red LED backlight functionality, 10 volume-control settings, wireless headphone accessories and advanced settings. The VANQUISH 540™ includes one waterproof 12" coil, and the VANQUISH 540™ Pro Pack includes two waterproof coils: the 8" and the 12". 21 ANNUAL REPORT 2019TRACKING SOLUTIONS 22 CODANFY19 SUMMARY • Integrated Minetec’s technology into Caterpillar MineStar® for Underground solution • Completed successful proof-of-value at Newmont Goldcorp’s Tanami mine FY20 OBJECTIVES • Improve Caterpillar dealer sales of MineStar® for Underground • Install and commission underground Wi-Fi WASP™ infrastructure in BHP’s Olympic Dam mine • Installed and commissioned Fleet Management • Continue to develop our core technology System in BHP’s Olympic Dam mine Minetec provides unique high-precision tracking, productivity and safety solutions for underground hard-rock mines. Minetec’s technology enables real-time monitoring and control of mining operations, which allow miners to visualise the whole mine in order to optimise productivity and enhance safety. Now integrated with the Caterpillar MineStar® for Underground solution, it provides the enabling technology required for mining automation. Minetec has a long history of providing communications services to the mining industry, and in recent years has been transitioning to a high-value-add technology solutions provider. Minetec has developed a range of core technologies to deliver innovative, data-driven mining systems that combine world- class high-precision tracking of assets underground, wireless mesh data communications and task-management software specific to the challenges of underground mining. These technologies combine to offer a range of safety and productivity capabilities to our customers: Safety: • Proximity awareness: increased visibility of machines and vehicles • Traffic management: control of physical access within congested areas • Proximity detection: audio and visual alerts of machinery, vehicles or other miners in close proximity • Collision avoidance: the ability to automatically slow or stop a vehicle in response to nearby threats Productivity: • Machine data: provision of real-time data to support production and maintenance planning • Development, production and maintenance scheduling: automated shift planning for underground operations • Short interval control: the ability to modify the shift plan in real time In February 2018, Minetec entered into a global licensing, technology development and marketing agreement with Caterpillar Inc. During FY19, we worked closely with Caterpillar’s development team to integrate Minetec’s high- precision tracking capability into an expanded Caterpillar MineStar® underground solution for hard-rock mines. As a result of this agreement, the division is now leveraging Caterpillar’s global dealer network to expand sales. During FY19, there were delays in securing contracts for the operational deployment of MineStar®, and therefore Minetec did not meet its revenue target of $15 million for the year. Revenue increased marginally to $11.1 million and the division recorded a small loss. Management is working closely with Caterpillar to improve this situation and is confident that these issues will be rectified in the near future. During the second half, Minetec and Caterpillar partnered with Newmont Goldcorp to demonstrate the value of the combined MineStar® system at their Tanami mine in the Northern Territory. This partnership allowed the team to commission MineStar® for Underground in an operational mine and quantify the benefits with real data. The trial ran from January to March 2019, and Newmont supplied operational data from their underground hard- rock mining operation during this period. While every mine is different, the Tanami trial showed that significant productivity improvements can be achieved through improved management of underground mobile equipment, enabled by high-precision tracking. Separate to the Caterpillar agreement, Minetec has continued to install and commission the underground Fleet Management System in BHP’s Olympic Dam mine in South Australia. Vehicle installations are complete across some 650 machines and we are working through the detailed process of site and user acceptance of the system. Our strategy for Minetec continues to focus on working with Caterpillar in order to leverage their global distribution capability, thereby increasing Minetec’s sales and profitability to a level that is significant to the Codan group. 23 ANNUAL REPORT 2019TRACKING SOLUTIONS MineStar® for Underground Proof of value Over the last year, Minetec and Caterpillar MineStar ® Solutions have been working together to integrate Minetec’s proprietary technology into an expanded MineStar® for Underground solution. This new Caterpillar solution incorporates a broad range of technologies to address the unique challenges of underground mining: • COMMAND Autonomous machine control and guidance • FLEET Short interval planning and control, site performance, assignment optimisation and data communications • DETECT High-precision tracking and visualisation, asset and personnel detection • HEALTH Machine data for diagnostics and reporting MineStar® for Underground integrates Minetec’s SMARTS™ task management, WASP™ high-precision tracking and SafeDetect™ proximity detection into a broad technology system. As part of the technical validation of the system, Minetec & Caterpillar partnered with Newmont Goldcorp to demonstrate the proof-of-value at the Newmont Tanami site in remote Northern Territory. This partnership allowed the team to commission the MineStar® for Underground system in an operational mine and quantify the benefits with real data. The proof-of-value pilot ran for a total of 48 days across two operational stopes, with key performance indicators (KPIs) assessed across the following areas: • Stope bogging (LHDs) • Haulage cycle times (trucks) • Validation of payload data (tonnes) • Operating hours • Safety (proximity detection events) The system achieved a 93% pass rate to the defined KPIs. Overall, the system quantified the opportunity to increase annual production by some 5% from the two underground production areas included in the pilot. This improvement in operational performance could yield additional ore to the mill each year and/or be applied to improve efficiency and lower unit costs. Following the success of the proof-of-value pilot, Caterpillar has completed the product release of MineStar® for Underground which is being brought to market through the global Caterpillar dealer network. 24 CODANThe system achieved a 93% pass rate to the defined KPIs. Overall, the system quantified the opportunity to increase annual production by some 5% from the two underground production areas included in the pilot. 25 ANNUAL REPORT 2019DEFENCE ELECTRONICS 26 CODANCodan has a long history of supplying the defence sector, with the company’s communications products and landmine detectors used by military organisations worldwide. We have a core technical competency in radio frequency subsystem design, which is the basis of our Metal Detection and Communications businesses. These capabilities have the company well placed to provide further engineering solutions and manufacturing expertise to the Australian defence sector. Codan Defence Electronics was established to offer advanced manufacturing and through-life support to the Australian defence industry. It was created to capitalise on favourable Australian defence industry policy settings that ensure prime contractors offer meaningful Australian Industry Capability (AIC) to the Australian Government. Codan Defence Electronics has a strong offering into this market, through its surface-mount manufacturing capability, mature supply chain management and the financial robustness of the Codan group. Following three years of intensive business development and bidding activity, Codan has become an approved partner for two defence programmes, however no Australian supply contracts have yet been awarded. Given the very long decision cycles in defence, we do not expect this division to generate significant revenue in FY20. 27 ANNUAL REPORT 2019ENGINEERING AND OPERATIONS 28 CODANEngineering and Operations enhance Codan’s growth and continuous improvement by driving technical excellence across the company. We operate highly disciplined and efficient engineering, advanced manufacturing and supply chain management to ensure programme success. Engineering Codan maintains a world-class team of research, engineering and technical staff, employing more than 160 engineers across the globe. With teams in Adelaide, Perth and Canada, our capabilities span a cross-section of engineering disciplines, including software, electronics and mechanical engineering. We have a number of PhD-qualified physicists and software, electronics and signal processing engineers on staff, recruited from Australia and overseas. Our engineering teams ensure that technology is released to specification, on schedule and with appropriate intellectual property (IP) protection. We also utilise a number of field testers from around the world, as well as a network of service providers when required. This combination of core competencies allows us to continuously develop unique IP to solve our customers’ communications, security, detection and productivity problems in some of the harshest environments. Advanced manufacturing The ability to manufacture precision electronics products and associated software is a core competency of Codan’s, and remains a sustainable competitive advantage driving our future growth. The company is committed to pursuing ongoing efficiencies, flexibility and investment in its production capabilities. With an upgrade to our surface-mount technology production line in FY19, Codan’s Adelaide manufacturing facility is an integral element of the company’s operations, serving as a technology hub for new product development and the manufacture of “IP-sensitive” and high-complexity products. Of particular note are Codan’s security-featured radios and Minelab’s landmine detectors, which retain local manufacture. Minetec’s personal tracking devices, reference nodes and other hardware are also manufactured in Adelaide. Codan’s relationship with one of the world’s leading subcontract electronics manufacturers, Plexus Corp, remains a cornerstone of the company’s manufacturing strategy. The majority of manufacturing is still carried out in Malaysia, while manufacture of land mobile radio products takes place at a Plexus facility in Nampa, Idaho, for supply into the US market. The partnership with Plexus, a US-owned company specialising in defence, aerospace and medical electronics manufacturing, will ensure that Codan’s well-proven manufacturing processes and exceptional performance, quality and delivery standards continue. Codan has adopted stringent testing and quality control procedures. It is accredited to AS 9100 Quality Management Systems – Requirements for Aviation, Space and Defence, and both Codan and Plexus maintain quality assurance systems approved to International Standard AS/NZS ISO 9001. Supply chain management Codan has an extensive global supply chain in place, sourcing product and material from most regions in the world. We work with suppliers who meet stringent quality standards, are innovative and work in safe and responsible ways. Our dealings with our suppliers reflect Codan’s core values, and, as such, we have built collaborative, honest and trusting relationships which have resulted in reliable supply over the long term. Our supply chain is responsive to the changing needs of our customers and markets. All Codan suppliers must provide agility, flexibility and speed to market. At the end of our supply chain are global distribution centres located in Dubai, Chicago, Netherlands, Penang, Poland, Brazil and Adelaide, which ensure product is regionally distributed for the fastest route to market. Manufacturing and distributing our world-class products demands a strong, cohesive and responsive supply chain, and at Codan we have experienced professionals dedicated to the delivery of supply chain excellence. Workplace health, safety and environment Codan is committed to a philosophy of zero harm for all staff in all areas of the business, and we are conscious of our impact on the environment during the manufacture, distribution, use and disposal of our products. We are particularly conscious of exposing employees to critical risk, especially with respect to those travelling to remote locations. As such, Codan engages experts to ensure the safety and welfare of its travellers. We maintain an effective Work Health, Safety and Environmental Management System that is integral to our business processes and are accredited to OHSAS 18001 and AS/NZS 4801 Occupational Health and Safety Management Systems and AS/NZS ISO 14001 Environmental Management Systems. Facilities Codan’s global head office is located in the Technology Park precinct at Mawson Lakes, South Australia, where around 260 Codan, Minelab and Minetec staff are located. The facility houses the company’s world-class advanced manufacturing facilities, focusing on new product development and manufacture of our security-featured radios, mine-clearance products and tracking-solutions hardware. It allows capacity for future growth and includes extensive training and demonstration facilities which are used to showcase our products to a global customer base. 29 ANNUAL REPORT 2019BOARD OF DIRECTORS David Simmons BA (Acc) Chairman, Independent Non-Executive Director Chair, Remuneration and Nomination Committee David was appointed by the board as Chairman in February 2015 and has been a director of Codan since May 2008. He has extensive financial and general management experience, having worked in large, diversified businesses throughout his career, including as Managing Director for 16 years of a then large Australian-based publicly listed company. Donald McGurk HNC (Mech Eng), MBA, FAICD, Harvard AMP Managing Director and Chief Executive Officer Donald was appointed to the board as a director in May 2010, and was appointed as Managing Director in November 2010. Donald joined Codan in December 2000 and had executive responsibility for group-wide manufacturing until his transition into the role of CEO. In addition to his manufacturing role, from 2005 to 2007 Donald held executive responsibility for sales of the company’s communications products, and from 2007 to 2010, executive responsibility for the business performance of the company’s HF radio products. Donald came to Codan with an extensive background in change management applied to manufacturing operations, and held senior manufacturing management positions in several industries. Donald holds a Masters Degree in Business Administration from The University of Adelaide and completed the Advanced Management Program at Harvard University in 2010. Peter Leahy AC BA (Military Studies), MMAS, GAICD Independent Non-Executive Director Peter was appointed to the board in September 2008. He retired from the Army in July 2008 after a 37-year career and six years as Chief of Army. His distinguished service was recognised with his 2007 appointment as a Companion of the Order of Australia. Since leaving the Army, he has been appointed as Professor and Foundation Director of the National Security Institute at the University of Canberra. He is the Chief Defence Advisor to the Queensland Government, has been a director of Electro Optic Systems Holdings Limited since May 2009 and a director of Citadel Group Limited since June 2014. Peter is a member of the Advisory Board to China Matters and is a technical advisor to WarpForge Limited. In August 2014, he was appointed to the Australian Federal Government’s First Principles Review Team, an initiative designed to ensure that the Australian Department of Defence is fit for purpose and able to promptly respond to future challenges. 30 CODANJim McDowell LLB (Hons) Independent Non-Executive Director Jim was appointed to the board in September 2014 and resigned on 31 August 2018. He was a director of Austal Limited from December 2014 to August 2018 and a director of Micro-X Limited from September 2017 to August 2018. Graeme Barclay MAICD, F Fin, CA, MA (Hons) Independent Non-Executive Director Graeme was appointed to the board in February 2015. He has more than 30 years of international business experience in professional services, broadcast and telecommunications, and extensive knowledge of business in the communications services, technology and infrastructure markets. He was Group Chief Executive Officer of the Broadcast Australia group for 11 years, following three years as Chief Financial Officer and Chief Operating Officer, retiring in April 2013. In his time with Broadcast Australia, the business grew domestically and expanded internationally, and diversified into private networks, transit location communications and data centre operation and managed hosting services. From July 2010 until September 2013, he was Chairman of Transit Wireless LLP, which has the exclusive rights to install and operate cellular and Wi-Fi systems in the New York subway. From 2002 to 2009, he was an executive director in Macquarie Group’s infrastructure team and was involved in several acquisitions and capital raising transactions for the then listed Macquarie Communications Infrastructure Group. From 2014 to 2018, he was Chairman of the Nextgen Group that successfully divested the Nextgen Networks and Metronode data-centre businesses in 2016 and 2018 respectively. He is currently Chairman of Uniti Group Limited, CEO of Axicom Holdings and has been a non-executive director of BSA Limited since June 2015. Graeme is a chartered accountant, holding membership of the Institute of Chartered Accountants of Scotland and of Chartered Accountants Australia and New Zealand. Kathy Gramp BA (Acc), CA, FAICA, FAICD Independent Non-Executive Director Chair, Board Audit, Risk and Compliance Committee Kathy was appointed to the board in November 2015. She has had a long and distinguished executive career and over 21 years of board experience across a diverse range of Australian organisations and industry sectors. She has had exposure to international markets and has a wealth of experience in corporate finance at both strategic and operational levels. In 1989, Kathy joined Austereo Ltd, Australia’s largest commercial radio network, at a senior corporate level, and her career with Austereo spanned 22 years. As Chief Financial Officer and a member of the Executive Committee, she was closely involved in Austereo’s national and international expansion and its successful move into digital and online radio. Kathy was a director, Chair of Audit & Risk and a member of the Remuneration Committee of Godfreys Group Limited from January 2018 until May 2018, was previously a director and member of the Audit & Risk and Remuneration Committees of Southern Cross Media Group Limited and has significant audit committee experience. Kathy is a director of Uniti Group Limited, a chartered accountant and a Fellow of the Australian Institute of Company Directors and the Institute of Chartered Accountants Australia and New Zealand. 31 ANNUAL REPORT 2019LEADERSHIP TEAM Donald McGurk HNC (Mech Eng), MBA, FAICD, Harvard AMP Managing Director and Chief Executive Officer Donald is a motivator of people, with extensive knowledge and experience in the areas of change management and strategy formulation. Donald joined Codan in December 2000 and had executive responsibility for group-wide manufacturing until his transition into the role of CEO. From 2005 to 2007, he also held executive responsibility for sales of the company’s communications products and, from 2007 to 2010, executive responsibility for the business performance of HF radio products. Donald was appointed to the board as a director in May 2010 and became Managing Director in November 2010. For more details of Donald’s qualifications and experience, please see page 30. Michael Barton BA (Acc), CA Chief Financial Officer and Company Secretary Michael joined Codan in May 2004 as Group Finance Manager and was appointed Company Secretary in May 2008. In September 2009, Michael was promoted to the position of Chief Financial Officer and Company Secretary and is responsible for financial control and reporting across the Codan group. He holds a Bachelor of Arts in Accountancy from the University of South Australia and is a member of Chartered Accountants Australia and New Zealand. Peter Charlesworth BEEEng (Hons), MBA, GAICD, Harvard AMP Executive General Manager, Minelab and Codan Defence Peter brings extensive knowledge and experience to Codan from more than 30 years in the electronics industry, including more than 16 years at Codan and formerly in management and technical roles at Tenix Defence and Vision Systems. Peter joined Codan in December 2002 as General Manager of Engineering and subsequently held various roles including New Business Manager and HF Radio Business Development Manager. He was appointed Executive General Manager of Minelab in 2008, following its acquisition by Codan in that same year. In addition to Minelab, Peter is Executive General Manager of Codan Defence Electronics. Peter holds a degree in Electrical and Electronic Engineering with First Class Honours, and a Masters of Business Administration, both from The University of Adelaide. He is also a Graduate Member of the Australian Institute of Company Directors and completed the Advanced Management Program at Harvard University in 2014. He was Chairman of the Technology Industry Association from 2006 to 2011 and was on The University of Adelaide ARI Advisory Board from 2009 to 2015. 32 CODAN Scott French BSc Executive General Manager, Land Mobile Radio Scott was appointed to the role of Executive General Manager, Land Mobile Radio in February 2019 and is based in Victoria, British Columbia. Scott came to Codan highly recommended for his lateral thinking, strategic approach to business and for his strong leadership. He brings a wealth of experience gained from almost 30 years with world-class organisations such as Motorola, Panasonic and Zetron. During his time at Motorola, Scott made the transition from engineering leadership to overall go-to-market leadership for several lines of business, helping to transform Motorola into a solutions provider beyond land mobile radio (LMR). Throughout his journey, Scott gained a high-level appreciation of LMR technology, solutions, services and associated markets. At Panasonic, he continued his leadership by transforming the company from product to solutions sales, with focus on mobile devices and security, before assuming the role of General Manager, Americas for two years with Zetron, a command and control company. In addition, Scott served as Vice Chairman on the state and local board of directors of TechAmerica, representing both Motorola and Panasonic, and was also the Chair of the State and Local Government and Education Executive Council of IT Alliance for Public Sector. Scott holds a Bachelor of Science in Industrial and Systems Engineering from Virginia Tech, and undertook MBA studies with a focus on leadership at Loyola University Maryland. Rory Linehan BSc (Hons), MSc, PhD, Harvard AMP Chief Technology Officer, Codan and Executive General Manager, Minetec Rory brings a unique mix of technical knowledge, diverse commercial skills and broad experience to Codan, delivering insightful leadership across the business. He joined Codan in March 2014, working across the group to leverage technology and innovation in developing strategies for growth. In February 2019, he was appointed to the role of Chief Technology Officer and leads the company’s Technology Council to maximize synergies across the Codan group and assess new opportunities for organic and acquisitive growth. In addition to this group role, Rory is Executive General Manager of Minetec. Rory holds degrees in Physics and Engineering and a PhD in Mathematics from Coventry University (UK). In November 2018, Rory completed the Harvard Business School Advanced Management Program (AMP). He has skills in strategy, marketing, business development, systems engineering and programme management gained across a wide range of complex projects, including development of the Boeing 787 primary flight-control system. Prior to Codan, Rory held a number of senior positions with blue-chip firms in the UK, including McLaren, Cobham and Goodrich. Paul Sangster ADBA, Chicago Booth AMP Executive General Manager, Tactical Communications Paul joined Codan in 2013 as the Vice President and General Manager of Business Development for the Communications Division and brings over 20 years of progressive experience in communications and surveillance solutions. He was appointed Executive General Manager of Codan Tactical Communications in 2018. Prior to Codan, Paul spent 12 years at Cobham Tactical Communications and Surveillance as the Vice President of Sales and Marketing. He studied business at University of Maryland University College and holds an Associate Degree in Management Studies. He also completed the Executive Development Program and the Advanced Management Program at University of Chicago’s Booth Business School. 33 ANNUAL REPORT 2019CORPORATE GOVERNANCE STATEMENT Codan’s corporate governance statement, which was approved by the board on 23 August 2019, is available on the company’s website and may be accessed via the following URL: http://codan.com.au/who-is-codan/corporate-governance. 34 CODANFINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2019 DIRECTORS’ REPORT LEAD AUDITOR’S INDEPENDENCE DECLARATION CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT 36 50 51 52 53 54 55 56 89 90 35 ANNUAL REPORT 2019DIRECTOR’S REPORT The directors present their report together with the financial statements of the group comprising Codan Limited (“the company”) and its subsidiaries for the financial year ended 30 June 2019 and the auditor’s report thereon. Directors’ meetings The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the company during the financial year are set out below: Board meetings A 10 10 10 1 10 10 B 10 10 10 1 10 10 Board Audit, Risk and Compliance Committee meetings Remuneration and Nomination Committee meetings A 2 2 1 B 2 2 1 A 4 3 3 4 B 4 4 4 4 Director Mr D J Simmons Mr D S McGurk Lt-Gen P F Leahy Mr J W McDowell Mr G R C Barclay Ms K J Gramp A – Number of meetings attended B – Number of meetings held during the time the director held office during the year Directors The directors of the company at any time during or since the end of the financial year are: David Simmons Donald McGurk Peter Leahy AC Jim McDowell Graeme Barclay Kathy Gramp Details of directors and their qualifications and experience are set out on pages 30 to 31. Company Secretary Mr Michael Barton BA (Acc), CA Michael joined Codan in May 2004 as Group Finance Manager and was appointed Company Secretary in May 2008. In September 2009, Michael was promoted to the position of Chief Financial Officer and Company Secretary and is responsible for financial control and reporting across the Codan group. He holds a Bachelor of Arts in Accountancy from the University of South Australia and is a member of Chartered Accountants Australia and New Zealand. 36 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANCertain executives may receive incentive payments based on the achievement of performance hurdles. The performance hurdles relate to measures of profitability. The bonus payable to certain executives may relate to the qualitative performance of the executive against objectives agreed as part of the budget and strategic planning processes. For FY19, the potential incentive payable to certain executives is normally based on 50% of the executives’ fixed salaries inclusive of superannuation, but can exceed this level if performance hurdles are exceeded, subject to a 200% cap. These performance conditions have been established to encourage the profitable growth of the group. The board considered that for the year ended 30 June 2019 the above performance- linked remuneration structure was appropriate. Total remuneration for all non- executive directors, last voted upon by shareholders at the 2010 AGM, is not to exceed $850,000 per annum. Non-executive directors do not receive any performance-related remuneration nor are they issued options on securities. Directors’ fees cover all main board activities and membership of committees. Remuneration Report – Audited Principles of remuneration Key management personnel comprise the directors and executives of the group. Key management personnel have authority and responsibility for planning, directing and controlling the activities of the group. Remuneration levels are competitively set to attract and retain appropriately qualified and experienced executives. The Remuneration and Nomination Committee may obtain independent advice on the appropriateness of remuneration packages, given trends in comparative companies both locally and internationally. Remuneration packages can include a mix of fixed remuneration and performance-based remuneration. The remuneration structures explained below are designed to attract suitably qualified candidates, and to achieve the broader outcome of increasing the group’s net profit. The remuneration structures take into account: • the overall level of remuneration for each director and executive; • the executive’s ability to control the relevant segment’s performance; and • the amount of incentives within each key management person’s remuneration. Service contracts It is the group’s policy that service contracts for key management personnel executives are unlimited in term but capable of termination on three to six months’ notice, and that the group retains the right to terminate the contract immediately by making payment in lieu of notice. The group has entered into a service contract with each key management person. The key management personnel are also entitled to receive on termination of employment their statutory entitlements of accrued annual and long service leave, as well as any entitlement to incentive payments and superannuation benefits. Performance rights At the 2004 AGM, shareholders approved the establishment of a Performance Rights Plan (Plan). The Plan is designed to provide nominated executives with an incentive to maximise the return to shareholders over the long term, and to assist in the attraction and retention of key executives. The number of performance rights issued normally represents 50% of the nominated executives’ fixed pay divided by the volume weighted average of the company’s share price in the five days after the release of the group’s annual results. For executives not participating in the performance rights plan, other benefits may be offered to encourage long-term performance. Details of performance rights granted to executives during the year are as follows: Number of performance rights granted during year Grant date Average fair value per right at grant date (cents) Exercise price per right (cents) Expiry date Number of rights vested during year DIRECTORS Mr D S McGurk EXECUTIVES Mr M Barton Mr P D Charlesworth Mr R D Linehan Mr S P Sangster 91,972 16 November 2018 253.9 – 30 June 2022 48,421 59,881 58,694 31,208 16 November 2018 16 November 2018 16 November 2018 16 November 2018 253.9 253.9 253.9 253.9 – 30 June 2022 – 30 June 2022 – 30 June 2022 – 30 June 2022 – – – – – 37 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019DIRECTORS' REPORT (continued) Remuneration Report – Audited (continued) Performance rights (continued) Mr S P Sangster was appointed to the position of Executive General Manager, Tactical Communications on 1 July 2018. The performance rights granted on 16 November 2018 become exercisable if certain performance requirements are achieved. The performance requirements are based on growth of the group’s earnings per share over a three-year period using a non-statutory base-level earnings per share as set by the board. For the maximum available number of performance rights to vest, the group’s earnings per share must increase in aggregate by at least 15% per annum over the three-year period from the base earnings per share. The threshold level of the group’s earnings per share before vesting is an increase in aggregate of 5% per annum over the three-year period from the base earnings per share. A pro-rata vesting will occur between the 5% and 15% levels of earnings per share for the three- year period. If achieved, performance rights are exercisable into the same number of ordinary shares in the company in the twelve-month period following the vesting date. Details of vesting profiles of performance rights granted to executives are detailed below: Performance rights granted Number Date Percentage vested in year Percentage forfeited in year Financial years in which shares will be issued if vesting achieved 236,948 173,959 124,524 91,972 120,709 91,586 65,559 48,421 154,240 113,237 81,058 59,881 154,240 113,237 79,469 58,694 103,630 69,728 40,373 31,208 25 November 2015 23 November 2016 10 November 2017 16 November 2018 25 May 2016 23 November 2016 8 December 2017 16 November 2018 25 May 2016 23 November 2016 8 December 2017 16 November 2018 25 May 2016 23 November 2016 8 December 2017 16 November 2018 22 April 2016 23 November 2016 8 December 2017 16 November 2018 100 – – – 100 – – – 100 – – – 100 – – – 100 – – – – – – – – – – – – – – – – – – – – – – – 2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022 Directors Mr D S McGurk Executives Mr M Barton Mr P D Charlesworth Mr R D Linehan Mr S P Sangster 38 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANIn relation to the performance rights granted on 23 November 2016, the performance requirements were based on the group’s aggregated earnings per share over a three-year performance period exceeding 43.93 cents per share. As this earnings per share target has been exceeded to 30 June 2019, it is expected that the performance rights will vest and be converted into shares before the end of August 2019. Limited, held directly, indirectly or beneficially by each key management person, including their related parties, is as follows: The movements during the reporting period in the number of performance rights over ordinary shares in Codan Directors Mr D S McGurk Executives Mr M Barton Mr P D Charlesworth Mr R D Linehan Mr S P Sangster Held at 1 July 2018 Issued Vested Lapsed Held at 30 June 2019 535,431 91,972 236,948 277,854 348,535 346,946 213,731 48,421 59,881 58,694 31,208 120,709 154,240 154,240 103,630 – – – – – 390,455 205,566 254,176 251,400 141,309 Other transactions with key management personnel There have been no loans to key management personnel or their related parties during the financial year. From time to time, directors and specified executives, or their personally related entities, may purchase goods from the group. These purchases occur within a normal employee relationship and are considered to be trivial in nature. Director share ownership The Directors’ Shareholding Policy was approved by the board on 20 March 2019 and requires non- executive directors to build a minimum shareholding in the company with a value approximately equivalent to their annual base fee, and executive directors to their annual total fixed remuneration. Under the policy, directors have five years to reach the minimum holding. The Directors’ Shareholding Policy is available on the company’s website. Movements in shares The movement during the reporting period in the number of ordinary shares in Codan Limited, held directly, indirectly or beneficially by each key management person, including their related parties, is as follows: Held at 1 July 2018 Received on exercise of rights Other changes * Held at 30 June 2019 Directors Mr D J Simmons Mr D S McGurk Lt-Gen P F Leahy Mr J W McDowell Mr G R C Barclay Ms K J Gramp Specified executives Mr M Barton Mr P D Charlesworth Mr S A French Mr R D Linehan Mr S P Sangster Mr C P Stuff 86,636 609,394 57,708 – 38,829 10,000 150,638 456,040 n/a 287,573 340 – – 236,948 – – – – 120,709 154,240 – 154,240 103,630 – – (100,000) – – – – – (68,933) – (287,573) (103,600) – * Other changes represent shares that were purchased or sold during the year 86,636 746,342 57,708 n/a 38,829 10,000 271,347 541,347 – 154,240 370 n/a 39 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019DIRECTORS' REPORT (continued) Remuneration Report – Audited (continued) Movements in shares (continued) Mr J W McDowell resigned as a director on 31 August 2018. Mr S P Sangster was appointed to the position of Executive General Manager, Tactical Communications on 1 July 2018, Mr S A French was appointed to the position of Executive General Manager, Land Mobile Radio on 25 February 2019 and Mr C P Stuff, our former Executive General Manager, Radio Communications, retired from the business on 8 March 2019. Directors’ and senior executives’ remuneration Details of the nature and amount of each major element of the remuneration paid or payable to each director of the company and other key management personnel of the group are: Directors Non-Executive Mr D J Simmons Lt-Gen P F Leahy Mr J W McDowell Mr G R C Barclay Ms K J Gramp Total non-executives’ remuneration Executive Mr D S McGurk Total directors’ remuneration Year Salary and fees Short-term incentives Other short term Post-employment and superannuation contributions Other long term Termination benefits Performance rights Total Proportion of remuneration performance related $ 179,133 175,908 89,567 87,955 14,806 87,955 89,567 87,955 97,709 95,950 470,782 535,723 $ – – – – – – – – – – – – 548,140 528,369 1,018,922 1,064,092 410,104 385,453 410,104 385,453 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 $ – – – – – – – – – – – – – – – – $ 17,018 16,711 8,509 8,356 1,407 8,356 8,509 8,356 9,282 9,115 44,725 50,894 20,531 20,049 65,256 70,943 $ – – – – – – – – – – – – 23,589 8,326 23,589 8,326 $ – – – – – – – – – – – – – – – – $ – – – – – – – – – – – – $ 196,151 192,619 98,076 96,311 16,213 96,311 98,076 96,311 106,991 105,065 515,507 586,617 226,670 207,126 226,670 207,126 1,229,034 1,149,323 1,744,541 1,735,940 % – – – – – – – – – – – – – – 51.8 51.6 Mr J W McDowell resigned as a director on 31 August 2018. 40 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANDirectors Year Salary and fees Short-term incentives Other Post-employment short term and superannuation Other long term Termination benefits Performance rights Total Proportion of remuneration performance related Non-Executive Mr D J Simmons Lt-Gen P F Leahy Mr J W McDowell Mr G R C Barclay Ms K J Gramp Total non-executives’ remuneration Executive Mr D S McGurk Total directors’ remuneration $ – – – – – – – – – – – – $ 179,133 175,908 89,567 87,955 14,806 87,955 89,567 87,955 97,709 95,950 470,782 535,723 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 548,140 528,369 1,018,922 1,064,092 410,104 385,453 410,104 385,453 $ – – – – – – – – – – – – – – – – contributions $ 17,018 16,711 8,509 8,356 1,407 8,356 8,509 8,356 9,282 9,115 44,725 50,894 20,531 20,049 65,256 70,943 $ – – – – – – – – – – – – 23,589 8,326 23,589 8,326 $ – – – – – – – – – – – – – – – – $ – – – – – – – – – – – – $ 196,151 192,619 98,076 96,311 16,213 96,311 98,076 96,311 106,991 105,065 515,507 586,617 226,670 207,126 226,670 207,126 1,229,034 1,149,323 1,744,541 1,735,940 % – – – – – – – – – – – – 51.8 51.6 – – 41 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019DIRECTORS' REPORT (continued) Remuneration Report – Audited (continued) Directors’ and senior executives’ remuneration (continued) Executive officers Year Salary and fees Short-term incentives Other short-term $ $ 276,527 215,911 278,940 202,934 362,641 270,079 344,240 266,713 $ – – – – 265,517 89,201 7,402 362,251 130,860 86,068* 374,614 198,982 64,500* 352,325 244,585 2,491 270,124 171,352 361,124 129,657 4,997 2,382 2019 2018 2019 2018 2019 2019 2018 2019 2019 2018 Post-employment and superannuation contributions $ 22,749 25,000 21,628 20,049 – – – – – – Mr M Barton (Chief Financial Officer and Company Secretary) Mr P D Charlesworth (Executive General Manager, Minelab & Codan Defence) Mr S A French (Executive General Manager, Land Mobile Radio) Mr R D Linehan (Chief Technology Officer, Codan and Executive General Manager, Minetec) Mr S P Sangster (Executive General Manager, Tactical Communications) Mr C P Stuff (Executive General Manager, Radio Communications) Total executive officers’ remuneration 2019 1,889,385 1,121,988 100,958 2018 1,358,918 798,286 66,882 44,377 45,049 83,214 486,182 3,837,804 425,266 2,777,211 Other long term Termination Performance Total Proportion of remuneration benefits rights performance related 10,051 7,527 19,106 3,995 $ – 9,678 9,106 8,233 64,632 62,182 111,700 82,810 $ – – – – – – – – – – 83,214 – 362,120 $ 116,884 121,381 144,528 152,236 142,628 151,649 82,142 – – $ 642,122 635,782 817,982 787,233 731,485 798,851 689,776 594,319 555,345 % 51.8 51.0 50.7 53.2 24.6 37.4 43.9 47.4 28.8 23.3 – – * Other short-term benefits for Mr R D Linehan relate to costs incurred for arrangements made following his relocation from overseas to Australia. Executive officers outside of Australia are paid in their local currencies. The Australian dollar equivalents are calculated using average exchange rates. Mr S P Sangster was appointed to the position of Executive General Manager, Tactical Communications on 1 July 2018, Mr S A French was appointed to the position of Executive General Manager, Land Mobile Radio on 25 February 2019 and Mr C P Stuff, our former Executive General Manager, Radio Communications, retired from the business on 8 March 2019. Short-term incentives which vested during the year are as follows: Mr D S McGurk 70% (30% forfeited), Mr M Barton 70% (30% forfeited), Mr P D Charlesworth 71% (29% forfeited), Mr S A French 70% (30% forfeited), Mr R D Linehan 35% (65% forfeited), Mr S P Sangster 62% (38% forfeited) and Mr C P Stuff 62% (38% forfeited). The remuneration amounts disclosed above have been calculated based on the expense to the company for the financial year. Therefore, items such as performance rights, annual leave and long service leave taken and provided for have been included in the calculations. As a result, the remuneration disclosed may not equal the salary package as agreed with the executive in any one year. Other than performance rights, no options or shares were issued during the year as compensation for any key management personnel. 42 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANExecutive officers Year Salary Short-term Other Post-employment and fees incentives short-term and superannuation Other long term Termination benefits Performance rights Total Proportion of remuneration performance related Mr M Barton (Chief Financial Officer and Company Secretary) Mr P D Charlesworth (Executive General Manager, Minelab & Codan Defence) Mr S A French (Executive General Manager, Land Mobile Radio) Mr R D Linehan Mr S P Sangster (Executive General Manager, Tactical Communications) Mr C P Stuff (Executive General Manager, Radio Communications) Total executive officers’ remuneration (Chief Technology Officer, Codan and Executive General Manager, Minetec) 2019 2018 2019 2018 2019 2019 2018 2019 2019 2018 $ $ 276,527 215,911 278,940 202,934 362,641 270,079 344,240 266,713 $ – – – – contributions $ 22,749 25,000 21,628 20,049 265,517 89,201 7,402 362,251 130,860 86,068* 374,614 198,982 64,500* 352,325 244,585 2,491 270,124 171,352 361,124 129,657 4,997 2,382 – – – – – – * Other short-term benefits for Mr R D Linehan relate to costs incurred for arrangements made following his relocation from overseas to Australia. 2019 1,889,385 1,121,988 100,958 2018 1,358,918 798,286 66,882 44,377 45,049 $ 10,051 7,527 19,106 3,995 – 9,678 9,106 8,233 64,632 62,182 111,700 82,810 $ – – – – – – – – 83,214 – $ 116,884 121,381 144,528 152,236 $ 642,122 635,782 817,982 787,233 – 362,120 142,628 151,649 82,142 – – 731,485 798,851 689,776 594,319 555,345 83,214 486,182 3,837,804 – 425,266 2,777,211 % 51.8 51.0 50.7 53.2 24.6 37.4 43.9 47.4 28.8 23.3 – – Corporate performance As required by the Corporations Act 2001, the following information is presented: Profit attributable to shareholders Dividends paid Share price at 30 June Change in share price at 30 June 2019 $ 45,665,443 26,872,758 3.47 0.47 2018 $ 41,574,557 19,593,194 3.00 0.66 2017 $ 43,514,938 17,723,725 2.34 1.16 2016 $ 15,494,607 7,082,530 1.18 0.03 2015 $ 12,507,609 5,310,509 1.15 0.40 43 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019Dividend The company announced a final dividend of 5.0 cents per share, fully franked, bringing the full-year dividend to 9.0 cents, up 6%. This dividend has a record date of 30 August 2019 and will be paid on 13 September 2019. In recognition of the continuing outperformance of the company, the company also announced a final special dividend of 2.5 cents per share for the second half, bringing the full-year special dividend to 5.0 cents which will be paid with the final dividend. DIRECTORS' REPORT (continued) The company continues to invest heavily in new products and has expanded into new markets in order to broaden the company’s sales and reduce earnings volatility. To that end, in FY19 we: • progressed development of our second simultaneous multi-frequency (Multi-IQ®) coin and treasure detector, the Vanquish™, to be released in the first half of FY20; • established a Minelab sales and distribution centre in Brazil to increase market penetration in the key gold detecting regions of Latin America; • completed development of the new Sentry® Military Manpack, further expanding our communications offering to the military market; and • integrated Minetec’s high-precision tracking capability into Caterpillar’s Minestar® underground solution for hard-rock mines. Given these initiatives, our strong performance in FY19 and our continuing investment in new product development, we have increased Codan’s base-business sales to a range of $200-220 million, delivering NPAT in the range of $28-33 million. This equates to an 11% increase in base-business sales and profitability. Operating and Financial Review Codan is a technology company that provides robust technology solutions that solve customers’ communications, safety, security and productivity problems in some of the harshest environments around the world. Our customers include United Nations organisations, mining companies, security and military groups, government departments, major corporates as well as individual consumers and small-scale miners. FY19 highlights: • Record sales of $271 million • Record statutory net profit after tax of $45.7 million • Annual dividend of 9.0 cents, fully franked (interim 4.0, final 5.0) • Annual special dividend of 5.0 cents, fully franked (interim 2.5, final 2.5) • Base-business sales re-rated to $200- 220 million, up from $180-200 million • Base-business NPAT re-rated to $28- 33 million, up from $25-30 million • Strong balance sheet continues – $37.5 million net cash Codan delivered a record profit in FY19, driven by a consistent level of gold detector sales into Africa, strong growth in sales of our recreational metal detectors and a successful transition into systems and solutions for our Communications business. 44 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANFinancial performance and other matters FY19 FY18 $m % of sales $m % of sales Revenue Communications Metal Detection Tracking Solutions Total revenue Underlying business performance EBITDA EBIT Interest Net profit before tax Taxation Underlying net profit after tax 77.6 182.1 11.1 270.8 78.6 63.4 (0.1) 63.3 (17.6) 45.7 29% 67% 4% 100% 29% 23% 23% 17% Non-underlying income/(expenses) after tax*: Newton property tax benefit Net profit after tax Underlying earnings per share, fully diluted Statutory earnings per share, fully diluted Ordinary dividend per share Special dividend per share – 45.7 25.3 cents 25.3 cents 9.0 cents 5.0 cents 25% 71% 4% 100% 31% 23% 23% 17% 56.5 164.0 9.4 229.9 70.4 53.7 (0.5) 53.2 (13.4) 39.8 1.7 41.5 22.1 cents 23.1 cents 8.5 cents 4.0 cents * Non-underlying income/(expenses) are considered to be outside of normal business activities of the group and for comparability reasons have been separately identified. The methodology of identifying and quantifying these items is consistently applied from year to year. Underlying profit is a non-IFRS measure used by management of the company to assess the operating performance of the business. The non-IFRS measures have not been subject to audit. Profit margins have remained strong despite the business significantly diversifying its product mix. Continuing strong cash generation resulted in a net cash position of $37.5 million at 30 June 2019. Performance by Business Unit Communications – Tactical and Land Mobile Radios (LMR) Codan Communications designs and manufactures mission-critical communications equipment for global military and public safety applications. Its solutions allow customers to save lives, enhance security and support peacekeeping activities worldwide. The division had an excellent year in FY19. Sales increased 37% to $78 million and segment profit increased 147% to $16.7 million. In the past, Communications has had base-business sales in the range of $65 million to $75 million per annum, with large tactical communications projects potentially taking us to the top of this range. Successful expansion into the global military market has increased the base business to a sales range of $70 million to $80 million per annum. We continue to execute our strategy of transitioning the Communications division from a product-centric business to a full solutions provider. Codan’s ongoing product development is being complemented by strategic partnerships with key suppliers in order to further broaden our solutions offering. In FY19, we completed development of the new Sentry® Military Manpack which will be available for shipment in FY20. This product strengthens our offering to the tactical military radio market and, combined with the Codan RIOS™ interoperability platform, allows us to offer communications solutions into mixed and legacy networks. Tactical Communications is specifically targeting the global military market, with a focus on developing world militaries in Africa, the Middle East, Asia, Eastern Europe and Latin America. As previously announced, the division recently won an AU $15 million contract to supply a tactical communications network incorporating Codan radios and interoperability solution, along with a suite of third party products. In LMR, our strategy is to grow the business by transitioning into larger systems projects and offering ongoing service and support. This will be enabled by the North American release of our new Cascade™ software-defined networked communications solution, an interoperable first-responder radio with excellent performance at a competitive price point. Cascade™ is scheduled for full release in FY21. 45 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019 DIRECTORS' REPORT (continued) Operating and Financial Review (continued) Performance by Business Unit (continued) Communications – Tactical and Land Mobile Radios (LMR) (continued) In April, we appointed Scott French, an LMR-industry executive with more than 20 years of experience, to lead the LMR business from Codan’s office in Victoria, Canada. We remain confident about the medium to long-term growth potential of this division. The Communications division has a strong order book, and we expect it to deliver FY20 sales in line with our increased base-business range. Metal Detection – Recreational, Gold Mining and Countermine Minelab is the world leader in handheld metal detecting technologies for the recreational, gold mining, demining and military markets. Over the past 30 years, Minelab has introduced more innovative technology than any of its competitors and has taken the metal detection industry to new levels of technological excellence. Minelab’s base business is comprised of recreational products sold primarily into Australia, Europe and the USA, a level of gold detector sales into Africa, Latin America and Asia Pacific and sales of countermine products (detecting and clearing explosive devices) globally. Minelab has had base-business sales of around $110 million per annum. Continuing strong sales of the EQUINOX® coin and treasure product, coupled with the imminent release of the new Vanquish™ detector and increasingly diversified gold detector sales, have resulted in an increase in base-business sales to a range of $120 million to $130 million per annum. Periods of stronger demand for gold detectors in Africa and new product introductions have the potential to push these revenues higher. 46 Given Minelab’s increasingly diversified sales mix, new products and improving retail distribution, we remain confident of continued success in FY20. Tracking Solutions – Minetec Minetec provides unique, high-precision tracking, productivity and safety solutions for underground hard-rock mines. Minetec’s technology allows real-time monitoring and control of mining operations in order to optimise productivity and enhance safety. It is an enabling technology required for mining automation. As previously announced, in 2018, Minetec entered into an exclusive global licensing, technology development and marketing agreement with Caterpillar Inc. During FY19, we worked closely with Caterpillar’s development team to integrate Minetec’s high-precision tracking capability into the Caterpillar MineStar® solution for underground hard-rock mines. As a result of this agreement, the division is now leveraging Caterpillar’s global dealer network to expand sales. During FY19, there were delays in securing contracts for the operational deployment of MineStar® and therefore Minetec did not meet its revenue target of $15 million for the year. Revenue increased marginally to $11.1 million, and the division recorded a small loss. Management is working closely with Caterpillar to improve this situation and is confident that these issues will be rectified in the near future. A period of outperformance occurred during the first half of FY19 as Minelab opened new gold markets in the Middle East. We also had the benefit of the first full year of EQUINOX® coin and treasure detector sales. This, coupled with strong ongoing demand for gold detectors, resulted in Minelab’s highest ever sales of $182 million, delivering segment contribution of $67 million in FY19. In Africa, Minelab dominates the artisanal gold mining market, with the GPZ 7000®, SDC2300® and Gold Monster® covering all price points. Existing customers are upgrading their GPX® gold detecting equipment and new customers are entering the market with the Gold Monster®. The SDC 2300® detector is exceptionally good at discovering fine-particle gold in mineralised soil and has become the alternative detector to the GPX 5000®. In Minelab’s established recreational markets, the EQUINOX® detector continues to take market share. During FY19, Minelab also progressed development of the new Vanquish™ coin and treasure detector, which, like the EQUINOX®, draws on Minelab’s proprietary simultaneous multi- frequency technology (Multi-IQ®) to make deep detecting easier and more efficient. Vanquish™ will be released to the market in the first half of FY20 and we believe it will take market share from competitors. In May 2019, Minelab delivered its first shipment of the new MDS-10® mine clearance detector, a dual-sensing detector which combines Minelab’s leading metal detection technology with ground penetrating radar. It provides superior results in the detection of minimal-metal landmines and improvised explosive devices. CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANDuring the second half, Minetec and Caterpillar partnered with Newmont Goldcorp to demonstrate value of the combined MineStar® system at their Tanami mine in the Northern Territory. This partnership allowed the team to commission MineStar® for Underground in an operational mine and quantify the benefits with real data. Separate to the Caterpillar agreement, Minetec has continued to install and commission the underground Fleet Management System in BHP’s Olympic Dam mine in South Australia. Vehicle installations are complete across some 650 machines, and we are working through the detailed process of site and user acceptance of the new system. Our strategy for Minetec continues to focus on working with Caterpillar in order to leverage their global distribution capability, thereby increasing Minetec’s sales and profitability to a level that is significant to the Codan group. Codan Defence Electronics Codan Defence Electronics was established in July 2016 to offer advanced manufacturing and through- life support to the Australian defence industry. Following three years of intensive business development and bidding activity, Codan has become an approved partner for two defence programmes, however only small supply contracts have been awarded to date. Given the very long decision cycles in defence, we once again do not expect this division to generate significant revenue in FY20. Outlook As a result of the strategic initiatives discussed above, we have succeeded in growing Codan’s base business during FY19, which represents an increased level of confidence by the board in the fundamental strength of our business. Codan has the ability to surprise on the upside as a result of increased demand for gold detectors and large project wins in our Communications division, both of which are difficult to predict. The board and management remain committed to maximising these opportunities while continuing to grow the company’s base business. FY19 was a record year for the company, with a very strong first half helped by opening a new market for gold detecting in the Middle East and the EQUINOX® coin and treasure detector launch. We do not expect to repeat this level of gold detector sales during the first half of FY20 and therefore expect sales to follow normal seasonality and be stronger in the second half. The board is not giving profit guidance at this point, however intends to provide a further business update at the Annual General Meeting in October. Dividends Dividends paid or declared by the company to members since the end of the previous financial year were: Cents per share Total amount $000 Franked Date of payment Declared and paid during the year ended 30 June 2019: FY18 final ordinary FY18 final special FY19 interim ordinary FY19 interim special Declared after the end of the year: FY19 final ordinary FY19 final special 4.5 4.0 4.0 2.5 8,062 7,166 7,166 4,479 100% 100% 100% 100% 14 September 2018 14 September 2018 13 March 2019 13 March 2019 5.0 2.5 8,961 4,481 100% 100% 13 September 2019 13 September 2019 All dividends paid or declared by the company since the end of the previous financial year were fully franked. Events subsequent to reporting date There has not arisen in the interval between the end of the financial 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, the results of those operations, or the state of affairs of the group, in future financial years. 47 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019DIRECTORS' REPORT (continued) Indemnification and insurance of officers Indemnification The company has agreed to indemnify the current and former directors and officers of the company and certain controlled entities against all liabilities to another person (other than the company or a related body corporate) that may arise from their position as directors and secretaries of the company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The Deed of Access, Indemnity and Insurance stipulates that the company and certain controlled entities will meet the full amount of any such liabilities, including costs and expenses. Insurance premiums 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 and legal expenses insurance contracts, as such disclosure is prohibited under the terms of the contract. Likely developments The group will continue with its strategy of continuing to invest in new product development and to seek opportunities to further strengthen profitability by expanding into related businesses offering complementary products and technologies. Further information about likely developments in the operations of the group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the group. Directors’ interests The relevant interest of each director in the shares issued by the company as notified by the directors to the Australian Securities Exchange in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: Mr D J Simmons Mr D S McGurk Lt-Gen P F Leahy Mr G R C Barclay Ms K J Gramp Ordinary shares 86,636 746,342 57,708 38,829 10,000 Non-audit services During the year, KPMG, the company’s auditor, has performed 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 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 company and have been reviewed by the Board Audit, Risk and Compliance Committee to ensure that they do not have an impact on 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 the company, acting as an advocate for the company or jointly sharing risks and rewards. Refer page 50 for a copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act 2001. 48 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANDetails of the amounts paid or payable to the auditor of the company, KPMG, and its related practices for audit and non- audit services provided during the year are as follows: Statutory audit Audit and review of financial reports (KPMG Australia) Services other than statutory audit Taxation compliance services (KPMG Australia) Taxation compliance services (overseas KPMG firms) Corporate finance services Consolidated 2019 $ 2018 $ 214,763 204,874 214,763 204,874 55,973 56,760 – 27,220 40,466 96,439 32,591 116,571 Rounding off The company is of a kind referred to in ASIC Legislative Instrument 2016/191 dated 1 April 2016 and, in accordance with that Legislative Instrument, amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. This report is made with a resolution of the directors: D J Simmons Director D S McGurk Director Dated at Mawson Lakes this 23rd day of August 2019. 49 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019LEAD AUDITOR’S INDEPENDENCE DECLARATION under Section 307c of the Corporations Act 2001 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Codan Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Codan Limited for the financial year ended 30 June 2019 there have been: i. ii. 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 Paul Cenko Partner Adelaide 23 August 2019 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. 18 50 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN CONSOLIDATED INCOME STATEMENT for the year ended 30 June 2019 Continuing operations Revenue Cost of sales Gross profit Administrative expenses Sales and marketing expenses Engineering expenses Net financing costs Other (expenses)/income Profit before tax Income tax expense Profit for the period Attributable to: Equity holders of the company Non-controlling interests Note Consolidated 2019 $000 2018 $000 2 3 4 7 270,811 (117,478) 153,333 (20,830) (44,159) (24,756) (203) (83) 63,302 (17,646) 45,656 45,665 (9) 45,656 229,914 (98,209) 131,705 (19,295) (37,976) (20,360) (730) (152) 53,192 (11,644) 41,548 41,575 (27) 41,548 Earnings per share for profit attributable to the ordinary equity holders of the company: Basic earnings per share Diluted earnings per share 6 6 25.5 cents 25.3 cents 23.4 cents 23.1 cents The consolidated income statement is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 56 to 88. 51 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 June 2019 Profit for the period Items that may be reclassified subsequently to profit or loss Changes in fair value of cash flow hedges less tax effect Changes in fair value of cash flow hedges, net of income tax Exchange differences on translation of foreign operations Consolidated 2019 $000 2018 $000 45,656 41,548 406 (122) 284 3,124 (1,170) 351 (819) 954 Note 21 21 Other comprehensive income/(loss) for the period, net of income tax 3,408 135 Total comprehensive income for the period 49,064 41,683 Attributable to: Equity holders of the company Non-controlling interests 49,073 (9) 49,064 41,710 (27) 41,683 The consolidated statement of comprehensive income is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 56 to 88. 52 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANCONSOLIDATED BALANCE SHEET as at 30 June 2019 Consolidated Note 2019 $000 2018 $000 Current assets Cash and cash equivalents Trade and other receivables Inventory Current tax assets Assets held for sale Other assets Total current assets Non-current assets Property, plant and equipment Product development Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax payable Provisions Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity Total equity attributable to the equity holders of the company Non-controlling interests 8 11 12 7 14 13 15 16 17 18 7 19 7 19 20 21 37,521 19,007 36,703 337 3,750 5,189 102,507 14,126 69,857 87,827 171,810 274,317 44,161 1,635 8,033 53,829 8,082 1,192 9,274 63,103 211,214 43,761 67,652 99,801 211,214 211,342 (128) 211,214 The consolidated balance sheet is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 56 to 88. 27,711 29,784 31,588 91 3,750 2,474 95,398 12,489 59,830 86,585 158,904 254,302 46,346 6,057 7,299 59,702 5,994 541 6,535 66,237 188,065 42,721 64,326 81,018 188,065 188,184 (119) 188,065 53 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2019 2019 Balance as at 1 July 2018 Profit for the period Performance rights expensed Change in fair value of cash flow hedges Exchange differences on translation of foreign operations Transfers to and from reserves Transactions with owners of the company Dividends recognised during the period Issue of share capital through performance rights Employee share plan, net of issue costs Consolidated Foreign currency translation reserve $000 Equity based payment reserve $000 Hedging reserve $000 3,588 – – – 3,124 (430) – – 284 – 2,187 – 712 – – Share capital $000 42,721 – – – – Profit reserve $000 Retained earnings $000 Total $000 58,981 – – – – 81,018 188,065 45,656 45,656 712 – 284 – 3,124 – 42,721 6,712 (146) 2,899 58,981 126,674 237,841 – 794 246 1,040 – – – – – – – – – (794) – (794) – – – – (26,873) – (26,873) – – (26,873) 246 (26,627) Balance at 30 June 2019 43,761 6,712 (146) 2,105 58,981 99,801 211,214 2018 Balance as at 1 July 2017 Profit for the period Performance rights expensed Change in fair value of cash flow hedges Exchange differences on translation of foreign operations Transfers to and from reserves Transactions with owners of the company Dividends recognised during the period Issue of share capital through performance rights Employee share plan, net of issue costs Consolidated Foreign currency translation reserve $000 Equity based payment reserve $000 Hedging reserve $000 Profit reserve $000 Retained earnings $000 Total $000 2,634 – – – 954 – 3,588 – – – – 389 – – (819) – – – 774 – – 58,981 – – – – 59,063 41,548 – – – 164,995 41,548 774 (819) 954 – (430) 1,954 2,728 – 58,981 – 100,611 – 207,452 – – – – – (541) – (541) – – – – (19,593) – (19,593) – – (19,593) 206 (19,387) Share capital $000 43,928 – – – – (1,954) 41,974 – 541 206 747 Balance at 30 June 2018 42,721 3,588 (430) 2,187 58,981 81,018 188,065 The consolidated statement of changes in equity is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 56 to 88. 54 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANCONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 June 2019 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Interest received Interest paid Income taxes paid (net) Net cash from operating activities Cash flows from investing activities Proceeds from disposal of property, plant and equipment Payments for capitalised product development Payments for intellectual property Acquisition of property, plant and equipment Acquisition of intangibles (computer software and licences) Net cash used in investing activities Cash flows from financing activities Dividends paid Net cash provided by/(used in) financing activities Net increase/(decrease) in cash held Cash and cash equivalents at the beginning of the financial year Effects of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the financial year Consolidated Note 2019 $000 2018 $000 290,738 (208,290) 176 (226) (20,305) 62,093 – (20,453) (226) (4,132) (866) (25,677) (26,873) (26,873) 9,543 27,711 267 37,521 231,096 (159,759) 94 (597) (22,616) 48,218 16 (16,543) (2,029) (3,427) (470) (22,453) (19,593) (19,593) 6,172 21,421 118 27,711 10 8 The consolidated statement of cash flows is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 56 to 88. 55 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 Significant Accounting Policies 1. Codan Limited (the “company”) is a company domiciled in Australia and is a for-profit entity. The consolidated financial report of the company as at and for the year ended 30 June 2019 comprises the company and its subsidiaries (together referred to as the “group” and individually as “group entities”). The financial report was authorised for issue by the directors on 23 August 2019. of assets within the next financial year relate to impairment assessments of non-current assets, including product development and goodwill (refer note 17). Changes in accounting policies Except as described below, the accounting policies applied in these financial statements are the same as those applied in the group’s consolidated financial statements as at and for the year ended 30 June 2018. AASB 15 – Revenue from Contracts with Customers AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced AASB 118 Revenue and related interpretations. The group adopted AASB 15 on 1 July 2018. The majority of the group’s sales, being sale of goods, have only one performance obligation, resulting in AASB 15 not having a material impact on recognition of revenue compared to the group’s accounting policies applied prior to implementation. Accordingly, the information presented for 2018 has not been restated. AASB 15 applies a five-step model to account for revenue arising from contracts with customers. It requires the identification of discrete performance obligations within a customer contract and an associated transaction price that is allocated to these obligations. Revenue is recognised upon satisfaction of these performance obligations, which occur when a customer obtains control of the goods or services. The key judgements in applying AASB 15 include the amount of variable consideration to be recognised, determining whether multiple distinct performance obligations are provided in a single contract, and the timing of transfer of control. The details of the new significant accounting policies and the nature of the changes to previous accounting policies in relation to the group’s various goods and services are set out below: Statement of compliance (a) The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001. The consolidated financial report of the group complies with International Financial Reporting Standards (IFRSs) adopted by the International Accounting Standards Board (“IASB”). (b) Basis of preparation The consolidated financial report is prepared in Australian dollars (the company’s functional currency and the functional currency of the majority of the group) on the historical costs basis except that derivative financial instruments are stated at their fair value. The group is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and, in accordance with that Legislative Instrument, amounts in the financial report have been rounded off to the nearest thousand dollars, unless otherwise stated. Use of estimates and judgements The preparation of a financial report in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts 56 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANType of product or service Sale of goods Nature, timing of satisfaction of performance obligations Nature of change in accounting policy The majority of revenue recognised by the Communications and Metal Detection segments is for the sale of goods. Most customers obtain control when the goods are dispatched from the group’s warehouse. Invoices are generated and revenue is recognised at that point in time. AASB 15 did not have a significant impact on the group’s accounting policies. Construction contracts The group’s construction contracts largely occur within the Tracking Solutions segment. The business recognises revenue over time, adopting the input method, which looks at the resources used to date to create the asset being transferred. Customers are invoiced in accordance with established contractual terms, and consideration is payable in line with agreed payment terms. In most cases, the measurement of revenue (when recognised over time) will not be the same as amounts invoiced to a customer. In these circumstances, the business will recognise either a contract asset (accrued income) or a contract liability (deferred income) for the difference between cumulative revenue recognised and cumulative amounts billed for that contract. AASB 15 did not have a significant impact on the group’s accounting policies. The group also provides services to its customers, however the aggregate amount of service revenue is not material to the group. AASB 9 – Financial Instruments The group has adopted AASB 9 Financial Instruments from 1 July 2018. AASB 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. It replaced AASB 139 Financial Instruments: Recognition and Measurement. The group has no complex financial instruments and the application of the AASB 9 principles relating to hedge accounting and expected credit loss impairment does not result in a material impact to the financial statements compared to the group’s previous accounting policies. Basis of consolidation (c) Subsidiaries are entities controlled by the group. Control exists when the group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date control commences until the date control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the group. Unrealised gains and losses and inter-entity balances resulting from transactions with or between subsidiaries are eliminated in full on consolidation. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the group. Transaction costs, other than those associated with the issue of debt or equity securities that the group incurs in connection with a business combination, are expensed as incurred. Upon the loss of control, the group derecognises the assets and liabilities of the subsidiary, and non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in the income statement. Non-controlling interests are measured at their proportionate share of the subsidiaries’ net assets. (d) Revenue recognition Revenues are recognised at the fair value of the consideration received or receivable, net of the amount of goods and services tax (GST) payable to taxation authorities. Sale of goods Revenue from the sale of goods is measured at the fair value of the consideration received or receivable (net of rebates, returns, discounts and other allowances). Revenue is recognised when the significant risks and rewards of ownership pass to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. Control usually passes when the goods are shipped to the customer. Construction contracts Contract revenue includes the initial amount agreed in the contract, plus any variations in contract work, claims and incentive payments, to the extent that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a construction contract can be estimated reliably, contract revenue is recognised in the income statement in proportion to the stage of completion of the contract. Contract expenses are recognised as incurred unless they create an asset related to future contract activity. 57 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) (d) Revenue recognition (continued) Construction contracts (continued) The stage of completion is assessed by reference to professional judgement of work performed. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. An expected loss on a contract is recognised immediately in the income statement. Rendering of services Revenue from rendering services is recognised in the period in which the service is provided. (e) Expenses Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense and are spread over the lease term. Net financing costs Net financing costs include interest paid relating to borrowings, interest received on funds invested, unwinding of discounts, foreign exchange gains and losses, and gains and losses on hedging instruments that are recognised in the income statement. Qualifying assets are assets that take more than 12 months to get ready for their intended use or sale. In these circumstances, borrowing costs are capitalised to the cost of the qualifying assets. Interest income and borrowing costs are recognised in the income statement on an accruals basis, using the effective-interest method. Foreign currency gains and losses are reported on a net basis. Foreign currency (f) Foreign currency transactions are translated to Australian dollars at the rates of exchange ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement, except for differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation, or qualifying cash flow hedges, which are recognised in other comprehensive income and presented within equity, to the extent that the hedge is effective. 58 Foreign operations The assets and liabilities of foreign operations, including goodwill and fair-value adjustments arising on acquisition, are translated to Australian dollars at the foreign exchange rates ruling at the reporting date. Equity items are translated at historical rates. The income and expenses of foreign operations are translated to Australian dollars at the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on translation are taken directly to the foreign currency translation reserve until the disposal, or partial disposal, of the foreign operations. Foreign exchange gains and losses arising from a monetary item receivable 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 on consolidation they are recognised in other comprehensive income, and are presented within equity in the foreign currency translation reserve. Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised directly in other comprehensive income to the extent that the hedge is effective, and are presented within equity in the hedging reserve. To the extent that the hedge is ineffective, such differences are recognised in the income statement. When the hedged part of a net investment is disposed of, the associated cumulative amount in equity is transferred to the income statement as an adjustment to the income statement on disposal. (g) Derivative financial instruments The group has used derivative financial instruments to hedge its exposure to foreign exchange and interest rate movements. In accordance with its policy, the group does not hold derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at fair value. Attributable transaction costs are recognised in the income statement when incurred. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on re-measurement to fair value is recognised immediately in the income statement unless the derivative qualifies for hedge accounting. CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANHedging On initial designation of the hedge, the group formally documents the relationship between the hedging instrument and hedged item, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in comprehensive income and presented within equity. When the forecast transaction subsequently results in the recognition of a financial asset or liability, then the associated gains and losses that were recognised directly in equity are reclassified into the income statement. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the unrealised gain or loss recognised in equity is recognised immediately in the income statement. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences 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. Tax consolidation The company is the head entity in the tax-consolidated group comprising all the Australian wholly owned subsidiaries. The company recognises the current tax liability of the tax-consolidated group. The tax-consolidated group has determined that subsidiaries will account for deferred tax balances and will make contributions to the head entity for the current tax liabilities as if the subsidiary prepared its tax calculation on a stand-alone basis. The company recognises deferred tax assets arising from unused tax losses of the tax consolidated group to the extent that it is probable that future taxable profits of the tax consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses, as a result of revised assessments of the probability of recoverability, are recognised by the head entity only. (h) Taxation Income tax expense on the income statement comprises a current and deferred tax expense. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, or in other comprehensive income. Current tax expense is the expected tax payable on the taxable income for the year using tax rates enacted or substantially enacted at the reporting date, adjusted for any prior year under or over provision. The movement in deferred tax assets and liabilities results in a deferred tax expense, unless the movement results from a business combination, in which case the tax entry is recognised in goodwill, or a transaction has impacted equity, in which case the tax entry is also reflected in equity. Deferred tax assets and liabilities arise from temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset 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 the tax liabilities and assets on a net basis, or their tax assets and liabilities will be realised simultaneously. Goods and services tax (i) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or is expensed. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. Cash flows are included in the Consolidated Statement of Cash Flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recovered from, or payable to, the ATO are classified as operating cash flows. Cash and cash equivalents (j) Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts form an integral part of the group’s cash management and are included as a component of cash and cash equivalents for the purpose of the Consolidated Statement of Cash Flows. 59 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) Trade and other receivables (k) Trade debtors are to be settled within agreed trading terms, typically less than 60 days, and are initially recognised at fair value and then subsequently at amortised cost, less any expected credit loss allowances. Under the “expected credit loss” model, the allowance for credit losses is calculated by considering on a discounted basis the cash shortfalls it would incur in various default scenarios for prescribed future periods and multiplying the shortfalls by the probability weighted outcomes. Significant receivables are individually assessed. Non-significant receivables are not individually assessed; instead, credit loss testing is performed by considering the risk profile of that group of receivables. All allowances for credit losses are recognised in the income statement. Inventories (l) Raw materials and stores, work in progress and finished goods are measured at the lower of cost (determined on a first-in first- out basis) and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. In the case of manufactured inventories and work in progress, costs comprise direct materials, direct labour, other direct variable costs and allocated factory overheads necessary to bring the inventories to their present location and condition. (m) Project work in progress Project work in progress represents the gross unbilled amount expected to be collected from customers for project work performed to date. It is measured at cost, plus profit recognised to date, less progress billings and recognised losses. Cost includes all expenditure related directly to specific projects. Project work in progress is presented as part of other assets in the balance sheet for all projects in which costs incurred, plus recognised profits, exceed progress billings. (n) Intangible assets Product development costs Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense when incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products, is capitalised only if development costs can be measured reliably, the product is technically and commercially feasible, future economic benefits are probable and the group intends to, and has 60 sufficient resources to, complete development and to use or sell the asset. The expenditure capitalised has a finite useful life and includes the cost of materials, direct labour and an appropriate proportion of overheads that are directly attributable to preparing the asset for its intended use, less accumulated amortisation and accumulated impairment losses. Other development expenditure is recognised in the income statement when incurred. Goodwill All business combinations are accounted for by applying the acquisition method, and goodwill may arise upon the acquisition of subsidiaries. Goodwill is stated at cost, less any accumulated impairment losses, and has an indefinite useful life. It is allocated to cash-generating units and is not amortised but is tested annually for impairment. Measuring goodwill The group measures goodwill as the fair value of the consideration transferred including the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired (including intangible assets) and liabilities assumed, all measured as of the acquisition date. Consideration transferred includes the fair values of the assets transferred, liabilities incurred by the group to the previous owners of the acquiree, and equity interests issued by the group. Consideration transferred also includes the fair value of any contingent consideration and share-based payment awards of the company. Contingent liabilities A contingent liability of the acquiree is assumed in a business combination only if such a liability represents a present obligation and arises from a past event, and its fair value can be measured reliably. Non‑controlling interest The group measures any non-controlling interest at its proportionate interest in the identifiable net assets of the acquiree. Transaction costs Transaction costs that the group incurs in connection with a business combination, such as finder’s fees, legal fees, due diligence fees, and other professional and consulting fees, are expensed as incurred. Licences and other intangible assets Licences and other intangible assets that are acquired by the group, which have finite useful lives, are stated at cost, less accumulated amortisation and accumulated impairment losses. Expenditure on internally generated goodwill and brands is recognised in the income statement as incurred. CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANSubsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in the income statement as incurred. Amortisation Amortisation is calculated on the cost of the asset, less its residual value. Amortisation is charged to the income statement on either a straight-line or units of production basis. Intangible assets are amortised over their estimated useful lives from the date that they are available for use, but goodwill is only written down if there is an impairment. The estimated useful lives in the current and comparative periods are as follows: Straight-line Units of production 2 - 15 years 5 - 10 years Product development, licences and intellectual property: Computer software: 3 - 7 years Not applicable Amortisation methods, useful lives and residual values are reviewed at each reporting date. Assets held for sale (o) 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 than through continuing use. Such assets are generally measured at the lower of their carrying amount and fair value less costs to sell. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortised or depreciated. (p) Property, plant and equipment Owned assets Items of property, plant and equipment are measured at cost, less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials, direct labour and 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. Land and buildings that had been revalued to fair value prior to the transition to AIFRS, being 1 July 2004, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” or “other expenses” in the income statement. Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in the income statement as incurred. Depreciation Depreciation is calculated on the depreciable amount, which is the cost of an asset, less its residual value. Depreciation is charged to the income statement on property, plant and equipment on a straight-line basis over the estimated useful life of the assets. Capitalised leased assets are amortised on a straight-line basis over the term of the relevant lease, or where it is likely the group will obtain ownership of the asset, the life of the asset. Land is not depreciated. The main depreciation rates used for each class of asset for current and comparative periods are as follows: Leasehold property Plant and equipment 6% to 10% 7% to 40% Depreciation methods, useful lives and residual values are reviewed at each reporting date. Impairment (q) The carrying amounts of the group’s assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. If any such impairment exists, the asset’s recoverable amount is estimated. For goodwill and intangible assets that have an indefinite useful life or are not yet available for use, the recoverable amount is estimated annually. The recoverable amount of 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. 61 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) (q) Impairment (continued) The group’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the cash-generating units to which the corporate asset belongs. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. A cash- generating unit is the smallest identifiable asset group that generates cash inflows that are largely independent from other assets or groups of assets. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill and then to reduce the carrying amount of the other assets in the cash-generating unit on a pro-rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimate 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. Payables (r) Liabilities are recognised for amounts to be paid in the future for goods or services received. Trade accounts payable are normally settled within 60 days. Long service leave The provision for employee benefits for long service leave represents the present value of the estimated future cash outflows resulting from the employees’ services provided to the reporting date. The provision is calculated using expected future increases in wage and salary rates, including related on-costs, and expected settlement dates based on turnover history, and is discounted using high-quality corporate bond rates at the reporting date which most closely match the terms of maturity of the related liabilities. Defined contribution superannuation 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. The group contributes to defined contribution superannuation plans and these contributions are expensed in the income statement as incurred. Provisions (u) A provision is recognised when there is a present legal or constructive obligation as a result of a past event, it can be estimated reliably and it is probable that a future sacrifice of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows required to settle the obligation at a pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost. Dividends Interest bearing borrowings (s) Interest bearing borrowings are recognised initially at their 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 income statement over the period of the borrowings on an effective-interest basis. A provision for dividends payable is recognised in the reporting period in which the dividends are declared. Restructuring and employee termination benefits A provision for restructuring is recognised when the group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. Warranty A provision is made for the group’s estimated liability on all products sold and still under warranty, and includes claims already received. The estimate is based on the group’s warranty cost experience over previous years. (t) Employee benefits Wages, salaries and annual leave Liabilities for employee benefits for wages, salaries, incentives and annual leave represent present obligations resulting from employees’ services provided to the reporting date, calculated at undiscounted amounts based on remuneration rates that the group expects to pay as at the reporting date, including related on-costs such as workers’ compensation insurance and payroll tax. 62 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANThe group will recognise new assets and liabilities for its operating leases of office, warehouse and factory facilities. The nature of expenses related to those leases will now change because the group will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities. Previously, the group recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. Based on the information currently available, the group estimates that it will recognise additional lease liabilities of $30.151 million and right-of-use assets of $29.315 million as at 1 July 2019. The impact on its income statement for the year ended 30 June 2020 is expected to be immaterial. In addition, the group does not expect the adoption of AASB 16 to impact its ability to comply with any loan covenants. The group plans to apply AASB 16 initially on 1 July 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 July 2019, with no restatement of comparative information. The group plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply AASB 16 to all contracts entered into before 1 July 2019 and identified as leases in accordance with AASB 117 and IFRIC 4. (v) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. (w) Share-based payment transactions Share-based payments in which the group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained from the group. 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 which vest. (x) Future Australian Accounting Standards requirements A number of new standards are effective after 2019 and earlier application is permitted; however, the group has not early adopted the new or amended standards in preparing these consolidated financial statements. Of those standards that are not yet effective, AASB 16 is expected to have a material impact on the group’s financial statements in the period of initial application. The group is required to adopt AASB 16 Leases from 1 July 2019. The group has assessed the estimated impact that initial application of AASB 16 will have on its consolidated financial statements, as described below. The actual impact of adopting the standard on 1 July 2019 may change because the new accounting policies are subject to change until the group presents its first financial statements that include the date of initial application. AASB 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short- term leases and leases of low-value items. AASB 16 replaces existing leases guidance, including AASB 117 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC- 15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. 63 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) GROUP PERFORMANCE Segment activities 2. The group determines and presents operating segments based on the information that is internally provided to the CEO, who is the group’s chief operating decision-maker. An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses. All operating segments’ results are regularly reviewed by the group’s CEO, to make decisions about resources to be allocated to the segments and assess their performance. Segment results relate to the underlying operations of a segment and are as reported to the CEO, and include the expense from functions that are directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the company’s headquarters and cash balances), corporate expenses, non- underlying other income and expense, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. The group’s primary format for segment reporting is based on business segments. Business segments Two or more operating segments may be aggregated into a single operating segment if they are similar in nature. The group comprises three business segments. The Communications segment includes the design, development, manufacture and marketing of communications equipment. The Metal Detection segment includes the design, development, manufacture and marketing of metal detection equipment. Lastly, the Tracking Solutions segment includes the design, manufacture, maintenance and support of a range of electronic products and associated software for the mining sector. Geographical segments In presenting information on the basis of geographical segments, segment revenue has been based on the geographic location of the invoiced customer. Segment assets are based on the geographic location of the assets. The group has manufacturing and corporate offices in Australia and Canada, with overseas representative offices in the United States of America, United Arab Emirates, South Africa, Brazil and Ireland. 64 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANInformation about reportable segments Communications Metal Detection Tracking Solutions Consolidated 2019 $000 2018 $000 2019 $000 2018 $000 2019 $000 2018 $000 2019 $000 2018 $000 Revenue External segment revenue Result Segment result Net financing cost Unallocated income and expenses Profit from operating activities Income tax expense Net Profit Non-cash items included above Depreciation and amortisation Unallocated depreciation and amortisation Total depreciation and amortisation Assets Capital expenditure Unallocated capital expenditure Total capital expenditure Segment assets Unallocated corporate assets Consolidated total assets 77,639 56,525 182,058 164,039 11,114 9,350 270,811 229,914 16,715 6,763 67,323 64,064 (1,183) 706 5,874 7,076 7,523 8,485 1,312 606 82,855 (203) (19,350) 63,302 (17,646) 45,656 71,533 (730) (17,611) 53,192 (11,644) 41,548 14,709 536 16,167 494 15,245 16,661 806 838 1,442 1,310 153 88,574 81,565 112,655 111,207 26,646 354 2,502 2,401 925 1,731 3,427 4,132 25,483 227,875 218,255 36,047 46,442 274,317 254,302 The group derived its revenues from a number of countries. The three significant countries where revenue was 10% or more of total revenue were United Arab Emirates totalling $65.908 million (2018: $54.745 million), the United States of America totalling $60.141 million (2018: $40.925 million) and Australia totalling $34.910 million (2018: $37.437 million). The group’s non-current assets, excluding financial instruments and deferred tax assets, were located as follows: Australia $128.234 million (2018: $121.474 million), Canada $43.254 million (2018: $37.051 million), United Arab Emirates $0.223 million (2018: $0.256 million), the United States of America $0.079 million (2018: $0.106 million) and Ireland $0.020 million (2018: $0.019 million). 65 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) GROUP PERFORMANCE (continued) Consolidated 2019 $000 2018 $000 (176) 134 245 203 90 2,478 2,568 7,477 4,007 409 289 495 12,677 42,181 3,746 3,719 886 2,514 712 246 54,004 (94) 222 602 730 148 2,699 2,847 7,891 3,339 1,939 161 484 13,814 38,629 3,541 3,158 466 1,743 774 206 48,517 6,113 5,580 62 21 83 161 (9) 152 Expenses 3. Net financing costs: Interest income Net foreign exchange (gain)/loss Interest expense Depreciation of: Leasehold property Plant and equipment Amortisation of: Product development – straight-line Product development – units of production Intellectual property Computer software Licences Personnel expenses: Wages and salaries Other associated personnel expenses Contributions to defined contribution superannuation plans Long service leave expense Annual leave expense Performance rights plan Employee share plan Additional expenses disclosed: Operating lease rental expense Other expenses / (income) 4. (Gain)/loss on sale of property, plant and equipment Other expenses/(income) 66 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN5. Dividends Codan Limited has provided or paid for dividends as follows: – ordinary final fully-franked dividend of 4.5 cents per ordinary share paid on 14 September 2018 – special final fully-franked dividend of 4.0 cents per ordinary share paid on 14 September 2018 – ordinary interim fully-franked dividend of 4.0 cents per ordinary share paid on 13 March 2019 – special interim fully-franked dividend of 2.5 cents per ordinary share paid on 13 March 2019 – ordinary final fully-franked dividend of 4.0 cents per ordinary share paid on 3 October 2017 – special final fully-franked dividend of 3.0 cents per ordinary share paid on 3 October 2017 – ordinary interim fully-franked dividend of 4.0 cents per ordinary share paid on 3 April 2018 Consolidated 2019 $000 2018 $000 8,062 7,166 7,166 4,479 – – – – – – – 7,125 5,343 7,125 26,873 19,593 Subsequent events Since the end of the financial year, the directors declared a final ordinary fully franked dividend of 5.0 cents per share and a fully franked special dividend of 2.5 cents per share, bringing total final dividends to 7.5 cents fully franked, payable on 13 September 2019. The financial impact of this final dividend of $13,442,093 has not been brought to account in the group financial statements for the year ended 30 June 2019 and will be recognised in subsequent financial reports. Dividend franking account Franking credits available to shareholders for subsequent financial years (30%) 27,110 23,334 The franking credits available are based on the balance of the dividend franking account at year-end, adjusted for the franking credits that will arise from the payment of the current tax liability. The ability to utilise the franking account credits is dependent upon there being sufficient available profits to declare dividends. Based upon the above declared dividend, the impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by $5,760,897 (2018: $6,491,207). 6. Earnings per share The group presents basic 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 performance rights granted to employees. Net profit used for the purpose of calculating basic and diluted earnings per share 45,665 41,575 The weighted average number of shares used as the denominator number for basic earnings per share was 178,994,483 (2018: 177,951,688). The movement in the year is as a consequence of the shares issued under the employee share plan and the performance rights plan. The calculation of diluted earnings per share at 30 June 2019 was based on a weighted average number of ordinary shares outstanding, after adjustment for the effects of all dilutive potential ordinary shares of 180,530,338 (2018: 179,977,716). The movement in the year relates to the shares issued under the employee share plan and the performance rights granted. 67 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) TAXATION Consolidated 2019 $000 2018 $000 16,336 (135) 16,201 1,445 17,646 13,064 (606) 12,458 (814) 11,644 18,991 15,958 (1,139) (135) – (21) 17,696 143 (193) 17,646 (5,966) 4 20,305 695 (16,336) (1,298) 337 (1,635) (1,298) (2,229) (606) (1,714) (6) 11,403 229 12 11,644 (16,089) (4) 22,616 575 (13,064) (5,966) 91 (6,057) (5,966) 7. Income tax A. Income tax expense Current tax expense: Current tax paid or payable for the financial year Adjustments for prior years Deferred tax expense: Origination and reversal of temporary differences Total income tax expense in income statement Reconciliation between tax expense and pre-tax net profit: The prima facie income tax expense calculated at 30% on the profit from ordinary activities Decrease in income tax expense due to: Additional deduction for research and development expenditure (Over)/under provision for taxation in previous years Demolition of buildings Sundry items Increase in income tax expense due to: Non-deductible expenses Effect of tax rates in foreign jurisdictions Income tax expense B. Current tax liabilities / assets Balance at the beginning of the year Net foreign currency differences on translation of foreign entities Income tax paid (net) Adjustments from prior year Current year's income tax paid or payable on operating profit Disclosed in balance sheet as: Current tax asset Current tax payable 68 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANC. Deferred tax liabilities Provision for deferred income tax comprises the estimated expense at the applicable rate of 30% on the following items: Expenditure currently tax deductible but deferred and amortised for accounting Set-off of tax in relation to deferred tax assets: Difference in depreciation of property, plant and equipment Payments for intellectual property not currently deductible Provisions for employee benefits not currently deductible Provisions and accruals not currently deductible Sundry items Carry forward overseas tax losses Carry forward overseas R&D tax credits Consolidated 2019 $000 2018 $000 20,241 18,441 (330) (2,165) (2,042) (3,367) (144) (55) (4,056) 8,082 (397) (3,051) (1,799) (2,942) (350) (20) (3,888) 5,994 69 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) CASH MANAGEMENT 8. Cash and cash equivalents Petty cash Cash at bank 9. Loans and borrowings The group has access to the following lines of credit: Total facilities available at balance date: Multi-option facility Commercial credit card Facilities utilised at balance date: Multi-option facility - guarantees Commercial credit card Facilities not utilised at balance date: Multi-option facility Commercial credit card Consolidated 2019 $000 2018 $000 2,012 35,509 37,521 300 27,411 27,711 40,000 200 40,200 6,281 23 6,304 33,719 177 33,896 40,000 200 40,200 3,336 11 3,347 36,664 189 36,853 In addition to these facilities, the group has cash at bank and short-term deposits of $37,521,000 as set out in note 8. Bank Facilities Facilities are supported by interlocking guarantees between the company and its subsidiaries. The multi-option facility of $40 million has a term of three years expiring in January 2022, and is subject to compliance with certain financial covenants, with an additional facility of $40 million available subject to our financial institutions’ approval. Consolidated 2019 % 0.67 2.61 2018 % 0.45 2.60 Weighted average interest rates: Cash at bank Cash advance 70 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN10. Notes to the statement of cash flows Reconciliation of profit after income tax to net cash provided by operating activities Profit after income tax Add/(less) items classified as investing or financing activities: (Gain)/loss on sale of non-current assets Add/(less) non-cash items: Depreciation of: Leasehold property Plant and equipment Amortisation Performance rights and employee share plan expensed Increase/(decrease) in income taxes Increase/(decrease) in net assets affected by translation Net cash from operating activities before changes in assets and liabilities Change in assets and liabilities during the financial year: Reduction/(increase) in receivables Reduction/(increase) in inventories Reduction/(increase) in other assets Increase/(reduction) in trade and other payables Increase/(reduction) in provisions Net cash from operating activities Consolidated 2019 $000 2018 $000 45,656 41,548 62 161 90 2,478 12,677 958 (2,659) 278 59,540 10,777 (5,115) (2,715) (1,779) 1,385 62,093 148 2,699 13,814 980 (10,972) (100) 48,278 (9,227) (561) 463 9,113 152 48,218 71 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) OPERATING ASSETS AND LIABILITIES Consolidated 2019 $000 2018 $000 11. Trade and other receivables Current Trade receivables Less: Expected credit loss provision Other debtors 12. Inventory Raw materials Work in progress Finished goods 20,177 (1,343) 173 19,007 9,667 14,003 13,033 36,703 In 2019, inventories of $102.216 million (2018: $83.904 million) were recognised as an expense and included in cost of sales. 29,994 (459) 249 29,784 6,565 12,695 12,328 31,588 2,188 – 286 2,474 3,811 832 546 5,189 3,750 3,750 13. Other assets Prepayments Project work in progress Other 14. Assets held for sale Freehold land In FY18, the company signed a contract for the sale of its Newton property. The contract is subject to a number of conditions to be satisfied by the purchaser, with settlement expected to take place in FY20. 15. Property, plant and equipment Leasehold property at cost Accumulated depreciation Plant and equipment at cost Accumulated depreciation Capital work in progress at cost Total property, plant and equipment 72 1,134 (566) 568 33,703 (23,346) 10,357 3,201 14,126 858 (498) 360 33,397 (22,595) 10,802 1,327 12,489 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANConsolidated 2019 $000 2018 $000 15. Property, plant and equipment Reconciliations Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Leasehold property improvements Carrying amount at beginning of year Additions Transfers Disposals Depreciation Net foreign currency differences on translation of foreign entities Carrying amount at end of year Plant and equipment Carrying amount at beginning of year Additions Transfers Disposals Depreciation Net foreign currency differences on translation of foreign entities Carrying amount at end of year Capital work in progress at cost Carrying amount at beginning of year Additions, net of transfers Carrying amount at end of year Total carrying amount at end of year 360 288 2 – (90) 8 568 10,802 1,541 429 (41) (2,478) 104 10,357 1,327 1,874 3,201 14,126 479 25 – (9) (148) 13 360 9,807 2,407 1,367 (168) (2,699) 88 10,802 1,699 (372) 1,327 12,489 73 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) OPERATING ASSETS AND LIABILITIES (continued) Consolidated 2019 $000 2018 $000 152,153 (82,296) 69,857 59,830 20,453 (11,484) 1,058 69,857 131,545 (71,715) 59,830 54,189 16,543 (11,230) 328 59,830 84,280 82,978 21,981 (19,810) 2,171 10,254 (9,624) 630 5,717 (4,971) 746 87,827 82,978 1,302 84,280 2,319 226 (409) 35 2,171 21,674 (19,355) 2,319 10,386 (10,063) 323 5,440 (4,475) 965 86,585 82,529 449 82,978 2,216 2,029 (1,939) 13 2,319 16. Product development Product development at cost Accumulated amortisation Reconciliation Carrying amount at beginning of year Capitalised in current period Amortisation Net foreign currency differences on translation of foreign entities 17. Intangible assets Goodwill Intellectual property at cost Accumulated amortisation Computer software at cost Accumulated amortisation Licences at cost Accumulated amortisation Total intangible assets Reconciliations Goodwill Carrying amount at beginning of year Net foreign currency differences on translation of foreign entities Intellectual property Carrying amount at beginning of year Additions Amortisation Net foreign currency differences on translation of foreign entities 74 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN Computer software Carrying amount at beginning of year Additions Transfers from capital works in progress Amortisation Disposals Net foreign currency differences on translation of foreign entities Licences Carrying amount at beginning of year Acquisitions Amortisation The following segments have significant carrying amounts of goodwill: Communications Metal Detection Tracking Solutions Consolidated 2019 $000 323 590 21 (289) (21) 6 630 965 276 (495) 746 2018 $000 354 128 – (161) – 2 323 1,107 342 (484) 965 21,785 53,957 8,538 84,280 20,483 53,957 8,538 82,978 Goodwill The recoverable amount of cash generating units has been determined using value-in-use calculations. The Communications and Metal Detection cash generating units are well established businesses, and the approach to the value- in- use calculations for these units is similar. The first year of the cash flow forecasts is based on the oncoming year’s budget, and cash flows are forecast for a 5-year period. The key assumption driving the value-in-use valuation is the level of sales, which is based on management assessment, having regard to the demand expected from customers, the global economy and the business’s competitive position. Other assumptions relate to the level of gross margins achieved on sales and the level of expense required to run the business; these assumptions reflect past experience. A terminal value has been determined at the conclusion of five years, assuming a long-term growth rate of 3%. A pre-tax discount rate of 11% (FY18: 14%) has been applied to the forecast cash flows. Management’s sensitivity analysis indicates that there is not a reasonable possibility that changes in the assumptions used would result in an impairment in the cash-generating units. Tracking Solutions, which comprises Minetec, was acquired by Codan in 2012, and over the past seven years, Minetec has developed unique high-precision, productivity and safety solutions for underground hard-rock mines. The strategy for Minetec is to pursue opportunities that will scale the business to achieve sales and profitability levels that will make a significant contribution to the Codan group. As previously announced, in 2018, Minetec entered into an exclusive global licensing, technology development and marketing agreement with Caterpillar Inc. During FY19, we worked closely with Caterpillar’s development team to integrate Minetec’s high- precision tracking capability into the Caterpillar MineStar® solution for underground hard-rock mines. As a result of this agreement, the division is now leveraging Caterpillar’s global dealer network to expand sales. During FY19, there were delays in securing contracts for the operational deployment of MineStar®, and therefore Minetec did not meet its revenue target of $15 million for the year. Revenue increased marginally to $11.1 million, and the division recorded a small loss. Management is working closely with Caterpillar to improve this situation and is confident that these issues will be rectified in the near future. In performing the value-in-use calculations for the Minetec business, the first year of the cash flow forecasts is based on the oncoming year’s budget. Cash flows are forecast for a five year period. As the business is in the early stage of its development, historical data is not reflective of the possible future outcomes. The key assumption to the valuation scenario is the level of sales achieved by this business. To prepare the sales forecasts management have considered a number of known opportunities that are expected to adopt Minetec’s technology in coming years. Other assumptions relate to the level of gross margins achieved on sales, the level of expense to run the business and working capital requirements, and these assumptions are reflective of Codan’s past experience with technology-based businesses. A terminal value has been determined at the conclusion of five years assuming a long term growth rate of 3%. A pre-tax discount rate of 14% (FY18: 17%) has been applied to the forecast cash flows. The key risk to the value-in-use calculations is that the mining industry does not adopt Minetec’s technology. If, from the FY20 budget year, Minetec were to grow at 8% over the forecast period, the recoverable amount of the Minetec cash-generating unit would be approximately equal to its carrying amount. Management’s sensitivity analysis indicates that there is not a reasonable possibility that changes in the assumptions used would result in an impairment in the cash-generating units. 75 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) OPERATING ASSETS AND LIABILITIES (continued) 17. Intangible assets (continued) Intellectual Property Licences Subsequent to the acquisition of Minelab Electronics Pty Limited by Codan Limited in 2008, Minelab Electronics Pty Limited acquired ownership of the intellectual property that forms the basis for its metal detection products. The consideration payable under the agreement was based on the sales of metal detection products over a ten-year period. An asset in relation to the acquired intellectual property was recognised as Minelab Electronics Pty Limited became liable for the payments under the contract. The company entered into a licence agreement on 30 June 2011 with a leading provider of advanced technology for high frequency radio communication products. Licence payments are being made as technology is delivered to the company. The licenced technology allows the company access to next- generation radio waveforms for high-speed data transmission, automatic link establishment and digital voice. Consolidated 2019 $000 2018 $000 22,634 21,319 208 44,161 25,693 20,039 614 46,346 6,235 1,798 8,033 5,847 1,452 7,299 1,192 541 1,452 1,644 (1,298) 1,798 1,593 1,201 (1,342) 1,452 18. Trade and other payables Current Trade payables Other payables and accruals Net foreign currency hedge payable 19. Provisions Current Employee benefits Warranty repairs Non-Current Employee benefits Reconciliation of warranty provision Carrying amount at beginning of year Provisions made Payments made 76 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN CAPITAL MANAGEMENT 20. Share capital Share capital Opening balance (178,189,989 ordinary shares fully paid) Transfers to and from reserves Issue of share capital through vested performance rights Issue of share capital through employee share plan Closing balance (179,227,907 ordinary shares fully paid) Consolidated 2019 $000 2018 $000 42,721 – 794 246 43,761 43,928 (1,954) 541 206 42,721 Terms and conditions Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In the winding up of the company, ordinary shareholders rank after all creditors and are fully entitled to any proceeds on liquidation. 21. Reserves Foreign currency translation Hedging reserve Equity based payment reserve Profit reserve 6,712 (146) 2,105 58,981 67,652 3,588 (430) 2,187 58,981 64,326 Foreign currency translation The foreign currency translation reserve records the foreign currency differences arising from the translation of foreign operations. Balance at beginning of year Net translation adjustment Balance at end of year 3,588 3,124 6,712 2,634 954 3,588 Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in fair value of cash flow hedging instruments (net of tax) related to hedged transactions that have not yet occurred. Balance at beginning of year Gains/(losses) on cash flow hedges taken to/from hedging reserve Balance at end of year (430) 284 (146) Equity based payment reserve The equity based payment reserve comprises Codan Limited’s accumulated expenses in relation to unvested performance rights Balance at beginning of year Performance rights expensed Transfers from Share Capital Performance rights vested Balance at end of year 2,187 712 – (794) 2,105 389 (819) (430) – 774 1,954 (541) 2,187 Profit reserve The profit reserve comprises a portion of Codan Limited’s accumulated profits. Balance at beginning of year Balance at end of year 58,981 58,981 58,981 58,981 77 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) CAPITAL MANAGEMENT (continued) 22. Capital management The board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The board of directors monitors the level of dividends paid to ordinary shareholders and the overall return on capital. The board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings, and the advantages and security afforded by a sound capital position. This approach has not changed from previous years. Neither the company nor any of its subsidiaries is subject to externally imposed capital requirements. GROUP STRUCTURE 23. Group entities Name Parent Entity Codan Limited Controlled Entities Codan Defence Electronics Pty Ltd Codan Executive Share Plan Pty Ltd Codan Radio Communications ME DMCC Codan Radio Communications Pty Ltd Codan (UK) Limited Codan US Inc Daniels Electronics Ltd Minelab Americas Inc Minelab do Brasil Equipamentos Para Mineração Ltda Minelab Electronics Pty Limited Minelab International Limited Minelab MEA General Trading LLC Minelab Mining Pro (FZE) Minelab Mining Pro General Trading (FZC) Minetec Pty Ltd Minetec RSA (Pty) Ltd Country of incorporation Interest held 2019 2018 Class of share % % Australia Ordinary Australia Australia UAE Australia England USA Canada USA Brazil Australia Ireland UAE UAE UAE Australia South Africa Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 49 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 49 100 50 100 100 78 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN24. Deed of cross guarantee Pursuant to ASIC Corporations (Wholly owned Companies) Instrument 2016/785 , the wholly-owned subsidiary listed below is relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial and directors’ reports. It is a condition of the Class Order that the company and its subsidiary enter into a Deed of Cross Guarantee. The effect of the Deed is that the company guarantees to each creditor payment in full of any debt in the event of the winding up of the subsidiary under certain provisions of the Corporations Act 2001. If a winding up occurs under the 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 subsidiary has also given similar guarantees in the event that the company is wound up. Minelab Electronics Pty Limited is the only subsidiary subject to the Deed. Minelab Electronics Pty Limited became a party to the Deed on 22 June 2009, by virtue of a Deed of Assumption. A summarised consolidated income statement and a consolidated balance sheet, comprising the company and controlled entity which is a party to the Deed, after eliminating all transactions between the parties to the Deed of Cross Guarantee, is set out as follows: Summarised income statement and retained earnings Profit before tax Income tax expense Profit after tax Retained earnings at beginning of year Retained earnings at end of year Balance sheet Current assets Cash and cash equivalents Trade and other receivables Inventories Assets held for sale Other assets Total current assets Non-current assets Investments Property, plant and equipment Product development Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Other liabilities Current tax payable Provisions Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net Assets Consolidated 2019 $000 2018 $000 60,422 (17,398) 43,024 66,743 82,894 52,572 (12,878) 39,694 46,642 66,743 29,583 44,021 28,938 3,750 3,720 110,012 32,976 11,919 39,982 55,804 140,681 250,693 39,914 6,705 1,568 6,175 54,362 4,306 1,000 5,306 59,668 191,025 21,486 60,062 24,558 3,750 2,282 112,138 13,888 9,974 39,297 56,182 119,341 231,479 37,291 5,763 6,033 5,846 54,933 3,710 439 4,149 59,082 172,397 79 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) GROUP STRUCTURE (continued) 24. Deed of cross guarantee (continued) Balance sheet (continued) Equity Share capital Reserves Retained earnings Total equity 25. Parent entity disclosures Consolidated 2019 $000 2018 $000 43,761 64,370 82,894 191,025 42,721 62,933 66,743 172,397 As at, and throughout, the financial year ending 30 June 2019, the parent company of the group was Codan Limited. Result of parent entity Profit after tax for the period Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising: Share capital Reserves Retained earnings Total equity Company 2019 $000 2018 $000 45,304 1,154 46,458 40,471 1,397 41,868 98,065 221,128 43,066 48,575 43,761 61,532 67,260 172,553 97,724 199,834 42,887 48,186 42,721 60,098 48,829 151,648 During the year, Codan Limited entered into contracts to purchase plant and equipment for $1,264,000 (2018: $837,000). 80 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANOTHER NOTES 26. Auditor's remuneration Audit services: KPMG Australia – audit and review of financial reports Overseas other firms – audit and review of financial reports Other services: KPMG Australia – taxation services KPMG Australia – other services Overseas KPMG firms – taxation services Overseas other firms – taxation & other services 27. Commitments I. Capital expenditure commitments Aggregate amount of contracts for capital expenditure on property, plant and equipment and intangibles: Within one year One year or later and no later than five years II. Non-cancellable operating lease expense and other commitments Future operating lease commitments not provided for in the financial statements which are payable: Within one year One year or later and no later than five years Later than five years Consolidated 2019 $ 2018 $ 214,763 87,285 204,874 67,471 55,973 40,466 – 60,974 459,461 56,760 32,591 27,220 76,884 465,800 Consolidated 2019 $000 2018 $000 1,589 – 1,589 1,315 – 1,315 5,790 14,437 20,957 41,184 5,231 13,670 23,893 42,794 The group leases property under non-cancellable operating leases with a term of one to fifteen years. Leases generally provide the group with a right of renewal, at which time all terms are renegotiated. Lease payments normally comprise a base amount and an adjustment for the consumer price index. 81 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) OTHER NOTES (continued) 28. Additional financial instruments disclosure Financial risk management (a) Credit risk Overview The group has exposure to the following risks from its use of financial instruments: • credit risk • liquidity risk • market risk • operational risk. This note presents information about the group’s exposure to each of the above risks, its objectives, policies and processes for measuring and managing risk, and its management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The board of directors has overall responsibility for the establishment and oversight of the risk management framework. The Board Audit, Risk and Compliance Committee is responsible for developing and monitoring risk management policies. The committee reports regularly to the board on its activities. Risk management policies are established to identify and analyse the risks faced by the group, to set appropriate risk limits and controls, and to monitor risk and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the group’s activities. The group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Board Audit, Risk and Compliance Committee oversees how management monitors compliance with the group’s risk management policies and procedures, and reviews the adequacy of the risk framework in relation to the risks faced by the group. Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the group’s receivables from customers. The credit risk on the financial assets of the consolidated entity is the carrying amount of the asset, net of any impairment losses recognised. The group minimises concentration of credit risk by undertaking transactions with a large number of customers in various countries. As at 30 June 2019, the customer with the group’s highest trade and other receivable balance accounted for $4.2 million (2018: nil). Trade and other receivables The group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the group’s customer base, including the default risk of the industry and country in which customers operate, have less of an influence on credit risk. The group has established a credit policy under which new customers are analysed for credit worthiness before the group’s payment and delivery terms and conditions are offered. Goods are sold subject to retention of title clauses, so that in the event of non-payment the group may have a secured claim. The group does not normally require collateral in respect of trade and other receivables. The group has established an allowance for expected credit losses that represents its estimate of 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. Guarantees Group policy is to provide financial guarantees only to wholly owned subsidiaries. 82 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN(a) Credit risk (continued) The carrying amount of the group’s financial assets represents the maximum credit exposure. The group’s maximum exposure to credit risk at the reporting date was: Carrying amount Consolidated Cash and cash equivalents Trade and other receivables Note 8 11 2019 $000 37,521 19,007 The group's maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Australia/Oceania 4,083 Europe 5,103 Americas 2,874 Asia 5,368 Africa/Middle East 2,749 20,177 Impairment losses The aging of the group's trade receivables at the reporting date was: 2018 $000 27,711 29,784 8,484 3,824 7,560 3,349 6,777 29,994 Not past due Past due 0-30 days Past due 31-60 days Past due 61-120 days More than 120 days Consolidated Gross 2019 $000 Impairment 2019 $000 Gross 2018 $000 Impairment 2018 $000 16,112 2,840 66 504 655 20,177 (795) – – – (548) (1,343) 25,115 3,629 378 621 251 29,994 (211) – – (46) (202) (459) Trade receivables have been reviewed, taking into consideration letters of credit held and the credit assessment of the individual customers. The impairment recognised is considered appropriate for the credit risk remaining. The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 July Impairment loss/(reversal) recognised Trade receivables written off to the allowance for impairment Balance at 30 June Consolidated 2019 $000 459 905 (21) 1,343 2018 $000 833 (122) (252) 459 83 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) OTHER NOTES (continued) 28. Additional financial instruments disclosure (continued) (b) Liquidity risk Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions and without incurring unacceptable losses or risking damage to the group’s reputation. Refer to note 9 for a summary of banking facilities available. The following are the contractual maturities of financial liabilities: 30 June 2019 Non-derivative financial liabilities Trade and other payables Derivative financial liabilities Net foreign currency hedge payables 30 June 2018 Non-derivative financial liabilities Trade and other payables Derivative financial liabilities Net foreign currency hedge payables (c) Market risk Carrying amount $000 Contractual cash flows $000 12 months or less $000 1-5 years More than 5 years $000 $000 43,953 43,953 (43,953) (43,953) (43,953) (43,953) 208 208 (208) (208) (208) (208) 45,732 45,732 (45,732) (45,732) (45,732) (45,732) 614 614 (614) (614) (614) (614) – – – – – – – – – – – – – – – – Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The group enters into derivatives, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the policy set by the board. Generally, the group seeks to apply hedge accounting in order to manage volatility in the income statement. The net fair values of monetary financial assets and financial liabilities not readily traded in an organised financial market are determined by valuing them at the present value of the contractual future cash flows on amounts due from customers (reduced for expected credit losses), or due to suppliers. The carrying amount of financial assets and financial liabilities approximates their net fair values. 84 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN(c) Market risk (continued) Interest rate risk Profile At the reporting date, the interest rate profile of the group's interest-bearing financial instruments was: Fixed rate instruments Financial assets Financial liabilities Variable rate instruments Financial assets Financial liabilities Cash flow sensitivity Carrying amount Consolidated 2019 $000 15,017 – 15,017 22,504 – 22,504 2018 $000 10,000 – 10,000 17,711 – 17,711 If interest rates varied by 100 basis points for the full financial year, then based on the balance of variable rate instruments held at the reporting date, profit and equity would have been affected as shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2018. Profit/(loss) before tax Reserve 100 bp increase $000 100 bp decrease $000 100 bp increase $000 100 bp decrease $000 225 177 (225) (177) – – – – 30 June 2019 Variable rate instruments 30 June 2018 Variable rate instruments Currency risk The group is exposed to currency risk on sales, purchases and balance sheet accounts that are denominated in a currency other than the respective functional currencies of group entities, primarily the Australian dollar (AUD). The currencies in which these transactions are denominated are primarily USD and EUR. The group enters into foreign currency hedging instruments or borrowings denominated in a foreign currency to hedge certain anticipated highly probable sales denominated in foreign currency (principally in USD). The terms of these commitments are usually less than 12 months. As at the reporting date, the group has entered into a mix of forward exchange contracts and collar hedge instruments which will limit the foreign exchange risk on USD $25,000,000 of FY20 cash flows. On average, the collars give protection above 73 cents and enable participation down to 68 cents, and the average forward exchange contract rate is 71 cents. 85 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) OTHER NOTES (continued) 28. Additional financial instruments disclosure (continued) (c) Market risk (continued) Currency risk (continued) The group’s exposure to foreign currency risk (in AUD equivalent), after taking into account hedge transactions at reporting date, was as follows: 30 June 2019 Cash and cash equivalents Trade receivables Trade payables Gross balance sheet exposure Hedge transactions relating to balance sheet exposure Net exposure at the reporting date 30 June 2018 Cash and cash equivalents Trade receivables Trade payables Gross balance sheet exposure Hedge transactions relating to balance sheet exposure Net exposure at the reporting date Consolidated EUR $000 441 542 (30) 953 – 953 630 1,442 (69) 2,003 – 2,003 USD $000 4,348 9,431 (11,953) 1,826 (4,278) (2,452) 4,761 15,529 (16,299) 3,991 (2,255) 1,736 Sensitivity analysis Given the foreign currency balances included in the balance sheet as at reporting date, if the Australian dollar at that date strengthened by 10%, then the impact on profit and equity arising from the balance sheet exposure would be as follows: 2019 EUR USD 2018 EUR USD Consolidated Reserve credit/(debit) Profit/(loss) before tax $000 $000 – 19 19 – 56 56 (87) 223 136 (182) (158) (340) A 10% weakening of the Australian dollar against the above currencies at 30 June would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. 86 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN(d) Fair value hierarchy The group’s financial instruments carried at fair value have been valued by using a “level 2” valuation method. Level 2 valuations are obtained from inputs, other than quoted prices, that are observable for the asset or liability either directly or indirectly. At the end of the current year, financial instruments valued at fair value were limited to net foreign currency hedge payable of $208,000, for which an independent valuation was obtained from the relevant banking institution. 29. Employee benefits Aggregate liability for employee benefits, including on-costs: Current – short-term incentives and other accruals Current – employee entitlements Non-current – employee entitlements The present values of employee entitlements not expected to be settled within 12 months of the reporting date have been calculated using the following weighted averages: Assumed rate of increase in wage and salary rates Discount rate Settlement term Consolidated 2019 $000 2018 $000 6,790 6,235 1,192 14,217 5,357 5,847 541 11,745 3.00% 2.81% 10 years 3.00% 3.77% 10 years Employee Share Plan On 19 December 2012, the directors approved the establishment of an Employee Share Plan (ESP). The ESP is designed to recognise the contribution made by employees to the group, and provides eligible employees with an opportunity to share in the future growth and profitability of the company by offering them the opportunity to acquire shares in the company. ESP shares issued in financial year 2019 The company issued 76,260 shares to eligible employees in June 2019. The fair values of the shares was $3.22 per share, based on the volume weighted average price at which Codan shares were traded on the ASX for the five trading days immediately preceding the date of issue of the shares. The exercise price was nil. The total expense recognised as employee costs in 2019 in relation to the ESP shares issued was $245,557. The shares are restricted from sale until the earlier of three years from the acquisition date or upon the date on which an employee is no longer employed by the group. Performance Rights Plan At the 2004 AGM, shareholders approved the establishment of a Performance Rights Plan (Plan). The Plan is designed to provide employees with an incentive to maximise the return to shareholders over the long term, and to assist in the attraction and retention of key employees. Performance rights issued in financial year 2017 The company issued 816,772 performance rights in November 2016 to certain employees. The fair value of the rights was on average $1.29 based on the Black-Scholes formula. The model inputs were: the share price of $1.57, no exercise price, expected volatility of 52%, dividend yield of 3.82%, a term of three years and a risk-free rate of 2.6%. Due to the departure of employees, 51,796 performance rights have been cancelled. The total recovery recognised as employee costs in 2019 in relation to the performance rights issued was $54,059 (2018: $435,147 expense). The performance rights become exercisable if certain performance thresholds are achieved. The performance threshold is based on growth of the group’s earnings per share over a three-year period using a non-statutory base-level earnings per share as set by the board, which was 11.0 cents. For employees to receive the total number of performance rights, the group’s earnings per share must increase by at least 15% per annum over the three-year period. The group’s earnings per share over the three-year period to 30 June have exceeded the performance target. Therefore, it is expected that 764,976 shares will be issued to the relevant employees by the end of August 2019. Performance rights issued in financial year 2018 The company issued 124,524 performance rights in November 2017 to the Chief Executive Officer. The fair value of the rights was on average $1.80 based on the Black-Scholes formula. The model inputs were: the share price of $2.26, no exercise price, expected volatility of 39%, dividend yield of 5.75%, a term of three years and a risk-free rate of 2.6%. The company issued 416,536 performance rights in December 2017 to certain employees. The fair value of the rights was on average $1.67 based on the Black-Scholes formula. The model inputs were: the share price of $2.09, no exercise price, expected volatility of 37%, dividend yield of 6.22%, a term of three years and a risk-free rate of 2.6%. Due to the departure of employees, 38,410 performance rights have been cancelled. The total expense recognised as employee costs in 2019 in relation to the performance rights issued was $347,630 (2018: $353,086). The performance rights become exercisable if certain performance thresholds are achieved. The performance threshold is based on growth of the group’s earnings per share over a three-year period using a non-statutory base-level earnings per share as set by the board, which was 14.9 cents. For employees to receive the total number of performance rights, the group’s earnings per share must increase by at least 15% per annum over the three-year period. If achieved, performance rights are exercisable into the same number of ordinary shares in the company. 87 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2019 (continued) OTHER NOTES (continued) 29. Employee benefits (continued) Performance rights issued in financial year 2019 The company issued 409,731 performance rights in November 2018 to certain employees. The fair value of the rights was on average $2.54 based on the Black-Scholes formula. The model inputs were: the share price of $3.14, no exercise price, expected volatility of 30%, dividend yield of 3.98%, a term of three years and a risk-free rate of 2.7%. Due to the departure of employees, 9,953 performance rights have been cancelled. The total expense recognised as employee costs in 2019 in relation to the performance rights issued was $418,163. The performance rights become exercisable if certain performance thresholds are achieved. The performance threshold is based on growth of the group’s earnings per share over a three- year period using a non-statutory base-level earnings per share as set by the board, which was 15.6 cents. For employees to receive the total number of performance rights, the group’s earnings per share must increase by at least 15% per annum over the three- year period. If achieved, performance rights are exercisable into the same number of ordinary shares in the company. No performance rights have been issued since the end of the financial year. 30. Key management personnel disclosures Transactions with key management personnel (a) Loans to directors There have been no loans to directors during the financial year. (b) Key management personnel compensation The key management personnel compensation included in "personnel expenses" (refer note 3) is as follows: Short-term employee benefits Post-employment benefits Share-based payments Other long term benefits Consolidated 2019 $ 4,541,357 109,633 712,852 135,289 5,499,131 2018 $ 3,673,631 115,992 632,392 91,136 4,513,151 (c) Key management personnel transactions From time to time, directors and specified executives, or their related parties, purchase goods from the group. These purchases occur within a normal employee relationship and are considered to be trivial in nature. 31. Other related parties All transactions with non-key management personnel related parties are on normal terms and conditions. Companies within the group purchase materials from other group companies. These transactions are on normal commercial terms. Loans between entities in the wholly owned group are repayable at call and no interest is charged. 32. Net tangible asset per share Net tangible asset per share 88 2019 2018 34.1 cents 26.5 cents CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANDIRECTORS’ DECLARATION 1. In the opinion of the directors of Codan Limited (“the company”): a) the consolidated financial statements and notes that are set out on pages 51 to 88 and the remuneration report on pages 37 to 43 in the directors’ report, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the group’s financial position as at 30 June 2019 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. There are reasonable grounds to believe that the company and the group entities identified in note 23 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. 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 2019. The directors draw attention to note 1 to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. 2. 3. 4. Signed in accordance with a resolution of the directors: Dated at Mawson Lakes this 23rd day of August 2019. D J Simmons Director D S McGurk Director 89 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019 INDEPENDENT AUDITOR’S REPORT Independent Auditor’s Report To the shareholders of Codan Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Codan 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 2019 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards the Corporations Regulations 2001. and Basis for opinion The Financial Report comprises: • Consolidated balance sheet as at 30 June 2019 • Consolidated income statement, Consolidated statement income, Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year then ended comprehensive of • Notes including a summary of significant accounting policies • 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. 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. Key Audit Matter The Key Audit Matter we identified is: • Recoverable value of goodwill in relation to the Tracking Solutions business. Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. This matter was 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 this matter. 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. 60 90 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN Recoverable value of goodwill in relation to the Tracking Solutions business Tracking Solutions Goodwill $8,538,000 – Refer to Note 17 to the Financial Report. The key audit matter How the matter was addressed in our audit the Group’s assessment of The ‘recoverable value of goodwill in relation to the Tracking Solutions business’ is a Key Audit Matter due to the level of judgement required by us in the evaluating recoverable value of goodwill. Tracking Solutions, which comprises the Minetec business, is in the early stage of commercialisation of its products, with a significant global licencing, technology development and marketing agreement signed during the prior year with Caterpillar and the contract to supply a fleet management system to BHP Billiton. The Group’s ability to secure further full-scale operational market acceptance and deployment of its productivity and safety solutions depends on successful integration of Minetec and Caterpillar technology, forecast growth of the mining sector and widespread uptake of the products. These conditions increase the possibility of goodwill being impaired, raising our audit focus. The Group’s assessment of the recoverable value of the Minetec business, through its value in use model, contains significant judgements. We focused on the following areas: • Sales forecasts, the gross margin expected to be earned, and operating costs. The uncertainty as to when the significant uptake of the products will occur makes it challenging to forecast cash flows in this business; and The discount rate applied to the forecast Minetec cash flows judgemental and may vary according to the conditions and environment from time to time. is • To assess the significant judgements relating to this key audit matter, we involved senior audit team members, including valuation specialists, with experience in the industry. Our procedures included: • We compared the value in use method applied against the requirements of Australian Accounting Standards. • We assessed the integrity of the value in use model, including the accuracy of the underlying calculations. • We tested design and implementation of the controls for the Group’s valuation of the Minetec business including board authorisation of key inputs to the value in use model such as sales forecasts, gross margin, operating costs and the discount rate. • We compared the forecast cash flows contained in the value in use model to Board approved forecasts. • We obtained an update of the product integration activity performed with Caterpillar during the year. We checked the consistency of the details of the integration activities to the forecast cashflows contained in the value in use model. • We performed sensitivity analysis on key judgements such as sales forecasts, gross margin, operating costs and discount rates, within a reasonably possible range, to identify those assumptions at higher risk of bias and to focus our further procedures. • We critically evaluated the Group’s key cash flow assumptions by: - Comparing the drivers of sales forecasts (including identified mines where the products could be deployed, sales value and gross margin expected to be earned) to known industry trends, Minetec’s price lists and existing customer contracts. - Checking the consistency of the Group’s forecast cash flows to the Group’s stated plans and strategy; using our knowledge of the Minetec business model and its early stage of commercialisation of its products. - Assessing the accuracy of previous Group forecasts to inform our evaluation of forecasts included in the value in use model. • Working with our valuation specialists we independently developed a discount rate range considered comparable using publicly available market data for comparable entities. the the Group’s disclosures against • We assessed requirements of Australian Accounting Standards. 61 91 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019 INDEPENDENT AUDITOR’S REPORT (continued) Other Information Other Information is financial and non-financial information in Codan 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. 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 assessing the Group and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. 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 and Company 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_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. 92 62 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODAN Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Codan Limited for the year ended 30 June 2019, 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 the Directors’ report for the year ended 30 June 2019. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPM_INI_01 KPMG Paul Cenko Partner Adelaide 23 August 2019 63 93 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019 ASX ADDITIONAL INFORMATION Additional information required by the Australian Stock Exchange Limited Listing Rules not disclosed elsewhere in this report is set out below. Shareholdings as at 15 August 2019 Substantial shareholders The numbers of shares held by substantial shareholders and their associates are set out below: Shareholder I B Wall and P M Wall Interests associated with Starform Pty Ltd, Dareel Pty Ltd and Pinara Group Pty Ltd Interests associated with Kynola Pty Ltd and Warren Glen Pty Ltd IOOF Holdings Limited Distribution of equity security holders Number of shares held 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - over Total Number of ordinary shares 34,808,151 26,974,425 9,829,758 9,336,998 Number of equity security holders Ordinary shares 1,504 1,694 636 707 82 4,623 The number of shareholders holding less than a marketable parcel of ordinary shares is 224. Securities exchange The company is listed on the Australian Securities Exchange. The home exchange is Sydney. Other information Codan Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. On-market buy-back There is no current on-market buy-back. 94 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANTwenty largest shareholders Name I B Wall and P M Wall HSBC Custody Nominees (Australia) Limited Dareel Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited Kynola Pty Ltd Starform Pty Ltd BNP Paribas Nominees Pty Ltd J P Morgan Nominees Australia Limited A Bettison Warren Glen Pty Ltd M K and M C Heard Mitranikitan Pty Ltd G Bettison J A Uhrig CS Third Nomineees Pty Limited Griffinna Pty Ltd Cedara Pty Ltd Rosevine Pty Ltd Fruehling Pty Ltd Total Offices and officers Company Secretary Mr Michael Barton BA (ACC), CA Principal registered office Technology Park 2 Second Avenue Mawson Lakes, South Australia 5095 Telephone: (08) 8305 0311 Facsimile: (08) 8305 0411 Internet address: www.codan.com.au Location of share registry Computershare Investor Services Pty Limited GPO Box 1903 Adelaide, South Australia 5001 Number of ordinary shares held Percentage of capital held 34,808,151 19,944,421 17,846,372 11,132,572 8,807,262 6,627,548 6,404,224 5,638,200 5,502,630 3,562,124 3,202,210 2,834,899 1,778,194 1,371,199 1,225,143 1,224,928 1,200,000 1,107,254 1,107,254 1,100,000 136,424,585 19.4% 11.1% 10.0% 6.2% 4.9% 3.7% 3.6% 3.1% 3.1% 2.0% 1.8% 1.6% 1.0% 0.8% 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 76.2% 95 CODAN LIMITED AND ITS CONTROLLED ENTITIESANNUAL REPORT 2019CORPORATE DIRECTORY Directors • David Simmons (Chairman) • Donald McGurk (Managing Director and Chief Executive Officer) • Peter Leahy AC • Jim McDowell • Graeme Barclay • Kathy Gramp Company Secretary • Michael Barton Principal registered office Technology Park 2 Second Avenue Mawson Lakes South Australia 5095 Auditor KPMG 151 Pirie Street Adelaide South Australia 5000 Location of share registry Computershare Investor Services Pty Limited GPO Box 1903 Adelaide South Australia 5001 96 CODAN LIMITED AND ITS CONTROLLED ENTITIESCODANInnovation wherever you are codan.com.au codan.com.au

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