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Report
2018
SCHOOLHOSPITALHOTELLAUNDRYCLEANOGAS CO This Annual Report includes
the Downer EDI Limited
Directors’ Report, the
Annual Financial Report and
Independent Audit Report
for the financial year ended
30 June 2018. The Annual
Report is available on
the Downer website
www.downergroup.com.
Contents
Directors’ Report
Page 2
Auditor’s signed reports
Page 52
Page 53
Auditor’s Independence Declaration
Independent Auditor’s Report
Financial Statements
Page 62
Page 63
Page 64
Page 65
Consolidated Statement of Profit or Loss and Other Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the consolidated financial statements
A
B
C
D
E
F
About this
report
Business
performance
Operating assets
and liabilities
Employee
benefits
Capital structure
and financing
Group
structure
G
Other
Page 66-67
Page 68-77
Page 78-87
Page 88
Page 89-95
Page 96-106
Page 107-120
B1
Segment
information
B2
Profit from
ordinary activities
B3
Earnings per share
B4
Taxation
B5
Remuneration
of auditors
B6
Subsequent events
C1
Reconciliation
of cash and
cash equivalents
C2
Trade and other
receivables
C3
Rendering of
services and
construction
contracts
C4
Inventories
C5
Trade and other
payables
C6
Property, plant
and equipment
C7
Intangible assets
C8
Provisions
C9
Contingent
liabilities
Page 121 Directors’ Declaration
Other information
Page 122 Sustainability Performance Summary 2018
Page 127 Corporate Governance
Page 136
Information for Investors
D1
Employee benefits
E1
Borrowings
F1
Joint arrangements
and associate
entities
G1
New accounting
standards
D2
Key management
personnel
compensation
D3
Employee discount
share plan
E2
Financing facilities
F2
Acquisition of
businesses
G2
Capital and financial
risk management
E3
Commitments
F3
Disposal of
business
G3
Other financial
assets and liabilities
E4
Issued capital
F4
Controlled entities
E5
Reserves
E6
Dividends
F5
Related party
information
F6
Parent entity
disclosures
Annual Report 2018 1
Directors’ Report
for the year ended 30 June 2018
The Directors of Downer EDI Limited submit the Annual
Financial Report of the Company for the financial year
ended 30 June 2018. In compliance with the provisions
of the Corporations Act 2001 (Cth), the Directors’ Report
is set out below.
Board of Directors
R M HARDING (69)
Chairman since November 2010, Independent
Non‑executive Director since July 2008
Mr Harding has held management positions around the world
with British Petroleum (BP), including President and General
Manager of BP Exploration Australia.
Mr Harding is currently the Chairman of Lynas Limited and a
Director of Cleanaway Waste Management Limited, a former
Chairman of Roc Oil Company Limited and Clough Limited
and a former Director of Santos Limited.
Mr Harding holds a Masters in Science, majoring in
Mechanical Engineering.
Mr Harding lives in Sydney.
G A FENN (53)
Managing Director and Chief Executive Officer since
July 2010
Mr Fenn has over 30 years’ experience in operational
management, strategic development and financial management.
He joined Downer in October 2009 as Chief Financial Officer and
was appointed Chief Executive Officer in July 2010.
He was previously a member of the Qantas Executive
Committee, holding a number of senior roles over 14 years,
as well as Chairman of Star Track Express and a Director of
Australian Air Express. He worked at KPMG for eight years
before he joined Qantas.
Mr Fenn is currently a Director of Sydney Airport Limited
and Spotless Group Holdings Limited and a Member of the
UTS Engineering and IT Industry Advisory Board.
Mr Fenn holds a Bachelor of Economics from Macquarie
University and is a member of the Australian Institute of
Chartered Accountants.
Mr Fenn lives in Sydney.
S A CHAPLAIN (60)
Independent Non‑executive Director since July 2008
Ms Chaplain is a former investment banker with extensive
experience in public and private sector debt financing. She also
has considerable experience as a Director of local and state
government-owned corporations involved in road, water and
port infrastructure.
Ms Chaplain is Chairman of Queensland Airports Limited and a
Director of Seven Group Holdings Limited. Ms Chaplain is also
Chairman of Canstar Pty Ltd, a financial services research and
ratings company and a Director of Credible Labs Inc and The
Australian Ballet. Her former board roles include being a member
of the Board of Taxation, a Director of EFIC, Australia’s export
credit agency and a Director of PanAust .
A Fellow of the Australian Institute of Company Directors,
Ms Chaplain holds a Bachelor of Arts degree majoring in
Economics and Mandarin from Griffith University in addition to
a Masters of Business Administration (MBA) from the University
of Melbourne. She holds an honorary doctorate from Griffith
University for her service to banking and finance, and to the
Gold Coast community.
Ms Chaplain lives on the Gold Coast.
P S GARLING (64)
Independent Non‑executive Director since November 2011
Mr Garling has over 35 years’ experience in the infrastructure,
construction, development and investment sectors. He was
the Global Head of Infrastructure at AMP Capital Investors,
a role he held for nine years. Prior to this, Mr Garling was CEO
of Tenix Infrastructure and a long-term senior executive at the
Lend Lease Group, including five years as CEO of Lend Lease
Capital Services.
Mr Garling is currently the Chairman of Tellus Holdings Limited,
Energy Queensland Limited and Newcastle Coal Infrastructure
Group and a Director of Charter Hall Limited and the NSW
electricity distributor, Essential Energy. He is a former Director of
Spotless Group Holdings Limited and a past President of Water
Polo Australia Limited.
Mr Garling holds a Bachelor of Building from the University of
New South Wales and the Advanced Diploma from the Australian
Institute of Company Directors. He is a Fellow of the Australian
Institute of Building, Australian Institute of Company Directors
and Institution of Engineers Australia.
Mr Garling lives in Sydney.
2 Downer EDI Limited
A Fellow of the Australian Institute of Company Directors
and a Member of Chief Executive Women and the Institute
of Chartered Accountants, Ms Hollows holds a Bachelor of
Business – Accounting and a Graduate Diploma in Advanced
Accounting (Distinction) from the Queensland University of
Technology and is a Graduate of Harvard Business School’s
Program for Management Development.
Ms Hollows lives in Brisbane.
C G THORNE (68)
Independent Non‑executive Director since July 2010
Dr Thorne has over 36 years’ experience in the mining and
extraction industry, specifically in senior operational and
executive roles with Rio Tinto. His experience spanned a range
of product groups and functional activities in Australia and
overseas. After serving in London as Group Mining Executive
from 1996 to 1998, Dr Thorne moved to Indonesia as President
Director of Kaltim Prima Coal and then returned to Australia
to manage Rio Tinto’s Australian coal business as Managing
Director of Rio Tinto Coal Australia and the publicly listed Coal
and Allied Industries. He was President of the Queensland
Resources Council in 2001-2003.
In 2006, Dr Thorne was appointed global head of Rio Tinto’s
technology, innovation and project engineering functions,
reporting to the Chief Executive. He was a member of Rio Tinto’s
Executive Committee and Investment Committee. He retired
from Rio Tinto in 2011.
Dr Thorne is a Director of Spotless Group Holdings Limited and
a former Director of Wesley Research Institute, JK Tech and
Queensland Energy Resources Limited. He is a Fellow of the
Australasian Institute of Mining and Metallurgy.
Dr Thorne also holds directorships with a number of
private companies.
He holds Bachelor and Doctoral degrees in Metallurgy from the
University of Queensland and is a Graduate of the Australian
Institute of Company Directors.
Dr Thorne lives on the Sunshine Coast.
T G HANDICOTT (55)
Independent Non‑executive Director since September 2016
Ms Handicott is a former corporate lawyer with over 30 years’
experience in mergers and acquisitions, capital markets and
corporate governance. She was a partner of national law firm
Corrs Chambers Westgarth for 22 years, serving as a member
of its National Board for seven years including four years
as National Chairman. She also has extensive experience in
governance of local and state government organisations.
Ms Handicott is currently the Chairman of listed company
PWR Holdings Limited and a Director of LGE Holding Company
Pty Ltd trading as Peak Services, which is the subsidiary of the
Local Government Association of Queensland that is responsible
for its commercial operations. Ms Handicott is also a Director
of Bangarra Dance Theatre Limited and a Divisional Councillor
of the Queensland Division of the Australian Institute of
Company Directors.
Ms Handicott is a former Director of CS Energy Limited, a former
member of the Queensland University of Technology (QUT)
Council, the Takeovers Panel and Corporations and Markets
Advisory Committee and a former Associate Member of the
Australian Competition and Consumer Commission.
A Senior Fellow of Finsia and Member of the Australian Institute
of Company Directors and Chief Executive Women, Ms Handicott
holds a Bachelor of Laws (Hons) degree from the Queensland
University of Technology.
Ms Handicott lives in Brisbane.
N M HOLLOWS (47)
Independent Non‑executive Director since June 2018
Ms Hollows has over 20 years’ experience in the resources
sector in a number of senior managerial roles across both the
public and private sectors, including in mining, utilities and rail.
Her experience spans operational management, accounting
and finance, mergers and acquisitions, capital management
and corporate governance.
Ms Hollows is currently the Chief Executive Officer of SunWater
Limited, a Queensland Government owned corporation. She is
the Chair of The Salvation Army Brisbane Red Shield Appeal
Committee and an advisory committee member of the Salvation
Army Queensland Advisory Council and also a board member of
the Water Services Association of Australia and a member of the
CEO Advisory Committee for Dean of Queensland University of
Technology Business School.
She was formerly the Chief Financial Officer and subsequently
Chief Executive Officer of Macarthur Coal Limited, Managing
Director of AMCI Australia and South East Asia and Interim Chair
of Queensland Rail Limited.
Annual Report 2018 3
Directors’ shareholdings
The following table sets out each Director’s relevant interest (direct and indirect) in shares, debentures, and rights or options in shares
or debentures (if any) of the Company at the date of this report. No Director has any relevant interest in shares, debentures and rights
or options in shares or debentures, of a related body corporate as at the date of this report.
Director
R M Harding
G A Fenn1
S A Chaplain
P S Garling
T G Handicott
N M Hollows
C G Thorne
Number of Fully Paid
Ordinary Shares
Number of Fully Paid
Performance Rights
Number of Fully Paid
Performance Options
14,210
1,164,203
103,799
16,940
14,000
–
82,922
–
1,547,403
–
–
–
–
–
–
–
–
–
–
–
–
1
Performance rights granted to Mr Fenn are subject to performance and/or service period conditions over the period 2015 to 2020. Further details regarding the conditions
relating to these restricted shares and performance rights are outlined in sections 6.4 and 9.2 of the Remuneration Report.
Company Secretary
Review of operations
Principal Activities
Downer EDI Limited (Downer) is a leading provider of integrated
services in Australia and New Zealand. Downer exists to create
and sustain the modern environment and its promise is to work
closely with its customers to help them succeed, using world
leading insights and solutions to design, build and sustain
assets, infrastructure and facilities. Downer employs about
56,000 people, mostly in Australia and New Zealand but also
in the Asia-Pacific region, South America and Southern Africa.
Downer reports its results under six service lines and an outline
of each service line is as follows:
The Company Secretarial function is responsible for ensuring that
the Company complies with its statutory duties and maintains
proper documentation, registers and records. It also provides
advice to Directors and officers about corporate governance
and gives practical effect to any decisions made by the Board.
Mr Peter Tompkins was appointed Company Secretary on
27 July 2011. He has qualifications in law and commerce
from Deakin University and corporate governance from the
Governance Institute of Australia and is an admitted solicitor
in New South Wales. Mr Tompkins joined Downer in 2008
and was appointed General Counsel in 2010.
Mr Peter Lyons was appointed joint Company Secretary on
27 July 2011. A member of CPA Australia and the Governance
Institute of Australia, he has qualifications in commerce from
the University of Western Sydney and corporate governance
from the Governance Institute of Australia. Mr Lyons was
previously Deputy Company Secretary and has been in
financial and secretarial roles at Downer for over 15 years.
4 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Transport
Transport comprises Downer’s road, transport infrastructure,
bridge, airport and port businesses. It features a broad range
of transport infrastructure services including earthworks, civil
construction, asset management, maintenance, surfacing and
stabilisation, supply of bituminous products and logistics, open
space and facilities management and rail track signalling and
electrification works.
Total revenue1 (FY18)
EBITA2 (FY18)
22.3%
25.3%
Utilities
The Utilities division provides complete lifecycle solutions
to customers in the power, gas, water, renewable energy and
communications sectors.
Total revenue1 (FY18)
EBITA2 (FY18)
14.1%
16.8%
Transport
1 Total revenue is a non-statutory disclosure and includes revenue, other income
and notional revenue from joint ventures and other alliances not proportionately
consolidated. Due to rounding, divisional percentages do not add up precisely
to 100%.
2 Downer calculates EBITA by adjusting EBIT to add back acquired intangibles
amortisation expense.
Road Services
Downer offers one of the largest non-government owned road
infrastructure services businesses in Australia and New Zealand,
maintaining more than 33,000 kilometres of road in Australia and
more than 25,000 kilometres in New Zealand.
Downer delivers a wide range of tailored pavement treatments
and traffic control services and also provides high-level
capabilities in strategic and tactical asset management, network
planning and intelligent transport systems. The Company
continues to invest in state-of-the-art technology to drive
innovation and performance, including asphalt plants that use
more recycled products and substantially less energy.
Downer is also a leading manufacturer and supplier of bitumen
based products and a provider of soil and pavement stabilisation,
pressure injection stabilisation, pavement recycling, pavement
profiling, spray sealing and asset management.
Downer’s Road Services customers include all of Australia’s
State Road Authorities, the New Zealand Transport Agency and
the majority of local government councils and authorities in
both countries.
Other transport infrastructure
Other transport infrastructure includes rail construction, light rail
construction, rail systems, transport mechanical and electrical
construction, car park construction, airport pavements, port
construction and associated maintenance services.
Utilities
1 Total revenue is a non-statutory disclosure and includes revenue, other income
and notional revenue from joint ventures and other alliances not proportionately
consolidated. Due to rounding, divisional percentages do not add up precisely
to 100%.
2 Downer calculates EBITA by adjusting EBIT to add back acquired intangibles
amortisation expense.
Power and Gas
Downer offers customers a wide range of services including
planning, designing, constructing, operating, maintaining,
managing and decommissioning power and gas network assets.
Downer maintains over 110,000 kilometres of electricity and
gas networks across more than 185,000 square kilometres
and connects tens of thousands of new power and gas
customers each year for customers across all States of Australia
and both islands in New Zealand. Downer also designs and
constructs steel lattice transmission towers, designs and builds
substations, and maintains large and complex power and gas
reticulation networks.
Customers include AusNet, ElectraNet, Transgrid, Powerco,
Wellington Electricity and Powerlink.
Water
Downer provides complete water lifecycle solutions for municipal
and industrial water users, with expertise including waste and
waste water treatment, pumping and water transfer, desalination,
water re-use, abstraction and dewatering.
Downer supports its customers across the full asset lifecycle
from the conceptual development of a project through design,
construction, commissioning and optimisation. Downer
purchased ITS Pipetech in March 2017 and its principal activities
include pipe bursting, civil maintenance and robotics. Downer
also operates and maintains treatment, storage, pump stations
and network assets.
Customers include Auckland Council, Invercargill City Council,
Logan City Council, Mackay Regional Council, Melbourne Water,
Queensland Urban Utilities, Tauranga City Council, Yarra Valley
Water, Wagga Wagga City Council, Watercare and Horowhenua
Council (Alliance).
Annual Report 2018 5
Renewable energy
Downer is one of Australia’s largest and most experienced
providers in the renewable energy market, offering design, build
and maintenance services for wind farms and solar farms.
Infrastructure & Construction
Spotless provides M&E and HVAC services to customers in
markets including health, education, commercial & industrial,
defence, justice and transport.
Its AE Smith and Nuvo businesses provide services across
the asset lifecycle from design through to commissioning, fine-
tuning and maintenance to more than 2,000 commercial facilities
in Australia and New Zealand.
Key customers include Probuild, Watpac, Lendlease, John Holland,
Crown Casino, Honeywell and Melbourne University.
Government
Spotless provides integrated facilities management, business
process outsourcing, and operational support to a range of
government customers.
Key customers include NSW Department of Education, Victorian
Department of Education, SA Department of Planning, Transport
and Infrastructure, SA Health, The Housing Authority of WA and
Children’s Health Partnership.
Hospitality & Facilities Management
Spotless provides integrated facilities management services to
customers in markets including aged care, education, healthcare,
airports, business and industry, hospitality, retail, stadia,
functions, and special events.
Key customers include Melbourne Cricket Club, Virgin Airlines,
Taronga Zoo, Brisbane City Hall, Emirates, and The Kings School.
Laundries
Spotless provides linen and garment services to social
infrastructure, industry, accommodation and resources
customers in Australia and New Zealand, with 16 laundries
processing more than 100,000 tonnes of laundry a year.
Key customers include Ramsay Health, HealthScope, WA Health,
SA Health, St John of God, and Inghams.
Defence
Spotless delivers a range of facilities and asset management
services for the Australian Government Department of Defence
and the New Zealand Defence Force. These services include
management services, cleaning and housekeeping, estate
upkeep, pest and vermin control and treatment, reprographic
services, sport and recreation, training area and range services,
and transport and air operations.
Key customers include the Australian Department of Defence
and NZ Defence Force.
Downer offers the services required for the entire asset lifecycle
including procurement, assembly, construction, commissioning
and maintenance.
Communications
Downer provides an end-to-end infrastructure service
offering comprising feasibility, design, civil construction,
network construction, commissioning, testing, operations and
maintenance across fibre, copper and radio networks in Australia
and New Zealand.
Customers include nbn™, Telstra, Chorus, Spark,
Enable and Vodafone.
Spotless
Spotless operates in Australia and New Zealand and provides
outsourced facility services, catering and laundry services,
technical and engineering services, maintenance and
asset management services and refrigeration solutions to
various industries.
Total revenue1 (FY18)
EBITA2 (FY18)
24.6%
29.6%
Spotless
1 Total revenue is a non-statutory disclosure and includes revenue, other income
and notional revenue from joint ventures and other alliances not proportionately
consolidated. Due to rounding, divisional percentages do not add up precisely
to 100%.
2 Downer calculates EBITA by adjusting EBIT to add back acquired intangibles
amortisation expense.
Spotless employs about 36,000 people who deliver services
to customers in a diverse range of industry sectors including:
defence; education; government; healthcare; senior living; sports
and venues; resources; leisure and hospitality; airports; industrial;
commercial; property; utilities and public private partnerships.
Spotless owns a number of businesses including AE Smith,
Alliance, Asset Services, Ensign, EPICURE, Clean Event, Clean
Domain, Mustard, Nuvo, Skilltech, Taylors, TGS, UAM and UASG.
Its customers include corporations and government
departments, agencies and authorities at the Federal, State and
Municipal level.
6 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Rail
Downer is Australia’s leading provider of passenger rolling
stock asset management services, delivering reliable and safe
services to the fast-growing and dynamic public transport sector.
Downer partners with its customers to deliver solutions across all
transport domains including heavy rail, electric and diesel trains,
light rail, bus and multi-modal transport solutions.
Total revenue1 (FY18)
EBITA2 (FY18)
9.3%
6.9%
Engineering, Construction and Maintenance (EC&M)
Downer works with customers in the public and private sectors
delivering services including design, engineering, construction,
maintenance and ongoing management of critical assets.
The EC&M service line includes Hawkins, which Downer
acquired in March 2017. Hawkins delivers a range of non-
residential building services across a variety of sectors.
Total revenue1 (FY18)
EBITA2 (FY18)
19.0%
12.5%
Rail
EC&M
1 Total revenue is a non-statutory disclosure and includes revenue, other income
and notional revenue from joint ventures and other alliances not proportionately
consolidated. Due to rounding, divisional percentages do not add up precisely
to 100%.
2 Downer calculates EBITA by adjusting EBIT to add back acquired intangibles
amortisation expense.
Downer’s track record spans across project management
services, engineering design, systems engineering, supply chain
engagement, systems integration, manufacturing, logistics,
testing, commissioning, asset management, fleet maintenance,
rail infrastructure design and construction, and through-life-
support and operations.
In November 2017, Downer entered an agreement to sell its
freight rail business to Progress Rail. The sale was completed
on 2 January 2018.
The Keolis Downer joint venture is Australia’s largest private
provider of multi-modal public transport solutions, with contracts
to operate and maintain Yarra Trams in Melbourne, the Gold
Coast light rail system in Queensland, and a new integrated
public transport system for the city of Newcastle in NSW.
Keolis Downer is also one of Australia’s most significant bus
operators with operations in South Australia, Western Australia
and Queensland. Keolis Downer provides more than 210 million
passenger trips each year.
Downer’s Rail customers include Sydney Trains, Transport for
NSW, Public Transport Authority (WA), Metro Trains Melbourne,
Public Transport Victoria, and Queensland Rail.
Downer is currently working on the Sydney Growth Trains (SGT)
project in New South Wales and the High Capacity Metro Trains
(HCMT) project in Victoria.
1 Total revenue is a non-statutory disclosure and includes revenue, other income
and notional revenue from joint ventures and other alliances not proportionately
consolidated. Due to rounding, divisional percentages do not add up precisely
to 100%.
2 Downer calculates EBITA by adjusting EBIT to add back acquired intangibles
amortisation expense.
Multi-disciplined teams project manage and self-execute a
wide range of services for greenfield and brownfield projects
across a range of industry sectors including: oil and gas; power
generation; commercial / non-residential; iron ore; coal; and
industrial materials. These services are delivered on complex
resources and industrial sites as well as commercial operations
with critical infrastructure requirements such as data centres,
airport facilities and hospitals.
Downer supports customers across all stages of the project
lifecycle with services including:
– feasibility studies;
– engineering design;
– civil works;
– structural, mechanical and piping;
– electrical and instrumentation;
– mineral process equipment design and manufacture;
– commissioning;
– maintenance;
– shutdowns, turnarounds and outages;
– strategic asset management; and
– decommissioning.
Customers include Alcoa, Bechtel, BHP Billiton, Chevron,
Newcrest, Orica, Origin Energy, Powerlink Queensland, Rio Tinto,
Santos, Wesfarmers, Christchurch City and Auckland Councils,
Auckland University, Auckland and Wellington Airports and the
Ministry of Education in New Zealand.
Annual Report 2018 7
Mining
Downer is one of Australia’s leading diversified mining
contractors serving its customers across more than
50 sites in Australia, Papua New Guinea, South America and
Southern Africa.
Total revenue1 (FY18)
EBITA2 (FY18)
10.8%
8.9%
Mining
1 Total revenue is a non-statutory disclosure and includes revenue, other income
and notional revenue from joint ventures and other alliances not proportionately
consolidated. Due to rounding, divisional percentages do not add up precisely
to 100%.
2 Downer calculates EBITA by adjusting EBIT to add back acquired intangibles
amortisation expense.
Downer’s Mining division generates its revenues primarily
from open cut mining and blasting services, with contributions
also from tyre management and underground mining.
Downer supports its customers at all stages of the mining
lifecycle including:
– asset management;
– blasting services, explosives manufacture and supply;
– civil projects (mine site infrastructure);
– crushing;
– exploration drilling;
– mine closure and mine site rehabilitation;
– mobile plant maintenance;
– open cut mining;
– training and development for ATSI employees;
– tyre management (through the subsidiary Otraco
International); and
– underground mining.
Customers include BHP Mitsubishi Alliance, Roy Hill Iron Ore,
Glencore, Karara Mining, Millmerran Power Partners, Newmarket
Gold, Newmont, Rio Tinto, Stanwell Corporation, OZ Minerals and
Yancoal Australia.
Group Financial Performance
On 27 June 2017, the Group’s ownership interest in Spotless
Group Holdings Limited (Spotless) exceeded 50%, requiring
the consolidation of Spotless’ financial statements from that time.
The Group’s offer for the remaining shares of Spotless closed
on 28 August 2017. As a result of the acquisition, Downer owns
87.8% of Spotless. The Group financial performance
includes a full-year contribution from Spotless for the year
ended 30 June 2018.
The main features of the result for the 12 months ended
30 June 2018 were:
– Total revenue of $12.6 billion, up 61.5%;
– Underlying earnings before interest, tax and amortisation of
acquired intangible assets (EBITA) of $479.6 million, up 68.2%
from $285.2 million;
– Statutory EBITA of $271.5 million, down from $285.2 million;
– Statutory earnings before interest and tax (EBIT) of
$204.8 million, down from $277.8 million;
– Individually Significant Items (ISI) recognised in EBIT in the
period of $208.1 million ($178.6 million after tax);
– Underlying net profit after tax and before amortisation of
acquired intangible assets (NPATA) of $296.5 million, up
58.9% from $186.6 million;
– Statutory NPATA of $117.9 million, down from
$186.6 million; and
– Statutory net profit after tax (NPAT) of $71.1 million.
During the period, the Group identified Individually Significant
Items totalling $178.6 million after tax including:
– $76.4 million Mining goodwill impairment;
– $40.6 million loss on divestment of freight rail;
– $17.5 million unsuccessful Auburn rail claim;
– $20.0 million Divisional merger costs; and
– $24.1 million related to Spotless management redundancies,
transaction costs and residual Strategy Reset costs.
Details of the ISI are disclosed in Note B2(b) of the
Financial Report.
8 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Revenue
Total revenue for the Group increased by $4.8 billion, or 61.5%,
to $12.6 billion.
Transport revenue increased by 30.8% to $2.8 billion due to
continuing strong performance by the Roads business in
Australia and New Zealand, and ongoing investment in transport
projects in Australia.
Utilities revenue increased by 17.5% to $1.8 billion, due to
continuing strong contributions from nbn™ contracts in Australia
as well as new renewable energy projects.
Spotless revenue for the 12 months was $3.1 billion. The major
contributors to this result were Government-related contracts
in the defence, health and education sectors, Public Private
Partnerships (PPPs), construction projects and lifecycle
maintenance contracts.
Rail revenue increased by 37.5% to $1.2 billion driven by the
Sydney Growth Trains and High Capacity Metro Trains projects
as well as continued strong performance on the Waratah
maintenance contract. This result was achieved despite the
divestment of the freight rail business. A significant portion
of the increase relates to pass-through revenue to the
manufacturing construction partner on Sydney Growth Trains.
EC&M revenue increased by 19.9% to $2.4 billion as a result
of increased activities on the Ichthys project in the Northern
Territory and a full year contribution from Hawkins. This increase
was partially offset by a reduction in activities on the Gorgon and
Wheatstone projects in Western Australia.
Mining revenue increased by 4.5% to $1.4 billion, mainly due to
increased activities at Roy Hill and Goonyella and contributions
from JVs and new contracts. These partially offset the
completion of the Boggabri contract in the first half and the
Christmas Creek contract in FY17.
Expenses
Total expenses increased by 68.5% and include $208.1 million
of Individually Significant Items (ISIs). Excluding these ISIs, total
expenses increased 65.6% as explained below.
Employee benefits expenses increased by 44.7%, or $1.2 billion,
to $4.0 billion and represent 34.0% of Downer’s cost base. This
increase is mainly due to Spotless’ contribution ($1.1 billion),
higher activity across the Group and a more labour intensive
contract base compared to the prior period. Included in
employee expenses is $23.4 million of pre-tax ISIs in relation to
divisional merger costs and Spotless transition-related costs as
described in Note B2(b) in the Financial Report.
Subcontractor costs increased by $2.0 billion to $3.8 billion
and represent 31.9% of Downer’s cost base. This increase is as
a result of Spotless’ contribution ($1.1 billion), higher contract
activities and the change in the subcontractor mix on some
contracts during the period.
Raw materials and consumables costs increased by 62.1% to
$2.2 billion and represent 18.6% of Downer’s cost base.
The increase is the net impact of raw material requirements for
new projects (particularly in Transport, Utilities and Rail) and
Spotless’ contribution ($421.8 million); partially offset by lower
requirements as a result of the completion of contracts in Mining.
Plant and equipment costs increased by 34.7% to $677.1 million
and represent 5.7% of Downer’s cost base. This largely reflects
the Spotless contribution and the increased activity in Transport.
The lower increase in plant and equipment costs compared to
other types of expenses reflects a less capital intensive business.
Depreciation and amortisation increased by 68.1% or
$150.0 million to $370.2 million and represents 3.1% of Downer’s
cost base. This increase is predominantly from Spotless’
contribution and from additional $59.3 million in amortisation
on acquired intangible assets following several acquisitions,
including Spotless.
Other expenses, which include communication, travel,
occupancy, professional fees costs and ISIs, have increased by
86.0% to $788.5 million and represent 6.7% of Downer’s cost
base. Included in other expenses is $184.7 million of pre-tax ISIs,
comprising $76.4 million Mining impairment, $50.2 million from
the divestment of freight rail, $25.0 million unsuccessful Auburn
rail claim costs, $15.8 million divisional merger costs including
surplus lease provision and asset write-offs and $17.3 million of
transaction costs related to Spotless.
Annual Report 2018 9
Earnings
Underlying EBITA for the Group increased by 68.2% to $479.6 million, as a result of 12 months Spotless contribution and the increase
in EBITA achieved by Transport, Utilities, Rail and EC&M, partially offset by Mining. Spotless’ EBITA contribution for the 12 months was
$167.7 million.
Underlying NPATA for the Group increased by 58.9% to $296.5 million.
Underlying NPAT for the Group increased by 37.6% to $249.7 million.
Statutory NPAT for the Group was $71.1 million, including $178.6 million of ISIs.
A reconciliation of the underlying result to the statutory result is set out below.
FY18
$m
Underlying result
Loss on divestment of freight rail
Mining goodwill impairment
Auburn Rail claim
Spotless integration costs
Spotless Management redundancies
and integration costs
Spotless residual Strategy Reset costs
Divisional merger costs
Individually Significant Items
Statutory result
Net
interest
expense
Tax
expense
(76.3)
–
–
–
–
(3.3)
(1.5)
–
(4.8)
(81.1)
(86.9)
9.6
–
7.5
2.0
3.0
3.7
8.5
34.3
(52.6)
EBIT
412.9
(50.2)
(76.4)
(25.0)
(7.3)
(9.4)
(11.3)
(28.5)
(208.1)
204.8
Add back:
Amortisation
of acquired
intangible
assets
46.8
–
–
–
–
–
–
–
–
46.8
NPAT
249.7
(40.6)
(76.4)
(17.5)
(5.3)
(9.7)
(9.1)
(20.0)
(178.6)
71.1
NPATA
296.5
(40.6)
(76.4)
(17.5)
(5.3)
(9.7)
(9.1)
(20.0)
(178.6)
117.9
Transport EBITA increased by 14.4% to $142.9 million due to continued strong performance across Australia and New Zealand and good
progress on infrastructure projects in Australia.
Utilities EBITA increased by 12.7% to $94.8 million, driven by the strong performance from nbn™ contracts in Australia, as well as full year
contributions from the acquisitions of UrbanGrid and ITS PipeTech.
Spotless’ underlying EBITA contribution was $167.7 million mainly driven by Government related contracts and PPPs.
Rail EBITA increased by 29.4% to $39.2 million, reflecting profit contributions from the SGT and HCMT projects (which made immaterial
contributions in the prior period).
EC&M EBITA increased by 34.2% to $70.6 million due to 12 months’ contribution from Hawkins in New Zealand and the acquisitions
of AGIS and Envista. There were strong performances on Australian gas projects and by the Operations Maintenance and Services
business. The Mineral Technologies business increased revenue and returned to profitability during the year.
Mining EBITA decreased by $33.0 million to $50.4 million predominantly due to the completion of contracts at Christmas
Creek and Boggabri.
Corporate costs increased by $9.3 million, or 12.1%, to $86.0 million mainly due to investment in governance and risk management
functions following the acquisition of Spotless.
Net finance costs increased by $54.3 million to $81.1 million due to $43.4 million additional interest from Spotless (nil in pcp),
incremental interest incurred following the acquisition of an additional 22% interest in Spotless and lower interest income contribution.
The underlying effective tax rate is 25.8% which is lower than the statutory rate of 30.0% due to the impact of non-assessable R&D tax
incentives, non-taxable distributions from joint ventures and lower overseas tax rates (e.g. New Zealand). The statutory effective tax
rate is 42.5% mainly as a result of the impact of ISIs including non-deductible goodwill impairment associated with Mining.
10 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Divisional Financial Performance
Transport
($m)
3,000
2,500
2,000
1,500
1,000
500
0
FY14
FY15
FY16
FY17
FY18
Revenue
EBITA margin
– Total revenue of $2.8 billion, up 30.8%;
– EBITA of $142.9 million, up 14.4%;
– EBITA margin of 5.1%, down 0.7ppts;
– ROFE1 of 24.2%, up from 22.2%; and
– Work-in-hand of $7.4 billion.
Utilities
($m)
2,000
1,500
1,000
500
0
FY14
FY15
FY16
FY17
FY18
Revenue
EBITA margin
– Total revenue of $1,783.0 million, up 17.5%;
– EBITA of $94.8 million, up 12.7%;
– EBITA margin of 5.3%, down 0.2ppts;
– ROFE1 of 26.1%, up from 22.7%; and
– Work-in-hand of $3.4 billion.
Spotless
($m)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
FY14
FY15
FY16
FY17*
FY18*
Revenue
EBITA margin
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
(%)
9.0
7.5
6.0
4.5
3.0
1.5
0.0
Rail
($m)
1,500
1,000
500
0
FY14
FY15
FY16
FY17
FY18
Revenue
EBITA margin
– Total revenue of $1,169.2 million, up 37.5%;
– EBITA of $39.2 million, up 29.4%;
– EBITA margin of 3.4%, down 0.2ppts;
– ROFE1 of 12.0%, up from 7.3%; and
– Work-in-hand of $8.2 billion.
Engineering, Construction and Maintenance (EC&M)
($m)
3,000
2,500
2,000
1,500
1,000
500
0
FY14
FY15
FY16
FY17
FY18
Revenue
EBITA margin
– Total revenue of $2.4 billion, up 19.9%;
– EBITA of $70.6 million, up 34.2%;
– EBITA margin of 2.9%, up 0.3ppts;
– ROFE1 of 27.0%, up from 23.0%; and
– Work-in-hand of $2.2 billion.
Mining
($m)
2,500
2,000
1,500
1,000
500
0
FY14
FY15
FY16
FY17
FY18
Revenue
EBITA margin
(%)
5.0
4.0
3.0
2.0
1.0
0.0
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
(%)
10.0
8.0
6.0
4.0
2.0
0.0
– Total revenue of $3.1 billion, up 3.2%;
– EBITA of $167.7 million, down 2.4%;
– EBITA margin of 5.4%, down 0.3ppts;
– ROFE1 of 14.1%, up from 12.1%; and
– Work-in-hand of $18.0 billion.
– Total revenue of $1.4 billion, up 4.5%;
– EBITA of $50.4 million, down from $83.4 million;
– EBITA margin of 3.7%, down from 6.4%;
– ROFE1 of 8.6%, down from 13.2%; and
– Work-in-hand of $2.8 billion.
The FY17 and FY18 EBITA have been based on underlying performance.
*
Note: Spotless past performance has been shown as a reference only as it has
started contributing to the Downer Group from 1 July 2017 (FY18).
1
ROFE = EBITA divided by average funds employed (AFE). AFE = Average
Opening and Closing Net Debt + Equity.
Annual Report 2018 11
Group Financial Position
Funding, liquidity and capital are managed at Group level,
with Divisions focused on working capital and operating cash
flow management.
Operating Cash Flow
Operating cash flow was strong at $583.3 million, up 32.1% from
last year due to strong contract performance, advance payments
received and a full year contribution from Spotless. Operating
cash flow / EBITDA conversion continued to be strong at 90.6%.
Investing Cash
Total investing cash flow was $729.6 million, down $266.2 million.
This includes $391.8 million consideration paid in relation to
Spotless acquisition (including an additional 22% ownership
interest) and a further $84.1 million in net cash consideration
paid for other acquisitions including Envista, UrbanGrid and
Cabrini. This was partially offset by $129.6 million proceeds
received from the divestment of the freight rail business.
The business continued to invest in capital equipment
to support the existing contracted operations and future
operations, resulting in net capital expenditure of $334.1 million.
Debt and Bonding
The Group’s performance bonding facilities totalled
$1,915.9 million at 30 June 2018 primarily with $574.3 million
undrawn. There is sufficient available capacity to support the
ongoing operations of the Group.
As at 30 June 2018, the Group had liquidity of $1.5 billion
comprising cash balances of $606.2 million and undrawn
committed debt facilities of $925.0 million. Total liquidity
available is $1.2 billion through Downer’s facilities and
$321.2 million through Spotless’ facilities.
The Group continues to be rated BBB (Stable) by Fitch Ratings.
Balance Sheet
The net assets of Downer decreased by 10.6% to $3.2 billion.
Cash and cash equivalents decreased by $238.4 million, or
28.2%, to $606.2 million, due to $391.8 million consideration paid
in relation to Spotless acquisition (including an additional 22%
ownership interest) and $84.1 million paid for other acquisitions.
These payments were offset by $129.6 million proceeds received
from the divestment of the freight rail business and from
continued strong operating cash flows.
Net debt increased from $620.2 million at 30 June 2017 to
$940.0 million at 30 June 2018 primarily as a result of a reduced
net cash position. This resulted in an increase in gearing
(net debt to net debt plus equity) to 22.7%, up from 14.7%
at 30 June 2017.
The present value of operating lease commitments for plant
and equipment reduced from $151.5 million to $138.1 million.
Total gearing (including off-balance sheet operating lease
commitments) was 25.2% at 30 June 2018, up from 17.7% in
the prior year.
Current trade and other receivables increased by $399.9 million
to $2,121.9 million reflecting higher activities across Transport,
Utilities and Mining.
Inventories decreased by $32.9 million to $268.8 million
reflecting the divestment of freight rail inventory coupled with
continued tight inventory management.
Current tax assets increased by $23.8 million to $69.3 million due
to the timing of tax payments.
Interest in joint ventures and associates increased by
$8.0 million, with $16.9 million of distributions received, offset by
Downer’s share of net profits from joint ventures and associates
of $25.1 million.
Property Plant and Equipment remained consistent at
$1,280.4 million as additional capital expenditure incurred during
the year was offset by the divestment of freight rail assets and
depreciation for the year including Spotless contribution.
Intangible assets increased by $19.5 million arising from
$160.1 million additional goodwill and other acquired intangible
assets recognised from the acquisition of Envista, UrbanGrid,
Cabrini, Integrated Services and Hawkins; $46.4 million additional
investment in software offset by a reduction in goodwill as a
result of the Mining goodwill impairment ($76.4 million) and
the divestment of freight rail ($14.2 million) and $91.9 million
amortisation in FY18 mainly related to Spotless’ acquired
intangible assets.
12 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Total trade and other payables increased by $516.4 million
(28.8%) primarily as a result of higher business activity and
timing of payments. Trade and other payables represent
50.4% of Downer’s total liabilities.
Other financial liabilities of $77.4 million increased by $31.9 million
and represents 1.7% of Downer’s total liabilities. The increase
mainly reflects deferred consideration payable for acquisitions
made during the year.
Deferred tax liability of $170.2 million primarily represents
temporary differences arising from work in progress, property
plant and equipment, and the tax effect of the recognition of
acquired intangibles.
Provisions of $490.5 million decreased by $36.4 million and
represent 10.7% of Downer’s total liabilities. Employee provisions
(annual leave and long service leave) made up 76.4% of this
balance with the remainder covering surplus lease contracts
provisions and return conditions obligations for leased assets
and property and warranty obligations.
Shareholder equity decreased by $381.4 million driven by the
payment for the acquisition of additional interest in Spotless and
the impact of minority interest, and $156.7 million of dividend
payments made during the year. This was offset by the parent
entity net profit after tax of $71.4 million. Net foreign currency
losses on translation of foreign operations, particularly in
New Zealand, resulted in a movement in the foreign currency
translation reserve by $8.8 million.
Dividends
The Downer Board resolved to pay a final dividend of 14.0 cents
per share, 50% franked (12.0 cents per share fully franked in the
prior corresponding period), payable on 27 September 2018 to
shareholders on the register at 30 August 2018. The unfranked
portion of the dividend (50%) will be paid out of Conduit
Foreign Income (CFI).
The Board also determined to continue to pay a fully imputed
dividend on the ROADS security, which having been reset on
15 June 2018 has a yield of 6.15% per annum payable quarterly
in arrears, with the next payment due on 17 September 2018.
As this dividend is fully imputed (the New Zealand equivalent of
being fully franked), the actual cash yield paid by Downer will be
4.43% per annum for the next 12 months.
Zero Harm
Downer’s Lost Time Injury Frequency Rate (LTIFR) increased
from 0.55 to 0.78 but importantly, the Total Recordable
Injury Frequency Rate (TRIFR) reduced from 3.50 to 3.27 per
million hours worked.
Downer Group Safety Performance
(12-month rolling frequency rates)
R
F
T
L
I
2.5
2.0
1.5
1.0
0.5
0.0
3.50
0.55
7
1
-
n
u
J
7
1
-
p
e
S
7
1
-
c
e
D
8
1
-
r
a
M
LTIFR
TRIFR
Note: This data excludes Hawkins and Spotless.
4.0
3.5
I
R
F
R
T
3.27
3.0
2.5
2.0
1.5
1.0
0.78
8
1
-
n
u
J
Annual Report 2018 13
Group Business Strategies and Prospects for Future Financial Years
Downer’s strategy focuses on safety, driving improvement in existing businesses, investing in growth, and creating new positions.
Downer’s strategic objectives, prospects, and the risks that could adversely affect the achievement of these objectives, are set out in
the table below.
Strategic Objective
Prospects
Risks and risk management
Maintain
focus on Zero Harm
Improve value and
service for customers
and their customers
Improve asset
management and data
analytics utilisation
across the Group
Downer recognises that a sustainable and
embedded Zero Harm culture is fundamental to
the Company’s future success.
Zero Harm means working in an environment
that supports the health and safety of its people,
allows it to deliver its business activities in an
environmentally sustainable manner, and advances
the communities in which it operates.
This requires strong commitment to Downer’s Zero
Harm objectives from all levels of the business.
Downer’s Zero Harm culture is built on leading
and inspiring, managing risk, rethinking processes,
applying lessons learnt, and adopting and adapting
practices that aim to achieve zero work-related
injuries and minimise environmental harm.
Providing valuable and reliable products and
services to Downer’s customers, and their
customers, is at the very heart of Downer’s culture.
It enables Downer’s customers to focus more on
their core expertise while Downer delivers non-
core operational services.
Through ongoing analysis of markets, customers
and competitors, Downer is well positioned to
improve value and service for its customers and
their customers.
The ISO 55001 standard sets a new baseline for
professional asset management across most
of the markets in which Downer operates. As a
leader in asset management, Downer aims to
adopt and implement world leading solutions
and insights to benefit its customers and their
customers. Additionally, the proliferation of data
points and connected devices, allows for greater
data and business intelligence to be captured and
monitored. This is key to driving greater levels of
efficiency as well as service improvements.
Downer’s approach to Zero Harm enables the
Company to work safely and environmentally
responsibly in industry sectors where there are
inherent hazardous environments.
Downer has implemented a strong critical risk
program throughout its business. This program has
provided Downer with the opportunity to understand
the risks in its business that could cause serious
injury to people or the environment. That knowledge
has enabled Downer to implement a program to
eliminate or control those risks, and to monitor the
performance of those critical controls.
Each Downer Division has in place a Zero Harm
management system, certified as a minimum to
AS/NZS 4801 or BS OHSAS 18001, and ISO 14001.
Each management system is reviewed regularly,
undergoing internal and external audit.
Relationships creating success continues to be
Downer’s core operating philosophy that drives
delivery of projects and services. It helps to ensure
investment, initiatives and activities are focused on
helping the Group’s customers to succeed. Risks to be
managed include:
– commoditisation of core products and services,
which affects margins;
– not keeping pace with changing customer
expectations for service improvements; and
– lack of focus on customer feedback channels.
Customers and end users’ expectations continue
to grow with regard to reliable, intuitive, and
cost-effective assets and services. Investments
are required into asset management and
data analytics frameworks to ensure lifecycle
performance is monitored and timely decisions
are made to optimise asset utilisation. Risks to be
managed include:
– lack of value added services to customers
reducing their need for integrated
services partners;
– reduction in scope and service from customers
to pure maintenance / blue collar services; and
– inability to properly manage performance
frameworks and desired service outcomes.
14 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Strategic Objective
Prospects
Risks and risk management
Position for greater
government
outsourcing
Leverage opportunities
that will emerge from
greater urbanisation
in major cities
Orient Downer’s
portfolio to growth
markets
Embed operational
technology into core
service offerings
Following the acquisition of Spotless, Downer is
the largest and most diverse services contractor
in the Asia-Pacific region with over $12 billion in
annual revenues. This scale and breadth gives
Downer greater resilience to withstand economic
headwinds when they arise, and the opportunity to
provide a more diverse range of services.
Downer is well positioned to pursue government
outsourcing opportunities in the Australian and
New Zealand markets now and into the future.
As cities become larger and more complex,
opportunities will emerge for Downer in
connecting, managing and monitoring
their core infrastructure. This will include
transport infrastructure, public transport,
utilities, telecommunications, and other
technology platforms.
Downer is well positioned to work with
governments and citizens to understand and
shape the infrastructure and networks that will
underpin the megacities of the future.
Downer continues to enjoy wide reaching access
to substantial asset management, projects, and
services opportunities in its core geographies
of Australia and New Zealand. While these
geographies will remain the core focus for
the foreseeable future, Downer continues to
investigate and pursue identified and evaluated
opportunities in Southern Africa, South America,
North America, Europe, and Asia.
Downer is focused on increasing the utilisation
of operational technology across all its service
lines to improve differentiation and competitive
advantage. This includes investing in partnerships
with global technology experts, co-creating
bespoke products and services to meet
customer needs, and investigating selective M&A
opportunities to improve the quality of the Group’s
service offering.
Government outsourcing provides a high level
of opportunity for Downer as government fiscal
demands increase and citizens desire more service
from less spend. Risks to be managed include:
– longer procurement contract durations reducing
opportunities to tender for new opportunities;
– commoditisation of long-term contracts; and
– introduction of foreign and technology
based competitors that bring a different
value proposition.
Greater urbanisation is likely to result in a
consolidation of competition, opportunities, and
capital. Risks to be managed include:
– intensification of competition as customers
converge into large single market
procurement channels;
– introduction of foreign and technology based
competitors that bring a different value
proposition; and
– greater investment in technology.
Downer continues to review the current shape of
its service offerings as well as the exportability of a
number of established and mature service offerings
which have reached leadership in the Group’s core
markets. Risks to be managed include:
– balancing growth objectives against sustainable
profit outcomes; and
– determining the optimal timing to export core
competencies to new growth markets or to
further diversify Downer’s offering.
Downer has opportunities to invest in new
skills to manage the risks that will emerge from
technological advancements. These risks include:
– market disruption;
– cybersecurity and data hacks as more
assets and infrastructure networks are
managed remotely; and
– switching costs associated with technological
infrastructure and networks.
Annual Report 2018 15
The following table provides an overview of the key prospects relevant to each of Downer’s service lines and summarises Downer’s
intended strategic response across each sector to maximise the Company’s performance and realise future opportunities.
Prospects
Downer’s response
The market for transport infrastructure and
services continues to exhibit good growth in
both Australia and New Zealand, as respective
governments invest in a range of projects to
reduce congestion, improve mobility, and provide
better linkages between communities.
In both Australia and New Zealand, Downer is
noticing a shift toward greater network integration,
journey management, and multi-modal solutions.
This is seeing not only a convergence between
transport modes but also between industries like
transport and energy. Two-way digital methods
of communication with passengers in real-time is
proliferating in the transport sector.
Growth across power and gas utility markets is
multi-faceted with a good pipeline of prospects
in both Australia and New Zealand. In Australia,
growth will be driven by prospects in electricity
transmission and distribution, as well as significant
new capital projects in the renewable energy
market. In New Zealand, increasing demand from
a growing population is seeing higher levels of
activity across the water and power & gas sectors.
Activity in telecommunications markets continues
to be dynamic, with large capital builds in both
Australia and New Zealand coming to a close.
Downer’s view is that the timing of these large
network builds will extend beyond most analysts’
predictions. However, increasing demand for data
services will see a solid baseload of activity in this
sector remains.
The manufacture and associated servicing of
rail rolling stock continues to be a strong growth
market for Downer. Major procurement activities
have been undertaken in Queensland, NSW and
Victoria in recent years, with the resulting volume
of work continuing to permeate the market.
Looking forward, potential outsourcing and
franchising opportunities across the transport
sector may further expand Downer’s portfolio in
public transport operations.
As a market leader in Australia and New Zealand,
Downer is well positioned to capitalise on future
transport opportunities. In particular, focus will be
upon the markets for road maintenance services,
road surfacing and bitumen supply, rail infrastructure
delivery, and public transport operations.
Downer continues to innovate across its core service
offerings, to ensure it brings to customers global
insights and competitively benchmarked solutions.
It also continues to selectively acquire scale where
this creates value for shareholders.
Downer is particularly focused on transport issues
which affect communities like congestion, parking
management, transport integration, and value capture
from associated developments.
Downer has market leading positions in the electricity,
water, gas and telecommunications sectors in both
Australia and New Zealand.
Downer is strongly positioned to take advantage of
the growth opportunities available in these sectors,
with a demonstrable track record of excellence in
service delivery, and a greater focus on introducing
operational technology to improve the value Downer
brings to customers.
In addition to maximising its share of the outsourced
‘poles and wires’ services market, the business is
focused on growing the national water sector and
participating in new construction, maintenance, and
operations contracts.
Downer’s rail asset management model is a clear
market leader with a strong focus on ‘return on
investment’ – i.e. increasing fleet availability and
reliability for customers’ customers.
Downer maintains strong strategic partnerships with
leading global transport solutions providers and,
through this model, is pursuing opportunities in rolling
stock manufacture and maintenance, and transport
network operations and maintenance.
The Keolis Downer joint venture is a leading
Australian multi-modal transport operator, through its
light rail and bus operations.
Service line
Transport
Utilities
Rail
16 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Service line
EC&M
Mining
Spotless
Prospects
Downer’s response
Downer is a market leader in electrical and
instrumentation work, particularly in the oil & gas
sector, and is growing its structural mechanical piping
business. Downer has experience working on all of the
recent Australian major oil & gas developments. While
the first phase of major LNG construction comes
to an end, Downer does envisage the potential for
additional trains to be constructed in the near future
due to the improving productivity of gas extraction at
these facilities.
Outside of oil & gas, Downer continues to be a major
player in the delivery of resources related engineering,
construction and maintenance services with long and
enduring relationships with all of Australia’s major
mining and industrial customers.
Downer increased its presence in the growing market
for infrastructure and building in New Zealand
through the acquisition of Hawkins, the country’s
second-largest builder.
Downer is one of Australia’s leading diversified
mining contractors offering customers open cut,
underground, mining services, tyre management, drill
and blast, and engineering and technology services.
A core focus is to drive efficiency in the way Downer
delivers services to ensure it creates value for
its customers.
Through the acquisition of Spotless, Downer is now
a major force in both Australia and New Zealand with
market leading positions across key sectors including:
defence; health; education; corrections; commercial;
stadia and open space management; leisure;
and resources.
There is a focus on leveraging both businesses’ scale
and routes to market to position the Group’s core
services offerings in an integrated way.
EC&M comprises resources-related
infrastructure, infrastructure projects, and non-
residential building.
Resources-related infrastructure is showing green
shoots of growth for the first time in a long period.
Downer expects this investment to largely focus
on brownfield expansions with relatively few new
greenfield developments.
Good growth prospects in the non-residential
building and commercial sector are expected as
business confidence remains high in both Australia
and New Zealand, while investment into social
infrastructure continues with particular focus on
health and education.
While mine owners continue to have a strong
focus on cost reduction, Downer is seeing green
shoots of growth particularly in Western Australia
across iron ore, gold and other precious metals.
Some mine owners are currently shifting their
operating models to maximise supply chain
benefits, which opens opportunities for contractors
to work collaboratively to drive productivity
improvements and reduce production costs.
The facilities management and services market
is undergoing consolidation, as operators look
to leverage scale across multiple service lines.
Downer and Spotless continue to see large-scale
and long-term outsourcing contracts come to
market across the government sector, however
the volume of PPPs in social infrastructure and
integrated services contracts in the resources
sector appears to be slowing.
The proliferation of operational technology to
enable real-time performance monitoring is
shaping the future of outsourcing, leading to
bundling services and the provision of ‘anything
as a service’.
The defence, health, education, corrections, and
commercial markets continue to provide a range
of exciting opportunities on the short-to-medium
term horizon in both Australia and New Zealand.
Annual Report 2018 17
The international environmental standard ISO 14001:2015, is
used as a benchmark for assessing, improving and maintaining
the environmental integrity of our business management
systems. The Company’s Divisions also adhere to environmental
management requirements established by customers in addition
to all applicable licence and regulatory requirements.
Dividends
In respect of the financial year ended 30 June 2018, the Board:
– declared a 50% franked interim dividend of 13.0 cents per
share that was paid on 4 April 2018 to shareholders on the
register at 7 March 2018 with the unfranked portion paid out
of Conduit Foreign Income; and
– declared a 50% franked final dividend of 14.0 cents per
share, payable on 27 September 2018 to shareholders on the
register at 30 August 2018 with the unfranked portion to be
paid out of Conduit Foreign Income.
Due to the strength of Downer’s balance sheet, the Company’s
Dividend Reinvestment Plan remains suspended.
As detailed in the Directors’ Report for the 2017 financial year,
the Board declared a fully franked final dividend of 12.0 cents
per share, that was paid on 10 October 2017 to shareholders
on the register at 12 September 2017.
Outlook
Downer is targeting consolidated net profit after tax and
before amortisation of acquired intangible assets (NPATA) of
$335 million before minority interests.
Subsequent events
There have been no matters or circumstances other than those
referred to in the financial statements or notes thereto, that have
arisen since the end of the financial year, that have significantly
affected, or may significantly affect, the operations of the Group,
the results of those operations, or the state of affairs of the
Group in subsequent financial years.
Changes in state of affairs
During the financial year there was no significant change
in the state of affairs of the Group other than that referred
to in the financial statements or notes thereto.
Environmental
Downer makes a positive contribution in industry sectors such
as utilities, renewable energy, public transport, infrastructure
and facilities management. Downer recognises it also operates
in highly carbon-intensive industry sectors, for example, mining.
Downer’s strategy focuses on driving improvement in existing
businesses, investing in sustainable growth, and adapting
as industry and customer needs and preferences change.
Downer’s business diversity allows it to leverage emerging
opportunities such as increasing and ageing populations,
infrastructure renewal requirements and the increased need for
inter-connected smart cities and regional city hubs.
Downer recognises its obligation to stakeholders, including
customers, shareholders, employees, contractors and the
communities in which it operates, to advance sustainability
and mitigate the Company’s environmental impact. Downer
acknowledges its role as a corporate citizen, and respects the
places and communities in which it operates. Downer’s Purpose,
Promise and Pillars underpin everything it does and Downer
is committed to conducting its operations in a manner that is
environmentally responsible and sustainable.
The Board oversees the Company’s environmental and
sustainability performance via the Zero Harm Board Committee.
The Zero Harm Management System Framework sets the
minimum standard for environment and sustainability within
the Divisions. As such, each Division is required to have an
Environmental Sustainability Action Plan (ESAP) and strategies
in place supported by suitably qualified environment and
sustainability professionals. The ESAP allocates internal
responsibilities for reducing the impact of its operations and
business activities on the environment. In addition, all Downer
Divisions’ environment management systems are audited by
both internal and external independent third parties.
18 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Employee Discount Share Plan (ESP)
An ESP was instituted in June 2005. In accordance with the provisions of the plan, as approved by shareholders at the 1998 Annual
General Meeting, permanent full-time and part-time employees of Downer EDI Limited and its subsidiary companies who have
completed six months service may be invited to participate.
No shares were issued under the ESP during the years ended 30 June 2018 or 30 June 2017.
There are no performance rights or performance options, in relation to unissued shares, that are outstanding.
Directors’ meetings
The following table sets out the number of Directors’ meetings (including meetings of Board Committees) held during the 2018 financial
year and the number of meetings attended by each Director (while they were a Director or Board Committee member). During the year,
22 Board meetings, seven Audit and Risk Committee meetings, five Zero Harm Committee meetings, four Remuneration Committee
meetings and three Nominations and Corporate Governance Committee meetings were held. In addition, 28 ad hoc meetings (attended
by various Directors) were held in relation to various matters including tender reviews and major projects.
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling2
T G Handicott3
N M Hollows
E A Howell
C G Thorne4
Director
R M Harding
G A Fenn
S A Chaplain
P S Garling2
T G Handicott3
N M Hollows
E A Howell
C G Thorne4
Board
Audit and Risk
Committee
Remuneration
Committee
Held1
22
22
22
22
22
1
12
22
Attended
21
22
20
21
21
1
12
21
Held1
–
–
7
7
7
1
–
7
Attended
–
–
7
7
7
1
–
7
Held1
4
–
–
4
4
–
–
–
Attended
4
–
–
4
4
–
–
–
Zero Harm
Committee
Nominations and
Corporate Governance
Committee
Held1
–
5
5
–
–
–
5
5
Attended
–
4
5
–
–
–
5
5
Held1
3
–
3
–
3
–
–
–
Attended
3
–
3
–
3
–
–
–
These columns indicate the number of meetings held during the period each person listed was a Director or member of the relevant Board Committee.
1
2 Mr Garling is also Chairman of the Rail Projects Committee.
3 Ms Handicott is also Chairman of the Disclosure Committee which meets on an unscheduled basis.
4 Dr Thorne is also Chairman of the Tender Risk Evaluation Committee which meets on an unscheduled basis.
Annual Report 2018 19
Indemnification of officers and auditors
During the financial year, the Company paid a premium in
respect of a contract insuring the Directors of the Company, the
Company Secretary, and all officers of the Company and of any
related body corporate against a liability incurred as a Director,
secretary or executive officer to the extent permitted by the
Corporations Act 2001 (Cth).
The contract of insurance prohibits disclosure of the nature
of the liability and the amount of the premium.
Downer’s Constitution includes indemnities, to the extent
permitted by law, for each Director and Company Secretary
of Downer and its subsidiaries against liability incurred in the
performance of their roles as officers. The Directors and the
Company Secretaries listed on pages 2 to 4, individuals who act
as a Director or Company Secretary of Downer’s subsidiaries
and certain individuals who formerly held any of these roles
also have the benefit of the indemnity in the Constitution.
The Company has not otherwise, during or since the financial
year, indemnified or agreed to indemnify an officer or auditor of
the Company or of any related body corporate against a liability
incurred as such an officer or auditor.
Corporate Governance
In recognising the need for the highest standards of corporate
behaviour and accountability, the Board endorses the ASX
Corporate Governance Council’s Corporate Governance
Principles and Recommendations (ASX Principles). The Group’s
corporate governance statement is set out at pages 127 to 135
of this Annual Report.
The Directors are of the opinion that the services as disclosed
below do not compromise the external auditor’s independence,
based on advice received from the Audit and Risk Committee,
for the following reasons:
– All non-audit services have been reviewed and approved
to ensure that they do not impact the integrity and
objectivity of the auditor; and
– None of the services undermine the general principles
relating to auditor independence as set out in the Institute
of Chartered Accountants in Australia and CPA Australia’s
Code of Conduct APES 110 Code of Ethics for Professional
Accountants issued by the Accounting Professional & Ethical
Standards Board, including reviewing or auditing the auditor’s
own work, acting in a management or decision-making
capacity for the Company, acting as advocate for the
Company or jointly sharing economic risks and rewards.
A copy of the auditor’s independence declaration is set out on
page 52 of this Annual Report.
During the year, details of the fees paid or payable for non-audit
services provided by the auditor of the parent entity, its related
practices and related audit firms were as follows:
Non-audit services
Tax services
Sustainability assurance
Due diligence and other
non-audit services
2018
$
556,106
278,634
2017
$
719,955
217,000
950,457
1,785,197
1,066,814
2,003,769
Non-audit services
Rounding of amounts
The Company is of a kind referred to in ASIC Corporations
(Rounding in Financial/Directors’ reports) Instrument 2016/191,
relating to the “rounding off” of amounts in the Directors’ Report
and consolidated financial statements. Unless otherwise stated,
amounts have been rounded off to the nearest whole number
of millions of dollars and one place of decimals representing
hundreds of thousands of dollars.
Downer is committed to audit independence. The Audit and
Risk Committee reviews the independence of the external
auditors on an annual basis. This process includes confirmation
from the auditors that, in their professional judgement, they are
independent of the Group. To ensure that there is no potential
conflict of interest in work undertaken by Downer’s external
auditors, KPMG, they may only provide services that are
consistent with the role of the Company’s auditor.
The Board has considered the position and, in accordance with
the advice from the Audit and Risk Committee, is satisfied that
the provision of non-audit services during the year is compatible
with the general standard of independence for auditors imposed
by the Corporations Act 2001 (Cth).
20 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Remuneration Report – AUDITED
Chairman’s letter
Dear Shareholders,
Downer’s 2018 Remuneration Report provides information about
the remuneration of its most senior executives and explains how
performance has been linked to reward outcomes at Downer for
the 2018 financial year.
At the last Annual General Meeting in November 2017,
93.2 percent of all votes cast by shareholders were in favour
of the 2017 Remuneration Report. The structure of the
2018 Remuneration Report has been prepared with the same
objective of providing readers with a transparent view of key
performance and outcomes using the report structure adopted
in previous years.
Strong financial and safety performance
Downer has once again delivered strong financial and
safety performance in 2018 and has continued to deliver
on its promises:
– Total Revenue was $12,620.2 million, an increase of
61.5 percent from 2017;
– Underlying Net Profit After Tax and before Amortisation
of acquired intangibles was $296.5 million, an increase
of $1.5 million over underlying guidance given at the
start of the year;
– Conversion of EBITDA (earnings before interest, tax,
depreciation and amortisation) to cash continued to be
strong at 90.6 percent;
– Work-in-hand is now $42.0 billion, up 7.1 percent from
December 2017; and
– Downer’s Total Shareholder Return over the three years to
30 June 2018 was 85.1 percent, 43.5 percent higher than the
ASX 100 median.
Downer’s Zero Harm performance continues to be industry
leading. Downer’s Lost Time Injury Frequency Rate was 0.78 and
the Total Recordable Injury Frequency Rate was 3.27. Many of the
activities that Downer’s people perform every day are inherently
dangerous and ensuring they remain safe is of paramount
importance. Zero Harm is central to Downer’s culture and our
commitment to continuous improvement in Zero Harm remains a
core strategic objective.
Key remuneration issues in 2018
Downer continued to invest in its future through strategic
acquisitions and capital investments that have enhanced the
geographic footprint of the existing business, grown capability
and created new market positions which will maximise long term
shareholder value. These include the acquisitions of Envista,
Integrated Services, UrbanGrid and Cabrini Linen Service.
Downer also divested the Freight Rail business. The restructuring
of Spotless and the integration of the Spotless business into the
Downer Group has also been a major activity during 2018.
The impact of these major transactions on executive
remuneration can be significant. The Board’s overarching
concern is to ensure executives:
– Are accountable for delivery of the annual budget and
business plan; and
– Consider potential acquisition or divestment
opportunities without the influence of their impact on
remuneration outcomes.
For these and other reasons, where a transaction is both material
and unbudgeted, the Board’s policy is that it should remove the
impact of the transaction when calculating the key performance
indicators on which executive performance is measured.
This ensures that executives are ‘no better or worse off’ as a
result of the transaction.
There were three significant items in 2018 which affected
statutory earnings being:
– A non-cash impairment of goodwill in the mining business;
– Major restructures to merge the Mining Division with the
Engineering, Construction and Maintenance Division to form
the new Mining, Energy and Industrial Services Division and
merger of the Rail Division into the Infrastructure Services
Division to form the Transport and Infrastructure Division to
ensure that our service offerings best align with the needs of
our customers; and
– Remediation of ground subsidence at the Auburn (Waratah)
Maintenance Centre.
The Board considers whether to adjust for the impact of
significant items (positive or negative) on a case by case basis,
having regard to the circumstances relevant to each item.
In 2018, adjustments were made in respect of the major
transactions in line with policy, major restructures and the Mining
goodwill impairment. No adjustment was made for the Auburn
Maintenance Centre remediation. The adjustments that were
made ensured that executives were rewarded for performance
against the operational performance targets set at the beginning
of the year absent the influence of remuneration outcomes.
The adjustments resulted in the Group gateway being met
which opened the Corporate scorecard and part achievement
of the Corporate Net Profit after Tax and Before Amortisation of
acquired intangibles measure but for other measures had no or
an immaterial impact on reward outcomes.
More information on the Board’s approach to the above activities
and their impact in 2018 can be found at sections 6.5 and 7.4 of
the Remuneration Report.
Annual Report 2018 21
Link between Downer performance and reward outcomes
Downer is one of the few companies in its sector that provides
earnings guidance to the market each year. Downer has been
successful in meeting or exceeding this earnings guidance
for the last seven reporting periods. Downer’s remuneration
framework for key senior employees has been very successful
in aligning Downer’s strategy and the creation of alignment
between senior executives and shareholders. As set out in
this Remuneration Report, Downer’s remuneration strategy
continues to provide:
– A significant proportion of remuneration being at risk linked
to clear, objective measures;
– A profitability gateway as a precondition to any short term
incentive entitlement;
– For deferral of 50 percent of short term incentive payments
over a further two year period; and
– The delivery of a significant proportion of pay in equity.
To ensure that this framework continues to support the
achievement of Downer’s strategy, a review has commenced
with outcomes to be communicated in next year’s
Remuneration Report.
We trust that this overview and the accompanying detailed
analysis are helpful when forming your own views on Downer’s
remuneration arrangements.
R M Harding
Chairman
T G Handicott
Remuneration Committee Chairman
22 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018
The Remuneration Report provides information about the remuneration arrangements for key management personnel (KMP), which
means Non-executive Directors and the Group’s most senior executives, for the year to 30 June 2018. The term “executive” in this
Report means KMPs who are not Non-executive Directors.
The Report covers the following matters:
1. Year in review;
2. Details of Key Management Personnel;
3. Remuneration policy, principles and practices;
4. Relationship between remuneration policy and company performance;
5. The Board’s role in remuneration;
6. Description of executive remuneration;
7. Details of executive remuneration;
8. Executive equity ownership;
9. Key terms of employment contracts;
10. Related party information; and
11. Description of Non-executive Director remuneration.
1. Year in review
1.1 Summary of changes to remuneration policy
Downer has continued to refine its remuneration policy during the period. The Board considered Company strategy and reward plans
based on performance measurement, competitive position and stakeholder feedback. Changes to policy are noted in the relevant
sections of this Report and are summarised in the table below.
Policy
Enhancements since 2017
Short-term incentive (STI) plan
– The Zero Harm measures for safety and environmental performance have been
further refined, building upon previous improvements to move with and support
growth in organisational maturity and ensure continual stretch and ongoing Zero Harm
improvement through:
– Requiring the completion of trend analysis on the outcomes of completed critical control
verifications to identify the existence of ineffective controls and escalation factors,
thereby further improving the understanding of the control environment; and
– Initiating a program of projects to improve the effectiveness of critical controls, informed
by the trend analysis on the outcomes of completed critical risk observations.
– The Financial measures for earnings have evolved from Net Profit After Tax (NPAT) to Net
Profit After Tax and Before Amortisation of acquired intangibles (NPATA) at the Group
level and Earnings Before Interest and Tax (EBIT) to Earnings Before Interest, Tax and
Amortisation of acquired intangibles (EBITA) at the Divisional level to ensure that reward
remains focused on the delivery of operational performance.
– As with 2017, the People measure is based on the outcomes of a Company-wide
employee engagement survey. In 2018, the targets were adjusted to create additional
stretch which reflects the Company’s increased maturity in this area and to ensure
continuous improvement.
Annual Report 2018 23
1.2 Remuneration Framework Review
Downer’s current remuneration framework was established in 2008 and has been developed and refined over the subsequent years.
In recent years, Downer has undergone transformational change in becoming Australia’s largest integrated services provider, including
through the acquisitions of Tenix, Hawkins and Spotless as well as the divestment of the Century Drilling and Freight Rail businesses
and its revenue and market capitalisation have grown significantly.
Accordingly, the Board, with the support of management, determined that it was timely and appropriate to review whether the
framework currently in place continues to be ‘fit for purpose’ for today’s Downer.
Guerdon Associates has been engaged to assist the Board with this review. A summary of outcomes of the review and any changes to
the remuneration framework will be provided in the 2019 Remuneration Report.
2. Details of Key Management Personnel
The following persons acted as Directors of the Company during or since the end of the most recent financial year:
Director
Role
R M Harding
G A Fenn
S A Chaplain
P S Garling
N M Hollows
T G Handicott
E A Howell
C G Thorne
Chairman, Independent Non-executive Director
Managing Director and Chief Executive Officer
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director, from 19 June 2018
Independent Non-executive Director
Independent Non-executive Director, to 2 November 2017
Independent Non-executive Director
The named persons held their current executive position for the whole of the most recent financial year, except as noted:
Executive
S Cinerari
M J Ferguson
S L Killeen
M J Miller
D Nelson
D J Overall
B C Petersen
Role
Chief Executive Officer – Infrastructure Services, to 6 March 2018
Chief Executive Officer – Transport and Infrastructure, from 7 March 2018
Chief Financial Officer
Chief Executive Officer – New Zealand
Chief Executive Officer – Rail, to 6 March 2018
Chief Executive Officer – Spotless, from 22 August 2017
Chief Executive Officer – Mining, to 19 February 2018
Chief Executive Officer – Engineering, Construction & Maintenance, to 19 February 2018
Chief Executive Officer – Mining, Energy and Industrial Services, from 20 February 2018
24 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 3. Remuneration policy, principles and practices
3.1 Executive remuneration policy
Downer’s executive remuneration policy and practices are summarised in the table below.
Policy
Practices aligned with policy
Retain experienced, proven
performers, and those
considered to have high
potential for succession
Focus performance
Provide a Zero
Harm environment
Manage risk
– Provide remuneration that is internally fair;
– Ensure remuneration is competitive with the external market; and
– Defer a substantial part of pay contingent on continuing service and sustained performance.
– Provide a substantial component of pay contingent on performance against targets;
– Focus attention on the most important drivers of value by linking pay to their achievement;
– Require profitability to reach a challenging level before any bonus payments can be made; and
– Provide a LTI plan component that rewards consistent Scorecard performance over multiple
years and over which executives have a clear line of sight.
– Incorporate measures that embody “Zero Harm” for Downer’s employees, contractors,
communities and the environment as a significant component of reward.
– Encourage sustainability by balancing incentives for achieving both short-term and longer-term
results, and deferring equity based reward vesting after performance has been initially tested;
– Set stretch targets that finely balance returns with reasonable but not excessive risk taking and
cap maximum incentive payments;
– Do not provide excessive “cliff” reward vesting that may encourage excessive risk taking as a
performance threshold is approached;
– Diversify risk and limit the prospects of unintended consequences from focusing on just one
measure in both short-term and long-term incentive plans;
– Stagger vesting of deferred short term incentive payments to encourage retention and allow
forfeiture of rewards that are the result of misconduct or material adjustments;
– Retain full Board discretion to vary incentive payments, including in the event of excessive
risk taking; and
– Restrict trading of vested equity rewards to ensure compliance with the Company’s Securities
Trading Policy.
Align executive interests with
those of shareholders
– Provide that a significant proportion of pay is delivered as equity so part of executive reward is
linked to shareholder value performance;
– Provide a long-term incentive that is based on consistent Scorecard performance against
challenging targets set each year that reflect sector volatility and prevailing economic
conditions as well as relative TSR and earnings per share measures directly related to
shareholder value;
– Maintain a guideline minimum shareholding requirement for the Managing Director;
– Exclude the short-term impact of unbudgeted and opportunistic acquisitions and divestments
from performance assessment to encourage agility and responsiveness;
– Encourage holding of shares after vesting via a trading restriction for all executives and
payment of LTI components in shares; and
– Prohibit hedging of unvested equity and equity subject to a trading lock to ensure alignment
with shareholder outcomes.
Attract experienced,
proven performers
– Provide a total remuneration opportunity sufficient to attract proven and experienced
executives from secure positions in other companies and retain existing executives.
Annual Report 2018 25
4. Relationship between remuneration policy
and company performance
4.1 Company strategy and remuneration
Downer’s business strategy includes:
– Maintaining focus on Zero Harm by continually improving
health, safety and environmental performance to achieve
Downer’s goal of zero work-related injuries and significant
environmental incidents;
– Driving growth in core markets through focusing on serving
existing customers better across multiple products and
service offerings, growing capabilities and investing in
innovation, research and development and community and
indigenous partnerships;
– Creating new strategic positions through enhanced value
add services that improve propositions for customers and
exporting established core competencies into new overseas
markets with current customers of the Company;
– Reducing risk and enhancing the Company’s capability
to withstand threats, take advantage of opportunities and
reduce cyclical volatility;
– Excluding the short term impacts of opportunistic and
unbudgeted acquisitions and divestments on incentive
outcomes to encourage flexibility, responsiveness and
growth consistent with strategy;
– Deferring 50% of STI awards to encourage sustainable
performance and a longer-term focus;
– Incorporating consistent financial performance in the LTIP
Scorecard measure;
– Emphasis on Zero Harm measures in the STI to maintain the
Company’s position as a Zero Harm leader and employer
and service provider of choice, thereby delivering a
competitive advantage; and
– Encouraging engagement with and the development
and retention of its people to help maintain a sustainable
supply of talent.
4.2 Remuneration linked to performance
The link to performance is provided by:
– Requiring a significant portion of executive remuneration to
vary with short-term and long-term performance;
– Applying a profitability gateway to be achieved before an STI
– Obtaining better utilisation of assets and improved margins
calculation for executives is made;
through simplifying and driving efficiency;
– Identifying opportunities to manage the Downer portfolio
through partnering, acquisition and divestment that deliver
long-term shareholder value; and
– Maintaining flexibility to be able to adapt to the changing
economic and competitive environment to ensure Downer
delivers shareholder value.
The Company’s remuneration policy complements
this strategy by:
– Incorporating Company-wide performance requirements
for both STI and LTI reward vesting for earnings (NPAT and
NPATA), Free Cash Flow (FFO) and People measures to
encourage cross-divisional collaboration;
– Incorporating performance metrics that focus on cash flow to
reduce working capital and debt exposure;
– Setting NPATA, EBITA and FFO STI performance and
gateway requirements based on effective application of funds
employed to run the business for better capital efficiency;
– Employing FFO as the cash measure for the STI to provide
more emphasis on control of capital expenditure;
– Applying further Zero Harm gateways to be achieved
before calculating any reward for safety or
environmental performance;
– Applying challenging financial and non-financial measures to
assess performance;
– Ensuring that these measures focus management
on strategic business objectives that create
shareholder value; and
– Delivering a significant proportion of payment in equity for
alignment with shareholder interests.
Downer measures performance on the following key
corporate measures:
– Earnings per share (EPS) growth;
– Total shareholder return (TSR) relative to other ASX100
companies (excluding ASX “Financials” sector companies);
– Group NPATA;
– Divisional EBITA;
– FFO;
– Engagement with Downer’s people; and
– “Zero Harm” measures of safety and environmental
sustainability.
Remuneration for all executives varies with performance on
these key measures.
26 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 The following graph shows the Company’s performance compared to the median performance of the ASX100 over the three year
period to 30 June 2018.
Downer EDI TSR compared to S&P/ASX 100 median*
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150
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50
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Jun
2015
Sep
2015
Dec
2015
Mar
2016
Jun
2016
Sep
2016
Dec
2016
Mar
2017
Jun
2017
Sep
2017
Dec
2017
Mar
2018
Jun
2018
* S&P/ASX 100 companies as at 30/06/2015
Downer EDI TSR
S&P/ASX 100 median TSR
The graphs below illustrate Downer’s performance against key financial and non-financial performance indicators over the
last five years.
Net profit after tax
Free cash flow
216.0
210.2
180.6
181.5
247.81
300
250
200
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150
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50
0
344.3
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400
300
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$
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200
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2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
1 Adjusted for material unbudgeted transactions and individually significant items.
2 Adjusted for material unbudgeted transactions, including payment for
Spotless shares.
Basic earnings per share3
45.5
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o
T
3 Historical basic earnings per share were restated as a result of 169.9 million
shares issued from the capital raising made as part of the Spotless takeover
offer announced on 21 March 2017. The weighted average number of shares
(WANOS) to calculate EPS was adjusted by an adjustment factor of 0.943.
Annual Report 2018 27
5. The Board’s role in remuneration
The Board engages with shareholders, management and other stakeholders as required, to continuously refine and improve executive
and Director remuneration policies and practices.
Two Board Committees deal with remuneration matters. They are the Remuneration Committee and the Nominations and Corporate
Governance Committee.
The role of the Remuneration Committee is to review and make recommendations to the Board in relation to executives in respect of:
– Executive remuneration and incentive policy;
– Remuneration of senior executives of the Company;
– Executive reward and its impact on risk management;
– Executive incentive plans;
– Equity-based incentive plans;
– Superannuation arrangements;
– Recruitment, retention, performance measurement and termination policies and procedures for all Key Management Personnel
and senior executives reporting directly to the Managing Director;
– Disclosure of remuneration in the Company’s public materials including ASX filings and the Annual Report; and
– Retirement payments for all Key Management Personnel and senior executives reporting directly to the Managing Director.
The Nominations and Corporate Governance Committee is responsible for recommending and reviewing remuneration arrangements
for the Executive Director and Non-executive Directors of the Company.
Each Committee has the authority to engage external professional advisers without seeking approval of the Board or management.
During the reporting period, the Remuneration Committee retained Guerdon Associates Pty Ltd as its adviser. Guerdon Associates
Pty Ltd does not provide services to management and is considered to be independent.
Remuneration arrangements for executives of Spotless are set by the Board of Spotless. Spotless’ People and Remuneration Committee
is comprised of two independent Directors and one Director nominated by Downer.
Details of the remuneration structure and arrangements for 2018 for D Nelson in her role as Chief Executive Officer – Spotless, as
established by the Spotless Board, are outlined at section 6.7.
28 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 6. Description of executive remuneration
6.1 Executive remuneration structure
Executive remuneration has a fixed component and a component that varies with performance.
The variable component ensures that a proportion of pay varies with performance. Performance is assessed annually for performance
periods covering one year and three years. Payment for performance assessed over one year is an STI. Payment for performance over a
three-year period is an LTI.
In order for maximum STIs to be awarded, performance must achieve a stretch goal that is a clear margin above the planned budget for
the period. This enables the Company to attract and retain better performing executives, and ensures pay outcomes are aligned with
shareholder returns.
Target STIs are less than the maximum STI. Target STI is payable on achievement of planned objectives. For executives the target
STI is 75% of the maximum STI. The maximum total remuneration that can be earned by an executive is capped. The maximums are
determined as a percentage of fixed remuneration.
Executive position
Managing Director
Executives appointed prior to 2011
Executives appointed from 2011
Target
STI % of
fixed
remuneration
Maximum
STI % of
fixed
remuneration
Maximum
LTI % of
fixed
remuneration
Maximum total
performance
based pay as a % of
fixed remuneration
75
75
56.25
100
100
75
100
75
50
200
175
125
The proportions of STI to LTI take into account:
– Market practice;
– The service period before executives can receive equity rewards;
– The behaviours that the Board seeks to encourage through direct key performance indicators; and
– The guideline for the Managing Director to maintain a shareholding as a multiple of pay after long-term incentive
rewards have vested.
6.2 Fixed remuneration
Fixed remuneration is the sum of salary and the direct cost of providing employee benefits, including superannuation, motor vehicles,
car parking, living away from home expenses and fringe benefits tax.
The level of remuneration is set to be able to retain proven performers and when necessary to attract the most suitable external
candidates from secure employment elsewhere.
Remuneration is benchmarked against a peer group of direct competitors and a sector peer group. While market levels of remuneration
are monitored on a regular basis, there is no contractual requirement or expectation that any adjustments will be made.
No adjustment has been made to remuneration for the Managing Director since July 2012.
Annual Report 2018 29
6.3 Short-term incentive
6.3.1 STI tabular summary
The following table outlines the major features of the 2018 STI plan.
Purpose of STI plan
– Focus performance on drivers of shareholder value over 12 month period;
– Improve “Zero Harm” and people related results; and
– Ensure a part of remuneration costs varies with the Company’s 12 month performance.
Minimum performance “gateway”
before any payments can be made
Achievement of a gateway based on budgeted Group NPATA for corporate executives and
Division EBITA for divisional heads.
Maximum STI that can be earned
– KMP appointed pre 2011: up to 100% of fixed remuneration; and
– KMP appointed from 2011: up to 75% of fixed remuneration.
Percentage of STI that can
be earned on achieving
target expectations
Individual Performance
Modifier (IPM)
75% of the maximum. For an executive to receive more, performance in excess of target
expectations will be required.
– An IPM may be applied based on an executive’s individual key performance indicators and
relative performance;
– Moderate individual performance may result in an IPM of less than 1 or outstanding
performance may result in an IPM greater than 1. The IPM must average 1 across all
participants; and
– Application of an IPM cannot result in an award greater than the maximum STI% level set out
in section 6.1.
Discretion to vary payments
The Board, in its discretion, may vary STI payments by up to + or – 100% from the payment
applicable to the level of performance achieved, up to the maximum for that executive.
Performance period
1 July 2017 to 30 June 2018.
Performance assessed
August 2018, following audit of accounts.
Additional service period
after performance period for
payment to be made
Payment timing
Form of payment
50% of the award is deferred with the first tranche of 25% vesting one year following award and
the second tranche of 25% vesting two years following award.
September 2018 for the first cash payment of 50% of the award. The deferred components
of the STI payments will be paid one and two years following the award, in equal tranches of
25% of the award.
Cash for initial payment.
The value of deferred components will be settled in cash or shares, net of personal tax. An
eligible leaver’s deferred components will be settled in shares or in cash in the sole and absolute
discretion of the Board.
Performance requirements
Group NPATA and divisional EBITA, FFO, Zero Harm and people measures.
Board discretion
New recruits
Terminating executives
30 Downer EDI Limited
The Board may exercise discretion to:
– Reduce partly or fully the value of the deferred components that are due to vest in certain
circumstances, including where an executive has acted inappropriately or where the Board
considers that the financial results against which the STIP performance measures were tested
were incorrect in a material respect or have been reversed or restated; and
– Settle deferred components in shares or cash.
New executives (either new starts or promoted employees) are eligible to participate in the STI in
the year in which they commence in their position with a pro-rata entitlement.
There is no STI entitlement where an executive’s employment terminates prior to the end of
the financial year. Where an executive’s employment terminates prior to the vesting date, the
unvested deferred components will be forfeited. However, the Board has retained discretion to
vest deferred awards, in the form of shares or cash, in their ordinary course where the executive is
judged to be an eligible leaver.
Directors’ Report – continuedfor the year ended 30 June 2018 6.3.2 STI overview
The STI plan provides for an annual payment that varies with annual performance. This has been applied to performance measured
over the Company’s financial year to 30 June 2018.
The basis of the plan is designed to align STI outcomes with financial results. No STI is paid unless a minimum profit gateway is met.
For corporate executives, the gateway is based on the Group budgeted profit target. For divisional executives, the gateway is based
on the division budgeted profit target. Profit for this purpose is defined as NPATA for corporate executives and EBITA for divisional
executives. This minimum must be at a challenging level to justify the payment of STI to an executive, and deliver an acceptable
return for the funds employed in running the business. Positive and negative impacts from material but unbudgeted and opportunistic
transactions are excluded from gateway assessment. Whether to exclude the impact of significant items (positive or negative) is
considered on a case by case basis.
As noted in section 6.1, the maximum STI that can be earned is capped to minimise excessive risk taking.
Deferral is a key feature as part of the STI structure. Payment of 50% of the award is paid at the time of award in cash and the remaining
50% of the award earned is deferred over two years.
The first payment of 50% of the award will be in cash after finalisation of the annual audited results. The payment of the deferred
component of the award will be in the form of two tranches, each to the value of 25% of the award.
The deferred components represent an entitlement to cash or shares, subject to the satisfaction of a continued employment condition.
The first tranche will vest one year following award and the second tranche will vest two years following award, provided an executive
remains employed by the Group at the time of vesting.
The value of deferred components will generally be settled in shares, net of applicable personal tax. This is designed to encourage
executive share ownership, and not adversely impact executives who have to meet their taxation obligations arising from the vesting
of the deferred components. However, the Board retains the discretion to vest deferred awards, in the form of shares or cash, and will
generally have regard to an executive’s individual circumstances and existing level of equity ownership.
No dividend entitlements are attached to the deferred components during the vesting period.
Where an executive ceases employment with the Group prior to the vesting date, the deferred components will be forfeited.
However, the Board has retained the discretion to vest deferred awards, in the form of shares or cash, in their ordinary course where the
executive is judged to be an eligible leaver.
6.3.3 How STI payments are assessed
Target STI plan percentage of pay
An individual’s target incentive under the STI plan is expressed as a percentage of fixed
remuneration. The STI plan percentage is set according to policy tabulated in section 6.1.
Organisational or divisional
scorecard result
As a principle, “target” achievement would be represented at budget. Thresholds and
maximums are also set.
Individual Performance
Modifier (IPM)
At the end of the plan year, eligible employees are provided with an IPM against their key
performance indicators and relative performance. Individual key performance indicators are set
between the individual and the Managing Director (if reporting to the Managing Director) or the
Board (if the Managing Director) at the start of the performance period. IPMs must average to 1.
STI plan incentive calculation
Fixed remuneration x maximum STI plan percent x scorecard result x IPM.
Annual Report 2018 31
6.3.4 STI performance requirements
Overall performance is assessed on NPATA, EBITA, FFO, Zero Harm and a measure of employee engagement.
NPATA and EBITA include joint ventures and associates and include, inter alia, changes in accounting policy.
FFO is defined as net cash from operating activities (i.e. EBIT plus non-cash items in operating profit plus distributions received
from JVs or associates plus movements in working capital plus movements in operating assets less net interest less tax paid), less
investing cash flow.
Zero Harm reflects Downer’s commitment to safety and environmental, social and governance matters. The Zero Harm element
includes safety and environmental measures, underscoring Downer’s commitment to customers, employees, regulators and the
communities in which it operates.
The measures for the Zero Harm element of the scorecard are as follows:
Measure
Target
Safety
TRIFR (total recordable injury
frequency rate)
LTIFR (lost time injury frequency rate)
Retain TRIFR and LTIFR below defined threshold levels for area of responsibility. TRIFR is
calculated as the number of recordable injuries x 1,000,000/the hours worked in
12 months. LTIFR is calculated as the number of lost time injuries x 1,000,000/the hours
worked in 12 months.
Environmental
Greenhouse gas emission reductions Review of targets for greenhouse gas reduction and energy efficiency and the achievement of
Critical risks
Zero Harm Leadership
energy efficiency targets for the area of control.
Continuation of critical control verification programs, trend analysis on critical control
verifications and the implementation of a program of initiatives to improve the resilience of
critical controls.
Performance of a minimum number of cross-divisional critical risk observations by senior
executives within the relevant area of control in other areas of Downer.
Should a workplace fatality or serious environmental incident occur, the relevant safety or environmental portion of the STI is foregone.
Weightings applied to the 2018 STI scorecard measures for all executives, including the Managing Director, are set out in
the table below.
Executive
Corporate
Business unit
Group NPATA
Divisional EBITA
Free cash flow
Zero Harm
30%
7.5%
–
22.5%
30%
30%
(7.5% Group,
22.5% division)
30%
30%
People
10%
10%
(3% Group,
7% division)
The Board has discretion to vary STI payments by up to + or – 100% from the payment applicable to the level of performance achieved,
up to the maximum for that executive.
Specific details of STI performance requirements are set out in section 7.3.
The Board retains the right to vary from policy in exceptional circumstances. However, any variation from policy and the reasons for it
will be disclosed.
32 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 6.4 Long-term incentive
6.4.1 LTI tabular summary
The following table outlines the major features of the 2018 LTI plan.
Purpose of LTI plan
– Focus performance on drivers of shareholder value over three-year period;
– Manage risk by countering any tendency to over-emphasise short-term performance to the
detriment of longer-term growth and sustainability; and
– Ensure a part of remuneration costs varies with the Company’s longer-term performance.
Maximum value of equity
that can be granted
– Managing Director: 100% of fixed remuneration;
– KMP appointed pre-2011: 75% of fixed remuneration; and
– KMP appointed from 2011: 50% of fixed remuneration.
Performance period
1 July 2017 to 30 June 2020.
Performance assessed
September 2020.
Additional service period
after performance period
for shares to vest
Performance rights for which the relevant performance vesting condition is satisfied will not vest
unless executives remain employed with the Group on 30 June 2021.
Performance rights vest
1 July 2021.
Form of award and payment
Performance rights.
Performance conditions
There are three performance conditions. Each applies to one-third of the performance rights granted to
each executive.
Relative TSR
The relative TSR performance condition is based on the Company’s TSR performance relative to the
TSR of companies comprising the ASX100 index, excluding financial services companies, at the start of
the performance period, measured over the three years to 30 June 2020.
The performance vesting scale that will apply to the performance rights subject to the relative TSR test
is shown in the table below:
Downer EDI Limited’s
TSR Ranking
Percentage of performance rights subject to TSR condition that
qualify for vesting
< 50th percentile
50th percentile
Above 50th and below
75th percentile
0%
30%
Pro rata so that 2.8% of the performance rights in the tranche will
vest for every 1 percentile increase between the 50th percentile and
75th percentile
75th percentile and above
100%
Annual Report 2018 33
EPS growth
The EPS growth performance condition is based on the Company’s compound annual EPS growth over
the three years to 30 June 2020.
The performance vesting scale that will apply to the performance rights subject to the EPS growth test
is shown in the table below:
Downer EDI Limited’s EPS
compound annual growth
Percentage of performance rights subject to EPS condition that
qualify for vesting
< 5%
5%
0%
30%
Above 5% to < 10%
Pro rata so that 14% of the performance rights in the tranche will
vest for every 1% increase in EPS growth between 5% and 10%
10% or more
100%
Scorecard
The Scorecard performance condition is based on the Group’s NPAT and FFO for each of the three years
to 30 June 2020.
The performance vesting scale that will apply to the performance rights subject to the Scorecard test is
shown in the table below:
Scorecard result
< 90%
90%
Above 90% to < 110%
Percentage of performance rights subject to Scorecard condition
that qualify for vesting
0%
30%
Pro rata so that 3.5% of the performance rights in the tranche will vest
for every 1% increase in the Scorecard result between 90% and 110%
110% or more
100%
How performance rights and
shares are acquired
The rights are issued by the Company and held by the participant subject to the satisfaction of
the vesting conditions. The number of rights held may be adjusted pro-rata, consistent with ASX
adjustment factors, for any capital re-structures.
If the rights vest, executives can exercise them to receive shares that are normally acquired on-market.
Treatment of dividends
and voting rights on
performance rights
Performance rights do not have voting rights or accrue dividends.
Restriction on hedging
Hedging of entitlements under the plan by executives is not permitted.
Restriction on trading
Vested shares arising from the rights may only be traded with the approval of the Remuneration
Committee. Approval requires that trading comply with the Company’s Securities Trading Policy.
New participants
Terminating executives
New executives (either new starts or promoted employees) are eligible to participate in the LTI on the
first grant date applicable to all executives after they commence in their position. An additional pro-
rata entitlement if their employment commenced after the grant date in the prior calendar year may be
made on a discretionary basis.
Where an executive ceases employment with the Group prior to the vesting date, the rights will
be forfeited. However, the Board will retain the discretion to retain executives in the plan in certain
circumstances including the death, total and permanent disability or retirement of an executive. In
these circumstances, the Board will also retain the discretion to vest awards in the form of cash.
34 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 Change of control
On the occurrence of a change of control event, and providing at least 12 months of the grants’
performance period have elapsed, unvested performance rights pro rated with the elapsed service
period are tested for vesting with performance against the relevant relative TSR, EPS growth or
Scorecard requirements for that relevant period. Vesting will occur to the extent the performance
conditions are met. Performance rights that have already been tested, have met performance
requirements and are subject to the completion of the service condition, fully vest.
6.4.2 LTI overview
Executives participate in a LTI plan. This is an equity-based plan that provides for a reward that varies with Company performance over
three-year measures of performance. Three-year measures of performance are considered to be the maximum reasonable time period
for setting incentive targets for earnings per share and are generally consistent with market practice in the Company’s sector.
The payment is in the form of performance rights. The performance rights do not have any dividend entitlements or voting rights. If all
the vesting requirements are satisfied, the performance rights will vest and the executives will receive shares in the Company or cash at
the discretion of the Board.
The 2018 LTI represents an entitlement to performance rights to ordinary shares exercisable subject to satisfaction of both a
performance condition and a continued employment condition. Grants will be in three equal tranches, with each tranche subject to an
independent performance requirement. The performance requirements for each tranche will share two common features:
– Once minimum performance conditions are met, the proportion of performance rights that qualify for vesting commences at
30% and gradually increases pro rata with performance. This approach provides a strong motivation for meeting minimum
performance, but avoids a large “cliff” which may encourage excessive risk taking; and
– The maximum reward is capped at a “stretch” performance level that is considered attainable without excessive risk taking.
Performance for the 2018 LTI grants will be measured over the three-year period to 30 June 2020.
The proportion of performance rights that can vest will be calculated in September 2020, but executives will be required to remain in
service until 30 June 2021 to be eligible to receive any shares.
Where an executive ceases employment with the Group prior to the vesting date, the rights will be forfeited. However, the Board will
retain the discretion to retain executives in the plan in certain circumstances such as the death, total and permanent disability or
retirement of an executive. In these circumstances, the Board will also retain the discretion to vest awards in the form of cash.
After vesting, any shares will remain subject to a trading restriction that is governed by the Company’s Securities Trading Policy.
All unvested performance rights will be forfeited if the Board determines that an executive has committed an act of fraud, defalcation or
gross misconduct or in other circumstances at the discretion of the Board.
Annual Report 2018 35
6.4.3 Performance requirements
One tranche of performance rights in the 2018 LTI grant will
qualify for vesting subject to performance relative to other
companies, while the other two tranches of performance rights
will qualify for vesting subject to separate, independent absolute
performance requirements.
The relative performance requirement applicable to the first
tranche of performance rights is based on total shareholder
return (TSR). TSR is calculated as the difference in share
price over the performance period, plus the value of shares
earned from reinvesting dividends received over this period,
expressed as a percentage of the share price at the beginning
of the performance period. If the TSR for each company in the
comparator group is ranked from highest to lowest, the median
TSR is the percentage return to shareholders that exceeds the
TSR for half of the comparison companies. The 75th percentile
TSR is the percentage return required to exceed the TSR for
75% of the comparison companies.
Performance rights in the tranche to which the relative TSR
performance requirement applies will vest pro rata between the
median and 75th percentile. That is, 30% of the tranche vest at
the 50th percentile, 32.8% at the 51st percentile, 35.6% at the
52nd percentile and so on until 100% vest at the 75th percentile.
The comparator group for the 2018 LTI grants will be the
companies, excluding financial services companies, in the
ASX100 index as at the start of the performance period on
1 July 2017. Consideration has been given to using a smaller
group of direct competitors for comparison, however:
– Limiting the comparator group to a small number of direct
competitors could result in very volatile outcomes from
period to period; and
– Management’s strong focus on improving the Company’s
ranking among ASX100 companies has become embedded
in Company culture, so reinforcing this rather than trying to
dislodge it with another focus was considered desirable.
The absolute performance requirement applicable to the
second tranche of performance rights is based on Earnings per
Share (EPS) growth over the three year performance period
to 30 June 2020. The EPS measure is based on AASB 133
Earnings per Share.
The tranche of performance rights dependent on the EPS
performance condition will vest pro rata between 5% compound
annual EPS growth and 10% compound annual EPS growth.
Vesting applies on a pro rata basis from 30% upon meeting
the minimum compound annual EPS growth performance level
of 5% to 100% at 10% annual compound annual EPS growth.
Capping reduces the tendency for excessive risk taking and
volatility that may be encouraged if the annual compound EPS
growth bar is set above 10%.
36 Downer EDI Limited
The absolute performance requirement applicable to
the third tranche of performance rights is based on the
Scorecard condition over the three year performance period
to 30 June 2020.
The Scorecard condition is designed to:
– Strengthen retention through the setting of challenging
targets on an annual basis that reflect prevailing market
conditions, for a portion of LTI awards;
– Align with the STI plan to encourage a long-term approach to
achieving annual financial performance targets;
– Improve the line of sight for executives so as to increase
motivation and focus on consistent performance; and
– Focus on performance sustainability through reward of
consistent achievement of absolute performance targets
over the long term.
The Scorecard condition is comprised of two independent
absolute components of equal weighting. These components are
based on Group NPAT and Group FFO.
The performance of each component will be measured over the
three year period to 30 June 2020.
NPAT and FFO targets are set at the beginning of each of the
three financial years. The performance of each component will
be assessed each year relative to the targets. Performance of
each component will be determined as the average of the annual
performance assessments for the three years. The performance
rights will vest on a pro-rata basis from 30% upon meeting the
minimum three-year average component performance level
of 90% of target to 100% at the capped maximum three-year
average component performance level of 110% of target.
The processes and timing applicable for the Scorecard measure
are outlined below:
Timing
Actions
At the beginning
of the plan
Weighting of components is
determined. In 2018 the components are
equally weighted.
At the beginning of
each financial year
NPAT and FFO target performance
levels are set.
At the end of
each financial year
– Calculate actual performance; and
– Assess actual performance compared
to target to determine performance
percentage for the year.
At the end of
three years
– Calculate average annual performance
for each component; and
– Calculate award based on performance
against the vesting range.
At the end of
four years
Consider the continued service condition
and determine vesting.
Directors’ Report – continuedfor the year ended 30 June 2018 6.4.4 Post‑vesting shareholding guideline
The Managing Director is required to continue holding shares
after they have vested until the shareholding guideline has
been attained. This guideline requires that the Managing
Director holds vested long-term incentive shares equal in value
to 100% of his fixed remuneration. The Managing Director’s
shareholding is currently well in excess of the guideline.
The Remuneration Committee has discretion to allow
variations from this guideline requirement. The guideline
requirement has been developed to reinforce alignment with
shareholder interests.
The Board retains the right to vary from policy in exceptional
circumstances. However, any variation from policy and the
reasons for it will be disclosed.
6.5 Treatment of major transactions
Downer has delivered significant shareholder value through a
long history of strategic mergers, acquisitions and divestments.
On each occasion, the Board considers the impact of these
transactions. Where a transaction is both material and
unbudgeted, the Board considers whether it is appropriate
to adjust for its impact on the key performance indicators on
which executive performance is measured. The objective of any
adjustment is to ensure that opportunities to add value through
an opportunistic divestment or acquisition should not be
fettered by consideration of the impact on incentive payments.
That is, executives should be ‘no better or worse off’ as a result
of the transaction. No adjustments are made for market reactions
to a transaction as the Board believes that management is
accountable for those outcomes.
This Board considers this approach to be appropriate as it:
– Ensures that executives and the Board consider these
transactions solely based on the best interests of Downer;
– Means executives remain accountable for transaction
execution and post-transaction performance from the
next budget cycle;
– Ensures that executives complete opportunistic transactions
that are in the long-term interest of shareholders;
– Is consistent with the Board’s long-term view when
considering the value of major transactions to Downer’s
shareholders; and
– Ensures Downer remains agile and responsive in managing
its portfolio by pursuing opportunities as and when
they emerge rather than be constrained by the annual
budget process.
In assessing Zero Harm performance of executives, the results of
acquired businesses are excluded for a period of twelve months
post-acquisition to ensure that management is accountable for
the objectives set in the annual business planning process and
in recognition that an integration period during which Downer’s
Zero Harm framework (including systems, processes, definitions
and measurement and reporting methods) is implemented
through the acquired business is appropriate. Where this
transition to Downer’s framework takes place over a longer
period due to the complexity of the implementation or the
maturity profile of the acquired business, the Board will consider
an extension to a more appropriate period.
6.6 Treatment of significant items
From time to time, Downer’s performance is impacted by
significant items. Where these occur, the Board considers
whether to adjust for their impact (positive or negative) on
a case by case basis, having regard to the circumstances
relevant to each item.
The Board considers this approach to be appropriate as it
ensures that executives and the Board make decisions solely
based on the best interests of Downer.
6.7 Chief Executive Officer – Spotless
Downer has an interest of 87.8% in Spotless Group Holdings
Limited (Spotless), which remains listed on the Australian
Securities Exchange. Remuneration arrangements for executives
of Spotless are set by the Board of Spotless. Spotless’ People
and Remuneration Committee is comprised of two independent
Directors and one Director nominated by Downer.
Following is a summary of the remuneration structure
and arrangements for FY18 for D Nelson in her role as
Chief Executive Officer – Spotless as established by the
Spotless Board.
6.7.1 Remuneration structure
The remuneration for the CEO – Spotless has a fixed component
and a component that varies with performance.
Fixed remuneration is the sum of salary and the direct cost of
providing employee benefits, including superannuation and other
non-cash benefits.
Remuneration is benchmarked against a peer group of
competitors. While market levels of remuneration are monitored
on a regular basis, there is no contractual requirement or
expectation that any adjustments will be made.
The variable component ensures that a proportion of pay
varies with performance. Performance is assessed annually
for performance periods covering one year and three years.
Payment for performance assessed over one year is an STI.
Payment for performance assessed over three years is an LTI.
For 2018, the Spotless Board determined that it was
inappropriate to grant performance rights under the LTI, which
was based on EPS and TSR performance hurdles, due to the
low level of free float shares in Spotless and lack of trading
liquidity following the takeover by Downer. Accordingly, for 2018,
the maximum value of the STI was increased from 100% to
150% of fixed remuneration and STI deferral was introduced.
The Spotless Board will give consideration to a longer term
approach for 2019.
Annual Report 2018 37
6.7.2 STI tabular summary
The following table outlines the major features of the Spotless 2018 STI plan.
Minimum performance “gateway”
before any payments can be made
Achievement of a gateway based on budgeted NPAT must be met before any STI payment can be
made. A further Zero Harm gateway must be met for an award for safety performance to be made.
Maximum STI that can be earned
100% of fixed remuneration. This was increased to 150% for 2018 only as no LTI grant
was made for 2018.
Percentage of STI that can
be earned on achieving
target expectations
Discretion to vary payments
75% of the maximum. For an executive to receive more, performance in excess of target
expectations will be required.
The Board, in its discretion, may vary STI payments by up to + or – 100% from the payment
applicable to the level of performance achieved, up to the maximum for that executive.
Performance period
1 July 2017 to 30 June 2018.
Performance assessed
August 2018, following audit of accounts.
Additional service period
after performance period for
payment to be made
Payment timing
50% of the award is deferred with the first tranche of 25% vesting one year following award and
the second tranche of 25% vesting two years following award.
September 2018 for the first payment of 50% of the award. The deferred components of
the STI payments will be paid one and two years following the award, in equal tranches of
25% of the award.
Form of payment
Payments are made in cash.
Performance requirements
The Spotless performance scorecard is comprised of the following measures:
Measure
NPAT
FFO
Revenue
Zero Harm – Recordable Injury Frequency Rate
People – talent and succession planning, regrettable turnover
Weighting
30%
30%
10%
20%
10%
The Board may exercise discretion to reduce partly or fully the value of the deferred
components that are due to vest in certain circumstances, including where an executive has
acted inappropriately or where the Board considers that the financial results against which
the STI performance measures were tested were incorrect in a material respect or have been
reversed or restated.
There is no STI entitlement where employment terminates prior to the end of the financial year.
Where employment terminates prior to the vesting date, the unvested deferred components will
be forfeited other than where the Spotless Board judges to be an eligible leaver.
Board discretion
Terminating executives
These arrangements reflect changes from the previous Spotless remuneration framework and an intention of the Spotless Board to
align with the Downer framework as appropriate.
Further information on Spotless’ remuneration practices is contained in its Remuneration Report which can be found on the Spotless
website www. spotless.com.
38 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 7. Details of executive remuneration
7.1 Remuneration received in relation to the 2018 financial year
Executives receive a mix of remuneration during the year, comprising fixed remuneration, an STI paid in cash and an LTI in the form of
performance rights that vest four years later, subject to meeting performance and continued employment conditions.
The table below lists the remuneration actually received in relation to the 2018 financial year, comprising fixed remuneration, cash STIs
relating to 2018, deferred STIs payable in 2018 in respect of prior years and the value of LTI grants that vested during the 2018 financial
year. This information differs to that provided in the statutory remuneration table at section 7.2 which shows the accounting expense
of LTIs and deferred STIs for 2018 determined in accordance with accounting standards rather than the value of LTI grants that vested
during the year.
Fixed
Remuneration1
$
Cash Bonus paid
or payable in
respect of
current year
$
G A Fenn2,4
S Cinerari2,4
M J Ferguson2,5
S L Killeen2,5
M J Miller2,5
D Nelson2
D J Overall4
B C Petersen2,4
2,060,323
1,082,745
825,000
829,185
483,882
948,731
800,891
852,640
7,883,397
840,300
492,580
267,846
200,476
156,576
506,237
–
283,146
Deferred
Bonus paid
or payable in
respect of
prior years
$
804,400
485,775
135,577
34,367
116,222
–
581,745
189,553
Total
payments
$
3,705,023
2,061,100
1,228,423
1,064,028
756,680
1,454,968
1,382,636
1,325,339
2,747,161
2,347,639
12,978,197
Equity
that vested
during 20173
$
Total
remuneration
received
$
–
–
–
–
–
–
–
–
–
3,705,023
2,061,100
1,228,423
1,064,028
756,680
1,454,968
1,382,636
1,325,339
12,978,197
1
2
3
Fixed remuneration comprises salary and fees, payment of leave entitlements, non-monetary benefits and superannuation payments.
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2018 financial year. These comprise the 50% cash component of the
award. The remaining 50% of the total award is deferred as described in section 6.3.
Represents the value of restricted shares granted in previous years that vested during the year, calculated as the number of restricted shares that vested multiplied by the
closing market prices of Downer shares on the vesting date.
4 Deferred Bonus represents the deferred cash bonus amount to be paid in September 2018, being the second deferred component of the 2016 award and the first deferred
component of the 2017 award, being 25% of each award.
Deferred Bonus represents the deferred cash bonus amount to be paid in September 2018, being the first deferred component of the 2017 award, being 25% of the award.
5
Annual Report 2018 39
7.2 Remuneration of executive key management personnel required under the Corporations Act 2001 (Cth)
2018
Short-term
employee benefits
Post-employment
benefits
Cash Bonus
paid or
payable in
respect
of current
year
$
840,300
492,580
267,846
200,476
156,576
506,237
–
283,146
2,747,161
Deferred
Bonus paid
or payable4
$
859,283
491,054
224,583
109,854
192,511
210,932
335,984
260,140
2,684,341
Salary
and fees
$
1,766,618
1,038,284
792,549
750,268
450,420
931,394
785,743
821,267
7,336,543
Non-
monetary
$
Super-
annuation
$
Other
benefits
$
Subtotal
$
Share-based
payment
transac-
tions3
$
Total
$
273,656
14,084
12,402
7,130
19,773
2,300
2,319
11,324
342,988
20,049
30,377
20,049
71,787
13,689
15,037
12,829
20,049
203,866
3,759,906
–
2,066,379
–
1,317,429
–
1,139,515
–
832,969
–
1,665,900
–
1,136,875
–
–
1,395,926
– 13,314,899
1,373,275
546,250
211,220
86,100
187,063
–
161,500
276,351
5,133,181
2,612,629
1,528,649
1,225,615
1,020,032
1,665,900
1,298,375
1,672,277
2,841,759 16,156,658
G A Fenn2,4
S Cinerari2,4
M J Ferguson2,4
S L Killeen2,4
M J Miller1,2,4
D Nelson1,2,4
D J Overall1,2,4
B C Petersen2,4
1
2
3
Amounts represent the payments relating to the period during which the individuals were Key Management Personnel (KMP).
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2018 financial year. These comprise the 50% cash component of
the award.
Represents the value of vested and unvested equity expensed during the period including reversal for forfeited equity incentives and the probability of the incentives
vesting, in accordance with AASB 2 Share-based Payment, related to grants made to the executive, as outlined in sections 8.2 and 8.3. Vesting of the majority of securities
remains subject to significant performance and service conditions as outlined in section 6.4.
4 Deferred Bonus represents the value of deferred components attributable to the 2018 financial year based on amortisation of deferred components over the period from the
commencement of the relevant performance year to the end of financial year to which payment of the relevant deferred component relates.
2017
Short-term
employee benefits
Post-employment
benefits
Cash Bonus
paid or
payable in
respect
of current
year
$
964,100
495,550
271,153
66,129
232,444
568,277
315,913
2,913,566
Deferred
Bonus paid
or payable4
$
803,667
467,313
112,980
28,639
96,852
584,940
157,961
2,252,352
Salary
and fees
$
1,775,384
980,384
659,616
289,648
638,762
1,326,197
810,235
6,480,226
Non-
monetary
$
Super-
annuation
$
Other
benefits
$
Subtotal
$
Share-based
payment
transac-
tions3
$
Total
$
288,050
19,916
8,268
2,351
16,622
8,495
20,149
363,851
19,616
26,276
19,616
10,792
19,616
19,616
19,616
135,148
–
–
–
–
–
395,708
–
3,850,817
1,989,439
1,071,633
397,559
1,004,296
2,903,233
1,323,874
395,708 12,540,851
1,656,713
593,437
119,473
–
111,507
496,208
184,604
5,507,530
2,582,876
1,191,106
397,559
1,115,803
3,399,441
1,508,478
3,161,942 15,702,793
G A Fenn2,4
S Cinerari2,4
M J Ferguson2,4
S L Killeen1,2,4
M J Miller2,4
D J Overall2,4,5
B C Petersen2,4
1
2
3
Amounts represent the payments relating to the period during which the individuals were Key Management Personnel (KMP).
Cash Bonus paid or payable in respect of current year represents cash payments in relation to the 2017 financial year. These comprise the 50% cash component of
the award.
Represents the value of vested and unvested equity expensed during the period including reversal for forfeited equity incentives and the probability of the incentives
vesting, in accordance with AASB 2 Share-based Payment, related to grants made to the executive, as outlined in sections 8.2 and 8.3. Vesting of the majority of securities
remains subject to significant performance and service conditions as outlined in section 6.4.
4 Deferred Bonus represents the value of deferred components attributable to the 2017 financial year based on amortisation of deferred components over the period from the
commencement of the relevant performance year to the end of financial year to which payment of the relevant deferred component relates.
D J Overall: Other benefits represents the accrual of the cash retention benefit payable on 21 May 2017 ($395,708), being 12 months’ fixed remuneration.
5
40 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018
7.3 Performance related remuneration
7.3.1 Performance outcomes required under the Corporations Act 2001 (Cth)
The table below lists the proportions of remuneration paid during the year ended 30 June 2018 that are performance and non-
performance related and the proportion of STIs that were earned during the year ended 30 June 2018 due to the achievement of the
relevant performance targets.
G A Fenn1
S Cinerari1
M J Ferguson
S L Killeen
D Nelson
B C Petersen
Proportion of
2018 remuneration
2018
Short-term incentive
Performance
Related
%
Non-
performance
Related
%
Paid
%
Forfeited
%
60
59
46
32
43
49
40
41
54
68
57
51
84
90
84
76
61
89
16
10
16
24
39
11
1
Performance related portion includes the reversal of expense for forfeited equity incentives described in section 6.4.
7.3.2 STI performance outcomes
Specific STI financial and commercial targets remain commercially sensitive and so have not been reported.
In order for an STI to be paid, a minimum of 90% of the budgeted profit target must be met. For corporate executives, the hurdle is
90% of the Group budgeted profit target. Profit for this purpose is defined as NPATA. For divisional executives, the hurdle is 90% of the
division budgeted profit target. Profit for this purpose is defined as EBITA.
The following table summarises the average performance achieved by the KMP across each element of the scorecard.
Weighting of scorecard element
Percentage of the element achieved
Corporate
Division
Corporate
Division1
Group
NPATA
Divisional
EBITA
Group
FFO
Divisional
FFO
30.0
7.5
58.4
58.4
22.5
66.7
30.0
7.5
100.0
100.0
22.5
95.2
Zero
Harm
30.0
30.0
100.0
96.0
People
10.0
10.0
65.0
48.6
1
Performance includes the results for each Division for each element, even if the EBITA gateway was not achieved.
Annual Report 2018 41
The following table sets out the performance achieved by each KMP across each element of the scorecard.
G A Fenn and M J Ferguson
Element
Measure
Threshold
Safety and Environmental
Employee engagement
Profit (NPATA)
FFO
Zero Harm
People
Financial
S Cinerari
Target
•
Maximum
Element
Measure
Threshold
Target
Maximum
Safety and Environmental
Employee engagement
Profit (NPATA/EBITA)
FFO
Zero Harm
People
Financial
S L Killeen
•
Element
Measure
Threshold
Target
Maximum
Safety and Environmental
Employee engagement
Profit (NPATA/EBITA)
FFO
Zero Harm
People
Financial
D Nelson
Element
Measure
Threshold
Target
Safety
Talent and succession
Profit (NPAT)
FFO
Revenue
Zero Harm
People
Financial
B C Petersen
Maximum
•
•
Element
Measure
Threshold
Target
Maximum
Zero Harm
People
Financial
Safety and Environmental
Employee engagement
Profit (NPATA/EBITA)
FFO
•
For 2018, the IPM applied to each member of the KMP ranged from 0.9 to 1.
•
•
42 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018
7.3.3 LTI performance outcomes
The table below summarises LTI performance measures tested and the outcomes for each executive.
Relevant
executives
G A Fenn,
S Cinerari,
D J Overall
Relevant
LTI measure
2015 plan
Performance
outcome
% LTI tranche
that vested
TSR tranche – percentile ranking of
Downer’s TSR relative to the constituents
of the ASX100 over a three-year period.
EPS tranche – compound annual
earnings per share growth against
absolute targets over a three-year period.
Scorecard tranche – sustained NPAT and
FFO performance against budget over a
three-year period.
Actual performance ranked at
the 76th percentile.
100% became
provisionally qualified.
Actual performance was
–4.95%.
0% became provisionally qualified.
100% were forfeited.
Actual performance was 102.6%
for NPAT and 170.5% for FFO.
87.1% became
provisionally qualified.
12.9% were forfeited.
7.4 Major transactions and significant items
7.4.1 Major transactions
In 2018 Downer continued to optimise its portfolio in keeping with its strategy of creating efficient market positions to deliver long-term
shareholder value through restructuring, partnering, acquisition and divestment.
Downer undertook five M&A transactions and a significant restructure of existing businesses during 2018. These transactions were the
acquisition of Cabrini Linen Service, Envista, Integrated Services and UrbanGrid and the divestment of the Freight Rail business.
The acquisition and integration of Spotless continued during 2018 which was also restructured in order to align its service offerings
with its core markets. Downer achieved majority ownership of Spotless on 27 June 2017, with Downer nominated Directors appointed
to the Spotless Board on 19 July 2017. In setting the 2018 financial targets at the beginning of the performance period, the mid-point
of 2018 underlying earnings guidance provided by the pre-acquisition Spotless Board was adopted by Downer and management has
been measured against these operational performance targets. Several unbudgeted non-operational items were incurred for integration
costs, redundancy costs and costs associated with completion of the Strategy Reset program established by the pre-acquisition
Spotless Board.
In accordance with its policy, the Board considered the impact of each major transaction on incentive outcomes and determined that:
– The performance of the Cabrini Linen Service business was reflected in the budget and accordingly no adjustment would be made
to incentive outcomes;
– The Integrated Services acquisition was immaterial and accordingly no adjustment would be made to incentive outcomes;
– The UrbanGrid acquisition was immaterial and accordingly no adjustment would be made to incentive outcomes;
– The divestment of the Freight Rail business was a material, unbudgeted transaction for which it was appropriate to adjust
incentive outcomes;
– The acquisition of Envista was a material, unbudgeted transaction for which it was appropriate to adjust incentive outcomes; and
– Costs related to the Spotless acquisition for integration, senior management redundancy and completion of Strategy Reset were
material and unbudgeted and it was appropriate to adjust incentive outcomes.
Annual Report 2018 43
7.4.2 Significant items
During the year there were three significant one-off items. The Board considers such items at the end of each performance period and
whether it is appropriate to adjust for their impact on incentive outcomes. In forming its views, the Board noted the robust operational
performance of the Company and strong returns to shareholders through TSR returns of 11.1% and 85.1% over one and three years
respectively, share price growth and increase in the dividend rate.
The Board considered it was appropriate to adjust incentive outcomes for the following items:
Item
Description
Mining goodwill impairment
In February 2018, a $76.4 million non-cash impairment of goodwill in the Mining
business was made.
Organisational restructuring costs
The earnings of the Mining division in 2018 (excluding the impairment) were below target
threshold levels and accordingly the Mining Division did not meet its 2018 earnings gate for STI
purposes. The negative impact of the lower earnings have also been reflected in the 2018 Group
earnings for STI and LTI purposes.
The Mining division has subsequently won contracts including at the Blackwater, Carrapateena,
Century and CSA mines.
The Board noted the negative impact on the STI outcomes from reduced Mining earnings
(excluding the impairment) and that there had been no noticeable negative impact on the share
price from the impairment and that shareholder returns continued to be strong, with TSR of 11.1%
over one year and 85.1% over three years, share price growth and an increase in the dividend rate
recorded for FY18.
Accordingly, the Board determined that it was appropriate to adjust incentive outcomes for
the impairment.
In 2018, the following management restructures were implemented:
– The Mining Division was merged with the Engineering, Construction and Maintenance
Division to form a new Division: Mining, Energy and Industrial Services; and
– The Rail Division was merged into the Infrastructure Services Division to form the Transport
and Infrastructure Division.
The Board believes that maintaining flexibility in adapting to changing markets is important to the
achievement of Downer’s objectives, including creating shareholder wealth and that management
should be encouraged to make decisions in the best interests of the Company without the
influence of incentive outcomes. The restructures will also deliver significant synergies.
Implementation of these restructures in 2018, rather than in a future reporting period was
considered to be in the best interest of Downer, notwithstanding that allowance for restructuring
costs was not made in the budget.
Accordingly, it was determined that it was appropriate to adjust incentive outcomes for this item.
Auburn Maintenance
Centre remediation
Ground subsidence at the Auburn (Waratah) Train Maintenance Centre was identified in 2014.
Downer has since completed rectification work and pursued associated legal claims.
In March 2018, Downer was unsuccessful in respect of the contractual claims related to the
ground subsidence and as a result expensed unbudgeted remediation and legal costs of
approximately $25 million which it had expected to recover.
The Board noted that this was a legacy issue and that current management had appropriately
overseen the remediation work and the legal claim.
Notwithstanding, no adjustment was made to incentive outcomes for this item.
44 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 7.4.3 Adjustments made to incentive calculations for major transactions and significant items
The Board determined that the following adjustments be made to KPI calculations for the impact of major transactions and significant
items. The adjustments mean that executives are ‘no better or worse off’ as a result of the transactions and significant items so that
performance is measured against delivery of the Company’s budget and business plan.
Measure
Adjustment
Impact on STI
Impact on LTI
NPATA (STI)
NPAT (LTI)
Net increase of $159.2 million comprised of:
– Exclusion of loss on divestment of Freight Rail
of $40.6 million;
– Exclusion of Mining goodwill impairment
of $76.4 million;
– Exclusion of Divisional merger costs
of $20.0 million;
– Exclusion of Spotless related costs (management
redundancies, integration and residual strategy
reset costs) of $24.1 million; and
– Exclusion of operating earnings of Envista (net of
transaction costs) of $1.9 million.
Net decrease of $67.2 million comprised of:
– Exclusion of the net proceed on divestment of
Freight Rail of $109.0 million; and
– Exclusion of the cash flow impact on Envista
acquisition (transaction costs, net interest
expense, operating cash and payment for business
acquisition) of $41.8 million.
FFO
For Corporate
scorecard participants:
– the gateway was
met; and
– 58.4% of the NPATA
measure was achieved.
An increase from nil to
52.4% of rights in the NPAT
tranche met the performance
condition. This equates to
8.7% of the total number of
rights in the grant.
For Mining scorecard
participants, the gateway was
not met and no STI was paid.
No change.
No change.
Zero Harm
The Zero Harm performance of acquired businesses
has been excluded.
EPS
– The use of NPAT adjusted as set out above; and
– Exclusion of shares issued under the capital
raising from the weighted average number of
shares calculation.
Not applicable as acquired
businesses historical
performance has been
measured on a different basis.
Not applicable.
Not applicable.
No change.
TSR
No adjustments were made.
Not applicable.
No change.
7.4.4 Future periods
For major transactions completed in 2018, the impact on operational performance is included in the 2019 budget and accordingly no
adjustments are expected in respect of FY19 operational performance.
7.5 Variance from policy
There were no variances from policy during the year.
Annual Report 2018 45
8. Executive equity ownership
8.1 Ordinary shares
KMP equity holdings in fully paid ordinary shares and performance rights issued by Downer EDI Limited are as follows:
Ordinary shares
Performance rights
Balance at
1 July 2017
Net
change
Balance at
30 June 2018
Balance at
1 July 2017
Net
change
Balance at
30 June 2018
No.
826,226
10,407
–
1,000
–
–
No.
–
–
–
–
–
2,510
No.
826,226
10,407
–
1,000
–
2,510
No.
1,757,163
626,421
94,411
–
–
170,016
No.
128,217
72,774
70,584
66,240
–
70,584
No.
1,885,380
699,195
164,995
66,240
–
240,600
G A Fenn
S Cinerari
M J Ferguson
S L Killeen
D Nelson
B C Petersen
KMP equity holdings in fully paid ordinary shares issued by Spotless Group Holdings Limited are as follows:
D Nelson
Ordinary shares
Balance at
1 July 2017
Net
change
Balance at
30 June 2018
No.
634,377
No.
(634,377)
No.
–
8.2 Preference shares
KMP equity holdings in fully paid preference shares issued by Works Finance (NZ) Limited, a wholly owned subsidiary of Downer EDI
Limited, are as follows:
Preference shares
Balance at
1 July 2017
Net
change
Balance at
30 June 2018
No.
3,000
No.
–
No.
3,000
S L Killeen
46 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 8.3 Options and rights
No performance options were granted by Downer EDI Limited or exercised during the 2018 financial year.
As outlined in section 6.4.1, the LTI plan for the 2018 financial year is in the form of performance rights. Relief from certain regulatory
requirements was applied for and has been received from the Australian Securities and Investments Commission. During the year,
grants of performance rights were made to KMP in respect of the 2018 financial year.
The following table shows the number of performance rights granted by Downer EDI Limited and percentage of performance rights
that vested or were forfeited during the year for each grant that affects compensation in this or future reporting periods.
2015 Plan
2016 Plan
2017 Plan
2018 Plan
Number
of per-
formance
rights1
541,920
170,705
–
–
–
–
Vested
%
Forfeited
%
–
–
–
–
–
–
37.6
37.6
–
–
–
–
Number
of per-
formance
rights2
711,717
266,894
–
–
–
63,017
Vested
%
Forfeited
%
–
–
–
–
–
–
–
–
–
–
–
–
Number
of per-
formance
rights3
503,526
188,822
94,411
–
–
106,999
Vested
%
Forfeited
%
Number
of per-
formance
rights4
Vested
%
Forfeited
%
–
–
–
–
–
–
–
–
–
–
–
–
332,160
137,016
70,584
66,240
–
70,584
–
–
–
–
–
–
–
–
–
–
–
–
G A Fenn
S Cinerari
M J Ferguson
S L Killeen
D Nelson
B C Petersen
Grant date 2 June 2015. The fair value of shares granted was $4.23 per share for the EPS and Scorecard tranches and $1.70 per share for the TSR tranche.
1
Grant date 30 June 2016. The fair value of shares granted was $3.24 per share for the EPS and Scorecard tranches and $0.97 per share for the TSR tranche.
2
3
Grant date 21 June 2017. The fair value of shares granted was $5.29 per share for the EPS and Scorecard tranches and $4.61 per share for the TSR tranche.
4 Grant date 21 June 2018. The fair value of shares granted was $6.12 per share for the EPS and Scorecard tranches and $3.38 per share for the TSR tranche.
KMP equity holdings in options and rights issued by Spotless Group Holdings Limited are as follows:
Options
Rights
Balance at
1 July 2017
No.
1,484,089
Net
change
Balance at
30 June 2018
Balance at
1 July 2017
Net
change
Balance at
30 June 2018
No.
(272,177)
No.
1,211,912
No.
348,838
No.
(348,838)
No.
–
D Nelson
The following table shows the number of options and rights granted by Spotless Group Holdings Limited and percentage of
performance rights that vested or lapsed during the year for each grant that affects compensation in this or future reporting periods.
2014 Options
2015 Options
2016 Rights
Number
of per-
formance
rights1
272,177
Vested
%
–
Forfeited
%
100
Number
of per-
formance
rights2
1,211,912
Vested
%
–
Forfeited
%
–
Number
of per-
formance
rights3
348,838
Vested
%
100
Forfeited
%
–
D Nelson
1
2
3
Grant date 23 May 2014. The fair value of options granted was $0.213 per option for the EPS tranche and $0.209 per option for the TSR tranche. The exercise price was
$1.60 per option.
Grant date 28 September 2015. The fair value of options granted was $0.251 per option for the EPS tranche and $0.238 per option for the TSR tranche. The exercise price
was $2.07 per option.
Grant date 24 November 2016. The fair value of rights granted was $0.744 per right for the EPS tranche and $0.496 per right for the TSR tranche.
Annual Report 2018 47
The maximum number of performance options and rights that may vest in future years that will be recognised as share-based
payments in future years is set out in the table below:
G A Fenn
S Cinerari
M J Ferguson
S L Killeen
D Nelson1
B C Petersen
Maximum number of shares
for the vesting year
2019
337,977
106,463
–
–
1,211,912
–
2020
711,717
266,894
–
–
–
63,017
2021
503,526
188,822
94,411
–
–
106,999
2022
332,160
137,016
70,584
66,240
–
70,584
1
Options granted to D Nelson that may vest in future years relate to shares in Spotless Group Holdings Limited.
The maximum value of performance options and rights that may vest in future years that will be recognised as share-based payments
in future years is set out in the table below. The amount reported is the value of share-based payments calculated in accordance with
AASB 2 Share-based Payment over the vesting period.
G A Fenn
S Cinerari
M J Ferguson
S L Killeen
D Nelson1
B C Petersen
2019
1,625,831
625,922
211,475
86,340
–
276,607
2020
1,070,144
417,539
211,475
86,340
–
227,405
2021
432,953
178,593
92,002
86,340
–
92,002
1
Options granted to D Nelson that may vest in future years relate to shares in Spotless Group Holdings Limited.
8.4 Remuneration consultants
Guerdon Associates Pty Ltd was engaged by the Board Remuneration Committee to provide remuneration advice in relation to KMP,
but did not provide the Board Remuneration Committee with remuneration recommendations as defined under Division 1, Part 1.2,
9B (1) of the Corporations Act 2001 (Cth).
The Board was satisfied that advice received was free from any undue influence by Key Management Personnel to whom the advice
may relate, because strict protocols were observed and complied with regarding any interaction between Guerdon Associates Pty Ltd
and management, and because all remuneration advice was provided to the Board Remuneration Committee chair.
9. Key terms of employment contracts
9.1 Notice and termination payments
Executives are on contracts with no fixed end date.
The following table captures the notice periods applicable to termination of the employment of executives.
Termination notice
period by Downer
Termination notice
period by employee
Termination payments
payable under contract
Managing Director
Other Executives
12 months
12 months
6 months
6 months
12 months
12 months
Termination payments are calculated based upon total fixed remuneration at the date of termination. No payment is made for
termination due to gross misconduct.
48 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 9.2 Managing Director and Chief Executive Officer of Downer’s employment agreement
Mr Fenn was appointed as the Managing Director of Downer commencing on 30 July 2010. The following table sets out the key terms
of the Managing Director’s employment agreement.
Term
Until terminated by either party.
Fixed remuneration
STI opportunity
LTI opportunity
Termination
$2.0 million per annum. This has remained unchanged since July 2012.
Fixed remuneration includes superannuation and non-cash benefits but excludes entitlements to
reimbursement for Mr Fenn’s home telephone rental and call costs, home internet costs and medical, life and
salary continuance insurance. Mr Fenn may also be accompanied by his wife when travelling on business, at the
Chairman’s discretion. There was no such travel during the year.
Mr Fenn is eligible to receive an annual STI and the maximum STI opportunity is 100% of fixed remuneration.
Any entitlement to an STI is at the discretion of the Board, having regard to performance measures and targets
developed in consultation with Mr Fenn including Downer’s financial performance, safety, people, environmental
and sustainability targets and adherence to risk management policies and practices. The Board also retains
the right to vary the STI by + or – 100% (up to the 100% maximum) based on its assessment of performance.
The STI deferral arrangements in place for KMP apply to Mr Fenn.
There is no STI entitlement where the Managing Director’s employment terminates prior to the end of the
financial year, other than in the event of a change in control or by mutual agreement.
Mr Fenn is eligible to participate in the annual LTI plan and the value of the award is 100% of fixed remuneration
calculated using the volume weighted average price after each year’s half yearly results announcement.
Mr Fenn’s performance requirements have been described in section 6.4.
In the event of a change of control, providing at least 12 months of a grant’s performance period have elapsed,
unvested shares and performance rights pro rated with the elapsed service period are tested for vesting with
performance against the relevant hurdles for that period and vest, as appropriate. Shares that have already been
tested, have met performance requirements and are subject to the completion of the service condition, fully vest.
Immediately for misconduct or other circumstances justifying summary dismissal; or
Mr Fenn can resign:
a) By providing six months’ written notice; or
b) Immediately in circumstances where there is a fundamental change in his role or responsibilities. In these
circumstances, Mr Fenn is entitled to a payment in lieu of 12 months’ notice.
Downer can terminate Mr Fenn’s employment:
c)
d) By providing 12 months’ written notice.
When notice is required, Downer can make a payment in lieu of notice of all or part of any notice period
(calculated based on Mr Fenn’s fixed annual remuneration).
If Mr Fenn resigns because ill health prevents him from continuing his duties, he will receive a payment in
recognition of his past services equivalent to 12 months’ fixed remuneration. At the discretion of the Board, his
shares under the LTI plan may also vest.
If Downer terminates Mr Fenn’s employment on account of redundancy, in addition to the notice (or payment in
lieu of notice) required to be given by Downer, Mr Fenn will receive a payment in recognition of his past services
equivalent to 12 months’ fixed remuneration.
If Mr Fenn resigns he will be subject to a six-month post-employment restraint in certain areas where the Downer
Group operates, where he is restricted from working for competitive businesses.
Other
The agreement contains provisions regarding leave entitlements, duties, confidentiality, intellectual property,
moral rights and other facilitative and ancillary clauses. It also contains provisions regarding corporate
governance and a provision dealing with the Corporations Act 2001 (Cth) limits on termination benefits to be
made to Mr Fenn.
Annual Report 2018 49
10. Related party information
10.1 Transactions with other related parties
Transactions entered into during the year with Directors of Downer EDI Limited and the Group are within normal employee, customer
or supplier relationships on terms and conditions no more favourable than dealings in the same circumstances on an arm’s length
basis and included;
– the receipt of dividends from Downer EDI Limited;
– participation in the Long Term Incentive Plan;
– terms and conditions of employment; and
– reimbursement of expenses.
A number of Directors of the Company hold directorships in other entities. Several of these entities transacted with the Group on terms
and conditions no more favourable than those available on an arm’s length basis.
11. Description of Non-executive Director remuneration
11.1 Non-executive Director remuneration policy
Downer’s Non-executive Director remuneration policy is to provide fair remuneration that is sufficient to attract and retain Directors
with the experience, knowledge, skills and judgment to steward the Company.
There has been no change to the level of Non-executive Director fees since the prior reporting period and there will be no changes in
the 2019 financial year.
Fees for Non-executive Directors are fixed and are not linked to the financial performance of the Company. The Board believes this is
necessary for Non-executive Directors to maintain their independence.
Shareholders approved an annual aggregate cap of $2.0 million for Non-executive Director fees at the 2008 AGM. The allocation of
fees to Non-executive Directors within this cap has been determined after consideration of a number of factors, including the time
commitment of Directors, the size and scale of the Company’s operations, the skill sets of Board members, the quantum of fees paid to
Non-executive Directors of comparable companies and participation in Board Committee work.
The basis of fees and the fee pool are reviewed when new Directors are appointed to the Board, when the structure of the Board
changes, or at least every three years. Reference is made to individual Non-executive Director fee levels and workload (i.e. number of
meetings and the number of Directors) at comparably sized companies from all industries other than the financial services sector, and
the fee pools at these companies. In addition, an assessment is made on the extent of flexibility provided by the fee pool to recruit any
additional Directors for planned succession after allocation of fees to existing Directors.
The Chairman receives a base fee of $375,000 per annum (inclusive of all Committee fees) plus superannuation. The other Non-
executive Directors each receive a base fee of $150,000 per annum plus superannuation. Additional fees are paid for Committee duties:
$35,000 for the chair of the Audit & Risk Committee; and $15,000 for the chair of each of the Zero Harm Committee, Remuneration
Committee, Rail Projects Committee and Tender Risk Evaluation Committee.
Non-executive Directors are not entitled to retirement benefits. All Non-executive Directors are entitled to payment of statutory
superannuation entitlements in addition to Directors’ fees.
50 Downer EDI Limited
Directors’ Report – continuedfor the year ended 30 June 2018 11.2 Non-executive Directors’ remuneration
The table below sets out the remuneration paid to Non-executive Directors for the 2018 and 2017 financial years.
Short-term benefits
Post-employment benefits
Board fee
$
Chair fee
$
Total fees
$
Superannuation
$
Termination
benefits
$
375,000
375,000
150,000
150,000
150,000
150,000
150,000
114,454
4,566
–
50,833
150,000
150,000
150,000
–
–
35,000
35,000
15,000
15,000
15,000
11,250
–
–
–
11,250
30,000
18,750
375,000
375,000
185,000
185,000
165,000
165,000
165,000
125,704
4,566
–
50,833
161,250
180,000
168,750
35,625
35,625
17,575
17,575
15,675
15,675
15,675
11,942
434
–
4,829
15,319
17,100
16,031
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Year
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Total
$
410,625
410,625
202,575
202,575
180,675
180,675
180,675
137,646
5,000
–
55,662
176,569
197,100
184,781
R M Harding
S A Chaplain
P S Garling
T G Handicott
N M Hollows
E A Howell
C G Thorne
11.3 Equity held by Non-executive Directors
The table below sets out the equity in Downer held by Non-executive Directors for the 2018 and 2017 financial years.
2018
2017
Balance at
1 July 2017
Net
change
Balance at
30 June 2018
Balance at
1 July 2016
Net
change
Balance at
30 June 2017
R M Harding
S A Chaplain
P S Garling
T G Handicott
N M Hollows
C G Thorne
14,210
103,799
16,940
14,000
–
82,922
–
–
–
–
–
–
14,210
103,799
16,940
14,000
–
82,922
10,150
74,142
12,100
–
–
59,230
4,060
29,657
4,840
14,000
–
23,692
14,210
103,799
16,940
14,000
–
82,922
Signed in accordance with a resolution of the Directors made pursuant to section 298(2) of the Corporations Act 2001 (Cth).
On behalf of the Directors
R M Harding
Chairman
Sydney, 16 August 2018
Annual Report 2018 51
Auditor’s Independence Declaration
Lead Auditor’s Independence Declaration under
Section 307C of the Corporations Act 2001
To the Directors of Downer EDI Limited
I declare that, to the best of my knowledge and belief, in relation to the audit of Downer EDI Limited for
the year ended 30 June 2018 there have been:
no contraventions of the auditor independence requirements as set out in the Corporations
Act 2001 in relation to the review; and
no contraventions of any applicable code of professional conduct in relation to the audit.
i.
ii.
KPM_INI_01
PAR_SIG_01
PAR_NAM_01
PAR_POS_01
PAR_DAT_01
PAR_CIT_01
KPMG
John Teer
Partner
Sydney
16 August 2018
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.
52 Downer EDI Limited
Independent Auditor’s Report
for the year ended 30 June 2018
Independent Auditor’s Report
To the shareholders of Downer EDI Limited
Report on the audit of the Financial Report
Opinion
We have audited the Financial Report of
Downer EDI 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 2018 and of its financial
performance for the year ended on
that date; and
complying with Australian Accounting
Standards and the Corporations
Regulations 2001.
The Financial Report comprises:
•
•
Consolidated Statement of financial position as
at 30 June 2018
Consolidated Statement of profit or loss and
other comprehensive income, Consolidated
Statement of changes in equity, and
Consolidated Statement of cash flows for the
year then ended
• Notes including a summary of significant
accounting policies
• Directors’ Declaration.
The Group consists of the Company and the entities
it controlled at the year-end or from time to time
during the financial year.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Our responsibilities under those standards are further described in the Auditor’s responsibilities for
the audit of the Financial Report section of our report.
We are independent of the Group in accordance with the Corporations Act 2001 and the ethical
requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics
for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in
Australia. We have fulfilled our other ethical responsibilities in accordance with the Code.
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
Annual Report 2018 53
Independent Auditor’s Report – continued
for the year ended 30 June 2018
Key Audit Matters
The Key Audit Matters we identified are:
•
•
•
Recognition of revenue and
transitional adjustment to AASB 15
Revenue from Contracts with
Customers
Value of goodwill
Acquisition of controlled entities
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.
These matters were addressed in the context of our
audit of the Financial Report as a whole, and in forming
our opinion thereon, and we do not provide a separate
opinion on these matters.
Recognition of revenue and transitional adjustments to AASB 15 Revenue from Contracts with
Customers
Refer to Note B2 ‘Revenue and other income’ ($12,620.2m) and Note G1(b) New accounting
standards and interpretations not yet adopted.
The key audit matter
How the matter was addressed in our audit
A substantial amount of the Group’s revenue
relates to revenue from the rendering of
services and construction contracts. Where
these services and/or contracts have a long-
term duration, revenue and margin are
recognised based on the stage of completion of
individual contracts. This is predominantly
calculated on the proportion of total costs
incurred at the reporting date compared to the
Group’s estimation of total costs of the
contract. We focussed on these types of
contracts due to the high level of estimation
involved, in particular relating to:
•
•
•
Forecasting total cost to complete at
initiation of the contract, including the
estimation of cost contingencies for
contracting risks;
Revisions to total forecast costs for certain
events or conditions that occur during the
performance of the contract, or are
expected to occur to complete the
contract; and
The recognition of variations and claims,
based on an assessment by the Group as
to the probability the amount will be
approved by the customer and therefore
recovered.
We focused on this area as a key audit matter
due to the number and type of estimation
events that may occur over the course of the
Our procedures included:
• We evaluated the Group’s process regarding
accounting for the Group’s contract revenues.
We tested controls such as:
‒ the authorisation of monthly project
valuations, which involves management
review and approval of key contract KPIs,
including cashflows;
‒ management’s review assessment and
approval of significant changes in work in
progress balances;
‒ management’s review assessment of
project unapproved variations and claims,
and responses to project risk ratings;
‒ management’s review and approval of bid
information including estimated project
milestones, projected Earnings Before
Interest and Tax (EBIT), Net Present Value
(NPV), Return On Funds Employed (ROFE)
and potential legal risks identified by the
Group risk and legal team, as prescribed in
the Group’s risk management process;
• We undertook a sample of site visits (to both
contract sites and commercial offices) across
the Group’s major divisions and geographies
to obtain a detailed understanding of the
Group’s contract processes, their consistent
application, and to understand the variety of
54 Downer EDI Limited
contract life, leading to complex and
judgemental revenue recognition from
contracts.
In addition to the above, the transition to the
new accounting standard AASB15 Revenue
from contracts with customers (AASB 15) (with
effect from 1 July 2018 for the Group) has
resulted in additional disclosure of the expected
transition adjustments. We focussed on this as
a key audit matter due to the audit effort
required from:
•
•
the complex nature of the changes to the
accounting standard and the impact on
services and construction contract
accounting requiring senior team
involvement; and
the need to consider consistency in
application of AASB 15 across the
components of the Group.
risk elements of the contracts;
• We used data analytic routines to select a
sample of contracts for testing based on a
number of quantitative and qualitative factors.
These factors included contracts with
significant deterioration in margin, significant
variations and claims, and factors which
indicated to us a greater level of judgement
was required by the Group when assessing
the revenue recognition based on the
estimates developed for current and forecast
contract performance. For the sample
selected, where relevant:
‒ we read the contract terms and conditions
to evaluate the individual characteristics of
each contract reflected in the Group’s
estimate;
‒ we assessed the estimation of costs to
complete by checking key forecast cost
assumptions to underlying documentation
such as Enterprise Bargaining Agreements
for wage rates, previous purchase invoices
for parts, and agreements with
subcontractors;
‒ we assessed the Group’s ability to forecast
margins on contracts by analysing the
accuracy of previous margin forecasts to
actual outcomes;
‒ we tested the variations and claims both
within contract revenue and contract costs
to underlying documentation, such as
timesheets, correspondence with
customers and objective time and cost
claim experts (where applicable) for
consistency and appropriateness with
contract terms;
‒ we evaluated the Group’s legal and external
experts’ reports received on contentious
matters to identify conditions indicating the
inappropriate recognition of variations and
claims. We checked the consistency of this
to the inclusion or not of an amount in the
estimates used for revenue recognition;
‒ for contracts with significant variation and
claim elements, we used our project
management specialists to evaluate the
claim elements for risk of non-recovery; and
‒ we evaluated significant exposures to
liquidated damages for late delivery of
Annual Report 2018 55
Independent Auditor’s Report – continued
for the year ended 30 June 2018
contract works by assessing the variation
registers, which track the nature, quantum
and status of current exposures.
We evaluated disclosures relating to the transition
to AASB15. For a sample of contracts assessed by
the Group for the transitional impacts of the new
standard we evaluated the conclusions reached by
the Group using our understanding of the
contracts obtained in the procedures noted above,
in the context of the requirements of AASB 15.
We assessed the Group’s disclosures of the
quantitative and qualitative considerations in
relation to the transitional adjustment, by
comparing these disclosures to our understanding
of the matter and the requirements of the
accounting standards.
Value of goodwill
Refer to C7 ‘Intangible assets’ ($2,351.5m).
The key audit matter
How the matter was addressed in our audit
The Group has 6 groups of Cash Generating
Units (CGU’s) for which the impairment of
goodwill is assessed, including the recently
acquired Spotless CGU group. As a
consequence, significant audit effort was
required to assess this matter and the value of
goodwill was therefore considered a key audit
matter.
We focussed on the following assumptions in
the Group’s models as a result of the significant
level of judgement applied by the Group:
•
•
•
•
The determination of CGUs or groups of
CGUs following the acquisitions made
during the year;
Budgeted future revenue, including the
outcome of tenders, and costs;
Discount rates; and
Terminal growth rate.
In addition to the above, the Group recorded a
full impairment of goodwill for the Mining CGU
at 31 December 2017.
Our procedures included:
• We evaluated the Group’s goodwill
impairment assessment process and tested
controls such as the review and approval of
forecasts by management;
• We considered the Group’s determination of
their CGUs based on our understanding of the
operations of the Group’s business and how
independent cash inflows were generated,
against the requirements of the accounting
standards;
• We obtained the Group’s value in use and
FVLCOD models and checked amounts to a
combination of the FY19 budget and the FY20-
FY21 business plan approved by the Board;
•
Key inputs to the value in use and FVLCOD
models included forecast revenue, costs,
capital expenditure, discount rates and
terminal growth rates. We challenged the key
market based assumptions to published
industry growth rates and industry reports. For
non-market based assumptions we compared
forecasts to historical costs incurred or
56 Downer EDI Limited
margins. We also assessed the inclusion of
key ongoing revenue contracts by comparing
the margins in the impairment model to
historical contract margins. For current
tenders we assessed the probability weighting
and margins based on our understanding of
the business;
• We assessed the accuracy of previous Group
forecasting to inform our evaluation of
forecasts included in the value in use and
FVLCOD model. We applied increased
scepticism to current period forecasts in areas
where previous forecasts were not achieved
and/or where future uncertainty is greater or
volatility is expected;
• We involved our valuation specialists, for
those CGUs with a higher risk of impairment.
Working with our valuation specialists we
independently developed a discount rate
range considered comparable using publicly
available market data for comparable entities,
adjusted by risk factors specific to the Group
and the industry it operates in. Valuation
specialists were also involved in assessing the
value in use and FVLCOD model valuation
methodology against the criteria in the
accounting standards. This included the
treatment of assumptions for capital
expenditure, terminal value and the net
present value calculation;
• We performed sensitivity analysis on CGUs in
two main areas, being the discount rate and
terminal growth rate assumptions. For the
CGUs with a higher risk of impairment we
performed a range of sensitivity analyses. This
included the discount rate and terminal growth
rate assumptions, revenue growth and cost
savings targets set by the Group, as well as
probability adjusting the outcomes of key
tenders;
• We assessed the Group’s disclosures of the
quantitative and qualitative considerations in
relation to the valuation of goodwill, by
comparing these disclosures to our
understanding of the matter and the
requirements of the accounting standards.
Annual Report 2018 57
Independent Auditor’s Report – continued
for the year ended 30 June 2018
Acquisition of controlled entities
Refer to F2 ‘Acquisition of businesses’’ ($475.9m)
The key audit matter
How the matter was addressed in our audit
Our procedures included:
• We read the Bidders Statement and Sale and
Purchase Agreements (as applicable) to
understand key terms and conditions;
• We evaluated the methodology used for the
acquisition accounting against accounting
standard requirements and common industry
practice for the determination of fair value;
• We challenged key assumptions in the
Group’s intangible valuation models by
comparing these inputs to historic and current
entity records, and strategic plans;
• Working with our valuation specialists, for the
Spotless acquisition we evaluated the
valuation methodology and assumptions used
by the external expert in the Group’s
determination of the fair value of identifiable
intangibles acquired to the requirements of
the accounting standards and publicly available
market data for comparable entities, adjusted
by risk factors specific to the Group and the
industry it operates in;
• We assessed the scope of work, capability,
competence and objectivity of the external
expert used by the Group to value the
Spotless acquired intangibles;
• We compared the acquired company’s
accounting policies against the Group’s
policies;
• We assessed the adequacy of the Group’s
disclosures in respect of the acquisitions
against the requirements of accounting
standards and our knowledge of the
transactions.
During the year the Group purchased controlling
interests in a number of businesses/entities and
finalised the purchase accounting for a number
of business combinations previously
provisionally accounted for (including Spotless
Group Holdings Limited).
Accounting for the purchase of controlling
interests in a number of businesses/entities
acquired during the year and the finalisation of
the previously provisional purchase accounting
is a key audit matter due to the:
•
•
•
•
Aggregated size of the acquisitions;
The complexity of the finalisation of the
provisional accounting for Spotless Group
Holdings Limited (Spotless) which included
the use of an external expert engaged by
the Group to value acquired intangibles,
requiring our assessment;
Early status of the acquisition accounting
for certain transactions, which remain
provisional at year end. This increases the
possible range of outcomes for the auditor
to consider and is impacted by the reduced
precision of audit evidence; and
Significance of the estimation required for
the Group to determine the fair values, of
acquired assets and liabilities under the
accounting standards, for those
transactions where the acquisition
accounting has been finalised.
We focused on assessing the basis for the
estimations against the allowed criteria in the
accounting standards to determine fair value
and the documentation available from the
Group to date. For those acquisitions where the
purchase accounting has been completed the
key inputs to the valuations were forecast
assumptions relating to:
•
•
•
•
revenue,
operating costs,
the impact of contributory assets, and
discount rates.
58 Downer EDI Limited
Other Information
Other Information is financial and non-financial information in Downer EDI 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 opinions.
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’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 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 the 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.
Annual Report 2018 59
Independent Auditor’s Report – continued
for the year ended 30 June 2018
Report on the Remuneration Report
Opinion
Directors’ responsibilities
In our opinion, the Remuneration Report
of Downer EDI Limited for the year ended
30 June 2018, complies with Section
300A of the Corporations Act 2001.
The Directors of the Company are responsible for the
preparation and presentation of the Remuneration
Report in accordance with Section 300A of the
Corporations Act 2001.
Our responsibilities
We have audited the Remuneration Report included in
pages 21 to 51 of the Directors’ report for the year
ended 30 June 2018.
Our responsibility is to express an opinion on the
Remuneration Report, based on our audit conducted in
accordance with Australian Auditing Standards.
KPMG
John Teer
Partner
Sydney
16 August 2018
Cameron Slapp
Partner
Sydney
16 August 2018
60 Downer EDI Limited
Financial Statements
Page 62
Page 63
Page 64
Page 65
Consolidated Statement of Profit or Loss and Other Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the consolidated financial statements
A
B
C
D
E
F
About this
report
Business
performance
Operating assets
and liabilities
Employee
benefits
Capital structure
and financing
Group
structure
G
Other
Page 66-67
Page 68-77
Page 78-87
Page 88
Page 89-95
Page 96-106
Page 107-120
D1
Employee benefits
E1
Borrowings
F1
Joint arrangements
and associate
entities
G1
New accounting
standards
D2
Key management
personnel
compensation
D3
Employee discount
share plan
E2
Financing facilities
F2
Acquisition of
businesses
G2
Capital and financial
risk management
E3
Commitments
F3
Disposal of
business
G3
Other financial
assets and liabilities
E4
Issued capital
F4
Controlled entities
E5
Reserves
E6
Dividends
F5
Related party
information
F6
Parent entity
disclosures
B1
Segment
information
C1
Reconciliation
of cash and
cash equivalents
B2
Profit from ordinary
activities
C2
Trade and other
receivables
B3
Earnings per share
B4
Taxation
B5
Remuneration
of auditors
B6
Subsequent events
C3
Rendering of
services and
construction
contracts
C4
Inventories
C5
Trade and other
payables
C6
Property, plant
and equipment
C7
Intangible assets
C8
Provisions
C9
Contingent
liabilities
Page 121 Directors’ Declaration
Other information
Page 122 Sustainability Performance Summary 2018
Page 127 Corporate Governance
Page 136
Information for Investors
Annual Report 2018 61
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2018
Revenue from ordinary activities
Other income
Total revenue and other income
Employee benefits expense
Subcontractor costs
Raw materials and consumables used
Plant and equipment costs
Depreciation and amortisation
Other expenses from ordinary activities
Total expenses
Share of net profit of joint ventures and associates
Earnings before interest and tax
Finance income
Finance costs
Net finance costs
Profit before income tax
Income tax expense
Profit after income tax
Profit for the year is attributable to:
– Non-controlling interest
– Members of the parent entity
Profit for the year
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
– Exchange differences arising on translation of foreign operations
– Net gain / (loss) on foreign currency forward contracts taken to equity
– Net loss on cross currency and interest rate swaps taken to equity
– Change in fair value of available-for-sale assets
– Available-for-sale reserve transferred to profit or loss
– Income tax relating to components of other comprehensive income
Other comprehensive income / (loss) for the year (net of tax)
Other comprehensive income for the year is attributable to:
– Non-controlling interest
– Members of the parent entity
Other comprehensive income / (loss) for the year
Total comprehensive income for the year
Earnings per share (cents)
– Basic earnings per share
– Diluted earnings per share(i)
Note
B2(a)
B2(a)
D1
C6,C7
F1(a)
B4(a)
B3
B3
2018
$’m
12,016.6
14.3
12,030.9
(4,034.2)
(3,781.3)
(2,199.9)
(677.1)
(370.2)
(788.5)
(11,851.2)
25.1
204.8
7.1
(88.2)
(81.1)
123.7
(52.6)
71.1
(0.3)
71.4
71.1
(8.3)
4.8
(14.0)
(1.3)
(0.5)
2.6
(16.7)
0.7
(17.4)
(16.7)
54.4
10.7
10.7
2017
$’m
7,267.1
20.3
7,287.4
(2,787.3)
(1,740.8)
(1,357.0)
(502.8)
(220.2)
(424.0)
(7,032.1)
22.5
277.8
14.4
(41.2)
(26.8)
251.0
(69.5)
181.5
–
181.5
181.5
0.4
(1.9)
(2.6)
18.3
(19.1)
0.9
(4.0)
–
(4.0)
(4.0)
177.5
35.8
35.0
(i) At 30 June 2018, the ROADS are deemed anti-dilutive and consequently, diluted EPS remained at 10.7 cents per share.
The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying
notes on pages 66 to 120.
62 Downer EDI Limited
Consolidated Statement of Financial Position
as at 30 June 2018
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables(i)
Other financial assets
Inventories
Current tax assets
Prepayments and other assets
Total current assets
Non-current assets
Trade and other receivables(i)
Interest in joint ventures and associates
Property, plant and equipment(i)
Intangible assets(i)
Other financial assets
Deferred tax assets(i)
Prepayments and other assets
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Borrowings
Other financial liabilities
Employee benefits provision
Provisions(i)
Current tax liabilities
Total current liabilities
Non-current liabilities
Trade and other payables(i)
Borrowings
Other financial liabilities
Employee benefits provision
Provisions(i)
Deferred tax liabilities(i)
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Issued capital
Reserves
Retained earnings
Parent interests
Non-controlling interest
Total equity
Note
C1(c)
C2
G3
C4
F1(a)
C6
C7
G3
B4(b)
C5
E1
G3
D1
C8
E1
G3
D1
C8
B4(b)
E4
E5
F2
30June
2018
$’m
30June
2017
$’m
606.2
2,121.9
18.6
268.8
69.3
48.8
3,133.6
117.7
96.0
1,280.4
3,050.7
15.5
75.5
18.8
4,654.6
7,788.2
2,281.6
153.7
43.2
336.7
50.7
15.7
2,881.6
26.5
1,367.5
34.2
38.0
65.1
170.2
1,701.5
4,583.1
3,205.1
2,421.9
(26.9)
655.1
3,050.1
155.0
3,205.1
844.6
1,722.0
12.5
301.7
45.5
49.5
2,975.8
64.6
88.0
1,280.4
3,031.2
17.1
95.8
31.7
4,608.8
7,584.6
1,761.0
863.2
23.8
365.4
70.1
7.2
3,090.7
30.7
581.8
21.7
38.2
53.2
181.8
907.4
3,998.1
3,586.5
2,421.8
(10.9)
740.4
3,151.3
435.2
3,586.5
(i) June 2017 balances were restated to reflect the impact of acquisition accounting adjustments made during the period on opening balances.
The consolidated statement of financial position should be read in conjunction with the accompanying notes on pages 66 to 120.
Annual Report 2018 63
Consolidated Statement of Changes in Equity
for the year ended 30 June 2018
2018
$’m
Issued
capital
Reserves
Retained
earnings
Total
attributable
to owners of
the parent
Non-
controlling
interest
Total
435.2
(0.3)
3,586.5
71.1
Balance at 1 July 2017
Profit after income tax
Other comprehensive income for the year
(net of tax)
Total comprehensive income for the year
Capital raising
(net of transaction costs and tax)
Vested executive incentive share transactions
Share-based employee benefits expense
Income tax relating to share-based
transactions during the year
Payment of dividends(i)
Acquisition of non-controlling interest
Balance at 30 June 2018
2,421.8
–
–
–
(0.1)
0.2
–
–
–
–
2,421.9
(10.9)
–
(17.4)
(17.4)
–
(0.2)
2.8
(1.2)
–
–
(26.9)
740.4
71.4
–
71.4
–
–
–
–
(156.7)
–
655.1
3,151.3
71.4
(17.4)
54.0
(0.1)
–
2.8
(1.2)
(156.7)
–
3,050.1
(i) Payment of dividend relates to the 2017 final dividend, 2018 interim dividend and $8.0m ROADS dividends paid during the financial year.
0.7
0.4
–
–
–
–
–
(280.6)
155.0
2017
$’m
Balance at 1 July 2016
Profit after income tax
Other comprehensive income for the year
(net of tax)
Total comprehensive income for the year
Capital raising
(net of transaction costs and tax)(i)
Acquisition of business(ii)
Vested executive incentive share transactions
Share-based employee benefits expense
Income tax relating to share-based
transactions during the year
Payment of dividends(iii)
Balance at 30 June 2017
Issued
capital
1,427.8
–
–
–
993.0
–
1.0
–
–
–
2,421.8
Reserves
Retained
earnings
Total
attributable
to owners of
the parent
Non–
controlling
interest
(8.8)
–
(4.0)
(4.0)
–
–
(1.0)
5.6
(2.7)
–
(10.9)
669.5
181.5
–
181.5
–
–
–
–
–
(110.6)
740.4
2,088.5
181.5
(4.0)
177.5
993.0
–
–
5.6
(2.7)
(110.6)
3,151.3
–
–
–
–
–
435.2
–
–
–
–
435.2
(16.7)
54.4
(0.1)
–
2.8
(1.2)
(156.7)
(280.6)
3,205.1
Total
2,088.5
181.5
(4.0)
177.5
993.0
435.2
–
5.6
(2.7)
(110.6)
3,586.5
(i) Relates to capital raising for the Spotless takeover bid. Refer to Note E4.
(ii) Non-controlling interest as a result of Spotless acquisition. Refer to Note F2.
(iii) Payment of dividends relates to 2016 final dividend, 2017 interim dividend and ROADS dividends paid during the financial year.
The consolidated statement of changes in equity should be read in conjunction with the accompanying notes on pages 66 to 120.
64 Downer EDI Limited
Consolidated Statement of Cash Flows
for the year ended 30 June 2018
Cash flows from operating activities
Receipts from customers
Distributions from equity accounted investees
Payments to suppliers and employees
Interest received
Interest and other costs of finance paid
Income tax paid
Net cash generated by operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Payments for property, plant and equipment
Payments for intangible assets
Payments for acquisition of Spotless
Payments for businesses acquired
Proceeds from sale of business
Receipts from investments
Advances (to) / from joint ventures
Proceeds from sale of assets
Net cash used in investing activities
Cash flows from financing activities
Net proceeds from capital raising
Issue of shares (net of costs)
Proceeds from borrowings
Repayments of borrowings
Dividends paid
Net cash (used in) / generated by financing activities
Net (decrease) / increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of exchange rate changes
Cash and cash equivalents at the end of the year
Note
2018
$’m
2017
$’m
F1(a)
C1(a)
F2
F2
F3
E4(a)
E4(b)
12,856.9
16.9
(12,164.3)
7.4
(77.6)
(56.0)
583.3
7,957.7
17.9
(7,462.0)
11.4
(34.4)
(49.0)
441.6
22.7
(356.8)
(47.0)
(391.8)
(84.1)
129.6
0.4
(7.1)
4.5
(729.6)
–
(0.2)
2,043.9
(1,974.7)
(156.7)
(87.7)
(234.0)
844.6
(4.4)
606.2
23.2
(203.6)
(37.9)
(636.1)
(143.2)
–
0.6
1.2
–
(995.8)
989.9
–
321.2
(370.0)
(110.6)
830.5
276.3
569.4
(1.1)
844.6
The consolidated statement of cash flows should be read in conjunction with the accompanying notes on pages 66 to 120.
Annual Report 2018 65
Notes to the consolidated financial statements
for the year ended 30 June 2018
A
About this report
Statement of compliance
Accounting estimates and judgements
These financial statements represent the consolidated results
of Downer EDI Limited (ABN 97 003 872 848). The consolidated
Financial Report (Financial Report) is a general purpose
financial statement which has been prepared in accordance
with Australian Accounting Standards (AASBs) adopted by
the Australian Accounting Standards Board (AASB) and the
Corporations Act 2001 (Cth). The Financial Report complies
with International Financial Reporting Standards (IFRS) adopted
by the International Accounting Standards Board (IASB).
The Financial Report was authorised for issue by the Board
of Directors on 16 August 2018.
Rounding of amounts
Downer is a company of the kind referred to in ASIC Corporations
(Rounding in Financial/Directors’ reports) Instrument 2016/191,
relating to the “rounding off” of amounts in the Directors’
Report and consolidated financial statements. Unless otherwise
expressly stated, amounts have been rounded off to the nearest
whole number of millions of dollars and one place of decimals
representing hundreds of thousands of dollars in accordance
with that Instrument. Amounts shown as $– represent amounts
less than $50,000 which have been rounded down.
Basis of preparation
The Financial Report has been prepared on a historical cost
basis, except for the revaluation of certain financial instruments.
Cost is based on the fair values of the consideration given in
exchange for assets. All amounts are presented in Australian
dollars, unless otherwise noted.
The accounting policies and methods of computation in the
preparation of the Financial Report are consistent with those
adopted and disclosed in Downer’s Annual Report for the
financial year ended 30 June 2017, except in relation to the
relevant amendments and their effects on the current period
or prior periods as described in Note G1.
As previously disclosed, Downer obtained control in Spotless
Group Holdings Limited (Spotless) on 27 June 2017. However,
at 30 June 2017, the Group did not consolidate the trading
performance of Spotless as part of the Group’s consolidated
profit or loss and cash flow as the Directors concluded that
Spotless’ profit or loss and cash flow impact for the three days to
30 June 2017 was not material to the Downer Group.
Downer has commenced the consolidation of Spotless with
effect from 30 June 2017. As at 30 June 2018, Downer holds a
relevant interest of 87.8% (2017: 65.7%). Refer to Note F2.
66 Downer EDI Limited
Preparation of the Financial Report requires management to
make judgements, estimates and assumptions about future
events. Information on material estimates and judgements
considered when applying the accounting policies can be
found in the following notes:
Accounting estimates and
judgements
Revenue recognition
Recovery of deferred tax assets
Income taxes
Capitalisation of tender/bid costs
Useful lives and residual values
Impairment of assets
Provisions
Annual leave and long service leave
Accounting for acquisition of businesses
Note
Page
B2
B4
B4
C2
C6
C7
C8
D1
F2
71
75
75
79
81
83
86
88
102
Significant accounting policies
Accounting policies are selected and applied in a manner that
ensures that the resulting financial information satisfies the
concepts of relevance and reliability, thereby ensuring that
the substance of the underlying transactions or other events
is reported. Other significant accounting policies are contained
in the notes to the Financial Report to which they relate.
(i) Principles of consolidation
The Financial Report incorporates the financial statements
of the Company and entities controlled by the Group and its
subsidiaries. The Group controls an entity when it is exposed
to, or has rights to, variable returns from its involvement with
the entity and has the ability to affect those returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity.
The Financial Report includes the information and results
of each subsidiary from the date on which the Company
obtains control and until such time as the Company ceases
to control such entity.
In preparing the Financial Report, all intercompany balances
and transactions, and unrealised profits arising within the
consolidated entity, are eliminated in full.
A. About this report – continued
(ii) Foreign currency
Transactions, assets and liabilities denominated in foreign
currencies are translated into Australian dollars at reporting date
using the following applicable exchange rates:
Foreign currency amount
Applicable exchange rate
Transactions
Monetary assets and liabilities Reporting date
Non-monetary assets and
liabilities carried at fair value
Date of transaction
Date fair value is determined
Foreign exchange gains and losses resulting from translation are
recognised in the statement of profit or loss, except for qualifying
cash flow hedges which are deferred to equity.
On consolidation the assets, liabilities, income and expenses of
foreign operations are translated into Australian dollars using the
following applicable exchange rates:
Foreign currency amount
Income and expenses
Assets and liabilities
Equity
Reserves
Applicable exchange rate
Average exchange rate
Reporting date
Historical date
Reporting date
Foreign exchange differences resulting from translation are
initially recognised in the foreign currency translation reserve
and subsequently transferred to the profit or loss on disposal
of the foreign operation.
(iii) Finance and borrowing costs
Finance costs comprise interest expense on borrowings, cost
to establish financing facilities (which are expensed over the
term of the facility), losses on ineffective hedging instruments
that are recognised in profit or loss and finance lease charges.
(iv) Available‑for‑sale financial assets
Available-for-sale financial assets are stated at fair value less
impairment. Gains and losses arising from changes in fair value
are recognised directly in the available-for-sale revaluation
reserve, until the investment is disposed of or is determined
to be impaired or control of an acquiree is obtained, at which
time the cumulative gain or loss previously recognised in the
available-for-sale revaluation reserve is included in the profit
or loss for the year.
Annual Report 2018 67
B
Business performance
This section provides the information that is most relevant to understanding the financial performance of the Group during
the financial year and, where relevant, the accounting policies applied and the critical judgements and estimates made.
B1. Segment information
B2. Profit from ordinary activities
B3. Earnings per share
B1. Segment information
Identification of reportable segments
An operating segment is a component of an entity that engages
in business activities from which it may earn revenue and incur
expenses, whose operating results are regularly reviewed by the
Group’s chief operating decision maker in order to effectively
allocate Group resources and assess performance.
The Group has identified its operating segments based on the
internal reports that are reviewed and used by the Group CEO
in assessing performance and in determining the allocation of
resources. The operating segments are identified by the Group
The reportable segments identified within the Group are outlined below:
Service line
Segment description
B4. Taxation
B5. Remuneration of auditors
B6. Subsequent events
based on the nature of the services provided. Discrete financial
information about each of these operating businesses is reported
to the Group CEO on a recurring basis.
The reportable segments are based on a combination of operating
segments determined by the similarity of the services provided,
and the sources of the Group’s major risks that could therefore
have the greatest effect on the rates of return. Downer has
determined that reportable segments are best represented
as service lines.
Transport
Utilities
Comprises the Group’s road, rail infrastructure, bridge, airport and port businesses and provides a broad range
of transport infrastructure services including: earthworks; civil construction; asset management; maintenance;
surfacing and stabilisation; supply of bituminous products and logistics; open space and facilities management;
and rail track signalling and electrification works.
Comprises the Group’s power, gas, water, renewable energy and telecommunications businesses. This includes:
planning, designing, constructing, operating, maintaining, managing and decommissioning power and gas network
assets; providing complete water lifecycle solutions for municipal and industrial water users including pipeline
bursting and civil maintenance; and design, build and maintenance services for wind farms, wind turbine sites
and solar farms; as well as feasibility, design, civil construction, network construction, commissioning, testing,
operations and maintenance across fibre, copper and radio networks as well as data centre services, automated
ticketing and intelligent transport technology solutions.
Rail
Provides total rail asset solutions including passenger build, operations and maintenance, component overhauls
and after-market services.
Engineering,
Construction
and Maintenance
(EC&M)
Provides design, engineering, construction and maintenance services for greenfield and brownfield projects
across a range of sectors and all stages of the project lifecycle including: feasibility studies; engineering design;
civil works; structural, mechanical and piping; electrical and instrumentation; mineral process equipment design
and manufacture; commissioning; operations maintenance; shutdowns, turnarounds and outages; strategic asset
management; and decommissioning.
Mining
Spotless
Provides services across all stages of the mining lifecycle including: asset management; blasting services, explosive
supply; civil projects; crushing; exploration drilling; mine closure and mine site rehabilitation; mobile plant maintenance;
open cut mining; training and development for ATSI employees; tyre management; and underground mining.
Spotless operates in Australia and New Zealand and provides outsourced facility services, catering and laundry
services, technical and engineering services, maintenance and asset management services and refrigeration
solutions to various industries.
68 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 B1. Segment information – continued
2018
$’m
Transport Utilities Spotless
Rail
EC&M Mining
Un-
allocated
Total
Revenue
Inter-segment sales
Total segment revenue
2,743.2
–
2,743.2
1,783.0
–
1,783.0
3,093.7
–
3,093.7
732.0 2,382.9
–
732.0 2,382.9
–
1,309.4
–
1,309.4
12,067.1
22.9
(36.2)
(36.2)
(13.3) 12,030.9
Share of sales revenue from joint ventures
and associates(i)
Total revenue including joint ventures
and other income(i)
Share of net profit of joint ventures
and associates
Depreciation and amortisation
EBIT before amortisation of
acquired intangibles (EBITA)
Amortisation of acquired intangibles
Total reported segment results (EBIT)
Net finance costs
Total profit before tax
73.8
–
8.1
437.2
21.2
49.0
–
589.3
2,817.0
1,783.0
3,101.8
1,169.2
2,404.1
1,358.4
(13.3) 12,620.2
9.7
44.6
–
22.3
0.4
94.9
142.9
(0.4)
142.5
94.8
(2.1)
92.7
167.7
(11.0)
156.7
13.7
9.9
39.2
–
39.2
(1.3)
18.5
2.6
126.6
–
53.4
25.1
370.2
70.6
(5.0)
65.6
50.4
–
50.4
(294.1)
(48.2)
(342.3)
271.5
(66.7)
204.8
(81.1)
123.7
Acquisition of segment assets
Segment assets
Segment liabilities
Carrying value of equity accounted investees
74.0
1,203.2
530.8
11.9
34.1
797.8
422.0
–
134.2
2,754.3
1,399.7
1.5
83.7
686.0
402.3
71.2
105.3
950.1
553.5
4.0
134.3
804.8
271.7
7.4
20.7
592.0
1,003.1
–
586.3
7,788.2
4,583.1
96.0
Transport Utilities Spotless
Rail
EC&M Mining
Un-
allocated
Total
2017
$’m
Revenue
Inter-segment sales
Total segment revenue
Share of sales revenue from joint ventures
and associates(i)
Total revenue including joint ventures
and other income(i)
Share of net profit of joint ventures
and associates
Depreciation and amortisation
EBIT before amortisation of
acquired intangibles (EBITA)
Amortisation of acquired intangibles
Total reported segment results (EBIT)
Net finance costs
Total profit before tax
2,091.1
–
2,091.1
1,517.3
–
1,517.3
62.3
–
2,153.4
1,517.3
8.5
40.6
124.9
(0.3)
124.6
–
21.6
84.1
–
84.1
–
–
–
–
–
–
–
–
–
–
Acquisition of segment assets
Segment assets
Segment liabilities
Carrying value of equity accounted investees
114.9
1,080.3
391.5
10.0
55.2
746.7
404.6
–
2,137.2
2,715.5
1,410.1
1.8
467.1
–
467.1
1,974.2
–
1,974.2
1,250.8
–
1,250.8
19.8
(32.9)
(13.1)
7,320.3
(32.9)
7,287.4
383.1
30.1
49.4
–
524.9
850.2
2,004.3
1,300.2
(13.1)
7,812.3
11.7
10.9
30.3
–
30.3
51.9
572.1
141.3
64.5
(0.6)
15.3
52.6
(0.3)
52.3
2.9
116.4
83.4
–
83.4
–
15.4
22.5
220.2
(90.1)
(6.8)
(96.9)
285.2
(7.4)
277.8
(26.8)
251.0
95.5
719.1
413.4
5.3
102.2
836.3
264.5
6.4
37.0
914.6
972.7
–
2,593.9
7,584.6
3,998.1
88.0
(i) This is a non-statutory disclosure as it relates to Downer’s share of revenue from equity accounted joint ventures and associates.
Annual Report 2018 69
B1. Segment information – continued
Reconciliation of segment net operating profit to net profit after tax:
Segment net operating profit
Unallocated:
Mining goodwill impairment
Divestment of Freight Rail
Auburn Rail claim
Divisional merger costs
Spotless management redundancies and integration costs
Spotless residual strategy reset costs
Spotless integration costs
Spotless transaction costs(i)
Bid costs written off(ii)
Amortisation of Spotless and Tenix acquired intangible assets
Settlement of contractual claims
Corporate costs
Total unallocated
Earnings before interest and tax
Net finance costs
Profit before income tax
Income tax expense
Profit after income tax
Segment results
Note
B2(b)
B2(b)
B2(b)
B2(b)
B2(b)
B2(b)
B2(b)
B2(b)
B2(b)
B4(a)
2018
$’m
547.1
(76.4)
(50.2)
(25.0)
(28.5)
(9.4)
(11.3)
(7.3)
–
–
(48.2)
–
(86.0)
(342.3)
204.8
(81.1)
123.7
(52.6)
71.1
2017
$’m
374.7
–
–
–
–
–
–
–
4.6
(13.0)
(6.8)
(5.0)
(76.7)
(96.9)
277.8
(26.8)
251.0
(69.5)
181.5
(i) Represents the net of costs incurred as a result of the Spotless takeover offer, offset by other income and revaluation of initial 19.99% investment in Spotless at
$1.15 per share.
(ii) Downer was a member of the Constellation Rail consortium. On 18 August 2016, the consortium was advised that it had not been successful in its bid to deliver and maintain
the New Intercity Fleet (NIF) for Transport for NSW. Accordingly, an amount of $10.0 million, referable to Downer’s share of pre-tax bid costs, has been expensed.
Downer was also a member of the Creative Learning consortium. On 17 January 2017, the consortium was advised that it had not been successful in its bid to design,
construct and maintain the NZ Schools PPP project for the Ministry of Education. Accordingly, an amount of $3.0 million, referable to Downer’s share of pre-tax bid costs,
has been expensed.
Total revenue(i)
Segment assets
Acquisition of
segment assets
2018
$’m
2017
$’m
2018
$’m
2017
$’m
2018
$’m
2017
$’m
9,517.2
2,444.9
–
50.9
14.5
3.4
12,030.9
5,704.8
1,538.7
–
29.2
12.6
2.1
7,287.4
6,779.7
946.1
2.7
42.8
14.0
2.9
7,788.2
6,730.4
794.7
7.5
36.4
13.4
2.2
7,584.6
538.0
47.1
0.1
0.8
0.2
0.1
586.3
2,462.4
128.9
–
1.2
1.4
–
2,593.9
By geographic location(ii)
Australia
New Zealand and Pacific
Asia
Africa
South America
Other
Total
(i) Total revenue includes other income and inter-segment sales, recorded at amounts equal to competitive market prices charged to external customers for similar goods
or services.
(ii) Revenue and assets are allocated based on geographical location of the legal entity.
70 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018
B2. Profit from ordinary activities
a) Revenue and other income
Sales revenue
Rendering of services
Construction contracts
Sale of goods
Other revenue
Total revenue from
ordinary activities
Fair value gain on
available-for-sale asset(i)
Other income on
available-for-sale asset(i)
Other
Other income
Total revenue and other income
Share of sales revenue from joint
ventures and associates(ii)
Total revenue including
joint ventures and associates
and other income(ii)
2018
$’m
2017
$’m
8,896.3
2,788.9
291.2
40.2
5,773.5
1,250.9
220.1
22.6
12,016.6
7,267.1
–
19.1
–
14.3
14.3
12,030.9
0.7
0.5
20.3
7,287.4
589.3
524.9
12,620.2
7,812.3
(i) For 30 June 2017, this relates to other income and revaluation of initial 19.99%
investment in Spotless at $1.15 per share. Refer to Note B2(b).
(ii) This is a non-statutory disclosure as it relates to Downer’s share of revenue from
equity accounted joint ventures and associates.
Recognition and measurement
Revenue
Revenue is measured at the fair value of the consideration
received or receivable. Revenue is recognised if it meets the
criteria below.
(i) Rendering of services
The Group primarily generates service revenue from the
following activities:
– Maintenance and management of transport infrastructure;
– Utilities infrastructure maintenance services (gas,
power and water);
– Maintenance and installation of infrastructure in the
telecommunications sector;
– Industrial plant maintenance;
– Contract mining services, mining assets maintenance
services, tyre management and blasting;
– Rolling stock maintenance and rail asset
management services;
– Engineering and consultancy services; and
– Facilities management.
These services are provided either under a fixed price service
contract or a time and materials contract. Time and materials
contract revenue is recognised at the contractual rates as labour
hours are delivered and direct expenses are incurred.
Other short-term service contracts are recognised when the
services are completed in accordance with the terms of the
contract. Service contracts that have a long-term duration
are recognised in proportion to the stage of completion at
balance sheet date.
(ii) Construction contracts
Construction contracts are contracts specifically negotiated
for the construction of an asset or combination of assets
(including rail and infrastructure assets). Revenue is recognised
in proportion to the stage of completion of the contract at
balance sheet date.
(iii) Sale of goods
Revenue is recognised when the significant risks and rewards
of ownership of the goods have passed to the buyer.
(iv) Other revenue
Other revenue primarily includes rental income and government
grants relating to research and development incentives received
by the Group. The Group elects to present the net amount in
“Other revenue” as allowed under AASB120 Accounting for
Government grants and disclosure of Government assistance.
Key estimate and judgement:
Revenue recognition
Determining the stage of completion requires an estimate
of expenses incurred to date as a percentage of total
estimated costs. Where variations and claims are made
to the contract, assumptions are made regarding the
probability that the customer will approve the variations
and claims and the amount of revenue that will arise.
Changes in these estimation methods could have a
material impact on the financial statements of Downer.
Annual Report 2018 71
B2. Profit from ordinary activities – continued
b) Individually significant items
2018
The following material items are relevant to an understanding of the Group’s financial performance:
Divestment
of freight
rail
Mining
goodwill
impairment
Auburn rail
claim
Divisional
merger
costs
Spotless
transaction
related
Employee benefit expense
Other expenses from ordinary activities
Loss before interest and tax
Net finance expense
Income tax benefit
Loss after income tax
–
(50.2)
(50.2)
–
9.6
(40.6)
–
(76.4)
(76.4)
–
–
(76.4)
–
(25.0)
(25.0)
–
7.5
(17.5)
(12.7)
(15.8)
(28.5)
–
8.5
(20.0)
(10.7)
(17.3)
(28.0)
(4.8)
8.7
(24.1)
2018
$’m
(23.4)
(184.7)
(208.1)
(4.8)
34.3
(178.6)
Divestment of freight rail
On 21 November 2017, Downer entered an agreement to sell its freight rail business to Progress Rail for $109 million ($122.7 million after
adjusting for working capital movements). As a result of the transaction, Downer recognised a non-cash pre-tax write down of assets
held for sale of $50.2 million ($40.6 million after tax). Refer to Note F3 for further details.
Mining goodwill impairment
Following the identification of possible impairment indicators, the Group undertook an assessment of the carrying value of the Mining
business. As a result of this assessment, a goodwill impairment of $76.4 million was recognised as at 31 December 2017. Refer to Note
C7 for further details.
Auburn rail claim
Downer was unsuccessful in its claim against John Holland Pty Ltd and others in relation to ground subsidence at some locations
within the Waratah Train Maintenance Centre located at Auburn. This claim was previously disclosed as a contingent liability.
The Auburn Rail claim costs represent legal and other costs incurred which were expected to be recovered as part of the proceedings.
As a result of the unsuccessful claim, these costs were expensed.
Divisional merger costs
Divisional merger costs incurred across the Group following the creation of Mining, Energy & Industrial (MEI) and Transport and
Infrastructure (TI) divisions. These costs include redundancies, onerous lease provision and asset write-offs.
Spotless transaction
Spotless transaction related costs are classified in the statement of profit or loss as at 30 June 2018 as follows:
2018
$’m
Spotless integration costs
Management redundancies and integration costs
Residual strategy reset costs
Earnings
before
interest
and tax
(7.3)
(9.4)
(11.3)
(28.0)
Net
Interest
Expense
–
(3.3)
(1.5)
(4.8)
Income tax
benefit
2.0
3.0
3.7
8.7
Profit after
income tax
(5.3)
(9.7)
(9.1)
(24.1)
For 30 June 2018, Spotless related transaction costs of $28.0 million includes $11.3 million of costs incurred in exiting contracts as
part of Spotless’ strategy reset; $7.3 million of integration costs incurred during the period and $9.4 million Spotless’ management
redundancies and other integration costs.
72 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 B2. Profit from ordinary activities – continued
b) Individually significant items – continued
2017
Spotless transaction
2017
$’m
Spotless transaction costs(i)
Fair value gain on available-for-sale asset(ii)
Other income on available-for-sale asset(ii)
Net finance income on Spotless takeover bid and
capital raising(iii)
Earnings
before
interest
and tax
(15.2)
19.1
0.7
–
4.6
Note
B1
Net finance
income (iii)
Income tax
expense
–
–
–
1.7
1.7
–
(5.5)
(0.2)
(0.5)
(6.2)
Profit after
income tax
(15.2)
13.6
0.5
1.2
0.1
(i) Transaction costs incurred in relation to the takeover of Spotless. The expenses are classified as “Other expenses from ordinary activities” in the statement of profit or loss
for the year ended 30 June 2017.
(ii) Referable to the other income and revaluation of the initial 19.99% interest equivalent in Spotless (economic interest of 4.99% pursuant to a cash settled total return equity
swap and 15.0% shareholding acquired immediately prior to the takeover bid) based on the offer share price of $1.15. The fair value gain is transferred from the available-for-
sale reserve to profit or loss on obtaining control and is classified as “Other income” in the statement of profit or loss for the year ended 30 June 2017.
(iii) Net interest income from the capital raising proceeds received in relation to the Spotless acquisition. The net interest income is classified as part of “Net finance costs” in
the statement of profit or loss for the year ended 30 June 2017.
Bid costs written‑off
New Intercity Fleet rail project(i)
NZ Schools PPP project(ii)
2018
$’m
–
–
–
2017
$’m
(10.0)
(3.0)
(13.0)
(i) Downer was a member of the Constellation Rail consortium. On 18 August 2016, the consortium was advised that it had not been successful in its bid to deliver and maintain
the New Intercity Fleet (NIF) for Transport for NSW. Accordingly, an amount of $10.0 million, referable to Downer’s share of pre-tax bid costs, has been expensed and
classified as “Other expenses from ordinary activities” in the statement of profit or loss for the year ended 30 June 2017.
(ii) Downer was a member of the Creative Learning consortium. On 17 January 2017, the consortium was advised that it had not been successful in its bid to design, construct
and maintain the NZ Schools PPP project for the Ministry of Education. Accordingly, an amount of $3.0 million, referable to Downer’s share of pre-tax bid costs, has been
expensed and classified as “Other expenses from ordinary activities” in the statement of profit or loss for the year ended 30 June 2017.
B3. Earnings per share
Basic earnings per share
The calculation of basic earnings per share (EPS) is based on the profit attributable to ordinary shareholders and the weighted average
number of ordinary shares outstanding.
Profit attributable to members of the parent entity ($’m)
Adjustment to reflect ROADS dividends paid ($’m)
Profit attributable to members of the parent entity used in calculating EPS ($’m)
Weighted average number of ordinary shares (WANOS) on issue (m’s)
Basic earnings per share (cents per share)
2018
71.4
(8.0)
63.4
590.5
10.7
2017
181.5
(8.6)
172.9
483.6
35.8
Annual Report 2018 73
B3. Earnings per share – continued
Diluted earnings per share
The calculation of diluted EPS is based on the profit attributable to ordinary shareholders and the weighted average number of ordinary
shares outstanding after adjustments for the effects of all dilutive potential ordinary shares.
Profit attributable to members of the parent entity ($’m)
Weighted average number of ordinary shares
– Weighted average number of ordinary shares (WANOS) on issue (m’s)(i)
– WANOS adjustment to reflect potential dilution for ROADS (m’s)(ii)
WANOS used in the calculation of diluted EPS (m’s)
Diluted earnings per share (cents per share)(iii)
2018
71.4
590.5
27.8
618.3
10.7
2017
181.5
483.6
35.3
518.9
35.0
(i) For diluted EPS, the WANOS has been further adjusted by the potential vesting of executive incentive shares.
(ii) The WANOS adjustment is the value of ROADS that could potentially be converted into ordinary shares at the reporting date. It is calculated based on the issued value of
ROADS in New Zealand dollars converted to Australian dollars at the spot rate prevailing at the reporting date, which was $183.4 million (2017: $190.5 million), divided by the
average market price of the Company’s ordinary shares for the period 1 July 2017 to 30 June 2018 discounted by 2.5% according to the ROADS contract terms, which was
$6.60 (2017: $5.40).
(iii) At 30 June 2018, the ROADS are deemed anti-dilutive and consequently, diluted EPS remained at 10.7 cents per share.
B4. Taxation
a) Reconciliation of income tax expense
The prima facie income tax expense on profit before income tax reconciles to the income tax expense in the financial statements as follows:
Profit before income tax
Tax using the Company’s statutory tax rate
Effect of tax rates in foreign jurisdictions
Non-deductible expenses
Profits and franked distributions from joint ventures and associates
Non-taxable government grant
Impairment of goodwill
Non-taxable gains / losses
Other items
Under / (over) provision of income tax in previous year
Total income tax expense
Current tax expense
Deferred tax expense
2018
$’m
123.7
37.1
(1.3)
1.0
(5.6)
(2.6)
22.9
(1.8)
1.2
1.7
52.6
49.2
3.4
2017
$’m
251.0
75.3
(1.3)
6.2
(5.1)
(2.6)
–
–
(0.8)
(2.2)
69.5
68.7
0.8
The tax rate used in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits
under Australian tax law. There has been no change in the corporate tax rate when compared with the previous year.
74 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 Tax consolidation
Downer EDI Limited and its wholly owned Australian entities are
part of a tax-consolidated group under Australian taxation law.
Downer EDI Limited is the head entity in the tax consolidated
group. Entities within the tax consolidated group have entered
into a tax funding agreement and a tax sharing agreement
with the head entity. Under the terms of the tax-funding
agreement, Downer EDI Limited and each of the entities in the
tax-consolidated group have agreed to pay (or receive) a tax
equivalent payment to (or from) the head entity, based on the
current tax liability or current tax asset of the entity.
Key estimate and judgement:
Recovery of deferred tax assets
Deferred tax assets are recognised for deductible
temporary differences, unused tax losses and tax offsets,
to the extent it is probable that sufficient future taxable
profits will be available to utilise them. Judgement is
required to determine the amount of deferred tax assets
that can be recognised, based upon the likely timing and
the level of future taxable profits.
Key estimate and judgement: Income taxes
The Group is subject to income taxes in Australia and
jurisdictions where it has foreign operations. Judgement is
required to determine the worldwide provision for income
taxes and to assess whether deferred tax balances are
recognised on the statement of financial position. Changes
in circumstances will alter expectations, which may impact
the amount of provision for income taxes and deferred tax
balances recognised.
B4. Taxation – continued
Recognition and measurement
Current tax
Current tax assets and liabilities are measured at the amount of
income taxes payable or recoverable in respect of the taxable
profit or tax loss for the period, it is calculated using tax rates
and tax laws that have been enacted or substantively enacted by
the reporting date.
Deferred tax
Deferred tax is accounted for in respect of temporary differences
arising from differences between the carrying amount of assets
and liabilities and the corresponding tax base.
Deferred tax liabilities are recognised for all taxable temporary
differences. Deferred tax assets are recognised for all deductible
temporary differences, unused tax losses and tax offsets, to the
extent that it is probable that sufficient taxable profits will be
available to utilise them.
However, deferred tax assets and liabilities are not
recognised for:
– taxable temporary differences that arise from the initial
recognition of assets or liabilities in a transaction that is not
a business combination which affects neither taxable income
nor accounting profit;
– taxable temporary differences relating to investments in
subsidiaries, associates and joint ventures to the extent that
the Group is able to control the timing of the reversal of the
temporary differences and it is probable that they will not
reverse in the foreseeable future; and
– taxable temporary differences arising from goodwill.
Deferred tax assets and liabilities are measured at the tax rates
and tax laws that are expected to apply the year when the
asset is utilised or liability is settled, based on tax rates and tax
laws that have been enacted or substantively enacted at the
reporting date.
Income taxes relating to items recognised directly in equity are
recognised in equity and not in the income statement.
Offsetting deferred tax balances
Deferred tax assets and liabilities are offset when they relate
to income taxes levied by the same taxation authority and the
Company/consolidated entity intends to settle its current tax
assets and liabilities on a net basis.
Annual Report 2018 75
B4. Taxation – continued
b) Movement in deferred tax balances
2018
$’m
Trade and other receivables
Inventories
Joint ventures and associates
Property, plant and equipment
Intangible assets
Income tax losses
Trade and other payables
Provisions
Other
Tax assets / (liabilities) before set-off
Set-off of DTA against DTL
Net tax assets / (liabilities)
Restated
Net
balance at
1 July
Charged
to income
statement
Charged to
compre-
hensive
income
and equity
Net foreign
currency
exchange
differences
Acquisition
and
disposal
Net
balance at
30 June
Deferred
tax assets
Deferred
tax
liabilities
1.6
9.8
0.2
(19.3)
19.0
7.4
12.9
(33.2)
(1.8)
(3.4)
(103.0)
(9.8)
(1.1)
(12.9)
(166.6)
25.1
20.8
156.5
5.0
(86.0)
–
(86.0)
–
–
–
–
–
–
–
–
1.6
1.6
0.8
–
–
–
–
–
0.3
(0.2)
0.1
1.0
0.1
–
–
–
(16.5)
–
0.5
6.3
1.7
(7.9)
(100.5)
–
(0.9)
(32.2)
(164.1)
32.5
34.5
129.4
6.6
(94.7)
–
–
–
–
–
32.5
34.5
129.4
6.6
203.0
(100.5)
–
(0.9)
(32.2)
(164.1)
–
–
–
–
(297.7)
–
(127.5)
127.5
(94.7)
75.5
(170.2)
2017
$’m
Trade and other receivables
Inventories
Joint ventures and associates
Property, plant and equipment
Intangible assets
Income tax losses
Trade and other payables
Provisions
Other
Tax assets / (liabilities) before
set-off
Set-off of DTA against DTL
Net tax assets / (liabilities)
Net
balance at
1 July
Charged
to income
statement
Charged
to compre-
hensive
income
and equity
Net
foreign
currency
exchange
differences
Acquisition
and
disposal
Net
balance at
30 June
Adjust–
ment to
opening
balances
Restated
Net
balance at
1 July(i)
Deferred
tax
assets(i)
Deferred
tax
liabilities(i)
3.6
(6.2)
0.2
(7.2)
1.8
–
11.5
1.0
(5.5)
(0.8)
–
–
–
–
–
–
–
–
6.0
6.0
(121.0)
(3.7)
(1.3)
(21.7)
(18.2)
–
8.4
99.6
0.2
(57.7)
–
(57.7)
–
–
–
–
–
–
–
–
–
–
1.1
0.1
–
12.9
(24.6)
25.1
0.9
56.6
(16.4)
55.7
(116.3)
(9.8)
(1.1)
(16.0)
(41.0)
25.1
20.8
157.2
(15.7)
3.2
–
3.2
13.3
–
–
3.1
(125.6)
–
–
(0.7)
20.7
(89.2)
(103.0)
(9.8)
(1.1)
(12.9)
(166.6)
25.1
20.8
156.5
5.0
(86.0)
–
(86.0)
–
–
–
–
–
25.1
20.8
156.5
5.0
207.4
(111.6)
95.8
(103.0)
(9.8)
(1.1)
(12.9)
(166.6)
–
–
–
–
(293.4)
111.6
(181.8)
(i) June 2017 balances were restated to reflect the impact of acquisition accounting adjustments made during the period on opening balances.
76 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 B5. Remuneration of auditors
B6. Subsequent events
Audit or review of financial reports:
Auditor of the Group – KPMG
Australia
Overseas
Auditor review of financial reports
– Ernst & Young(i)
Non-audit services – KPMG
Tax services
Sustainability assurance
Due diligence and other
non-audit services
2018
$
2017
$
At the date of this report there is no matter or circumstance
that has arisen since the end of the financial year that has
significantly affected, or may significantly affect:
a) The Group’s operations in future financial years;
b) The results of those operations in future financial years; or
c) The Group’s state of affairs in future financial years.
3,929,000
721,000
4,650,000
2,546,000
667,000
3,213,000
–
4,650,000
1,600,000
4,813,000
556,106
278,634
719,955
217,000
950,457
1,785,197
1,066,814
2,003,769
(i)
In 2017, audit fees were paid by Spotless Group Holdings Limited for the full year
audit, which includes the period prior to Downer taking control of Spotless.
Annual Report 2018 77
C
Operating assets and liabilities
This section provides information relating to the operating assets and liabilities of the Group. Downer has a strong focus
on maintaining a strong balance sheet through continued focus on cash conversion. The Group’s strategy also considers
expenditure, growth and acquisition requirements.
C1. Reconciliation of cash and cash equivalents
C2. Trade and other receivables
C3. Rendering of services and construction contracts
C4. Inventories
C5. Trade and other payables
C6. Property, plant and equipment
C7. Intangible assets
C8. Provisions
C9. Contingent liabilities
C1. Reconciliation of cash and cash equivalents
(a) Reconciliation of cash flows from operating activities
Profit after tax for the year
Adjustments for:
Share of joint ventures and associates’ profits net of distributions
Depreciation and amortisation of non-current assets
Amortisation of deferred costs
Net (gain) / loss on sale of property, plant and equipment
Loss on disposal of business
Impairment of intangibles
Research and development incentives
Foreign exchange gains
Movement in current tax balances
Movement in deferred tax balances
Share-based employee benefits expense
Fair value gain on available-for-sale assets
Bid costs written off
Other
Changes in net assets and liabilities, net of effects from acquisition and disposal of businesses:
(Increase) / decrease in assets:
Current trade and other receivables
Current inventories
Other current assets
Non-current trade and other receivables
Other non-current assets
Increase / (decrease) in liabilities:
Current trade and other payables
Current financial liabilities
Current provisions
Non-current trade and other payables
Non-current financial liabilities
Non-current provisions
Net cash generated by operating activities
78 Downer EDI Limited
Note
C6,C7
B2(b)
B2(b)
D1
B2(b)
B2(b)
2018
$’m
71.1
(8.2)
370.2
5.7
(14.2)
40.6
76.4
(8.7)
(0.1)
(7.5)
13.7
2.8
–
–
0.7
471.4
(479.1)
(17.2)
6.3
(53.8)
12.1
607.7
21.2
(41.8)
(13.9)
10.2
(10.9)
40.8
583.3
2017
$’m
181.5
(4.6)
220.2
3.0
1.2
–
–
(8.5)
(0.5)
19.7
0.8
5.6
(19.1)
13.0
2.7
233.5
(159.8)
38.7
0.2
(5.1)
(0.4)
160.7
3.3
(4.8)
(10.2)
16.9
(12.9)
26.6
441.6
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 C1. Reconciliation of cash and cash equivalents – continued
(b) Reconciliation of liabilities arising from financing activities
$’m
Interest bearing loans
Finance lease liabilities
Total liabilities from financing activities
(c) Cash and cash equivalents
For the purpose of the statement
of cash flows, cash and cash
equivalents comprises:
Cash(i)
Short-term deposits
2018
$’m
2017
$’m
321.4
284.8
606.2
784.5
60.1
844.6
(i) As at 30 June 2017, in accordance with the Business Sale Agreement, the
completion payment for the assets of Cabrini Health Limited ($20.0 million)
was held on trust for Spotless (restricted cash) and released to Cabrini Health
Limited on 1 July 2017.
C2. Trade and other receivables
Note
2018
$’m
2017(i)
$’m
Current
Trade receivables
Allowance for
doubtful debts
Amounts due from
customers under contracts
and rendering of services
Other receivables
C3
Ageing profile of
trade receivables
Neither past due
nor impaired
Past due but not impaired
Impaired
842.0
757.1
(15.3)
826.7
(7.1)
750.0
1,203.4
91.8
2,121.9
908.3
63.7
1,722.0
702.0
124.7
15.3
842.0
675.1
74.9
7.1
757.1
(i) June 2017 balances were restated to reflect the impact of acquisition
accounting adjustments made during the period on opening balances.
1 July
2017
Net cash
flows
1,409.2
35.8
1,445.0
87.6
(18.4)
69.2
Amortisation
and foreign
exchange
movement
7.9
(0.9)
7.0
30 June
2018
1,504.7
16.5
1,521.2
Recognition and measurement
Trade receivables
Trade receivables and other receivables are initially recognised
at fair value and subsequently at amortised cost using the
effective interest rate method, less an allowance for impairment.
Fair value
Due to the short-term nature of these financial rights, their
carrying amounts are estimated to represent their fair values.
Impairment of trade receivables
The Group has considered the collectability and recoverability
of trade receivables. An allowance for doubtful debts has been
made for the estimated irrecoverable trade receivable amounts
arising from services provided, determined by reference to past
default experience.
Capitalisation of tender / bid costs
When it is probable that a contract will be awarded, the
expenditure incurred in relation to tender / bid costs is
capitalised to amounts due from customers under contracts.
Capitalised costs are expensed in accordance with contract
accounting principles once the contract is awarded. Where
a tender / bid is subsequently unsuccessful, the previously
capitalised costs are immediately expensed. Tender / bid
costs that have been expensed cannot be recapitalised in
the subsequent financial year.
Key estimate and judgement:
Capitalisation of tender / bid costs
Judgement is exercised in determining whether it is
probable that the contract will be awarded. An error
in judgement may result in capitalised tender / bid
costs being recognised as an expense in the following
financial year.
Annual Report 2018 79
C3. Rendering of services and
construction contracts
C4. Inventories
Note
2018
$’m
2017
$’m
Current
Raw materials
Work in progress
Finished goods
Components and spare parts
2018
$’m
176.9
0.2
47.6
44.1
268.8
2017
$’m
187.8
0.1
66.5
47.3
301.7
Recognition and measurement
Inventories are valued at the lower of cost and net realisable
value. Net realisable value represents the estimated selling price
less all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
C5. Trade and other payables
Note
2018
$’m
2017
$’m
Current
Trade payables
Amounts due to customers
under contracts and
rendering of services
Amounts owing in relation
to Spotless shares
acceptance
Accruals
Other
C3
F2
674.2
527.6
410.2
288.2
–
1,084.4
112.8
2,281.6
110.8
732.8
101.6
1,761.0
Recognition and measurement
Trade and other payables
Trade payables and other accounts payable are recognised when
the Group becomes obliged to make future payments resulting
from the purchase of goods and services.
Fair value
Due to the short-term nature of these financial obligations, their
carrying amounts are estimated to represent their fair values.
Cumulative contracts
in progress as at
reporting date:
Cumulative costs incurred
plus recognised profits less
recognised losses to date
Less: progress billings
Net amount
Recognised and included
in the financial statements
as amounts due:
From customers under
contracts
To customers under
contracts
Net amount
5,019.9
(4,226.7)
793.2
7,361.4
(6,741.3)
620.1
C2
C5
1,203.4
908.3
(410.2)
793.2
(288.2)
620.1
Recognition and measurement
Services and construction contracts are reported in trade
receivables and trade payables, as gross amounts due
from / to customers.
If cumulative work done to date (contract costs plus contract
net profit) of contracts in progress exceeds the progress
payments received, the difference is recognised as an asset
and included in amounts due from customers for contract
work. If the net amount after deduction of progress payments
received is negative, the difference is recognised as a liability
and included in amounts due to customers for contract work.
80 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 C6. Property, plant and equipment
2018
$’m
Carrying amount as at 1 July 2017 (restated)(iii)
Additions
Disposals at net book value
Acquisition of businesses(i)
Disposal of business at net book value
Depreciation expense
Reclassifications at net book value
Reclassified as intangible assets(ii)
Net foreign currency exchange differences at net book value
Closing net book value as at 30 June 2018
Cost
Accumulated depreciation
2017
Carrying amount as at 1 July 2016
Additions
Disposals at net book value
Acquisition of businesses (restated)(iii)
Depreciation expense
Reclassifications at net book value
Reclassified as intangible assets(ii)
Net foreign currency exchange differences at net book value
Closing net book value as at 30 June 2017 (restated)(iii)
Cost (restated)(iii)
Accumulated depreciation
Plant,
equipment
and
leasehold
improve-
ments
Freehold
land and
buildings
Equipment
under
finance
lease
Laundries
rental stock
129.4
0.5
(5.6)
–
–
(5.1)
–
–
(0.4)
118.8
155.1
(36.3)
68.5
7.4
(0.1)
57.4
(4.7)
1.0
–
(0.1)
129.4
160.9
(31.5)
1,061.2
322.9
(14.9)
3.2
(60.0)
(229.5)
26.5
(0.3)
(2.8)
1,106.3
2,488.7
(1,382.4)
859.9
212.7
(17.6)
180.2
(182.3)
18.7
(7.2)
(3.2)
1,061.2
2,355.4
(1,294.2)
52.3
7.9
(14.4)
7.6
–
(10.3)
(29.1)
–
0.1
14.1
34.1
(20.0)
59.9
2.2
(0.2)
17.5
(6.2)
(19.7)
–
(1.2)
52.3
92.7
(40.4)
37.5
36.2
–
1.5
–
(33.4)
2.6
–
(3.2)
41.2
74.0
(32.8)
–
–
–
37.5
–
–
–
–
37.5
37.5
–
Total
1,280.4
367.5
(34.9)
12.3
(60.0)
(278.3)
–
(0.3)
(6.3)
1,280.4
2,751.9
(1,471.5)
988.3
222.3
(17.9)
292.6
(193.2)
–
(7.2)
(4.5)
1,280.4
2,646.5
(1,366.1)
(i) The values recognised are based on the fair value of assets acquired from the business acquisitions made during the year ended 30 June 2018, for which the accounting on
certain transactions remains provisional. Refer to Note F2.
(ii) Refers to the reclassification of software from Capital work in progress to Intangible assets.
(iii) June 2017 balances were restated to reflect the impact of acquisition accounting adjustments made during the period on opening balances. Refer to Note F2.
Recognition and measurement
The value of property, plant and equipment is measured as the cost of the asset less accumulated depreciation and impairment.
The expected useful life and depreciation methods used are listed below:
Item
Freehold land
Buildings
Leasehold improvements
Plant and equipment – mining, power and gas
Plant and equipment – other
Equipment under finance lease
Laundries rental stock
Useful life
n/a
20-50 years
Life of lease
Working hours
3-25 years
5-15 years
18 months-5 years
Depreciation method
No depreciation
Straight-line
Straight-line
Based on hours of use
Straight-line
Straight-line – lease term
Straight-line
Key estimate and judgement: Useful lives and residual values
The estimation of the useful lives and residual values of assets has been based on historical experience as well as manufacturers’
warranties (for plant and equipment), lease terms (for leased equipment and leasehold improvements) and turnover policies.
In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life.
Adjustments to useful lives and residual values are made when considered necessary.
Annual Report 2018 81
C7. Intangible assets
2018
$’m
Carrying amount as at 1 July 2017 (restated)(iii)
Additions
Disposals at net book value
Acquisition of businesses(i)
Disposal of business at net book value
Reclassifications at net book value(ii)
Amortisation expense
Impairment of goodwill
Net foreign currency exchange differences
at net book value
Closing net book value as at 30 June 2018
Cost
Accumulated amortisation and impairment
2017
Carrying amount as at 1 July 2016
Additions
Acquisition of businesses (restated)(iii)
Disposals of business at net book value
Reclassifications at net book value(ii)
Amortisation expense
Net foreign currency exchange differences
at net book value
Closing net book value as at 30 June 2017
(restated)(iii)
Cost (restated)(iii)
Accumulated amortisation and impairment
Goodwill
2,341.1
–
–
105.0
(14.2)
–
–
(76.4)
(4.0)
2,351.5
2,503.9
(152.4)
805.3
–
1,533.0
–
–
–
2.8
2,341.1
2,417.1
(76.0)
Customer
contracts
and
relationships
Brand
names on
acquisition
Intellectual
property on
acquisition
Software
and system
development
409.1
–
–
34.5
–
–
(62.6)
–
0.1
381.1
463.8
(82.7)
37.1
–
379.2
–
–
(7.2)
–
409.1
429.3
(20.2)
56.9
–
–
21.7
–
–
(3.9)
–
–
74.7
78.7
(4.0)
–
–
57.1
–
–
(0.2)
–
56.9
57.1
(0.2)
3.5
–
–
(1.1)
–
–
(0.2)
–
–
2.2
2.4
(0.2)
–
–
3.5
–
–
–
–
3.5
3.5
–
Total
3,031.2
46.4
(0.2)
160.1
(14.2)
0.3
(91.9)
(76.4)
(4.6)
3,050.7
3,443.7
(393.0)
969.9
38.5
2,040.5
(0.7)
7.2
(27.0)
220.6
46.4
(0.2)
–
–
0.3
(25.2)
–
(0.7)
241.2
394.9
(153.7)
127.5
38.5
67.7
(0.7)
7.2
(19.6)
–
2.8
220.6
359.2
(138.6)
3,031.2
3,266.2
(235.0)
(i) The values recognised are based on the fair value of assets acquired from the business acquisitions made during the year ended 30 June 2018, for which the accounting on
certain transactions remains provisional. Refer to Note F2.
(ii) Refers to the reclassification of software from Capital work in progress to Intangible assets.
(iii) June 2017 balances were restated to reflect the impact of acquisition accounting adjustments made during the period on opening balances. Refer to Note F2.
Recognition and measurement
Goodwill
Goodwill acquired in a business combination is measured at
cost and subsequently measured at cost less any impairment
losses. The cost represents the excess of the cost of a business
combination over the fair value of the identifiable assets,
liabilities and contingent liabilities acquired.
Customer contracts and relationships on acquisition
Customer contracts and relationships acquired as part of
a business combination are recognised separately from
goodwill and are carried at fair value at date of acquisition
less accumulated amortisation and any accumulated
impairment losses.
Brand names on acquisition
Brand names acquired as part of a business combination are
recognised separately from goodwill and are carried at fair value
at date of acquisition less accumulated amortisation and any
accumulated impairment losses.
Intellectual property on acquisition
Intellectual property acquired as part of a business combination
is recognised separately from goodwill and is carried at fair value
at date of acquisition less accumulated amortisation and any
accumulated impairment losses.
82 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 C7. Intangible assets – continued
Intellectual property, software and system development
Intangible assets acquired by the Group, including intellectual
property (purchased patents, trademarks and licences) and
software are initially recognised at cost, and subsequently
measured at cost less accumulated amortisation and any
impairment losses. Internally developed systems are capitalised
once the project is assessed to be feasible. The costs
capitalised include consulting, licensing and direct labour
costs. Costs incurred in determining project feasibility are
expensed as incurred.
Amortisation
Intangible assets with finite useful lives are amortised on a
straight-line basis over their useful lives. The estimated useful
lives are generally:
Item
Software and system development
Brand names
Customer contracts and relationships
Intellectual property acquired
Other intangible assets (other than
indefinite useful life intangible assets)
Useful Life
5-15 years
20 years
1-20 years
15-20 years
20 years
Transport(i)
Utilities(iv)
Rail(ii)
EC&M(i)
Mining(iii)
Spotless(iv)
Allocation of goodwill to cash-generating units
Goodwill has been allocated, for impairment testing purposes,
to CGUs (group of units) that are significant individually or
in aggregate, taking into consideration the nature of service,
resource allocation, how operations are monitored and where
independent cash inflows are identifiable. Six independent CGUs
(by service line) have been identified across the Group against
which impairment testing has been undertaken. Goodwill has
been allocated to these CGUs as follows:
Note
B2(b)
Carrying value of
consolidated goodwill
2018
$’m
253.8
348.4
55.3
281.9
–
1,412.1
2,351.5
2017
$’m
251.0
322.9
69.5
239.2
76.4
1,382.1
2,341.1
The estimated useful life and amortisation method are reviewed
at the end of each annual reporting period.
(i)
Included in this amount is the goodwill for certain acquisitions made during the
year ended 30 June 2018, for which the accounting remains provisional.
(ii) Rail CGU goodwill reduced following disposal of the Freight Rail business during
Impairment of assets
Goodwill and intangible assets that have an indefinite useful
life are tested annually for impairment, or more frequently if
events or changes in circumstances indicate that they might be
impaired. Other assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable.
An impairment loss is recognised for the amount by which
the asset’s carrying amount exceeds its recoverable amount.
For the purpose of assessing impairment, assets are grouped
at the lowest levels for which there are separately identifiable
cash inflows that are largely independent of the cash inflows
from other assets or groups of assets (cash-generating units or
CGUs). Non-financial assets other than goodwill that suffered
impairment are reviewed for possible reversal of the impairment
at each reporting date.
the period. Refer to Note F3.
(iii) The goodwill of the Mining CGU was fully impaired following an assessment
of the carrying value of the CGU.
(iv) June 2017 balances were restated to reflect the impact of acquisition
accounting adjustments made during the period on opening balances.
Key estimate and judgement:
Impairment of assets
Determination of potential impairment requires an
estimation of the recoverable amount of the CGUs to which
the goodwill and intangible assets with indefinite useful
lives are allocated. Key assumptions requiring judgement
include projected cash flows, growth rate estimates,
discount rates, working capital and capital expenditure.
Annual Report 2018 83
C7. Intangible assets – continued
Recoverable amount testing – key assumptions
The carrying value of Transport, Utilities, EC&M and Rail CGUs
has been completed using a “value in use” model, consistent
with prior periods. Following the impairment of the goodwill
allocated to the Mining CGU as at 31 December 2017, the Mining
CGU no longer carries an indefinite useful life intangible asset
and therefore, impairment assessment is required only when
an indicator of impairment exists. There were no indicators of
impairment for the Mining CGU as at 30 June 2018.
The recoverable amount of the Spotless CGU is assessed as
the fair value less costs of disposal (“FVLCOD”) estimated
using discounted cash flows. The table below shows
the key assumptions utilised in the “value in use” and
FVLCOD calculations.
Budgeted
EBITDA(i)
Long-term
growth rate
Discount
rate
Transport
Utilities
Rail
EC&M
Mining
Spotless
1.9%
0.3%
5.5%
9.4%
7.3%
7.3%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
9.8%
9.8%
10.3%
9.8%
11.0%
8.5%
(i) Budgeted EBITDA used for impairment testing is expressed as the compound
annual growth rates from FY18 to terminal year based on the CGUs
business plan.
(i) Projected cash flows
Value in use calculation
The Group determines the value in use calculations recoverable
amount, using three year cash flow projections based on the
FY19 budget for the year ending 30 June 2019 and the business
plan for the subsequent financial years ending 30 June 2020
and 2021 (as discussed with the Board). For FY22 onwards, the
Group assumes a long-term growth rate to allow for organic
growth on the existing asset base.
Cash flow projections are determined utilising the budgeted
Earnings Before Interest, Tax, Depreciation and Amortisation
(EBITDA) less tax, capital maintenance spending and working
capital changes, adjusted to exclude any uncommitted
restructuring costs and future benefits to provide a “free cash
flow” estimate. This calculated free cash flow is then discounted
to its present value using a post-tax discount rate that reflects
current market assessments of the time value of money and the
risks specific to the asset for which the estimates of future cash
flows have not been adjusted.
Budgeted EBITDA has been based on past experience and the
Group’s assessment of economic and regulatory factors affecting
the industry within which the Downer businesses operate:
– Transport is expected to benefit from an increase in activity
in the transport infrastructure sector;
– Utilities is expected to benefit from an increase in activity
across the electricity, water and renewables sectors partially
offset by the potential reduction in revenue from its existing
significant telecommunication contracts;
– Rail is expected to benefit from the two major projects (High
Capacity Metro Trains and Sydney Growth Trains) in both the
construction and long-term maintenance phases. In addition,
closer integration with strategic partners is expected to
continue to contribute to revenue and EBITDA growth; and
– EC&M’s revenue and EBITDA include assumptions that take
into account the cyclical nature of the resources industry
and various growth opportunities.
FVLCOD calculations
As mentioned above, the Group determines the recoverable
amount of the Spotless CGU using a FVLCOD calculation which
is estimated using discounted cash flows. Key assumptions used
in the estimation of the recoverable amount are described in
the table above.
Similarly to the other CGUs, a three-year cash flow projection,
based on the EBITDA as per the FY19 budget and the business
plan for FY20 and FY21 was utilised. For FY22 onwards, the
Group assumes a long-term growth rate to allow for organic
growth on the existing asset base. Adjustments are made
to these projections to include assumptions that a market
participant would make, such as cash flows relating to
restructuring and integration.
The cash flow projection is then adjusted to exclude tax, capital
maintenance spending and working capital changes to provide a
“free cash flow estimate” which is then discounted to its present
value using a post-tax rate that reflects the current assessment
of the time value of money.
Spotless’ revenue and EBITDA was estimated taking into account
contracted work and the expected impact from business
improvement initiatives and the expected benefit from growth
opportunities in the Government sector.
(ii) Long‑term growth rates
The future annual growth rates for FY22 onwards to perpetuity
are based on the historical nominal GDP rates for the
country of operation.
84 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 C7. Intangible assets – continued
Recoverable amount testing – key assumptions – continued
(iii) Discount rates
Post-tax discount rates of between 8.5% and 11.0% reflect the Group’s estimate of the time value of money and risks specific to each
CGU. In determining the appropriate discount rate for each CGU, consideration has been given to the estimated weighted average cost
of capital (WACC) for the Group adjusted for country and business risks specific to that CGU, including benchmarking against relevant
peer group companies. The post-tax discount rate is applied to post-tax cash flows that include an allowance for tax based on the
respective jurisdiction’s tax rate. This method is used to approximate the requirement of the accounting standards to apply a pre-tax
discount rate to pre-tax cash flows.
(iv) Budgeted capital expenditure
The cash flows for capital expenditure are based on past experience and the amounts included in the terminal year calculation are for
maintenance capital used for existing plant and replacement of plant as it is retired from service. The resulting expenditure has been
compared against the annual depreciation charge to ensure that it is reasonable.
(v) Budgeted working capital
Working capital has been maintained at a level required to support the business activities of each CGU, taking into account changes in
the business cycle. It has been assumed to be in line with historic trends given the level of utilisation and operating activity.
Sensitivities
The Group believes that for all CGUs, any reasonably possible change in the key assumptions would not cause the carrying value of the
CGUs to exceed their recoverable amounts.
C8. Provisions
2018
$’m
At 1 July 2017(i)
Additional provisions recognised
Unused provision reversed
Utilisation of provision
Acquisition of businesses
Disposal of business
Net foreign currency exchange differences
At 30 June 2018
Current
Non-current
Decommissioning
and restoration
Warranties
and contract
claims
Onerous
contracts
and other
41.6
3.6
(7.3)
(5.5)
0.8
–
(0.1)
33.1
11.8
21.3
17.4
7.2
(2.4)
(5.1)
2.8
–
(0.1)
19.8
18.1
1.7
64.3
17.2
(10.6)
(26.8)
23.1
(4.4)
0.1
62.9
20.8
42.1
Total
123.3
28.0
(20.3)
(37.4)
26.7
(4.4)
(0.1)
115.8
50.7
65.1
(i) June 2017 balances were restated to reflect the impact of acquisition accounting adjustments made during the period on opening balances. Refer to Note F2.
Recognition and measurement
Provisions
Provisions are recognised when:
– the Group has a present obligation as a result of a past event;
– it is probable that resources will be expended to settle the
obligation; and
– the amount of the provision can be measured reliably.
(i) Decommissioning and restoration
Provisions for decommissioning and restoration are made for
close down, restoration and environmental rehabilitation costs,
including the cost of dismantling and demolition of infrastructure,
removal of residual materials and remediation of disturbed areas.
Future rectification costs are reviewed annually and any changes
are reflected in the present value of the rectification provision at
the end of the reporting period.
The provision is discounted using a pre-tax rate that reflects
current market assessments of the time value of money and
the risks specific to the liability.
Annual Report 2018 85
C8. Provisions – continued
C9. Contingent liabilities
(ii) Warranties and contract claims
Provisions for warranties and contract claims are made for
the estimated liability on all products still under warranty at
balance sheet date and known claims arising under service
and construction contracts.
(iii) Onerous contracts and other
Provisions primarily include amounts recognised in relation to
onerous customers, supply contracts, surplus lease contracts
and return conditions provisions for leased assets. The Group
has leases that require the leased asset to be returned to the
lessor in a certain condition.
The onerous contract provision is discounted using a pre-tax
rate that reflects current market assessments of the time value
of money and the risks specific to the liability.
Key estimate and judgement: Provisions
(i) Decommissioning and restoration
Judgement is required in determining the expected
expenditure required to settle rectification obligations at
the reporting date, based on current legal requirements
and technology.
(ii) Warranties and contract claims
The provision is estimated having regard to previous
claims experience.
(iii) Onerous contracts and other
These provisions have been calculated based on
management’s best estimate of discounted net cash
outflows required to fulfil the contracts. The status of
these contracts and the adequacy of provisions are
assessed at each reporting date.
The return condition provision is estimated based on
the costs associated with returning leased assets to the
lessor in a certain condition.
Bonding
Note
2018
$’m
2017
$’m
The Group has bid bonds
and performance bonds
issued in respect of
contract performance
in the normal course of
business for wholly-owned
controlled entities
E2
1,341.6
1,185.5
The Group is called upon to give guarantees and indemnities to
counterparties, relating to the performance of contractual and
financial obligations (including for controlled entities and related
parties). Other than as noted above, these guarantees and
indemnities are indeterminable in amount.
Other contingent liabilities
i) The Group is subject to design liability in relation to
completed design and construction projects. The Directors
are of the opinion that there is adequate insurance to cover
this area and accordingly, no amounts are recognised in
the financial statements.
ii) The Group is subject to product liability claims. Provision
is made for the potential costs of carrying out rectification
works based on known claims and previous claims history.
However, as the ultimate outcome of these claims cannot
be reliably determined at the date of this report, contingent
liability may exist for any amounts that ultimately become
payable in excess of current provisioning levels.
iii) Controlled entities have entered into various joint
arrangements under which the controlled entity is jointly
and severally liable for the obligations of the relevant
joint arrangements.
iv) The Group carries the normal contractor’s and consultant’s
liability in relation to services, supply and construction
contracts (for example, liability relating to professional advice,
design, completion, workmanship, and damage), as well as
liability for personal injury / property damage during the
course of a project. Potential liability may arise from claims,
disputes and / or litigation / arbitration by or against Group
companies and / or joint venture arrangements in which
the Group has an interest. The Group is currently managing
a number of claims, arbitration and litigation processes in
relation to services, supply and construction contracts as
well as in relation to personal injury and property damage
claims arising from project delivery.
86 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 C9. Contingent liabilities – continued
v) Several New Zealand entities in the Group have been named
as co-defendants in five “leaky building” claims. The leaky
building claims where Group entities are co-defendants
generally relate to water damage arising from historical
design and construction methodologies (and certification)
for residential and other buildings in New Zealand during
the early-mid 2000s. The Directors are of the opinion
that disclosure of any further information relating to
the leaky building claims would be prejudicial to the
interests of the Group.
vi) Ground subsidence at the Waratah Train Maintenance
Centre, located on Manchester Road, Auburn (“AMC”)
has been identified. The design and construction of
the AMC formed part of the Waratah Train Project, with
Reliance Rail contracting Downer to design and build the
AMC. In turn, Downer subcontracted this work to John
Holland Pty Ltd. The design and construction of the areas
in which subsidence has been observed formed part of
the subcontractor’s design and construct obligations.
On 20 March 2018, Downer received the decision of
the NSW Supreme Court in respect of the AMC claim.
Downer’s claim was not successful. Downer has recognised
$25 million in relation to rectification, legal and other
costs which were expected to be recovered as part of the
proceedings, which are disclosed as Individually Significant
Items (refer to Note B2(b)). Downer has filed a Notice of
Appeal in relation to aspects of the decision.
vii) On 16 September 2015, the Group announced that it had
terminated a contract with Tecnicas Reunidas S.A. (“TR”)
following TR’s failure to remedy a substantial breach of the
contract and that the Group was pursuing a claim against
TR in the order of $65 million. Downer has since demobilised
from the site and has commenced a claim that will be
determined via an arbitration process, with a hearing date
currently scheduled to commence in February 2019. TR has
initiated a counter-claim, which is being defended by Downer.
The Directors are of the opinion that disclosure of any further
information relating to this matter would be prejudicial to the
interests of the Group.
viii) In September 2017 Spotless commenced a Facilities
Management Subcontract (‘Subcontract’) at the new Royal
Adelaide Hospital (‘nRAH’). Spotless’ Subcontract is with
Celsus, which has a head contract with the South Australian
Government under a Public Private Partnership model.
Spotless has previously announced that the Subcontract is a
cash negative underperforming contract and that Spotless is
working to resolve various commercial and operational issues
which include significant preliminary claims and counter
claims (including the application of some abatements, which
are disputed by Spotless). Discussions between Spotless,
Celsus and the South Australian Government are ongoing
and most recently, a formal process has commenced (as set
out in a Process Suspension Deed dated 20 June 2018) to
enable the parties to address the various commercial and
operational issues affecting the delivery of services at the
nRAH (‘Standstill Discussions’).
In the event that Spotless is not successful in either
reaching agreement as part of the Standstill Discussions or
via arbitration proceedings then Spotless is likely to incur
operating losses up until September 2022 being the five
year anniversary of the Subcontract term, at which point
Spotless has the ability to trigger a re-pricing process. In this
scenario, the estimated present value of the losses would
be $93.8 million (after tax) as at 30 June 2018, excluding
abatements that are disputed by Spotless which the
Company does not consider to be probable.
ix) On 25 May 2017, Alison Court, as applicant, filed a
representative proceeding in the Federal Court of Australia
on behalf of shareholders who acquired Spotless shares from
25 August 2015 to 1 December 2015. The applicant under
this proceeding alleges that Spotless engaged in misleading
or deceptive conduct and/or breached its continuous
disclosure obligations in relation to Spotless financial results
for the financial year ended 30 June 2015 and in its conduct
following the release of those financial results until Spotless
issued its trading update of 2 December 2015. The applicant
seeks damages, declarations, interest and costs. Spotless
is vigorously defending the proceeding. No provision
has been recognised at 30 June 2018 in respect of the
representative proceedings.
Annual Report 2018 87
Employee benefits expense:
– Defined contribution plans
– Shared-based employee
benefits expense
– Employee benefits
Total
2018
$’m
2017
$’m
219.2
170.5
2.8
3,812.2
4,034.2
5.6
2,611.2
2,787.3
D2. Key management personnel compensation
2018
$
2017
$
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
14,236,432
310,779
2,841,759
17,388,970
13,742,489
836,489
2,929,596
17,508,574
Recognition and measurement
Equity‑settled transactions
Equity-settled share-based transactions are measured at
fair value at the date of grant. The cost of these transactions
is recognised in the profit or loss and credited to equity over
the vesting period. At each balance sheet date, the Group
revises its estimates of the number of rights that are expected
to vest for service and non-market performance conditions.
The expense recognised each year takes into account the
most recent estimate.
The fair value at grant date is independently determined using
an option pricing model and takes into account any market
related performance conditions. Non-market vesting conditions
are not considered when determining value; however they are
included in assumptions about the number of rights that are
expected to vest.
Cash‑settled transactions
The amount payable to employees in respect of cash-settled
share-based payments is recognised as an expense, with a
corresponding increase in liabilities, over the period during
which the employees become unconditionally entitled to the
payment. The liability is remeasured at each reporting date and
at settlement date based on the fair value, with any changes in
the liability being recognised in profit or loss.
D3. Employee discount share plan
No shares were issued under the Employee Discount Share Plan
during the years ended 30 June 2018 and 30 June 2017.
D
Employee benefits
This section provides a breakdown of the various programs
Downer uses to reward and recognise employees and key
executives, including Key Management Personnel (KMP).
Downer believes that these programs reinforce the value
of ownership and incentives and drive performance both
individually and collectively to deliver better returns
to shareholders.
D1. Employee benefits
D2. Key management personnel compensation
D3. Employee discount share plan
D1. Employee benefits
Employee benefits provision:
– Current
– Non-current
Total
2018
$’m
336.7
38.0
374.7
2017
$’m
365.4
38.2
403.6
Recognition and measurement
The employee benefits liability represents accrued wages and
salaries, leave entitlements and other incentives recognised in
respect of employees’ services up to the end of the reporting
period. These liabilities are measured at the amounts expected
to be paid when they are settled and include related on-costs,
such as workers compensation insurance, superannuation
and payroll tax.
Key estimate and judgement:
Annual leave and long service leave
Long-term employee benefits are measured at the present
value of estimated future payments for the services
provided by employees up to the end of the reporting
period. This calculation requires judgement in determining
the following key assumptions:
– Future increase in wages and salary rates;
– Future on-cost rates; and
– Expected settlement dates based on staff
turnover history.
The liability is discounted using the Australian corporate
bond rates which most closely match the terms to maturity
of the entitlement.
88 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 E
Capital structure and financing
This section provides information relating to the Group’s capital structure and its exposure to financial risks, how they affect
the Group’s financial position and performance and how the risks are managed.
The capital structure of the Group consists of debt and equity. The Directors determine the appropriate capital structure
of Downer, specifically how much is raised from shareholders (equity) and how much is borrowed from financial institutions
(debt) in order to finance the current and future activities of the Group. The Directors review the Group’s capital structure
and dividend policy regularly and do so in the context of the Group’s ability to continue as a going concern, to invest in
opportunities that grow the business and enhance shareholder value.
E1. Borrowings
E2. Financing facilities
E3. Commitments
E1. Borrowings
Current
Secured:
– Finance lease liabilities
– Hire purchase liabilities
Unsecured:
– Bank loans
– Medium term notes
– Deferred finance charges
Total current borrowings
Non-current
Secured:
– Finance lease liabilities
– Hire purchase liabilities
Unsecured:
– Bank loans
– USD private placement notes
– AUD private placement notes
– Medium term notes
– Deferred finance charges
Total non-current borrowings
Total borrowings
Fair value of total borrowings(i)
(i) Excludes finance lease, hire purchase and supplier finance liabilities.
E4. Issued capital
E5. Reserves
E6. Dividends
Note
2018
$’m
2017
$’m
E3(d)
E3(e)
E3(d)
E3(e)
5.1
0.2
5.3
2.1
150.0
(3.7)
148.4
153.7
11.2
–
11.2
817.7
144.7
30.0
372.2
(8.3)
1,356.3
1,367.5
1,521.2
1,561.8
20.4
0.4
20.8
836.4
13.3
(7.3)
842.4
863.2
14.8
0.2
15.0
2.1
139.1
30.0
400.0
(4.4)
566.8
581.8
1,445.0
1,466.0
Annual Report 2018 89
E1. Borrowings – continued
Recognition and measurement
Borrowings
Borrowings are initially recognised at fair value, net of transaction
costs. They are subsequently measured at amortised cost using
the effective interest rate method.
Fair value
The cash flows under the Group’s debt instruments are
discounted using current market base interest rates and
adjusted for current market credit default swap spreads
for industrial companies with a BBB credit rating.
E2. Financing facilities
At reporting date, the Group had the following facilities that
were unutilised:
Syndicated bank bridge loan facility
Syndicated bank loan facilities
Bilateral bank loan facilities
Total unutilised bank
loan facilities
Syndicated and bilateral bank and
bilateral insurance bonding facilities
Total unutilised
bonding facilities
2018
$’m
–
780.0
145.0
2017
$’m
500.0
500.0
190.0
925.0
1,190.0
574.3
574.3
738.3
738.3
Summary of borrowing arrangements
Bank loan facilities
Bilateral bank loan facilities:
– A total of $245.0 million in bilateral bank loan facilities
are committed and unsecured facilities with maturities in
calendar years 2019, 2020 and 2021.
Syndicated bank bridge loan facility:
– The syndicated bank bridge loan facility limit of
$500.0 million was terminated in February 2018 at the
election of Downer.
Syndicated loan facilities:
During the financial year, Downer terminated a $200.0 million
tranche of an existing $400.0 million syndicated bank loan
facility and $400.0 million of new syndicated bank loan facilities
were established in May 2018. The $600.0 million of syndicated
bank loan facilities are unsecured, revolving committed facilities
and comprise the following tranches:
– $200 million maturing April 2021;
– $200 million maturing May 2022; and
– $200 million maturing May 2023.
Spotless’ bank loan facilities were refinanced in full in May
2018. Given that Downer’s interest in Spotless remains below
90%, the new facilities were established on a standalone basis.
The syndicated loan facilities are on an unsecured, committed
basis and comprise Australian Dollar and New Zealand Dollar
tranches as follows:
– $280 million revolving tranche maturing May 2021;
– NZD75 million revolving tranche maturing May 2021;
– NZD75 million term tranche maturing May 2021;
– $280 million revolving tranche maturing May 2022; and
– $200 million term tranche maturing May 2022.
USD private placement notes
USD unsecured private placement notes are on issue for a
total amount of US$107.0 million. US$7.0 million notes mature in
September 2019 and US$100.0 million in July 2025. The USD
denominated principal and interest amounts have been fully
hedged against the Australian dollar through cross-currency
interest rate swaps.
AUD private placement notes
AUD unsecured private placement notes are on issue for a total
amount of $30.0 million with a maturity date of July 2025.
Medium Term Notes (MTNs)
The Group has the following unsecured MTNs on issue:
– $150.0 million maturing November 2018;
– $250.0 million maturing March 2022; and
– JPY10.0 billion maturing May 2033.
The JPY denominated principal and interest amounts have been
fully hedged against the Australian dollar through cross-currency
interest rate swaps.
The above bank loan facilities and note issuances are supported
by certain Group guarantees.
90 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 E2. Financing facilities – continued
Summary of borrowing arrangements – continued
Finance lease / Hire purchase facilities
The Group has certain secured facilities of these types which are
for an aggregate amount of $16.5 million and which amortise over
different periods of up to five years.
Covenants on financing facilities
Downer Group’s financing facilities contain undertakings
to comply with financial covenants. These require that the
Group operates within certain financial ratios and ensure
that Group guarantors of these facilities collectively meet the
minimum threshold amounts of Group EBIT and Group Total
Tangible Assets.
The main financial covenants which the Group is subject to
are Net Worth, Interest Service Coverage (rolling 12-month
EBIT to Net Interest Expense) and Leverage (Net Debt to
Total Capitalisation).
Financial covenants testing is undertaken and reported to
the Downer Board on a monthly basis. Reporting of financial
covenants to financiers occurs semi-annually for the rolling
12-month periods to 30 June and 31 December. The Downer
Group was in compliance with all its financial covenants as
at 30 June 2018.
Spotless’ financing facilities contain undertakings to comply with
financial covenants. The main financial covenants that Spotless
is subject to are Net Leverage (Net Debt to EBITDA) and Interest
Service Coverage (rolling 12-month EBITDA to Net Total Cash
Interest) as well as ensuring that the guarantors under various
facilities collectively meet the minimum threshold amounts of
Group EBITDA and Group Total Assets.
Financial covenants are reviewed by the Spotless Board and
reported to financiers on a semi-annual basis. Spotless was in
compliance with all its financial covenants as at 30 June 2018.
Bonding
The Group has $1,915.9 million of bank guarantee and
insurance bond facilities to support its contracting activities.
$1,032.5 million of these facilities are provided to the Group
on a committed basis and $883.4 million on an uncommitted
basis. Included in these facilities is a syndicated $210.0 million
committed revolving bank guarantee facility for the specific
purpose of a passenger rail manufacturing contract and of which
$142.9 million is utilised and $67.1 million is unutilised.
The Group’s bonding facilities are provided by a number of banks
and insurance companies on an unsecured and revolving basis.
These facilities are supported by Group guarantees representing
certain minimum threshold amounts of Group EBIT and Group
Total Tangible Assets (for Downer) and Group EBITDA and
Group Total Assets (for Spotless). $1,341.6 million (refer to Note
C9) of these facilities were utilised as at 30 June 2018 with
$574.3 million unutilised. These facilities have varying maturity
dates between calendar years 2018 and 2020.
The underlying risk being assumed by the relevant financier
under all bank guarantees and insurance bonds is corporate
credit risk rather than project specific risk.
The Group has the flexibility in respect of certain committed
facility amounts (shown as part of the unutilised bilateral bank
loan facilities) which can at the election of the Group be utilised
for bonding purposes.
Refinancing requirements
Where existing facilities approach maturity, the Group
will negotiate with existing and, where required, with new
financiers to extend the maturity date of or refinance these
facilities. The Group’s financial metrics and credit rating as
well as conditions in financial markets and other factors may
influence the outcome of these negotiations.
Credit ratings
The Group has an Investment Grade credit rating of BBB
(Outlook Stable) from Fitch Ratings. Where the credit rating is
reduced or placed on negative watch, customers and suppliers
may be less willing to contract with the Group. Furthermore,
banks and other lending institutions may demand more stringent
terms (including increased pricing, reduced tenors and lower
facility limits) on debt and bonding facilities, to reflect the weaker
credit risk profile.
Annual Report 2018 91
E3. Commitments
a) Capital expenditure commitments
Plant and equipment and other
Within one year
Between one and five years
b) Operating lease commitments
Non-cancellable operating leases relate to premises with lease terms of between
one to 20 years.
Within one year
Between one and five years
Greater than five years
Non-cancellable operating leases relate to plant and equipment with lease terms of
between one to ten years.
Within one year
Between one and five years
Greater than five years
c) Catering rights
Catering rights relates to exclusive secured catering rights arrangements with customers.
Within one year
Between one and five years
Greater than five years
d) Finance lease commitments
Finance leases relate to plant and equipment with lease terms of between one to five years.
Within one year
Between one and five years
Minimum finance lease payments
Future finance charges
Finance lease liabilities
Included in the financial statements as:
Current borrowings
Non-current borrowings
e) Hire purchase liabilities
Within one year
Between one and five years
Minimum hire purchase payments
Hire purchase liabilities
Included in the financial statements as:
Current borrowings
Non-current borrowings
f) Operating lease expenses
Operating lease expenses relating to land and buildings
Operating lease expenses relating to plant and equipment
Total operating lease expenses
92 Downer EDI Limited
Note
E1
E1
E1
E1
2018
$’m
60.3
14.4
74.7
79.3
225.4
148.8
453.5
65.2
84.8
7.2
157.2
26.9
81.8
12.0
120.7
6.1
11.6
17.7
(1.4)
16.3
5.1
11.2
16.3
0.2
–
0.2
0.2
0.2
–
0.2
81.8
121.1
202.9
2017
$’m
74.2
14.0
88.2
79.0
201.9
157.1
438.0
71.8
91.9
6.9
170.6
28.7
92.8
9.1
130.6
21.5
15.3
36.8
(1.6)
35.2
20.4
14.8
35.2
0.4
0.2
0.6
0.6
0.4
0.2
0.6
70.2
92.9
163.1
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 E3. Commitments – continued
Recognition and measurement
Leases
When the terms of a lease transfer substantially all the risks and
rewards of ownership to the Group, the lease is classified as a
finance lease. All other leases are classified as operating leases.
(i) Operating leases
Operating lease payments are recognised as an expense
on a straight-line basis over the term of the lease, except
where another systematic basis is more representative of
the time pattern in which economic benefits from the leased
assets are consumed.
E4. Issued capital
Ordinary shares
594,702,512 ordinary shares (2017: 594,702,512)
Unvested executive incentive shares
4,207,358 ordinary shares (2017: 4,257,373)
200,000,000 Redeemable Optionally Adjustable
Distributing Securities (ROADS) (2017: 200,000,000)
(ii) Finance leases
Assets held under finance leases are initially recognised at
an amount equal to the lower of their fair value or the present
value of the minimum lease payments. Subsequently the assets
are depreciated on a straight-line basis over the lesser of the
estimated useful life or the lease term.
Finance lease payments are apportioned between the finance
expense and the reduction of outstanding liability. The finance
expense is allocated to each period during the lease term so as
to achieve a constant rate of interest on the remaining balance
of the liability.
2018
$’m
2017
$’m
2,263.1
2,263.2
(19.8)
(20.0)
178.6
2,421.9
178.6
2,421.8
a) Fully paid ordinary share capital
Fully paid ordinary shares carry one vote per share and carry the right to dividends.
Fully paid ordinary share capital
Balance at the beginning of the financial year
Capital raising(i)
Capital raising costs net of tax
Balance at the end of the financial year
b) Unvested executive incentive shares
Balance at the beginning of the financial year
Vested executive incentive share transactions(ii)
Balance at the end of the financial year
2018
2017
m’s
$’m
m’s
$’m
594.7
–
–
594.7
4.3
(0.1)
4.2
2,263.2
–
(0.1)
2,263.1
(20.0)
0.2
(19.8)
424.8
169.9
–
594.7
4.5
(0.2)
4.3
1,270.2
1,011.0
(18.0)
2,263.2
(21.0)
1.0
(20.0)
(i) Relates to 169.9 million shares issued from capital raising as part of the Spotless takeover offer where two new shares for every five outstanding shares were issued at a
discounted price of $5.95 per share.
(ii) June 2018 figures referable to the second deferred component of the 2015 STI award and the first deferred component of the 2016 STI award totalling 50,015 vested shares
for a value of $192,660.
June 2017 figures referable to the second deferred component of the 2014 STI award and the first deferred component of the 2015 STI award totalling 196,083 vested shares
for a value of $955,174.
Unvested executive incentive shares are stock market purchases and are held by the Executive Employee Share Plan Trust. Dividends
are retained in the trust to be used by the Company to acquire additional shares on the market for employee equity plans.
Annual Report 2018 93
E4. Issued capital – continued
2018
2017
m’s
$’m
m’s
$’m
c) Redeemable Optionally Adjustable Distributing Securities
(ROADS)
Balance at the beginning and at the end of the financial year
200.0
178.6
200.0
178.6
ROADS are perpetual, redeemable, exchangeable preference shares. In accordance with the terms of the ROADS preference shares, the
dividend rate for the one year commencing 15 June 2018 is 6.15% per annum (2017: 6.05% per annum) which is equivalent to the one
year swap rate on 15 June 2018 plus the Step-up margin of 4.05% per annum.
Share options and performance rights
During the financial year 1,078,912 performance rights (2017: 1,608,887) in relation to unissued shares were granted to senior
executives of the Group under the LTI plan. Further details of the Key Management Personnel (KMP) LTI plan are contained in the
Remuneration Report.
Recognition and measurement
Ordinary shares
Incremental costs directly attributed to the issue of ordinary shares are accounted for as a deduction from equity, net of any tax effects.
Executive incentive shares
When executive incentive shares subsequently vest to employees under the Downer employee share plans, the carrying value of the
vested shares is transferred from issued capital to the employee benefits reserve.
E5. Reserves
2018
$’m
Balance at 1 July 2017
Foreign currency translation difference
Change in fair value of cash flow hedges (net of tax)
Change in fair value of available-for-sale assets
Available-for-sale reserve transferred to profit or loss
Total comprehensive income for the year
Vested executive incentive share transactions
Share-based employee benefits expense
Income tax relating to share-based transactions
during the year
Balance at 30 June 2018
2017
Balance at 1 July 2016
Foreign currency translation difference
Change in fair value of cash flow hedges (net of tax)
Change in fair value of available-for-sale assets
Available-for-sale reserve transferred to profit or loss
Total comprehensive income for the year
Vested executive incentive share transactions
Share-based employee benefits expense
Income tax relating to share-based transactions
during the year
Balance at 30 June 2017
94 Downer EDI Limited
Foreign
currency
translation
reserve
Employee
benefits
reserve
Available-
for-sale
revaluation
reserve
Hedge
reserve
Total
attributable
to the
members of
the Parent
(6.2)
–
(6.8)
–
–
(6.8)
–
–
–
(13.0)
(2.6)
–
(3.6)
–
–
(3.6)
–
–
–
(6.2)
(18.0)
(8.8)
–
–
–
(8.8)
–
–
–
(26.8)
(18.4)
0.4
–
–
–
0.4
–
–
–
(18.0)
14.1
–
–
–
–
–
(0.2)
2.8
(1.2)
15.5
12.2
–
–
–
–
–
(1.0)
5.6
(2.7)
14.1
(0.8)
–
–
(1.3)
(0.5)
(1.8)
–
–
–
(2.6)
–
–
–
18.3
(19.1)
(0.8)
–
–
–
(0.8)
(10.9)
(8.8)
(6.8)
(1.3)
(0.5)
(17.4)
(0.2)
2.8
(1.2)
(26.9)
(8.8)
0.4
(3.6)
18.3
(19.1)
(4.0)
(1.0)
5.6
(2.7)
(10.9)
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 E5. Reserves – continued
Hedge reserve
The hedge reserve comprises the effective portion of the cumulative net change in the fair value cash flow hedging instruments
relating to future transactions.
Foreign currency translation reserve
The foreign currency translation reserve comprises foreign exchange differences arising from the translation of the financial statements
of operations where their functional currency is different to the presentation currency of the Group.
Employee benefit reserve
The employee benefit reserve is used to recognise the fair value of share-based payments issued to employees over the vesting period,
and to recognise the value attributable to the share-based payments during the reporting period.
Available-for-sale revaluation reserve
The fair value reserve includes the cumulative net movement above cost of the fair value of available-for-sale investment until the
asset is realised or impaired or control of an acquiree is obtained at which time the cumulative gain or loss previously recognised in the
available-for-sale revaluation reserve is included in the profit or loss.
E6. Dividends
a) Ordinary shares
Dividend per share (in Australian cents)
Franking percentage
Cost (in $’m)
Dividend record date
Payment date
2018
Final
2018
Interim
2017
Final
2017
Interim
14.0
50%
83.3
30/8/18
27/9/18
13.0
50%
77.3
7/3/18
4/4/18
12.0
100%
71.4
12/9/17
10/10/17
12.0
100%
51.0
16/2/17
16/3/17
Recognition and measurement
Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity,
before or at the end of the financial year but not distributed at balance date.
The final 2018 dividend has not been declared at the reporting date and therefore is not reflected in the consolidated
financial statements.
b) Redeemable Optionally Adjustable Distributing Securities (ROADS)
2018
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Dividend per ROADS (in Australian cents)
New Zealand imputation credit percentage
Cost (in A$’m)
Payment date
2017
Dividend per ROADS (in Australian cents)
New Zealand imputation credit percentage
Cost (in A$’m)
Payment date
1.00
100%
2.0
15/9/17
0.99
100%
2.0
15/12/17
1.02
100%
2.0
15/3/18
1.00
100%
2.0
15/6/18
Quarter 1
Quarter 2
Quarter 3
Quarter 4
1.08
100%
2.1
15/9/16
1.09
100%
2.2
15/12/16
1.03
100%
2.1
15/3/17
1.08
100%
2.2
15/6/17
c) Franking credits
The franking account balance as at 30 June 2018 is nil (2017: nil).
Total
4.01
100%
8.0
Total
4.28
100%
8.6
Annual Report 2018 95
F
Group structure
This section explains significant aspects of Downer’s group structure, including joint arrangements where the Group has interest
in its controlled entities and how changes have affected the Group structure. It also provides information on business acquisitions
and disposals made during the financial year as well as information relating to Downer’s related parties, the extent of related party
transactions and the impact they had on the Group’s financial performance and position.
F1. Joint arrangements and associate entities
F4. Controlled entities
F2. Acquisition of businesses
F3. Disposal of business
F5. Related party information
F6. Parent entity disclosures
F1. Joint arrangements and associate entities
a) Interest in joint ventures and associates
Interest in joint ventures at the beginning of the financial year
Share of net profit
Share of distributions
Acquisition of businesses
Foreign currency exchange differences
Interest in joint ventures at the end of the financial year
Interest in associates at the beginning of the financial year
Share of net profit
Share of distributions
Interest in associates at the end of the financial year
Interest in joint ventures and associates
Note
F2
2018
$’m
19.0
15.9
(13.5)
–
(0.2)
21.2
69.0
9.2
(3.4)
74.8
96.0
2017
$’m
17.3
15.8
(15.9)
1.8
–
19.0
64.3
6.7
(2.0)
69.0
88.0
96 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 F1. Joint arrangements and associate entities – continued
a) Interest in joint ventures and associates – continued
The Group has interests in the following joint ventures and associates which are equity accounted:
Name of arrangement
Principal activity
Ownership interest
Country of
operation
2018
%
2017
%
Asphalt plant
Construction of bitumen storage facility
Bitumen importer
Catering for functions at Eden Park
Joint ventures
Allied Asphalt Limited
Bitumen Importers Australia Joint Venture
Bitumen Importers Australia Pty Ltd
Eden Park Catering Limited(i)
EDI Rail-Bombardier Transportation Pty Ltd Sale and maintenance of railway rolling stock
Emulco Limited
Isaac Asphalt Limited
RTL Mining and Earthworks Pty Ltd
VEC Shaw Joint Venture
ZFS Functions (Pty) Ltd(i)
Emulsion plant
Manufacture and supply of asphalt
Contract mining; civil works and plant hire
Road construction
Catering for functions at Federation Square
New Zealand
Australia
Australia
New Zealand
Australia
New Zealand
New Zealand
Australia
Australia
Australia
Associates
MHPS Plant Services Pty Ltd
Keolis Downer Pty Ltd
Reliance Rail Pty Ltd
Refurbishment, construction and maintenance of
boilers
Operation and maintenance of Gold Coast light rail,
Melbourne tram network and bus operation
Rail manufacturing and maintenance
Australia
Australia
Australia
(i) Spotless joint ventures acquired as part of the Spotless Group Holdings Limited acquisition. Refer to Note F2.
There are no material commitments held by joint ventures or associates.
50
50
50
50
50
50
50
44
50
50
27
49
–
50
50
50
50
50
50
50
44
50
50
27
49
49
All joint ventures and associates have a statutory reporting date of 30 June, with the exception of MHPS Plant Services Pty Ltd which
has a statutory reporting date of 31 March.
Recognition and measurement
Equity accounting
(i) Investments in joint ventures
Investments in joint ventures are accounted for using the equity method of accounting.
(ii) Investments in associates
Investments in entities over which the Group has the ability to exercise significant influence, but not control, are accounted for using
the equity method of accounting. The investment in associates is carried at cost plus post-acquisition changes in the Group’s share of
the associates’ net assets, less any impairment in value.
Proportionate consolidation
Joint operations
Joint operations give the Group the right to the underlying assets and obligations for liabilities and are accounted for by recognising
the share of those assets and liabilities.
Annual Report 2018 97
F1. Joint arrangements and associate entities – continued
b) Interest in joint operations
The Group has interests in the following joint operations which are proportionately consolidated:
Name of joint operation
Principal activity
Ownership interest
Country of
operation
2018
%
2017
%
Ausenco Downer Joint Venture
BPL Downer Joint Venture
CDJV Construction Pty Ltd(v)
China Hawkins Construction JV
City Rail JV
Clough Downer Joint Venture(v)
CMC and Downer Joint Venture(v)
Concrete Paving Recycling Pty Ltd
Dampier Highway Joint Venture
DM Roads Services Pty Ltd
Downer-Carey Mining JV
Downer Clough Joint Venture(iv)
Downer Daracon Joint Venture
Downer EDI Works Pty Ltd & Leighton
Contractors Pty Ltd
Downer Electrical GHD JV(i)
Downer FKG JV
Downer HEB Joint Venture
DownerMouchel(ii)
Downer Seymour Whyte JV
Downer York Joint Venture
Hatch Downer JV
HCMT Supplier JV
John Holland EDI Joint Venture
John Holland Pty Ltd & Downer Utilities
Australia Pty Ltd Partnership
Karlayura ReGen Joint Venture
Landloch Project JV
Enabling works for Carrapateena Project
Building construction
Employment of labour force deployed in
Clough Downer
Building construction
Enabling works for Auckland City Rail Link
Gas compression facilities and pipelines
Road construction
Road maintenance
Highway construction and design
Employment of labour force deployed in DM
in New South Wales
Management of run of mine and ore
rehandling services
Ammonium nitrate production
Construction
Design and construction of rail works
Australia
Singapore
Australia
New Zealand
New Zealand
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
Traffic control infrastructure
Major civil and roadworks
Design and build of the New Zealand National
War Memorial Park
Australia
Road maintenance
Australia
Construct of an urban operations training facility
Tramline extension
Australia
Design and construction of solvent extraction plant Australia
Australia
Rail build supplier
Australia
Research reactor
Australia
Operation of water recycling plant at Mackay
Road construction
Rehabilitation works, earthworks and plant
monitoring and maintenance
Design and construction of pipes and structures
Road construction
Road construction
LD&C Joint Venture(iv)
Leighton Works Joint Venture
Macdow Downer Joint Venture
(Russley Road)
Macdow Downer Joint Venture (Connectus) Rail construction
Macdow Downer Joint Venture (CSM2)
Road construction
Australia
Australia
Australia
New Zealand
New Zealand
New Zealand
New Zealand
50
50
50
50
50
50
–
49
50
50
46
–
50
50
90
50
50
60
50
50
50
50
40
50
50
(iii)
–
50
50
50
50
–
50
50
50
50
50
50
49
50
50
46
50
50
50
90
–
50
60
–
50
50
50
40
50
50
(iii)
37.5
50
50
50
50
98 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 F1. Joint arrangements and associate entities – continued
b) Interest in joint operations – continued
Name of joint operation
Principal activity
Organic Water Joint Venture
Synergy Joint Venture(iv)
Thiess Downer EDI Works JV(iv)
Thiess VEC Joint Venture
Utilita Water JV
Waanyi Downer JV Pty Ltd
Waanyi ReGen JV
WDJV Unit Trust
Wiri Train Depot Joint Venture
Design, construction and operation of
water recycling plant
Road and pavement construction
Construction of coast to coast railway
Highway construction
Plant maintenance
Contract mining services
Rehab contract services
Contract mining services
Construction of the Wiri train depot
Ownership interest
Country of
operation
2018
%
2017
%
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
50
–
–
50
50
50
50
50
50
50
33
25
50
50
–
50
–
50
(i) Contractual arrangement prevents control despite ownership of more than 50% of these joint ventures.
(ii) The joint arrangement specifies 50% interest, except where an Integrated Service Arrangement (ISA) obligation is in place, whereby Downer EDI Limited has a 60% interest.
(iii) Joint control is effected through unanimous vote by joint venture partners to direct the joint arrangement’s relevant activities; however, the Group’s interest may vary based
on discrete phases of works performed.
(iv) Downer’s interest in the joint operation was disposed of/ceased during the financial year ended 30 June 2018.
(v) Entity commenced voluntary de-registration/wind up as at 30 June 2018.
F2. Acquisition of businesses
2018
Cash outflow on acquisitions
The total net cash outflow as a result of the acquisitions made during the financial year ended 30 June 2018 is as follows:
Further NCI acquired(ii)
Consideration payable during the year
Gross purchase consideration
Deferred consideration paid during the year
Less: Net cash acquired
Less: Contingent consideration
Total cash consideration
Note
C5
Spotless
$’m
Other(i)
$’m
281.0
110.8
–
–
–
–
391.8
–
–
119.3
1.3
(1.3)
(35.2)
84.1
Total
$’m
281.0
110.8
119.3
1.3
(1.3)
(35.2)
475.9
(i) Other includes the acquisition of UrbanGrid, Envista, Integrated Services, Cabrini, ITS Pipetech, Hawkins and AGIS.
(ii) Represents the cash consideration paid during the year for 22.15% additional interest obtained in Spotless and $0.4 million of additional NCI obtained and paid during
the year.
Spotless
On 27 June 2017, the Group obtained a controlling interest in Spotless Group Holdings Limited (Spotless). During the 2018 financial
year, the Group commissioned an independent valuation of the identifiable assets acquired and liabilities assumed in the Spotless
acquisition. The valuation determined the net identifiable assets / (liabilities) as being $269.2 million higher than previously reported.
As a consequence, the goodwill acquired as part of the Spotless acquisition has decreased by this amount resulting in the previously
reported Spotless goodwill of $1,651.3 million reducing to $1,382.1 million. The comparative information shown in the financial statements
has been restated to include the adjusted fair values. There has been no impact to the comparative profit or loss as a result of
these restatements.
Annual Report 2018 99
F2. Acquisition of businesses – continued
Details of the identified adjustments are as follows:
Cash and other cash equivalents
Trade and other receivables
Inventories
Other current assets
Equity accounted investments
Property, plant and equipment
Intangibles
Non-current trade and other receivables
Net deferred tax asset / (liability)
Other non-current assets
Trade and other payables
Provisions
Borrowings
Financial liabilities
Current tax payable
Non-current trade and other payables
Net identifiable (liabilities) / assets acquired
Provisional
amount
disclosed at
30 Jun 2017
$’m
Acquisition
adjustments
$’m
Restated(i)
balance at
30 Jun 2017
$’m
66.0
412.7
32.0
11.3
1.8
281.2
65.9
73.4
59.4
25.8
(381.6)
(162.7)
(848.3)
(2.3)
(7.2)
(11.5)
(384.1)
–
(3.7)
–
–
–
(14.8)
422.8
(41.0)
(90.5)
–
–
(3.5)
–
–
–
(0.1)
269.2
66.0
409.0
32.0
11.3
1.8
266.4
488.7
32.4
(31.1)
25.8
(381.6)
(166.2)
(848.3)
(2.3)
(7.2)
(11.6)
(114.9)
(i) June 2017 balances were restated to reflect the impact of acquisition accounting adjustments made during the period on opening balances.
Spotless non‑controlling interest (NCI)
During the year, the Group acquired an additional 22.15% interest in Spotless for $281.0 million. The consideration paid was equal to the
carrying amount of the NCI and as a consequence, there was no change in the equity attributable to the owners of the Company from
the acquisition of the NCI.
The following table summarises the NCI in relation to the Spotless acquisition:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
NCI percentage
Net assets attributable to NCI
2018
$’m
Restated(i)
2017
$’m
529.1
2,272.8
(521.1)
(1,009.9)
1,270.9
12.198%
155.0
518.3
2,292.9
(1,348.2)
(195.8)
1,267.2
34.343%
435.2
(i) 30 June 2017 balances were restated to reflect the impact of acquisition accounting adjustments made during the period on opening balances.
Other acquisitions
The goodwill arising from other individually immaterial acquisitions made during the financial year ended 30 June 2018 is as follows:
Cash
Deferred consideration and contingent consideration
Less: Net identifiable assets acquired
Goodwill arising from acquisitions
100 Downer EDI Limited
Note
C7
Total
$’m
84.1
35.2
119.3
14.3
105.0
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 F2. Acquisition of businesses – continued
UrbanGrid
On 1 July 2017, Downer acquired the net assets of UrbanGrid
Australia (UrbanGrid). UrbanGrid provides a wide range of
specialist services to develop, operate and maintain Western
Australia’s essential water, energy and communications networks
as well as civil projects.
The Group has concluded the acquisition accounting process
for this acquisition.
Cabrini
On 1 July 2017, Spotless Facility Services Pty Ltd acquired the
customer contracts and associated assets and liabilities of
Cabrini Linen Service (referred to as “Cabrini”) from Cabrini
Health Limited. The primary purpose of this acquisition is to
strengthen Spotless’ linen capabilities, enhance customer
service offerings and maintain Spotless’ market-leading position
in the Victorian health sector.
The Group has concluded the acquisition accounting process
for this acquisition.
Envista
On 2 March 2018, the Group acquired 100% of Envista Pty
Ltd and Smarter Contracting Pty Ltd (“Envista”). Envista
provides strategy, architecture and delivery services in
complex and sensitive environments. The acquisition enhances
Downer’s services to customers in the Defence and National
Security sectors.
The acquisition accounting for Envista will remain provisionally
accounted for as at 30 June 2018.
Integrated Services
On 31 January 2018, the Group acquired the net assets of
Integrated Services. The business provides traffic infrastructure
electrics related works and complements the existing Transport
business capabilities.
The acquisition accounting for Integrated Services will remain
provisionally accounted for as at 30 June 2018.
2017
Hawkins
On 31 March 2017, the Group acquired the business of Hawkins.
The principal activities of Hawkins include construction,
infrastructure development and project management throughout
New Zealand. The Hawkins acquisition will complement
existing engineering, construction and maintenance capabilities
in New Zealand.
The Group has concluded the acquisition accounting process
for this acquisition.
ITS PipeTech
On 31 March 2017, the Group acquired 100% of ITS PipeTech Pty
Ltd (ITS). The principal activities of ITS include pipe bursting,
civil maintenance and robotics. ITS complements, grows and
broadens existing pipeline capabilities in the Utilities business.
The Group has concluded the acquisition accounting process
for this acquisition.
RPQ Group
On 30 September 2016, the Group acquired 100% of RPQ Group
(RPQ). The principal activities of RPQ include the supply of asphalt,
bitumen spray sealing, road milling and profiling, road maintenance,
foam bitumen stabilisation, mobile asphalt production, mobile
crushing and equipment hire.
The Group has concluded the acquisition accounting process
for this acquisition.
AGIS
On 1 July 2016, the Group acquired 100% of AGIS Group Pty Limited
(AGIS). AGIS provides project management, systems engineering
and integration, and capability development advice to a range
of government agencies including the Department of Defence,
Australian Defence Forces and the Department of Foreign Affairs
and Trade. The AGIS acquisition expands the Group’s footprint in the
Defence sector.
The Group has concluded the acquisition accounting process
for this acquisition.
Annual Report 2018 101
F2. Acquisition of businesses – continued
The valuation techniques used for measuring the fair value of material assets acquired were as follows:
Asset acquired
Valuation technique
Trade and other receivables
Property, plant and equipment
Intangible assets
Trade and other payables
Borrowings
Provisions
Cost technique – considers the expected economic benefits receivable when due.
Market comparison technique and cost technique – the valuation model considers quoted market
prices for similar items when available and depreciated replacement cost when appropriate.
Multi-period excess earnings method – considers the present value of net cash flows expected to
be generated by the customer contracts and relationships, intellectual property and brand names,
excluding any cash flows related to contributory assets. For the valuation of certain brand names,
discounted cash flow under the relief from royalty valuation methodology has been utilised.
Cost technique – considers the expected economic outflow of resources when due.
Cost technique – considers the expected economic outflow of resources when due.
Cost technique – considers the probable economic outflow of resources when the obligation arises.
Goodwill from acquisitions
The goodwill resulting from the above acquisitions represents
the future market development, expected revenue growth
opportunities, technical talent and expertise, and the benefits
of expected synergies. These benefits are not recognised
separately from goodwill because they do not meet the
recognition criteria for identifiable intangible assets. None of
the goodwill arising from these acquisitions is expected to be
deductible for tax purposes.
Recognition and measurement
Business combinations
The Group accounts for business combinations using the
acquisition method when control is transferred to the Group.
The consideration transferred in the acquisition is measured at
fair value. Acquisition-related costs are expensed as incurred in
profit or loss.
(i) Acquisition achieved in stages
Where a business combination is achieved in stages, the Group’s
previously held equity interest in the acquiree is remeasured
to fair value at the acquisition date (i.e. the date when the
Group attains control) and the resulting gain or loss, if any, is
recognised in profit or loss. Amounts arising from interests in the
acquiree prior to the acquisition date that have previously been
recognised in other comprehensive income are reclassified to
profit or loss where such treatment would be appropriate if that
interest were disposed of or control of the acquiree obtained.
(ii) Contingent consideration
The subsequent accounting for changes in the fair value of
contingent consideration that do not qualify as measurement
period adjustments depends on how the contingent
consideration is classified.
Contingent consideration that is classified as equity is not
remeasured at subsequent reporting dates and its subsequent
settlement is accounted for within equity.
Contingent consideration that is classified as an asset or
liability is remeasured at subsequent reporting dates with the
corresponding gain or loss being recognised in profit or loss.
(iii) Non‑controlling interest
The Group can elect, on an acquisition by acquisition basis, to
recognise non-controlling interests in an acquired entity either
at fair value or at the non-controlling interest’s share of the
acquired entity’s net identifiable assets / (liabilities).
Key estimate and judgement:
Accounting for acquisition of businesses
Accounting for acquisition of businesses requires
judgement and estimates in determining the fair value of
acquired assets and liabilities. The relevant accounting
standard allows the fair value of assets acquired to be
refined in a window of a year after the acquisition date
and judgement is required to ensure that the adjustments
made reflect new information obtained about facts and
circumstances that existed as of the acquisition date.
The adjustments made to the fair value of assets are
retrospective in nature and have an impact on goodwill
recognised on acquisition.
102 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 F3. Disposal of business
2018
On 21 November 2017, Downer entered an agreement to
sell its Freight Rail business to Progress Rail for $109 million
($122.7 million after adjusting for working capital movements),
with a completion date of 2 January 2018. The following disposal
entries were recorded in the financial year:
Note
C7
C6
C8
Proceeds on disposal
Less: working capital adjustments
Disposal costs incurred
Proceeds net of disposal costs
Trade and other receivables
Amounts due from customers
under contracts
Inventory
Other assets
Intangibles (goodwill)
Property, plant and equipment
Assets disposed
Trade and other payables
Amounts due to customers
under contracts
Employee benefits provisions
Provisions
Liabilities disposed
Net assets disposed
Loss on disposal pre-tax
Income tax benefit
Total loss on disposal after tax
B2(b)
B2(b)
2018
$’m
129.6
(6.9)
(4.3)
118.4
30.0
33.5
49.4
0.1
14.2
60.0
187.2
(3.7)
(1.9)
(8.6)
(4.4)
(18.6)
168.6
(50.2)
9.6
(40.6)
2017
The Group did not dispose of any business during the period
ended 30 June 2017.
Annual Report 2018 103
F4. Controlled entities
The controlled entities of the Group listed below were wholly owned during the current and prior year, unless otherwise stated:
Australia
AGIS Group Pty Ltd
ASPIC Infrastructure Pty Ltd
Dean Adams Consulting Pty Ltd
Downer Australia Pty Ltd
Downer EDI Associated Investments Pty Ltd
Downer EDI Engineering Company Pty Limited
Downer EDI Engineering CWH Pty Limited
Downer EDI Engineering Electrical Pty Ltd
Downer EDI Engineering Group Pty Limited
Downer EDI Engineering Holdings Pty Ltd
Downer EDI Engineering Power Pty Ltd
Downer EDI Engineering Pty Limited
Downer EDI Engineering Transmission Pty Ltd(iv)
Downer EDI Limited Tax Deferred Employee Share Plan
Downer EDI Mining Pty Ltd
Downer EDI Mining-Blasting Services Pty Ltd
Downer EDI Mining-Minerals Exploration Pty Ltd
Downer EDI Rail Pty Ltd
Downer EDI Services Pty Ltd
Downer EDI Works Pty Ltd
Downer Energy Systems Pty Limited
Downer Group Finance Pty Limited
Downer Holdings Pty Limited
Downer Investment Holdings Pty Ltd
Downer Mining Regional NSW Pty Ltd
Downer PipeTech Pty Limited
Downer PPP Investments Pty Ltd
Downer Utilities Australia Pty Ltd
Downer Utilities Holdings Australia Pty Ltd
Downer Utilities Networks Pty Ltd
Downer Utilities New Zealand Pty Ltd
Downer Utilities Projects Pty Ltd
Downer Utilities SDR Australia Pty Ltd
Downer Utilities SDR Pty Ltd
Downer Victoria PPP Maintenance Pty Ltd
EDI Rail PPP Maintenance Pty Ltd
EDICO Pty Ltd
Emoleum Partnership
Emoleum Road Services Pty Ltd
Emoleum Roads Group Pty Ltd
Emoleum Services Pty Limited
Envista Pty Limited(iii)
Evans Deakin Industries Pty Ltd
Faxgroove Pty. Limited(iv)
LNK Group Pty Ltd
Locomotive Demand Power Pty Ltd(viii)
Lowan (Management) Pty. Ltd.
Maclab Services Pty Ltd
Mineral Technologies (Holdings) Pty Ltd
Mineral Technologies Pty Ltd
New South Wales Spray Seal Pty Ltd
Otraco International Pty Ltd
Otracom Pty Ltd
Primary Producers Improvers Pty Ltd
104 Downer EDI Limited
QCC Resources Pty Ltd
Rail Services Victoria Pty Ltd
REJV Services Pty Ltd
Reussi Pty Ltd(iv)
Roche Bros. Superannuation Pty. Ltd.
Roche Services Pty Ltd
RPC Roads Pty Ltd
RPQ Asphalt Pty Ltd
RPQ North Coast Pty Ltd
RPQ Pty Ltd
RPQ Services Pty Ltd
RPQ Spray Seal Pty Ltd
SACH Infrastructure Pty Ltd
Smarter Contracting Pty Ltd(iii)
Snowden Holdings Pty Ltd
Snowden Mining Industry Consultants Pty Ltd
Snowden Technologies Pty Ltd
Southern Asphalters Pty Ltd
Trico Asphlat Pty Ltd
VEC Civil Engineering Pty Ltd
VEC Plant and Equipment Pty Ltd
New Zealand and Pacific
A F Downer memorial Scholarship Trust
DGL Investments Limited
Downer Construction (Fiji) Limited
Downer Construction (New Zealand) Limited
Downer Construction PNG Limited(iv)
Downer EDI Engineering PNG Limited
Downer EDI Engineering Power Limited
Downer EDI Mining NZ Limited(iv)
Downer EDI Works Vanuatu Limited
Downer New Zealand Limited
Downer New Zealand Projects 1 Ltd
Downer New Zealand Projects 2 Ltd
Downer New Zealand Projects 3 Ltd
Downer Utilities Alliance New Zealand Limited
Downer Utilities New Zealand Limited
Downer Utilities PNG Limited
Green Vision Recycling Limited
Hawkins 2017 Limited
Hawkins Project 1 Limited
ITS Pipetech (Fiji) Limited
Richter Drilling (PNG) Limited
Techtel Training & Development Limited
Underground Locators Limited
Waste Solutions Limited
Works Finance (NZ) Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 F4. Controlled entities – continued
Africa
Downer EDI Mining – Ghana Ltd
Downer Mining South Africa Proprietary Limited(iii)
MD Mineral Technologies SA (Pty) Ltd.
MD Mining and Mineral Services (Pty) Ltd(i)
Otraco Botswana (Proprietary) Limited
Otraco Southern Africa (Pty) Ltd
Otraco Tyre Management Namibia (Proprietary) Limited
Snowden Mining Industry Consultants (Proprietary) Ltd
Snowden Training (Pty) Ltd(iv)
Asia
Chan Lian Construction Pte Ltd(iv)
Chang Chun Ao Da Technical Consulting Co Ltd(ii)
ChangChun Ao Hua Technical Consulting Co Ltd
Downer EDI Engineering (S) Pte Ltd
Downer EDI Engineering Holdings (Thailand) Limited
Downer EDI Engineering Thailand Ltd
Downer EDI Group Insurance Pte Ltd
Downer EDI Rail (Hong Kong) Limited
Downer EDI Works (Hong Kong) Limited
Downer Pte Ltd
Downer Singapore Pte Ltd
Duffill Watts Pte Ltd(iv)
MD Mineral Technologies Private Limited
PT Duffill Watts Indonesia
PT Otraco Indonesia
Americas
DBS Chile SpA
Mineral Technologies Comercio de Equipamentos para
Processamento de Minerais LTD
Mineral Technologies, Inc.
Otraco Brasil Gerenciamento de Pneus Ltda
Otraco Chile SA
Snowden Consultoria do Brasil Limitada
Snowden Mining Industry Consultants Inc.(ii)
United Kingdom
Sillars (B. & C.E.) Limited
Sillars (TMWD) Limited
Sillars Holdings Limited
Sillars Road Construction Limited
Snowden Mining Industry Consultants Limited(iv)
Works Infrastructure (Holdings) Limited
Works Infrastructure Limited
Spotless(vi)
AE Smith & Son (NQ) Pty Ltd
AE Smith & Son (SEQ) Pty Ltd
AE Smith & Son Proprietary Ltd
AE Smith Building Technologies Pty Ltd
AE Smith Service (SEQ) Pty Ltd
AE Smith Service Holdings Pty Ltd
AE Smith Service Pty Ltd
Aladdin Group Services Pty Limited(vii)
Aladdin Holdings Pty Limited(vii)
Aladdin Laundry Pty Limited(vii)
Aladdin Linen Supply Pty Limited(vii)
Asset Services (Aust) Pty Ltd(vii)
Berkeley Challenge (Management) Pty Limited(vii)
Berkeley Challenge Pty Limited(vii)
Berkeley Railcar Services Pty Ltd(vii)
Berkeleys Franchise Services Pty Ltd(vii)
Bonnyrigg Management Pty Ltd(vii)
Cleandomain Proprietary Limited(vii)
Cleanevent Australia Pty Ltd(vii)
Cleanevent Holdings Pty Ltd(vii)
Cleanevent International Pty Ltd(vii)
Cleanevent Middle East FZ LLC(ii)
Cleanevent Technology Pty Ltd(vii)
Emerald ESP Pty Ltd
Ensign Services (Aust) Pty Ltd(vii)
Errolon Pty Ltd(vii)
Fieldforce Services Pty Ltd(vii)
Infrastructure Constructions Pty Ltd(vii)
International Linen Service Pty Ltd(vii)
Monteon Pty Ltd(vii)
National Community Enterprises(ii)
Nationwide Venue Management Pty Ltd(vii)
NG-Serv Pty Ltd(vii)
Nuvogroup (Australia) Pty Ltd(vii)
Pacific Industrial Services BidCo Pty Limited(vii)
Pacific Industrial Services FinCo Pty Limited(vii)
Riley Shelley Services Pty Ltd(vii)
Skilltech Consulting Services Pty Ltd(vii)
Skilltech Metering Solutions Pty Ltd(vii)
Sports Venue Services Pty Ltd(vii)
Spotless Defence Services Pty Ltd(vii)
Spotless Facility Services (NZ) Limited
Spotless Facility Services Pty Ltd(vii)
Spotless Financing Pty Limited(vii)
Annual Report 2018 105
c) Controlling entity
The parent entity of the Group is Downer EDI Limited.
F6. Parent entity disclosures
a) Financial position
Company
2018
$’m
2017
$’m
970.4
1,500.3
2,470.7
39.4
15.3
54.7
2,416.0
1,108.8
1,305.2
2,414.0
29.9
6.4
36.3
2,377.7
2,243.3
157.2
2,243.2
120.4
15.5
2,416.0
14.1
2,377.7
185.5
185.5
117.6
117.6
Assets
Current assets
Non-current assets
Total assets
Liabilities
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Equity
Issued capital
Retained earnings
Reserves
Employee benefits reserve
Total equity
b) Financial performance
Profit for the year
Total comprehensive income
c) Guarantees entered into by the parent entity in
relation to debts of its subsidiaries
The parent entity has, in the normal course of business, entered
into guarantees in relation to the debts of its subsidiaries during
the financial year.
d) Contingent liabilities of the parent entity
The parent entity has no contingent liabilities as at 30 June 2018
(2017: nil) other than those disclosed in Note C9.
The parent entity does not have any commitments for acquisition
of property, plant and equipment as at 30 June 2018 (2017: nil).
F4. Controlled entities – continued
Spotless(vi) (continued)
Spotless Group Limited(vii)
Spotless Group Holdings Limited(vii)
Spotless Holdings (NZ) Limited
Spotless Investment Holdings Pty Ltd(vii)
Spotless Management Services Pty Ltd(vii)
Spotless Property Cleaning Services Pty Ltd(vii)
Spotless Securities Plan Pty Ltd(vii)
Spotless Services Australia Limited(vii)
Spotless Services International Pty Ltd(vii)
Spotless Services Limited(vii)
Spotless Treasury Pty Ltd(vii)
SSL Asset Services (Management) Pty Ltd(vii)
SSL Facilities Management Real Estate Services Pty Ltd(vii)
SSL Security Services Pty Ltd(vii)
Taylors Two Two Seven Pty Ltd(vii)
Trenchless Group Pty Ltd(vii)
UAM Pty Ltd(vii)
Utility Services Group Holdings Pty Ltd(vii)
Utility Services Group Limited(vii)
(i) 70% ownership interest.
(ii) Entity currently undergoing liquidation/dissolution.
(iii) Entity acquired during the financial year ended 30 June 2018.
(iv) Entity liquidated during the financial year ended 30 June 2018.
(v) Entity incorporated during the financial year ended 30 June 2018.
(vi) Entity acquired as part of the Spotless Group Holdings Limited acquisition. The
ownership interest in Spotless described is 87.8% as at 30 June 2018.
(vii) These Spotless controlled entities all form part of the tax-consolidated group of
which Spotless Group Holdings Limited is the head entity.
(viii) Entity disposed during the financial year ended 30 June 2018.
F5. Related party information
a) Transactions with controlled entities
Aggregate amounts receivable from and payable to controlled
entities are included within total assets and liabilities balances
as disclosed in Note F6. Amounts contributed to the defined
contribution plan are disclosed in Note D1.
Other transactions which occurred during the financial year
between the parent entity and controlled entities, as well as
between entities in the Group, were on normal arm’s length
commercial terms.
b) Equity interests in related parties
Equity interests in subsidiaries
Details of the percentage of ordinary shares held in controlled
entities are disclosed in Note F4.
Equity interests in joint arrangements and
associate entities
Details of interests in joint arrangements and associate entities
are disclosed in Note F1. The business activities of a number of
these entities are conducted under joint venture arrangements.
Associated entities conduct business transactions with various
controlled entities. Such transactions include purchases and
sales, dividends and interest. All such transactions are conducted
on the basis of normal arm’s length commercial terms.
106 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 G
Other
This section provides details on other required disclosures relating to the Group to comply with the accounting standards
and other pronouncements including the Group’s capital and financial risk management disclosure. This disclosure provides
information around the Group’s risk management policies and how Downer uses derivatives to hedge the underlying exposure to
changes in interest rates and to foreign exchange rate fluctuations.
G1. New accounting standards
G2. Capital and financial risk management
G3. Other financial assets and liabilities
G1. New accounting standards
a) New and amended accounting standards adopted
by the Group
In the current period, the Group has applied a number of new
and revised accounting standards issued by the Australian
Accounting Standards Board (AASB) that are mandatorily
effective for an accounting period that begins on or after
1 July 2017, as follows:
– AASB 2016-1 Amendments to Australian Accounting
Standards – Recognition of Deferred Tax Assets for
Unrealised Losses (AASB 112);
– AASB 2016-2 Amendments to Australian Accounting
Standards – Disclosure Initiative: Amendments
to AASB 107; and
– AASB 2017-2 Amendments to Australian Accounting
Standards – Further Annual Improvements 2014-2016 Cycle.
Adoption of these standards has not resulted in any material
changes to the Group’s financial statements.
b) New accounting standards and interpretations
not yet adopted
The following standards, amendments to standards and
interpretations are relevant to current operations. They are
available for early adoption but have not been applied by the
Group in this Financial Report.
AASB 9 – Financial Instruments
AASB 9 replaces AASB 139 Financial instruments: Recognition
and Measurement and addresses the classification and
measurement of financial assets and financial liabilities, including
a new expected credit loss model for calculation of impairment
on financial assets, and new general hedge accounting
requirements. It also carries forward guidance on recognition
and derecognition of financial instruments from AASB 139.
The Group has adopted AASB 9 from 1 July 2018 and has
elected not to restate comparative information for prior periods.
Classification and measurement – financial assets
and liabilities
AASB 9 contains a new classification and measurement
approach for financial assets that reflects the business model in
which assets are managed and their cash flow characteristics.
AASB 9 contains three principal classification categories for
financial assets: measured at amortised cost, fair value through
other comprehensive income (FVOCI) and fair value through
profit or loss (FVTPL). The standard eliminates the existing
AASB 139 categories of held to maturity, loans and receivables
and available for sale, while the existing requirements for the
classification of financial liabilities in AASB 139 is retained.
Based on its assessment, the Group does not believe that the
new classification requirements will have a material impact.
The unquoted equity investment disclosed in Note G3 is
classified as available-for-sale investments carried at fair value
under AASB 139. Under AASB 9, the Group has designated this
investment as measured at FVOCI. Consequently, all fair value
gains and losses will be reported in the OCI and no impairment
losses nor gains or losses (when the investment is derecognised)
will be recognised in the statement of profit or loss.
Impairment
AASB 9 replaces the ‘incurred loss” model in AASB 139 with a
forward looking “expected credit loss” (ECL) model. This requires
considerate judgement about how changes in economic factors
affect ECL, which is determined on a probability-weighted basis.
There is consideration around the probability of default upon
initial recognition and subsequent assessment as to whether
there has been a significant increase in credit risk at each
reporting period.
The new impairment model will apply to financial assets
measured at amortised cost or FVOCI except for investment in
equity instruments.
Annual Report 2018 107
AASB 15 – Revenue from Contracts with Customers
AASB 15 changes the manner in which revenue is recognised
and provides for a significant increase in the disclosure
requirements for the business.
The core principle is that an entity recognises revenue to depict
the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.
This means that revenue will be recognised when control of
goods or services is transferred rather than on transfer of
risks and rewards.
During the current period, the Group made significant progress
toward completing the evaluation of potential changes from
adopting the new standard on future financial reporting and
disclosures. The Group has completed material contract reviews
and detailed policy drafting. The evaluation has included
consultation between Group and Divisional Finance Teams,
Commercial and Group Legal functions. The implementation
project is ongoing and therefore all amounts are current
estimates which are subject to finalisation prior to final
implementation.
The Group has adopted AASB 15 from 1 July 2018 using the
cumulative approach method on initial application. This means
that the cumulative impact of adoption is recognised in the
opening retained earnings at 1 July 2018 with no restatement
of comparatives.
G1. New accounting standards – continued
b) New accounting standards and interpretations not yet adopted – continued
AASB 9 – Financial Instruments – continued
Impairment – continued
Under AASB 9, loss allowances will be measured on either of the
following bases:
– 12-month ECLs: where there are ECLs that result from
possible default events within 12 months from the
reporting date; and
– Lifetime ECLs: these are ECLs that result from all possible
default events over the expected life of a financial instrument.
The Group expects to apply the simplified approach to recognise
lifetime expected credit losses for trade receivables and finance
lease receivables as permitted by AASB 9.
In general, the Group anticipates that the application of the
expected credit loss model of AASB 9 will result in the earlier
recognition of credit losses for the respective items and will
increase the amount of loss allowance recognised for these
items. While the Group is finalising the impairment assessment
utilising the simplified expected loss approach, it is anticipated
that the impact on transition will not be material.
Hedge accounting
AASB 9 will align the accounting for hedging instruments
more closely with the Group’s risk management objectives
and strategy and apply a more qualitative and forward-looking
approach to assessing hedge effectiveness. AASB 9 also
introduces new requirements on rebalancing hedge relationships
and prohibiting voluntary discontinuation of hedge accounting.
Under the new model, it is possible that more risk management
strategies, particularly those involving hedging a risk component
(other than foreign currency risk) of a non-financial item, will be
likely to qualify for hedge accounting.
An assessment of the Group’s current hedging relationships
indicates that they will qualify as continuing hedging
relationships upon application of AASB 9. Similar to the Group’s
current hedge accounting policy, management do not intend
to exclude the forward element of foreign currency forward
contracts from designated hedging relationships. Moreover, the
Group has already elected to adjust non-financial hedged items
with gains/losses arising from effective cash flow hedges under
AASB 139, which is mandatory under AASB 9.
Management do not anticipate that the application of AASB 9
hedge accounting requirements will have a material impact on
the Group’s consolidated financial statements.
108 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 G1. New accounting standards – continued
b) New accounting standards and interpretations not yet adopted – continued
AASB 15 – Revenue from Contracts with Customers – continued
Rendering of Services
Services revenue is primarily generated from maintenance and other services supplied to infrastructure assets and facilities across different
sectors as well as from contract mining services, mining assets maintenance services, tyre management, blasting, catering and laundry
services. The service contracts that have been determined to have one performance obligation which are significantly integrated or highly
inter-related and are fulfilled over time and therefore there is no change to the current revenue recognition methodology.
However, the new standard provides a higher threshold for recognition of variations, claims and incentives which only allows revenue
from variations and claims to be recognised to the extent they are approved or enforceable under the contract. The amount of revenue
is then recognised to the extent it is highly probable that a significant reversal of revenue will not happen.
Construction Revenue
The contractual terms and the way in which the Group operates its construction contracts is predominantly derived from projects
containing one performance obligation. Contracted revenue will continue to be recognised over time based on stage of completion of
contract. As with services revenue the new standard provides higher thresholds for variable consideration, as well as accounting for claims
and variations as contract modifications requiring recognition only to the extent that they are approved or enforceable under the contract.
The amount of revenue is then recognised to the extent that it is highly probable that a significant reversal of revenue will not happen.
The Group has identified the following differences between current accounting standards (AASB 118 Revenue and AASB 111
Construction Contracts) and AASB 15:
Current Accounting
Future Accounting
Contract claims and variations – now referred to as contract modifications
Estimates of revenue include:
– claims from customers where negotiations
have reached an advanced stage and
it is probable that the customer will
accept the claim and the amount can be
measured reliably and
– variations when it is probable that the
customer will approve the variation and the
amount can be measured reliably.
Revenue in relation to variations, such as a change in the scope of the contract, will
only be included in the transaction price, when it is approved by the parties to the
contract, the variation is enforceable and the amount becomes highly probable.
Variations will be recognised when client instruction has been received in line with
customary business practice in the sector.
Revenue in relation to claims, where the Group has an enforceable right between
the parties, is only included in the transaction price when the amount claimable
becomes highly probable. This is a higher threshold than is required by current
accounting standards.
In making this assessment, Downer considers a number of factors including nature
of the claim, formal or informal acceptance by the customer of the validity of the
claim, stage of negotiations, legal opinion on the enforceability of the claim under
the contract, or the historical outcome of similar claims to determine whether the
”highly probable” threshold has been met.
Impact on transition
As a result of the change to a higher threshold of approval of claims or variations
and the highly probable threshold for the estimation of the amount to be
recognised as revenue, it is estimated that revenue recognised prior to 30 June
2018 will be deferred to later years resulting in a corresponding adjustment to
opening retained earnings at 1 July 2018 of $198.9 million after tax.
The above adjustment includes claims and variations in relation to the Tan Burrup
and nRAH contracts. Refer to Note C9 Contingent Liabilities for further details.
Contract costs (Tender costs)
Costs incurred during the tender/bid process are
capitalised within amounts due from customers
under contracts when it is probable that the
contract will be awarded. If the contracts are not
subsequently awarded the amounts capitalised are
expensed to profit or loss.
Costs incurred during the tender/bid process will be expensed, unless they are
incremental to obtaining the contract and the Group expects to recover those
costs or where they are explicitly chargeable to the customer regardless of
whether the contract is obtained.
Impact on transition
Tender costs on contracts of $23.9 million after tax currently capitalised will be
required to be written off through opening retained earnings at 1 July 2018.
Annual Report 2018 109
G1. New accounting standards – continued
b) New accounting standards and interpretations not yet adopted – continued
AASB 15 – Revenue from Contracts with Customers – continued
Current Accounting
Future Accounting
Performance obligations and contract duration
Under AASB 111 Construction Contracts revenue is
recognised over the stated term of the contract.
Measure of progress
Contract revenue and contract costs are
recognised as revenue and expenses by reference
to the stage of completion of the contract at the
end of the reporting period.
Variable consideration
Estimates of revenue include incentive payments
such as payments for meeting certain performance
criteria when it is probable that the criteria will
be met and can be measured reliably. Liquidated
damages or abatements that are probable
and can be measured reliably are included in
contract costs.
Revenue is allocated to each performance obligation and recognised as the
performance obligation is satisfied which may be at a point in time or over time.
AASB 15 requires a more granular approach to identify the different revenue
streams (i.e. performance obligations) in a contract by identifying the different
activities that are being undertaken and then aggregating only those where the
different activities are significantly integrated or highly interdependent.
AASB 15 provides guidance in respect of the term over which revenue may be
recognised and is limited to the period for which the parties have enforceable
rights and obligations. When the customer can terminate for convenience without
a substantive penalty, the contract term and related revenue is limited to the
termination period.
Impact on transition
The contract review performed by the Group identified some contracts with
additional performance obligations. This has resulted in an adjustment to opening
retained earnings at 1 July 2018 of $26.8 million after tax.
The Group will measure revenue using the measure of progress that best reflects
the Group’s performance in satisfying the performance obligation within the
contracts over time. The different methods of measuring progress include an
input method (e.g. costs incurred) or an output method (e.g. milestones reached).
The same method of measuring progress will be consistently applied to similar
performance obligations.
Impact on transition
In relation to particular Rail maintenance contracts, it was identified that the
input method would better reflect the measure of progress rather than the billing
method currently used. Based on this analysis the adjustment to opening retained
earnings at 1 July 2018 is $2.5 million after tax.
Variable consideration that is contingent on the Group’s performance, including
key performance payments, liquidated damages and abatements that offset
revenue under the contract, are recognised such that only revenue that is
highly probable, and that a reversal of that revenue will not occur, is recognised.
This is a higher recognition threshold than the one required by the current
accounting standards.
In addition, where the identified revenue stream is determined to be a series
of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer (e.g. maintenance services); variable
consideration is recognised in the period which the performance obligation
subject to the variable consideration is completed, rather than being recognised
according to the percentage of completion of the performance obligation.
Impact on transition
No significant adjustment to opening retained earnings is expected as a result
of this change.
110 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 G1. New accounting standards – continued
b) New accounting standards and interpretations not yet adopted – continued
AASB 15 – Revenue from Contracts with Customers – continued
Current Accounting
Future Accounting
Loss-making contracts
For contracts under the percentage of completion
method the expected loss on a contract is
recognised immediately when it is probable
that total contract costs will exceed total
contract revenue.
These loss-making contracts will now be recognised under AASB 137 Provisions,
Contingent Liabilities and Contingent Assets as onerous contracts.
In summary, based on the current assessment, an adjustment of $252.1 million after tax is expected to be recognised in opening
retained earnings of the Group at 1 July 2018 on adoption of AASB 15.
AASB 16 – Leases
AASB 16 will replace the current leasing standard AASB 117, and
contains significant changes to the accounting treatment of
leases around how to recognise, measure and disclose leases.
The new standard provides a single lessee accounting model,
requiring lessees to recognise assets and liabilities for all leases,
with the exception of short-term (less than 12 months) and
low value leases. AASB 16 applies to annual reporting periods
beginning on or after 1 July 2019.
The Group manages its owned and leased assets to ensure
there is an appropriate level of equipment to meet its current
obligations and to tender for new work. The decision as to
whether to lease or purchase an asset is dependent on the
finance available at the time and the residual risk of ownership
following the anticipated completion of the project.
As at reporting date, the Group has non-cancellable
operating lease commitments of $610.7 million (refer to Note
E3 Commitments).
To date, management has focused on the identification of
the provisions of the standard which will most impact the
Group and is in the process of determining whether any
additional arrangements in excess of the current portfolio
will be considered as a lease, together with a review of the
lease contracts and financial reporting systems in place. As
such, the Group has not yet quantified the effect of the new
standard, however; the following impacts are expected on
implementation date:
– Total assets and total liabilities will increase, due to the
recognition of a “Right of Use Asset” and a “Lease Liability”
grossing up the assets and liabilities in the Consolidated
Statement of Financial Position;
– Interest expense will increase due to the effective interest
rate implicit in the lease, where the interest expense
component is higher on early years of the lease;
– Depreciation charge will increase as the right of use
asset is recognised;
– Lease rental expenses will decrease due to the recognition of
interest and depreciation noted above; and
– Operating cash flows will be higher as repayment of the
principal portion of all lease liabilities will be classified as
financing activities.
AASB 16 needs to be implemented retrospectively, either with
the restatement of comparatives or with the cumulative impact
of application recognised as at 1 July 2019 under the modified
retrospective approach. The Group is in the process of assessing
the available options for transition.
Other
The following new or amended standards are not expected
to have a significant impact on the Group’s consolidated
financial statements:
– AASB 17 Insurance Contracts;
– AASB Interpretation 22 Foreign Currency Transactions and
Advance Consideration;
– AASB 1059 Service Concession Arrangements Grantor;
– AASB 2014-10 Amendments to Australian Accounting
Standards – Sale or Contribution of Assets between an
Investor and its Associate or Joint Venture;
– AASB 2016-5 Amendments to Australian Accounting
Standards – Classification and Measurement of Share-based
Payment Transactions;
– AASB 2017-4 Amendments to Australian Accounting
Standards, – Uncertainty over Income Tax Treatments;
– AASB 2017-7 Amendments to Australian Accounting
Standards – Long term interest in Associates and JVs; and
– AASB 2018-2 Amendments to Australian Accounting
Standards – Plan Amendment, Curtailment or Settlement.
Annual Report 2018 111
G2. Capital and financial risk management
a) Capital risk management
The capital structure of the Group consists of debt and equity. The Group may vary its capital structure by adjusting the amount of
dividends, returning capital to shareholders, issuing new shares or increasing or reducing debt.
The Group’s objectives when managing capital are to safeguard its ability to operate as a going concern so that it can meet all its
financial obligations when they fall due, provide adequate returns to shareholders, maintain an appropriate capital structure to optimise
its cost of capital, and maintain an Investment Grade credit rating to ensure ongoing access to funding.
b) Financial risk management objectives
The Group’s Treasury function manages the funding, liquidity and financial risks of the Group. These risks include foreign exchange,
interest rate, commodity and financial counterparty credit risk.
The Group may enter into a variety of derivative financial instruments to manage its exposures including:
i) Forward foreign exchange contracts to hedge the exchange rate risk arising from cross-border trade flows, foreign income and debt
service obligations;
ii) Cross-currency interest rate swaps to manage the interest rate and currency risk associated with foreign currency denominated
borrowings; and
iii) Interest rate swaps to manage interest rate risk.
The Group does not enter into or trade derivative financial instruments for speculative purposes.
Financial assets and liabilities are offset and the net amount reported in the Consolidated Statement of Financial Position, when there
is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset
and settle the liability simultaneously. No material amounts with a right to offset were identified in the Consolidated Statement of
Financial Position.
c) Foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies. As a result, exposures to exchange rate fluctuations
arise. Exchange rate exposures are managed within approved policy parameters, utilising forward foreign exchange contracts and
cross-currency swaps.
The carrying amounts of the Group’s material unhedged foreign currency denominated financial assets and financial liabilities at the
reporting date are as follows:
US dollar (USD)
(i) The above table shows foreign currency financial assets and liabilities in Australian dollar equivalent.
Financial assets(i)
Financial liabilities(i)
2018
$’m
1.4
2017
$’m
1.9
2018
$’m
6.3
2017
$’m
11.8
112 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 G2. Capital and financial risk management – continued
c) Foreign currency risk management – continued
Foreign currency forward contracts
The following table summarises by currency, the Australian dollar value (unless otherwise stated) of forward exchange contracts
outstanding as at the reporting date:
Weighted average
exchange rate
Foreign currency
Contract value
Fair value
Outstanding contracts
2018
2017
2018
FC’m
2017
FC’m
2018
$’m
Buy USD / Sell AUD
Less than 3 months
3 to 6 months
Later than 6 months
Buy AUD / Sell USD
Less than 3 months
3 to 6 months
Later than 6 months
Buy EUR / Sell AUD
Less than 3 months
3 to 6 months
Later than 6 months
Buy AUD / Sell NZD
Less than 3 months
3 to 6 months
Later than 6 months
Buy CAD / Sell AUD
Less than 3 months
Sell CAD / Buy AUD
Less than 3 months
0.7540
–
0.7534
0.7165
0.7529
0.7492
0.7617
–
0.7613
0.7294
0.7351
0.7628
0.6366
–
0.6167
0.6818
0.6790
0.6735
1.0812
1.0814
1.0819
1.0542
1.0547
1.0558
1.0181
1.0053
–
–
20.0
–
66.9
86.9
5.8
–
7.0
12.8
8.6
–
5.4
14.0
5.3
11.8
26.9
44.0
24.2
25.3
30.3
4.1
81.8
116.2
1.5
4.9
1.0
7.4
30.9
0.4
0.4
31.7
4.1
11.4
28.8
44.3
–
–
26.6
–
88.8
115.4
7.6
–
9.2
16.8
13.5
–
8.8
22.3
4.9
10.9
24.9
40.7
24.6
25.4
2017
$’m
42.3
5.5
109.2
157.0
2.1
6.7
1.3
10.1
45.3
0.6
0.6
46.5
3.9
10.8
27.2
41.9
–
–
2018
$’m
2017
$’m
0.8
–
1.5
2.3
(0.2)
–
(0.3)
(0.5)
0.1
–
(0.1)
–
0.1
0.1
0.3
0.5
0.3
(0.6)
(1.4)
(0.1)
(2.3)
(3.8)
0.1
0.3
–
0.4
0.7
0.1
–
0.8
–
(0.1)
(0.1)
(0.2)
–
–
Annual Report 2018 113
G2. Capital and financial risk management – continued
c) Foreign currency risk management – continued
Cross‑currency interest rate swaps
Under cross-currency interest rate swaps, the Group is committed to exchange certain foreign currency loan principal and interest
amounts at agreed future dates at fixed foreign exchange and interest rates. Such contracts enable the Group to eliminate the risk of
adverse movements in foreign exchange and interest rates related to foreign currency denominated borrowings.
The following table details the Australian dollar equivalent of cross-currency interest rate swaps outstanding as at the reporting date:
Weighted average
AUD equivalent
interest rate (including
credit margin)
2018
%
2017
%
Weighted average
exchange rate
2018
2017
Outstanding contracts
Buy USD / Sell AUD
1 to 5 years
5 years or more
Buy JPY / Sell AUD
5 years or more
7.8
5.9
5.2
Contract value
Fair value
2018
$’m
9.8
129.2
139.0
2017
$’m
9.8
129.2
139.0
–
2018
$’m
2017
$’m
(0.5)
(5.4)
(5.9)
(6.9)
(0.9)
(4.7)
(5.6)
–
7.8
5.9
0.7785
0.7739
0.7168
0.7739
–
83.1220
–
120.3
The above cross-currency interest rate swaps are designated as effective cash flow hedges.
Foreign currency sensitivity analysis
The Group is mainly exposed to the United States dollar (USD), Euro (EUR), Japanese Yen (JPY) and New Zealand dollar (NZD).
The following table details the Group’s sensitivity to movements in the Australian dollar against relevant foreign currencies.
The percentages disclosed below represent the Group’s assessment of the possible changes in spot foreign exchange rates
(i.e. forward exchange points and discount factors have been kept constant). The sensitivity analysis includes only outstanding
foreign currency denominated monetary items and adjusts their translation at the period end for a given percentage change in foreign
exchange rates.
A positive number indicates a before-tax increase in profit and equity and a negative number indicates a before-tax decrease in
profit and equity.
USD impact
- 15% rate change
+ 15% rate change
EUR impact
- 15% rate change
+ 15% rate change
JPY impact
- 15% rate change
+ 15% rate change
NZD impact
- 15% rate change
+ 15% rate change
Profit / (loss)(i)
Equity(ii)
2018
$’m
2017
$’m
2018
$’m
(0.9)
0.6
–
–
–
–
(7.6)
5.6
(1.7)
1.3
(0.2)
0.1
–
–
(6.9)
5.1
16.7
(12.4)
(3.3)
3.3
5.7
(4.2)
–
–
2017
$’m
24.9
(18.4)
7.1
(7.1)
–
–
–
–
(i) This is mainly as a result of the changes in the value of forward foreign exchange contracts not designated in a hedge relationship, foreign currency investments, receivables
and payables.
(ii) This is as a result of the changes in the value of forward foreign exchange contracts designated as cash flow hedges.
114 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 G2. Capital and financial risk management – continued
d) Interest rate risk management
The Group is exposed to interest rate risk as entities borrow funds at floating interest rates. The risk is managed by maintaining an
appropriate mix between fixed and floating rate borrowings and hedging is undertaken through interest rate swap contracts and the
issue of long-term fixed rate debt securities.
The Group’s exposure to interest rates on financial assets and financial liabilities is detailed in the table below:
Floating interest rates – cash flow exposure
Bank loans
Cash and cash equivalents
Total cash flow exposure
Fixed interest rates – fair value exposure
Bank loans(i)
USD private placement notes(i)
AUD private placement notes
Medium term notes (i) (ii) (iii)
Finance lease and hire purchase
Total fair value exposure
Weighted average
AUD equivalent
interest rate
(including credit margin)
Liability / (asset)
2018
%
2017
%
2018
$’m
2017
$’m
3.4
1.5
2.2
6.0
5.8
5.2
4.1
3.3
1.7
4.0
6.0
5.8
5.2
4.2
202.1
(606.2)
(404.1)
617.7
150.6
30.0
529.1
16.5
1,343.9
733.7
(844.6)
(110.9)
107.0
144.7
30.0
413.6
35.8
731.1
(i) The values of the interest rate and cross-currency swaps have been included in the debt amounts.
(ii) 2017 values include medium term notes issued on a floating rate basis and fixed through interest rate swaps.
(iii) Weighted average interest rate is shown on a yield-to-maturity basis.
All interest rates in the above table reflect rates in the currency of the relevant loan other than USD private placement notes and JPY
medium term notes, where the AUD rates under the relevant cross-currency swaps are used.
The table above relates to amounts that are drawn. The Group has a number of undrawn facilities, which if utilised would be on a
floating rate basis.
Interest rate swap contracts
The Group uses interest rate swap contracts to manage interest rate exposures. Under these contracts, the Group commits to
exchange the difference between fixed and floating rate interest amounts calculated on notional principal amounts. The fair value of
interest rate swaps are based on market values of equivalent instruments at the reporting date.
Annual Report 2018 115
G2. Capital and financial risk management – continued
d) Interest rate risk management – continued
The following table details the interest rate swap contracts and related notional principal amounts as at the reporting date:
Outstanding floating to
fixed swap contracts
AUD interest rate swaps
Less than 1 year
1 to 2 years
NZD interest rate swaps
Less than 1 year
1 to 2 years
Weighted average
interest rate
Notional principal amount
Fair value
2018
%
2017
%
2018
$’m
2017
$’m
2018
$’m
2017
$’m
–
2.1
–
2.2
3.8
5.2
4.7
–
–
450.0
450.0
–
100.0
100.0
81.8
13.3
95.1
25.2
–
25.2
–
(0.2)
(0.2)
–
(0.2)
(0.2)
(1.6)
(0.2)
(1.8)
(0.7)
–
(0.7)
Interest rate sensitivity analysis
The sensitivity analysis has been determined based on the exposure to interest rates at the reporting date and assuming that the rate
change occurs at the beginning of the financial year and is then held constant throughout the reporting period.
Sensitivities have been based on a movement in interest rates of 100 basis points across the yield curve of the relevant currencies.
The selected basis points increase or decrease represents the Group’s assessment of the possible change in interest rates on variable
rate instruments, cross-currency interest rate swaps and interest rate swaps. An increase in interest rates of 100 basis points on the
unhedged position (mostly cash and cash equivalents) will generate a profit of $5.6 million to the profit or loss, a similar decrease in
interest rates will generate a $5.6 million loss to the profit or loss.
For hedged positions designated as cash flow hedges, an increase and decrease in interest rates of 100 basis points will generate an
increase and decrease in equity of $4.8 million and $3.7 million, respectively.
e) Credit risk management
Credit risk refers to the risk that a financial counterparty will default on its contractual obligations, resulting in a loss to the Group.
The Group’s exposure and the credit ratings of these counterparties are regularly monitored and transactions are diversified among
approved counterparties.
Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit
evaluation is performed on the financial condition of trade receivable counterparties. Refer to Note C2 for details on credit risk arising
from trade and other receivables.
The preferred credit risk on derivative financial instruments is to counterparties that have minimum long-term credit ratings from
Standard & Poor’s of no less than AA- (or equivalent from other rating agencies). Due to the general downward migration of the credit
ratings of bank counterparties over recent years, the Group has exposure to banks at the A+ and A rating levels, in addition to those
at the AA- level.
Credit risk arising from cash balances held with banks is managed by Group Treasury. Investments of surplus funds are generally only
made with counterparties that have a minimum AA- credit rating. Investments for relatively short tenors are made from time to time
with A+ and A rated counterparties. In limited circumstances, amounts of surplus funds are held in foreign jurisdictions where there are
no financial institutions that meet the above minimum rating thresholds.
Financial counterparty credit limits and the related credit acceptability of counterparties are set by a Board approved Treasury Policy
that is reviewed by the Board from time to time. The limits are set to minimise the concentration of risks and therefore mitigate financial
loss through potential counterparty default. No material exposure is considered to exist by virtue of the non-performance of any
financial counterparty.
The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Group’s
maximum exposure to credit risk.
116 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 G2. Capital and financial risk management – continued
f) Liquidity risk management
Liquidity risk arises from the possibility that the Group is unable to settle a financial transaction on the due date. Liquidity risk
management is ultimately a Board responsibility and is managed within an appropriate risk management framework under the
Group’s Treasury policy.
The Group manages liquidity risk by maintaining adequate cash reserves and committed undrawn debt facilities, monitoring forecast
and actual cash flows and by matching the maturity profiles of financial assets and liabilities. Included in Note E2 is a summary of
committed undrawn bank loan facilities.
Liquidity risk tables
The following tables detail the contractual maturity of the Group’s financial liabilities. The tables are based on the undiscounted cash
flows of financial liabilities and include both interest and principal cash flows.
2018
$’m
Less than
1 year
1 to 2 years
2 to 3 years
3 to 4 years 4 to 5 years
More than
5 years
Trade payables
Finance lease and hire purchase liabilities
Bank loans
USD notes
AUD notes
Medium term notes
Total borrowings including interest
Cross-currency interest rate swaps(i)
Interest rate swaps
Foreign currency forward contracts
Total derivative instruments(ii)
Total
2017
Trade payables
Finance lease and hire purchase liabilities
Bank loans
USD notes
AUD notes
Medium term notes
Total borrowings including interest
Cross currency interest rate swaps(i)
Interest rate swaps
Foreign currency forward contracts
Total derivative instruments(ii)
674.2
12.7
27.0
8.5
1.7
166.9
204.1
6.5
0.3
2.2
9.0
–
8.2
75.7
17.7
1.7
12.6
107.7
6.7
0.1
0.1
6.9
–
3.7
494.5
7.9
1.7
12.6
516.7
6.4
–
–
6.4
–
0.2
312.6
7.9
1.7
262.6
584.8
6.3
–
–
6.3
900.0
122.8
526.8
591.3
527.6
21.2
836.6
6.5
1.7
33.6
878.4
1.9
2.2
2.7
6.8
–
9.0
2.1
6.5
1.7
165.6
175.9
1.9
–
0.2
2.1
–
4.9
–
15.4
1.7
11.3
28.4
2.5
–
–
2.5
–
1.0
–
6.0
1.7
11.3
19.0
1.7
–
–
1.7
–
–
–
7.9
1.7
1.4
11.0
6.3
–
–
6.3
17.3
–
–
–
6.0
1.7
261.3
269.0
1.8
–
–
1.8
–
–
–
185.1
34.4
135.5
355.0
44.8
–
–
44.8
399.8
–
–
–
151.0
36.1
–
187.1
5.0
–
–
5.0
Total
1,434.0
187.0
35.8
21.7
270.8
192.1
(i) Bond basis.
(ii)
Includes assets and liabilities.
Annual Report 2018 117
G2. Capital and financial risk management – continued
Recognition and measurement
Derivative financial instruments
Derivative financial instruments are initially recognised at fair
value on the date a derivative contract is entered into and are
subsequently re-measured to their fair value at each reporting
date. Any gains or losses arising from changes in fair value of
derivatives, except those that qualify as effective hedges, are
immediately recognised in profit or loss.
Hedge accounting
When the Group designates certain derivatives to be part of
a hedging relationship, and they meet the criteria for hedge
accounting, the hedges are classified as either fair value or
cash flow hedges.
Fair value hedges
Fair value hedges are used to hedge the exposure to changes in
the fair value of a recognised asset, liability or firm commitment.
For fair value hedges, changes in the fair value of the derivative,
together with any changes in the fair value of the hedged asset
or liability that is attributable to the hedged risk, are immediately
recorded in profit or loss. Hedge accounting is discontinued
when the hedge instrument expires or is sold, terminated,
exercised, or no longer qualifies for hedge accounting.
Cash flow hedges
Cash flow hedges are used to hedge risks associated with
contracted and highly probable forecast transactions. For cash
flow hedges, the effective portion of changes in the fair value of
the derivative is deferred in equity and the gain or loss relating to
the ineffective portion is recognised immediately in profit or loss.
Amounts deferred in equity are transferred to profit or loss
in the same period the hedged item is recognised in profit or
loss. When the forecast transaction that is hedged results in
the recognition of a non-financial asset or liability, the gains
and losses previously deferred in equity are transferred to form
part of the initial measurement of the cost of the non-financial
asset or liability.
If the forecast transaction is no longer expected to occur, the
cumulative gain or loss that was deferred in equity is recognised
immediately in profit or loss. If the hedge instrument expires or
is sold, terminated, exercised, or no longer qualifies for hedge
accounting, any gain or loss deferred in equity remains in equity
until the forecast transaction occurs.
118 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 G3. Other financial assets and liabilities
2018
$’m
At amortised cost:
Other financial assets
Advances to / from joint ventures and associates
Deferred consideration
At fair value:
Level 2
Foreign currency forward contracts – Cash flow hedge
Foreign currency forward contracts – Fair value through profit or loss
Cross-currency and interest rate swaps – Cash flow hedge
Level 3
Unquoted equity investments – Available-for-sale
Contingent consideration
Total
2017
$’m
At amortised cost:
Other financial assets
Advances to/from joint ventures and associates
At fair value:
Level 2
Foreign currency forward contracts – Cash flow hedge
Cross-currency and interest rate swaps – Cash flow hedge
Level 3
Unquoted equity investments – Available-for-sale
Contingent consideration
Total
Financial assets
Financial liabilities
Current Non-current
Current Non-current
10.0
5.1
–
15.1
3.0
0.5
–
3.5
–
–
–
18.6
13.5
–
–
13.5
–
–
–
–
2.0
–
2.0
15.5
–
11.3
8.0
19.3
1.2
0.1
6.1
7.4
–
16.5
16.5
43.2
–
–
13.3
13.3
–
–
7.1
7.1
–
13.8
13.8
34.2
Financial assets
Financial liabilities
Current Non-current
Current Non-current
9.8
1.5
11.3
1.2
–
1.2
–
–
–
12.5
13.4
–
13.4
–
–
–
3.7
–
3.7
17.1
–
13.2
13.2
3.8
3.5
7.3
–
3.3
3.3
23.8
–
–
–
0.2
4.6
4.8
–
16.9
16.9
21.7
Reconciliation of Level 3 fair value measurements of financial assets
Level 3 investments decreased by $1.7 million from prior year (2017: $1.4 million decrease) mostly due to revaluation and
return on investment.
Annual Report 2018 119
G3. Other financial assets and liabilities – continued
Recognition and measurement
Fair value measurement
When a derivative is designated as the cash flow hedging instrument, the effective portion of changes in the fair value of the derivative
is recognised in Other Comprehensive Income and accumulated in the hedging reserve. Any ineffective portion of changes in the fair
value of the derivative is recognised immediately in profit or loss.
Valuation of financial instruments
For financial instruments measured and carried at fair value, the Group uses the following to categorise the methods used:
– Level 1: fair value is calculated using quoted prices in active markets for identical assets or liabilities;
– Level 2: fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly (as prices) or indirectly (derived from prices); and
– Level 3: fair value is estimated using inputs for the asset or liability that are not based on observable market data.
During the year there were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies.
The following table shows the valuation technique used in measuring Level 2 and 3 fair values, as well as significant
unobservable inputs used:
Type
Valuation technique
Significant unobservable input
Cross-currency and interest rate swaps
Foreign currency forward contracts
Unquoted equity investments
Calculated using the present value of the
estimated future cash flows based on
observable yield curves.
Calculated using forward exchange rates
prevailing at the balance sheet date.
Calculated based on the Group’s interest in
the net assets of the unquoted entities.
Contingent Consideration
Calculated on the amounts expected to be
paid based on the probability of contingent
events and targets being achieved,
determined by reference to forecasts
of future performance of the acquired
businesses discounted using the market
rates prevailing at financial year end.
Not applicable.
Not applicable.
Assumptions are made with regard to future
expected revenues and discount rates.
Changing the inputs to the valuations to
reasonably possible alternative assumptions
would not significantly change the amounts
recognised in profit or loss, total assets or
total liabilities, or total equity.
Assumptions are made with regard to future
expected earnings and discount rates on
certain of the contingent arrangements.
120 Downer EDI Limited
Notes to the consolidated financial statements – continuedfor the year ended 30 June 2018 Directors’ Declaration
for the year ended 30 June 2018
In the opinion of the Directors of Downer EDI Limited:
(a) The financial statements and notes set out on pages 62 to 120 are in accordance with the Australian Corporations Act 2001 (Cth),
including:
(i) Complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting
requirements; and
(ii) The financial statements and notes thereto give a true and fair view of the financial position and performance of the Company
and the consolidated entity;
(b) There are reasonable grounds to believe that Downer EDI Limited will be able to pay its debts as and when they become
due and payable;
(c) The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 (Cth); and
(d) The attached financial statements are in compliance with International Financial Reporting Standards, as noted in Note A
to the financial statements.
Signed in accordance with a resolution of the Directors made pursuant to Section 295(5) of the Corporations Act 2001 (Cth).
On behalf of the Directors
R M Harding
Chairman
Sydney, 16 August 2018
Annual Report 2018 121
Sustainability Performance Summary 2018
Downer’s approach to sustainability
Sustainability at Downer means environment sustainability,
the safety of its people, sustainable growth, sustainable
supply chains, and a sustainable diverse inclusive workforce.
Downer recognises that sustainability is vital for securing
long-term environmental, economic and social viability and
understands its role in contributing to a sustainable future for
communities to prosper.
Sustainability is intrinsically linked to Downer’s business strategy
because the sustainability of Downer’s activities is fundamental
to the Company’s future success.
Downer’s sustainability strategy is shaped by its four Pillars:
Safety, Delivery, Relationships and Thought Leadership. Downer’s
commitment to sustainability is outlined on the Downer website
at www. downergroup.com.
As an integrated services company, Downer’s contribution
to sustainability is also achieved by providing its customers
with industry leading solutions that drive and provide
efficiency reducing the impact of customers’ operations on
the environment.
Downer works closely with the local communities in which it
operates to achieve better social outcomes, implementing a
range of initiatives focusing on social responsibility, local and
Indigenous employment, cultural heritage management and
stakeholder engagement.
Downer success is a direct result of the experience, capability
and engagement of Downer’s people. Downer embraces
diversity and inclusiveness in the workplace. Downer relies on,
and encourages, its people to contribute a diverse range of
skills and experiences in order to deliver the best outcomes
for its customers. Downer continues to strengthen its focus on
recruiting strategically to increase workforce participation across
a range of demographics.
Downer’s approach to reporting
Downer has prepared its Sustainability Report with reference
to the Global Reporting Initiative’s (GRI) Standards to provide
investors with comparable information relating to environmental,
social and governance (ESG) performance. Specifically,
Downer’s approach takes into consideration the GRI’s principles
for informing report content: materiality, completeness, and
sustainability context and stakeholder inclusiveness. A key focus
is to demonstrate how Downer delivers sustainable returns while
managing risk and being responsible in how it operates.
What’s new?
Some of the new topics discussed in the Sustainability Report
this year include:
– Alignment to the GRI Standards from G4 Guideline;
– Alignment of Case Studies to the UN Sustainable
Development Goals;
122 Downer EDI Limited
– Adoption of Task Force on Climate-related Financial
Disclosures (TCFD) recommendations;
– Inclusion of Spotless’ data (excluding health, safety and
environmental data for New Zealand); and
– Inclusion of ESG Sustainability Analyst Rating Scores.
Governance and Risk Management
The Board’s Zero Harm Committee oversees the development
and implementation of Downer’s workplace health and safety
and environmental management systems. The effectiveness of
these systems is monitored through extensive internal and third-
party audit programs, with oversight by both the Board Zero
Harm and Board Audit and Risk Committees. Other aspects of
Downer’s approach to sustainability are overseen by the Group
Diversity Committee and its other corporate governance forums.
The Downer Board has oversight of ensuring Downer duly
considers climate-related risks and receives guidance from the
Audit and Risk Committee, Zero Harm Committee, Tender Risk
Evaluation Committee and Disclosure Committee. Climate related
risks and opportunities form part of Downer’s broader corporate
strategy, planning and risk management.
The Downer Board recognises that an integrated approach to
managing climate-related risks and opportunities is essential.
This has been reflected in the strengthening of Downer’s
governance structure and increased focus on this risk in both
Board and executive forums throughout the 2018 financial year.
This has included:
– formal updates to the Board on a six-monthly basis and Audit
and Risk and Zero Harm Committees on a bi-monthly basis;
– regular updates and stakeholder engagement with the Group
Executive Committee;
– amendments to the Audit and Risk Committee Charter
to include explicit reference to climate-related risks
and opportunities;
– inclusion of climate-related risks and opportunities in the
annual Board strategy agenda;
– incorporating additional questions focused on the
identification of climate-related risks and opportunities
in the bi-annual Financial and Corporate Governance
Self-Assessment; and
– incorporating climate-related risk and opportunity
discussions in Divisional executive meetings, including
climate-related workshops with senior leadership teams
of each Division.
Climate-related risks are governed as part of Downer’s Group
Risk and Opportunity Management Framework and Project Risk
Management Framework. Downer identify, manage and disclose
material climate-related risks as part of Downer’s standard
business practices, and, in accordance with the Group and
Divisional strategies, which apply to everyone at Downer.
The Audit and Risk Committee Charter explicitly addresses
climate-related risk. To further strengthen Downer’s risk
management framework in line with the range of impacts and
considerations associated with climate risk over the short,
medium and long-term horizons, the Consequence Rating
Table within the Group’s Risk and Opportunity Management
Framework includes climate change risks and opportunities to
enable senior management and employees to understand and
assess the potential risks and opportunities arising from various
future scenarios when making decisions that affect Downer.
Downer’s Zero Harm Management System Framework sets
the Company’s sustainability governance requirements.
Downer uses a Company-wide Risk Management Framework
and divisional integrated management systems to identify
and manage sustainability issues and opportunities.
Downer has been certified (as a minimum) to the following
standards: AS/NZS 4801 or OHSAS 18001 (for occupational
health and safety management systems); ISO 14001
environmental management systems; and IS0 9001 quality
management systems.
The method for measuring the Company’s performance is clearly
set out in its governance framework. Short-term remuneration
incentives are offered to senior managers in relation to the
Company’s performance against environmental sustainability
targets. These targets include the management of critical
environmental risks and GHG emissions reduction.
Downer’s Zero Harm performance during 2018 is summarised
below. More comprehensive information is provided in Downer’s
2018 Sustainability Report which will be available on the
Downer website.
Health and safety
Health and safety is Downer’s highest priority. Downer believe
that work can be performed safely and without injury to
Downer’s people. Downer is committed to the pursuit of
Zero Harm to its employees, contractors, and those directly
affected by the Company’s operations. Downer’s commitment
is enhanced by strong leadership from senior leaders within the
business, who actively engage, enable and empower Downer’s
people to work safely, and maintain safe working environments
for themselves and the community. As Downer’s health and
safety performance demonstrates, Downer has a mature safety
culture, and is proud of its people’s support and commitment to
Downer’s Zero Harm principles and practices.
Downer’s strategic plan for critical risk management continues
to be a key focus of Downer’s Zero Harm program. As the critical
risk program has matured within its business, the strategy
embraces the identification of opportunities to further harmonise
the way that shared critical risks are managed throughout
the business. This presents opportunities to increase the
consistency and effectiveness of critical risk management within
Downer’s business, while continuing to focus on evaluation and
assurance of critical controls by multiple layers of management
and frontline leaders.
Downer continue to focus on investing in the capability of its
frontline leaders, and recognise the important role they hold
in cultivating a workplace culture focused on prevention of
harm. Downer’s strategy this year includes enhancement of
internal training provided to Downer’s leaders and incorporates
advancements in learning methodologies.
LTIFR
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0.6
0.4
0.2
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2011
2012
2013
2014
2015
2016
2017
2018
12
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Environmental sustainability
Downer’s environmental sustainability performance is measured
against the key areas of risk management, compliance,
minimising environmental impact and maximising resource
efficiency opportunities in its own and its customers’ businesses.
Downer’s key focus areas during the year were:
– continuing to focus on the resilience and assurance of
environmental risk controls;
– incorporating sustainability rating tools and initiatives into
major projects;
– improving environmental workforce capability;
– engaging with customers regarding Downer’s environmental
capability; and
– positioning its businesses for the transition to a low
carbon economy.
Downer achieved its Group-wide target of zero Level 51 or
Level 62 environmental incidents. There were no significant
environmental incidents3 (≥ Level 4) during financial year 2018.
However, Downer incurred four minor infringement notices
totalling NZD$3,000 relating to its New Zealand operations,
(further information is available in the 2018 Sustainability Report).
1
2
3
A Level 5 environmental incident is defined as any incident that causes significant impact or serious harm on the environment, where material harm has occurred and if
costs in aggregate exceed $50,000.
A Level 6 environmental incident is defined as an incident that results in catastrophic widespread impact on the environment, resulting in irreversible damage.
A significant environmental incident or significant environmental spill (≥ Level 4) is any environmental incident or spill where there is significant impact on or material harm
to the environment; or there is long-term community irritation leading to disruptive actions and requiring continual management attention.
Annual Report 2018 123
Sustainability Performance Summary 2018 – continued
Achievements for 2018 include:
– Plastiphalt – the launch of a new recycled asphalt product
to join the series of Downer’s recycled road products.
Partnering with Hume City Council, Close the Loop and RED
Group, Downer produced and laid a road manufactured using
soft plastics and glass, in an Australian first.
– The Rosehill Detritus Plant – Downer opened a repurposing
facility which is capable of cost effectively processing,
separating and cleaning more than 40,000 tonnes annually
from street sweepings and stormwater pits. Approximately
85% of detritus can be converted into meaningful streams
of material for reuse such as organic matter, sand, gravel,
metals and plastic.
– Smart stormwater drains – working with partners Yarra Valley
Rangers Council, Fujitsu and EYEfi, Downer has helped
implement a network of sensors, technology and software
architecture which monitors water levels and potential flow
rates within stormwater drains to reduce the risk of flooding.
Regular rising water alerts sent to response and maintenance
teams enable faster responses and opportunities for
preventative action.
In the renewable energy sector Downer remains one of
Australia’s largest and most experienced delivery partners
offering design, build and maintenance services for wind farms,
wind turbine sites and solar farms. Downer has been involved in
the construction of approximately half the wind turbines built in
Australia and has worked, or is currently working, on 576MW of
capacity with the Sunshine Coast, Clare, Beryl and Ross River
solar farms and Murra Warra Wind Farm (Stage 1). Downer’s
experience in the renewables sector led to its work at the Ararat
Wind Farm being awarded4 Australia’s first ISCA rating for a
renewables project.
Downer’s climate risk journey
Downer conducts business in a way that is sustainable.
At Downer there are many facets of sustainable operations,
including climate change impacts and ultimately this requires
making sure that it runs its business as efficiently as possible
and by providing innovative solutions to customers that reduce
their environmental footprints. Downer recognises that the
impact of climate change presents a challenge to business,
society and the natural environment. While Downer’s business
portfolio is diverse, it has limited exposure to the effects of
climate change impacts on its business through fixed, long lived
capital assets. Downer’s diverse portfolio allows it to be flexible
and agile to redeploy its assets to high growth areas as markets
change. This portfolio diversity strongly positions Downer
to mitigate and manage its exposure to climate risks and to
maximise the business opportunities it presents.
In this reporting period a detailed assessment against
the Task Force on Climate Related Financial Disclosures
(TCFD) framework has been conducted and disclosures
presented are aligned with the TCFD recommendations. In
conducting its assessment, Downer considered the diversity
of its operations and portfolio, in the context of transitional,
physical and reputational risks as well as considering
opportunities particularly in respect of transport, new markets
and technological changes. This review did not identify any
material short-term risks to the Downer business in respect of
climate change, however risks and opportunities across short,
medium and long-term horizons were identified and these are
outlined below.
Downer’s existing Group and Divisional strategy process
already considers the key external drivers as mentioned
above. Downer has also enhanced its strategy process to more
explicitly incorporate climate-related risks and opportunities on
an ongoing basis. Downer has already embedded this process
in the annual Group strategy session, with the intention of
implementing a similar process into the Divisional strategy
sessions during the 2019 period.
Outlined below are the key climate-related risks and
opportunities. These risks and opportunities are not listed in
order of significance and are not intended to be exhaustive.
They are a representative sample of the risks identified
during the review undertaken in the 2018 financial year.
They are informed by a review of Group and Divisional risk
registers, interviews and workshops with senior management,
and employees.
As indicated below, the majority of Downer’s climate-related
risks have been deemed to impact the business in the medium
to longer term. Opportunities identified relate primarily to
leveraging Downer’s existing capabilities and business model as
a service provider to service new and adjacent emerging markets
that arise from the transition to a lower carbon economy.
Downer has made significant progress to date in assessing
climate-related risks and opportunities and in the 2019 financial
year Downer is committed to exploring further the impacts of
these items through analysis and identification of appropriate
metrics and targets.
Stemming from the risk and opportunity analysis undertaken
already, Downer’s focus for scenario analysis will now be in the
following areas:
– outlook for metallurgic and thermal coal;
– impact of extreme weather (increase in rainfall and
temperature); and
– energy transition, considering both the impact on energy
prices and opportunities for alternative generation sources.
4
This award was issued in the 2018 financial year.
124 Downer EDI Limited
Downer FY2018 TCFD
Climate change is a global challenge. As a diverse organisation with operations spanning across the Asia Pacific region, Downer
acknowledges that climate change will impact its business, which will present a combination of climate-related risks and opportunities
over the medium to long term.
Recognising the need for increased information on climate-related impacts, the TCFD developed voluntary, consistent climate-related
financial disclosures for use by investors, lenders, insurers and other stakeholders to inform decision making in relation to climate risk.
The final TCFD report was released in June 2017 and is supported by Downer. This report recommended improved disclosures in
relation to the areas of governance, strategy, risk management and metrics and targets relevant to climate risk. The TCFD recognises
that meaningful adoption of the report’s recommendations will be achieved over a three-year timeframe as both experience and
disclosures evolve in response to clearer messaging from financial markets about the information they require to measure and respond
to climate-related risks and opportunities.
Downer supports the TCFD objectives. Commencing in the 2018 financial year Downer’s climate related disclosures align with the
TCFD recommendations and build on Downer’s disclosures in the 2017 financial year.
Risk
Description
TCFD Risk Type
Impacts of increasing
energy costs
Exposure to extreme
weather events
Exposure to thermal
coal contracts
Increased operational
costs due to increase
in electricity, gaseous
and liquid fuel prices,
materially impacting
high energy consuming
service lines
Severe weather events
impacting the delivery of
contractual obligations.
For example, resource
mobilisation, health and
safety, and security
Transition to a low
carbon economy leads
to reduced demand for
thermal coal for power
generation
Transition: Market
and Policy
Potential Impact
to Business
Management Response
and Mitigation
Decreased profitability
from contracts in energy-
intensive service lines
Time horizon: Medium
to Long Term
Continue identifying and
implementing energy
efficiency initiatives
Physical: Acute and
Chronic, and Legal
Inability to achieve
contractual schedules
due to adverse and
severe weather events
Time horizon:
Long Term
Continue to assess contractual
arrangements with respect
to acute and chronic weather
events to ensure appropriate
mitigation measures are
in place
Transition: Policy,
Legal, Technology
Changes, Market
Changes, Reputation
Reputational risks arise
from Downer’s continual
exposure to the coal
sector
Time horizon:
Medium Term
Continue to monitor demand
forecasts for thermal coal
– particularly local demand
driven by power stations that
are current customers for
existing thermal coal mining
services contracts
Undertake scenario analysis of
Downer’s medium to long term
exposure to metallurgical and
thermal coal
When reviewing contract
extensions / new contracts,
continue to undertake analysis
to increase exposure to mines
that are expected to maintain
competitiveness in light of
the transition to a low carbon
economy
Annual Report 2018 125
Sustainability Performance Summary 2018 – continued
Risk
Description
TCFD Risk Type
Changing design
and construction
requirements
Physical and liability:
Acute and Chronic,
Policy, Legal and
Reputation
Increased climate-
related risk
requirements relevant
to the construction of
infrastructure driven
by changing customer
expectations and
increased climate-related
design requirements
stipulated in EPCM
contracts
Potential Impact
to Business
Management Response
and Mitigation
Increased cost of EPCM
services and challenges
to the competitiveness of
Downer’s services
Time horizon: Medium
to Long Term
Continue to assess contractual
arrangements with respect
to design and construction
events to ensure appropriate
mitigation measures are place
Response to climate-related opportunities
Opportunity
Description
TCFD Opportunity
Type
Potential Growth
to Business
Existing renewable
energy capability and
market presence
Expertise with
developing, implementing
and maintaining
renewable energy assets
Resource efficiency
and Products/
Services
Leverage existing
mining capabilities
to service new and
adjacent markets
Transition to low carbon
is driving demand for
base (e.g. Copper, Gold)
and precious metals (e.g.
Lithium, Zinc) critical for
this transition
Products/Services
and Markets
Response services
to extreme weather
events
Products/Services,
Markets and
Resilience
Increased frequency
and impacts of extreme
weather events drive
increase demand for
disaster recovery and
resilience services
Transition to a low
carbon economy drives
increased demand
for renewable energy
technology and
infrastructure services,
as well as broader
smart city products and
services
Opportunity to leverage
existing mining
capabilities to service
new and adjacent
markets with products
essential for the
transition to a low carbon
economy
Opportunity to further
leverage Downer’s
existing expertise in
responding to asset
damage from extreme
weather events.
Opportunity to also
leverage this expertise to
improve the resilience of
existing assets
Management Response
– Strengthen existing and
establish new relationships
with key customers
– Leverage Downer’s
capability and broaden
Downer’s service offerings
– Strengthen existing and
establish new relationships
with key customers
– Leverage Downer’s
capability and broaden
Downer’s service offerings
– Continue to work with
Government customers on
emergency response to
extreme weather response
– Strengthen and leverage
existing capability
– Incorporate climate
change and adaptation
into the design of any
infrastructure contract
126 Downer EDI Limited
Corporate Governance
for the year ended 30 June 2018
Overview
Downer’s corporate governance framework provides the
platform from which:
– The Board is accountable to shareholders for the operations,
performance and growth of the Company;
– Downer management is accountable to the Board;
– The risks to Downer’s business are identified
and managed; and
– Downer effectively communicates with its shareholders
and the investment community.
Downer has written employment agreements with each of
its senior executives and the performance of those senior
executives is regularly reviewed against appropriate measures,
including performance targets linked to the business plan and
overall corporate objectives. In 2018, Downer’s senior executives
participated in periodic performance evaluations where they
received feedback on progress against these targets.
The Company Secretary is responsible for supporting the
effectiveness of the Board and is directly accountable to the
Board, through the Chairman, on all matters to do with the proper
functioning of the Board.
Downer continues to enhance its policies and processes to
promote leading corporate governance practices.
Details of Downer’s Directors and the Executive Leadership Team
are available on the Downer website at www. downergroup.com.
The Board endorses the ASX Corporate Governance Council’s
Corporate Governance Principles and Recommendations
(ASX Principles).
Principle 1: Lay solid foundations
for management and oversight
The Downer Board Charter sets out the functions and
responsibilities of the Board and is available on the Downer
website at www. downergroup.com.
The Board Charter states that the role of the Board is to provide
strategic guidance and to effectively oversee management of the
Company. Among other things, the Board is responsible for:
– Overseeing the Company, including its control and
accountability systems;
– Appointing and removing the Group CEO and
senior executives;
– Monitoring performance of the Group CEO and senior
executives; and
– Reviewing, ratifying and monitoring systems of risk
management and internal control, codes of conduct
and legal compliance.
Before appointing a Director, the Board undertakes appropriate
checks and provides shareholders with all material information
which is relevant to the decision to elect or re-elect a Director.
Directors receive formal letters of engagement setting out the
key terms, conditions and expectations of their engagement.
The Board Charter also describes the functions delegated to
management, led by the Group CEO.
The primary goal set for management by the Board is to focus
on enhancing shareholder value, which includes responsibility
for Downer’s economic, environmental and social performance.
The Group CEO is responsible for the day-to-day
management of Downer and his authority is delegated and
authorised by the Board.
Diversity at Downer
Downer is committed to ensuring that it has a diverse and
inclusive workforce, which fulfils the expectations of its
employees, customers and shareholders while building a
sustainable future for its business. This is formalised through
the Downer Diversity & Inclusiveness (D&I) Policy which outlines
the Company’s commitment to developing a diverse and
inclusive workforce.
In 2016, Downer launched a revised Diversity Framework.
The purpose of this framework is to support the D&I Policy
and implementation of Divisional D&I strategies.
The Diversity & Inclusiveness Policy is available on the Downer
website at www. downergroup.com.
ASX diversity recommendations – diversity statement
This diversity statement outlines Downer’s performance
throughout 2018 with respect to its broader diversity program,
but with a particular focus on gender, and specifically includes:
– Details of Downer’s key gender representation metrics;
– An overview of the gender diversity initiatives undertaken
by Downer throughout 2018; and
– An outline of Downer’s measurable gender diversity
objectives for 2019.
Gender representation metrics
As at 30 June 2018, the gender representation metrics
were as follows:
– Three of the six Non-executive Directors on the Downer
Board are women;
– Women currently make up 21% of Senior Executive1 roles;
– 17% of Manager2 roles are held by women; and
– Women constitute approximately 35% of Downer’s workforce.
1
2
For present purposes, “Senior Executive” refers to CEO, KMP and Other Executives/General Managers as defined in the Workplace Gender Equality Agency Reference guide
to the workplace profile and reporting questionnaire (WGEA Reference Guide).
For present purposes, “Manager” refers to CEO, KMP, Other Executives/General Managers, Senior Managers and Other Managers as defined in the WGEA Reference Guide.
Annual Report 2018 127
Looking back: 2018 measurable objectives
Objective
Outcome
Through the Talent Management and
Succession Planning process ensure
that identified top female talent (across
the Divisions) have active performance
and development plans that are tracking
to plan.
Develop tools, policies and training in
relation to Flexible Work and pilot within the
Rail Division to ensure that individual and
business needs are met. Set and monitor
targets to measure employee engagement
in flexible work and report to the GDSC.
Review and update Downer’s Parental
Leave Policy to include employer funded
paid parental leave for secondary carers.
Following the successful delivery of
Downers ‘Reflect’ RAP, draft an ‘Innovate’
RAP which includes a focus on cultural
learning, Aboriginal and Torres Strait
Islander employment and supplier diversity.
To continue the association with Jawun
in Australia and Māori based leadership
programs in New Zealand.
Establish baseline data on Aboriginal
and Torres Strait Islander people working
at Downer.
Active performance and development plans are in place for all identified
female talent at Downer as part of the annual Performance and Development
Review Process.
In February, a program of work on flexibility was formally launched to Corporate
and Rail Division employees based at the North Ryde office. This included
supporting resources for managers and employees. Annual measurement
of participation in flexible work practices is being managed through Human
Resources. Employee attitude and perceptions of flexible work is measured
through the annual employee engagement survey.
A review on Downer’s Parental Leave Policy benchmarked against 30+ large
Australian based employers was completed. A cost model and recommendations
were presented to and endorsed by Divisional Human Resources and Divisional
Diversity Steering Committees.
Downer’s second Reconciliation Action Plan (RAP) has been drafted. This RAP
is an ‘Innovate’ RAP and focuses on implementing reconciliation with an
emphasises on strengthening relationships.
– Seven employees participated in the Jawun secondment program in Cape
York, West Kimberley, or Inner Sydney this year. Since the program inception,
37 employees have been on secondment and this represents 222 weeks of
secondment placements allowing Indigenous-led organisations to access
Downer’s talented employees.
– 155 employees have participated in our marae-based Maori Leadership
program. Through this program Downer continues to see an increase in
Maori employees in senior positions.
Downer commenced capturing data on Aboriginal and Torres Strait Islander
identity when voluntarily provided by new employees. Additionally, Aboriginal
and Torres Strait Islander employees have the option to identify their ancestry in
the annual employee engagement survey.
128 Downer EDI Limited
Corporate Governance – continuedfor the year ended 30 June 2018 Looking ahead: 2019 measurable objectives
Focus Area
Objective
Targets
Initiatives
Brand & Reputation To enhance the brand
Gender Diversity
and reputation of Downer
Group through partnerships
related to our diversity focus
areas and to ensure Downer
Group continues to be
viewed as an organisation
that is committed to D&I.
To improve opportunities
for women to reach their
potential through an
inclusive work environment
while positioning Downer
Group as a preferred
employer for women in our
industry.
Establish two partnerships
with reputable diversity
agencies.
37% women in the workforce
by 2020.
20% women in management
by 2020.
– Actively consider partnering with the Diversity
Council of Australia and/or the Australian Human
Rights Commission to strengthen and illustrate
Downer’s commitment to Diversity and Inclusion.
– Build Downer’s employee value proposition that
builds on employee engagement survey findings
– including through regular internal and external
messaging focused on an inclusive culture.
– Launch a new Downer paid parental leave policy
during the period.
– Establish a mentoring program during the period
where 15 high performing women are paired
with high performing leaders to support their
development goals.
– Build the executive talent pool of senior females
with focused development opportunities
including Downer ExeLD program (five places)
and targeted external development through
Chief Executive Women (three places).
– Implementation of a new learning module during
the period and to be completed progressively
by hiring managers. The module will focus
on diversity insights relevant to recruitment
processes so that hiring managers are able to
apply insights that are focused on achieving
improved gender diversity.
– Launch Downer Group’s second Reconciliation
Action Plan during the period to demonstrate
the ongoing commitment to reconciliation.
– Develop two partnerships with Indigenous
pre-employment agencies during the period to
support the commitment to closing the gap.
– All Supervisors and above will complete cultural
awareness training, which will commence
during the period.
3% Aboriginal and Torres
Strait Islander employees
by 2020.
Cultural Diversity
Generational
Diversity
To build on Downer Group’s
commitment to closing
the gap by increasing
Indigenous workforce
participation and developing
strategic partnerships with
Indigenous organisations
and community groups.
To establish Downer Group
as a sought-after employer
for all age-groups and as
an organisation that builds
a talent pipeline of thought
leaders and continues to
value experience.
Build our Linked-In ranking
(currently the 12th most
sought after business to
work for).
– Build a talent pipeline by investing in youth
programs that align to our diversity focus of both
female and Aboriginal and Torres Strait Islander
priority areas, including:
Maintain or increase
the number of graduate
employees year-on-year
until 2021.
– The Downer Graduate Development Program
(continue to unify a one Downer approach to
graduate recruitment).
– Establish governance structure and a framework
for the Downer Apprentice and Trainee Program
that supports strategic attraction and selection.
– Develop D&I image guidelines to ensure
internal and external collateral covers the broad
spectrum of diverse employees (with a focus
on generational).
Annual Report 2018 129
Principle 2: Structure the Board to add value
Throughout the 2018 financial year, the Board was comprised of
a majority of independent Directors.
Downer’s governance framework requires each Director to
promptly disclose actual and possible conflicts of interest, any
interests in contracts, other directorships or offices held, related
party transactions and any dealing in the Company’s securities.
The Board is currently comprised of the Chairman (Mike Harding,
an independent, Non-executive Director), five other independent,
Non-executive Directors and an Executive Director (the Group
CEO, Grant Fenn). Details of the members of the Board, including
their skills, experience, status and their term of office are set out
in the Directors’ Report on pages 2 to 3 and are also available on
the Downer website at www. downergroup.com.
The composition of the Board is reviewed and assessed by the
Nominations and Corporate Governance Committee to ensure
the Board is of a composition, size and commitment to effectively
discharge its responsibilities and duties.
Directors are required to bring their independent judgement to
bear on all Board decisions. To facilitate this, it is Downer’s policy
to provide Directors with access to independent professional
advice at the Company’s expense in appropriate circumstances.
Downer’s Non-executive Directors recognise the benefit of
conferring regularly without management present, and they do
so at various times throughout the year.
The Board considers that an independent Director is a Non-
executive Director who is not a member of management and
who is free of any business or other relationship that could (or
could reasonably be perceived to) materially interfere with the
independent exercise of their judgement. The Board regularly
assesses the independence of each Director to ensure that each
Director has the capacity to bring independent judgement to
bear on issues before the Board and to act in the best interests
of Downer as a whole.
Board Committee
Audit and Risk
Chairman
S A Chaplain
Zero Harm
C G Thorne
Nominations and Corporate Governance
R M Harding
Remuneration
Disclosure
Rail Projects
T G Handicott
T G Handicott
P S Garling
Tender Risk Evaluation
C G Thorne
130 Downer EDI Limited
At least one Director must retire from office at each Annual
General Meeting (AGM). No Non-executive Director can
serve more than three years without offering themselves
for re-election.
The Chairman of the Board is an independent, Non-executive
Director. He is responsible for the leadership of the Board
and for the efficient organisation and functioning of the
Board. The Chairman is appointed by the Board to ensure
that a high standard of values, governance and constructive
interaction is maintained.
The Chairman facilitates the effective contribution of all
Directors and promotes constructive and respectful relations
between Directors and the Board and management. He also
represents the views of the Board to Downer’s shareholders and
conducts the AGM.
The roles of Chairman and Group CEO are not exercised by
the same person and the division of responsibilities between
the Chairman and the Group CEO have been agreed by the
Board and are set out in the Board Charter and Downer’s
Delegations Policy.
The Board has established a number of committees to assist the
Board to effectively and efficiently execute its responsibilities.
A list of the main Board Committees and their current
membership is set out in the table below.
Members
P S Garling
T G Handicott
N M Hollows
C G Thorne
S A Chaplain
G A Fenn
S A Chaplain
T G Handicott
P S Garling
R M Harding
G A Fenn
R M Harding
G A Fenn
T G Handicott
R M Harding
G A Fenn
T G Handicott
R M Harding
Corporate Governance – continuedfor the year ended 30 June 2018 The names of members of each committee, the number of
meetings and the attendances by each of the members of the
various committees to which they are appointed is set out in the
Directors’ Report on page 19.
The Tender Risk Evaluation Committee’s primary purpose is
to oversee tenders and contracts that exceed the delegation
of the Group CEO. The Tender Risk Evaluation Committee,
is chaired by an independent Director and comprises five
members, including the Group CEO. Meetings of the Tender
Risk Evaluation Committee are convened as required to review
tender opportunities.
The Board has established the Nominations and Corporate
Governance Committee to oversee the practices for selection
and appointment of Directors of the Company.
The Nominations and Corporate Governance Committee’s
primary purpose is to support and advise the Board on fulfilling
its responsibilities to shareholders by ensuring that the Board
is comprised of individuals who are best able to discharge the
responsibilities of Directors having regard to the law and leading
governance practice.
The Nominations and Corporate Governance Committee
has a charter which sets out its roles and responsibilities,
composition, structure, membership requirements and the
procedures for inviting non-committee members to attend
meetings. The Nominations and Corporate Governance
Committee Charter gives the Nominations and Corporate
Governance Committee access to internal and external
resources, including advice from external consultants and
specialists. The Nominations and Corporate Governance
Committee Charter is available on the Downer website at
www. downergroup.com.
The Nominations and Corporate Governance Committee, all
members of which are independent Directors, is chaired by an
independent Director and has a minimum of three members.
The Committee’s responsibilities include:
– Assessing the skills and competencies required on the Board;
– Assessing the extent to which the required skills are
represented on the Board;
– Establishing processes for the review of the performance
of individual Directors and the Board as a whole;
– Establishing processes for identifying suitable candidates
for appointment to the Board (including undertaking a
formal due diligence screening process); and
– Recommending the engagement of nominated
persons as Directors.
When appointing Directors, the Nominations and Corporate
Governance Committee aims to ensure that an appropriate
balance of skills, experience, expertise and diversity is
represented on the Board. This may result in a non-executive
Director with a longer tenure remaining in office to bring that
experience and depth of understanding to matters brought
before the Board.
Given the breadth of Downer’s service offerings across a range
of markets, the Board seeks to ensure that it maintains an
appropriate range of technical skills across engineering, geology,
construction and scientific disciplines as well as professional
services when considering the appointment of a new Director.
The Board identified that the review of major tender bids and the
successful delivery of major projects in an increasingly complex
commercial environment required additional Directors with
strong financial acumen. It is for this reason that in undertaking
the selection process for its most recently appointed Director,
the Board selected a candidate with financial and accounting
qualifications and experience as a CFO and CEO of an ASX
listed company.
Annual Report 2018 131
The chart below illustrates the balance achieved with the
current Board composition. The Company recognises the value
of diversity which has been a component of the appointment
process over the past few years.
Professional qualifications
From time to time, Downer engages external specialists to assist
with the selection process as necessary, and the Chairman,
Board and Group CEO meet with candidates as part of the
appointment process.
Professional qualifications
Business and economics
Technical*
Humanities
Legal
0.0
1.0
2.0
3.0
4.0
5.0
*Comprises construction, engineering, metallurgy and science.
Industry experience
Professional Services*
Resources
Transport and infrastructure
Nominations for re-election of Directors are reviewed by the
Nominations and Corporate Governance Committee and
Directors are re-elected in accordance with the Downer
Constitution and the ASX Listing Rules.
As part of its commitment to leading corporate governance
practice, the Board undertakes improvement programs, including
externally facilitated periodic reviews of its performance and
that of its Committees and Directors. The last review was
completed during FY16.
The Company has formal induction procedures for both
Directors and senior executives. These induction procedures
have been developed to enable new Directors and senior
executives to gain an understanding of:
– Downer’s financial position, strategies, operations and risk
management policies;
– The respective rights, duties and responsibilities and roles of
the Board and senior executives; and
0.0
1.0
2.0
3.0
4.0
5.0
– Downer’s culture and values.
Directors are given an induction briefing by the Company
Secretary and an induction pack containing information about
Downer and its business, Board and Committee charters and
Downer Group policies. New Directors also meet with key senior
executives to gain an insight into the Company’s business
operations and the Downer Group structure.
Directors are encouraged to continually build on their exposure
to the Company’s business and a formal program of Director
site visits has been in place since 2009. Directors are also
encouraged to attend appropriate training and professional
development courses to update and enhance their skills
and knowledge and the Company Secretary regularly
organises governance and other continuing education
sessions for the Board.
The Board is provided with the information it needs to discharge
its responsibilities effectively. The Directors also have access to the
Company Secretary for all Board and governance-related issues
and the appointment and removal of the Company Secretary is
determined by the Board. The Company Secretary is accountable
to the Board, through the Chair, on all governance matters.
*Includes banking, finance and legal.
Tenure
9+
6–9
3–6
0–3
0.0
1.0
2.0
3.0
Gender diversity
Gender diversity
3
4
Male
Female
132 Downer EDI Limited
Corporate Governance – continuedfor the year ended 30 June 2018 Principle 3: Promote ethical and
responsible decision-making
Downer’s Purpose, Promise and Pillars define the way
Downer manages its business and are the foundations
that support Downer’s culture. An overview of the Purpose,
Promise and Pillars can be found on the Downer website at
www. downergroup.com.
Downer strives to attain the highest standards of behaviour and
business ethics when engaging in corporate activity. The Downer
Standards of Business Conduct sets the ethical tone
and standards of the Company and deals with matters such as:
– Compliance with the letter and the spirit of the law;
– Workplace behaviour;
– Prohibition against bribery and corruption;
– Protection of confidential information;
– Engaging with stakeholders;
– Workplace safety;
– Diversity and inclusiveness;
– Sustainability; and
– Conflicts of interest.
Downer has a formal whistleblower policy and procedures
for reporting and investigating breaches of the Standards of
Business Conduct. This includes the Our Voice service, an
external and independent reporting service which enables
employees to anonymously report potential breaches of the
Standards of Business Conduct, including misconduct or other
unethical behaviour. Reports received through Our Voice are
investigated where appropriate, with the Company Secretary
overseeing the completion of any remedial action.
The Standards of Business Conduct applies to all officers
and employees and is available on the Downer website at
www. downergroup.com.
Downer endorses leading governance practices and has in
place policies setting out the Company’s approach to various
matters, including:
– Securities trading (stipulating ‘closed periods’ for designated
employees and a formal process which employees must
adhere to when dealing in securities);
– The Company’s disclosure obligations (including
continuous disclosure);
– Communicating with shareholders and the general
investment community; and
– Privacy.
Downer has an Anti-Bribery and Corruption Policy which expands
upon the prohibition against bribery and corruption currently
contained in the Standards of Business Conduct, and which
addresses key issues such as working with government, political
donations, human rights, conducting business internationally
and gifts and benefits. As Downer has operations in foreign
jurisdictions, Downer employees are confronted by the challenges
of doing business in environments where bribery and corruption
are real risks. However, regardless of the country or culture within
which its people work, Downer is committed to compliance with
the law, as well as maintaining its reputation for ethical practice.
These policies are available on the Downer website at
www. downergroup.com.
Principle 4: Safeguard integrity
in financial reporting
The Company has in place a structure of review and
authorisation which independently verifies and safeguards
the integrity of its financial reporting.
The Audit and Risk Committee assists the Board to fulfil
its responsibilities relating to:
– The quality and integrity of the accounting, auditing
and reporting practices of the Company with a particular
focus on the qualitative aspects of financial reporting
to shareholders;
– The Company’s risk profile and risk policies; and
– The effectiveness of the Company’s system of internal
control and framework for risk management.
The Audit and Risk Committee is structured so that it:
– Consists of only Non-executive Directors;
– Consists of a majority of independent Directors;
– Is chaired by an independent Chairman
(who is not the Chairman of the Board); and
– Has at least three members.
The Audit and Risk Committee comprises only independent
Directors, includes members who are financially literate and
has at least one member who has relevant qualifications
and experience.
The Audit and Risk Committee Charter sets out the Audit and
Risk Committee’s role and responsibilities, composition, structure
and membership requirements and the procedures for inviting
non-committee members to attend meetings.
The Board receives assurances from the Group CEO and the
Group CFO that the declarations provided to it in relation to the
annual and half-year financial statements, in accordance with
sections 295A and 303(4) of the Corporations Act 2001 (Cth)
are founded on a sound system of risk management and internal
control and that the system is operating effectively in all material
respects in relation to financial reporting risks.
Annual Report 2018 133
Principle 7: Recognise and manage risk
To mitigate the risks that arise through its activities, Downer has
various risk management policies and procedures in place that
cover (among other matters) interest rate management, foreign
exchange risk management, credit risk management, tendering
and contracting risk and project management.
Downer has controls at the Board, executive and business unit
levels that are designed to safeguard Downer’s interests and
ensure the integrity of reporting (including accounting, financial
reporting, environment and workplace health and safety policies
and procedures). These controls are designed to ensure that
Downer complies with legal and regulatory requirements,
as well as community standards.
Downer has a Risk Management Framework in place to
enable business risks to be identified, evaluated and managed.
The Board ratifies Downer’s approach to managing risk and
oversees Downer’s Risk Management Framework, including
the Group risk profile and the effectiveness of the systems
being implemented to manage risk. The last comprehensive
review of the Risk Management Framework was completed in
2016. However, the Board reviews the Group risk profile twice
each year, undertakes a facilitated risk workshop annually,
and considers other risk matters, such as business resilience,
tender review processes, risk appetite, and specific risk areas,
on a regular basis, as well as regular reports from senior
management, the internal audit team, and the external auditor.
Downer’s annual Sustainability Report provides a detailed overview
of Downer’s approach to managing its environmental sustainability
and social sustainability risks. The 2017 Sustainability Report is
available on the Downer website at www. downergroup.com.
The Company’s internal audit function objectively evaluates and
reports on the existence, design and operating effectiveness of
internal controls. Downer’s internal audit team is independent
of the external auditor and reports to the Audit and
Risk Committee.
Downer’s Audit and Risk Committee assists the Board in
its oversight of Downer’s risk profile and risk policies, the
effectiveness of the systems of internal control and Risk
Management Framework and Downer’s compliance with
applicable legal and regulatory obligations. The Audit and
Risk Committee Charter is available on the Downer website
at www. downergroup.com.
Management reports regularly to the Audit and Risk Committee
on the effectiveness of Downer’s management of its material
business risks and on the progress of mitigation treatments.
Downer’s external auditor attends the Company’s AGMs and is
available to answer any questions which shareholders may have
about the conduct of the external audit for the relevant financial
year and the preparation and content of the Audit Report.
Information regarding the number of times the Audit and Risk
Committee convened in FY18, together with the individual
attendances of members at the meetings, is set out in the
Directors’ Report on page 19.
The Audit and Risk Committee Charter is available on the
Downer website at www. downergroup.com.
Principle 5: Make timely and
balanced disclosure
The Company’s Disclosure Policy sets out processes which
assist the Company to ensure that all investors have equal and
timely access to material information about the Company and
that Company announcements are factual and presented in
a clear and balanced way. A copy of the Disclosure Policy is
available on the Downer website at www. downergroup.com.
The Disclosure Policy also sets out the procedures for identifying
and disclosing material and market-sensitive information in
accordance with the Corporations Act 2001 (Cth) and the
ASX Listing Rules.
Downer’s Disclosure Committee consists of two independent,
Non-executive Directors (one of which is the Chairman of the
Board) and the Group CEO. The Disclosure Committee oversees
disclosure of information by the Company to the market and the
general investment community.
Principle 6: Respect the rights of shareholders
Downer empowers its shareholders by:
– Communicating effectively, openly and honestly
with shareholders;
– Giving shareholders ready access to balanced and
understandable information about the Company
and its governance; and
– Making it easy for shareholders to participate
in general meetings.
The Downer Communication Policy sets out the Company’s
approach to communicating with shareholders and is available
on the Downer website at www. downergroup.com.
The Company publishes corporate information on its
website (www. downergroup.com), including Annual and Half
Year Reports, ASX announcements, investor updates and
media releases.
Downer encourages shareholder participation at AGMs through
its use of electronic communication, including by making notices
of meetings available on its website and audio casting of general
meetings and significant Group presentations.
The Directors and key members of management attend the
Company’s AGMs and are available to answer questions.
134 Downer EDI Limited
Corporate Governance – continuedfor the year ended 30 June 2018 Executive Directors and senior executives are prohibited from
entering into transactions in associated products which limit the
economic risk of participating in unvested entitlements under
any of the Company’s equity-based remuneration schemes.
Further details about the remuneration of Executive Directors
and senior executives are set out in the Remuneration Report
at page 21 and details of Downer shares beneficially owned by
Directors are provided in the Directors’ Report at page 4.
Principle 8: Remunerate fairly and responsibly
The Board has established a Remuneration Committee and has
adopted the Remuneration Committee Charter which sets out its
role and responsibilities, composition, structure and membership
requirements and the procedures for inviting non-committee
members to attend meetings.
The Remuneration Committee is responsible for reviewing and
making recommendations to the Board about:
– Executive remuneration and incentive policies;
– The remuneration, recruitment, retention, performance
measurement and termination policies and procedures for
all senior executives reporting directly to the Group CEO;
– Executive and equity-based incentive plans; and
– Superannuation arrangements and retirement payments.
Remuneration of the Group CEO, executive directors and
non-executive directors forms part of the responsibilities
of the Nominations and Corporate Governance Committee.
Downer’s remuneration policy is designed to motivate senior
executives to pursue the long-term growth and success of
the Company and prescribes a relationship between the
performance and remuneration of senior executives.
The Remuneration Committee is structured so that it:
– Consists of a majority of independent Directors;
– Is chaired by an independent Director; and
– Has at least three members.
The Executive Director is not a member of the
Remuneration Committee.
The maximum aggregate fee approved by shareholders that can
be paid to Non-executive Directors is $2.0 million per annum.
This cap was approved by shareholders on 30 October 2008.
Further details about remuneration paid to Non-executive
Directors are set out in the Remuneration Report at page 21.
Retirement benefits are not paid to Non-executive Directors.
Non-executive Directors do not participate in any equity
incentive schemes.
The remuneration structure for Executive Directors and
senior executives is designed to achieve a balance between
fixed and variable remuneration taking into account the
performance of the individual and the performance of the
Company. Executive Directors receive payment of equity-based
remuneration as short and long-term incentives.
Annual Report 2018 135
Information for Investors
for the year ended 30 June 2018
Downer shareholders
Share registry
Downer had 18,599 ordinary shareholders as at 30 June 2018.
The largest shareholder, HSBC Custody Nominees (Australia)
Limited, holds 29.49% of the 594,702,512 fully paid ordinary
shares issued at that date. Downer has 16,883 shareholders
with registered addresses in Australia.
Securities exchange listing
Downer is listed on the Australian Securities Exchange (ASX)
under the “Downer EDI” market call code 3965, with ASX code
DOW, and is an overseas listed issuer on the New Zealand
Exchange with the ticker code DOW NZ.
Company information
The Company’s website www. downergroup.com offers
comprehensive information about Downer and its services.
The site also contains news releases and announcements to
the ASX and NZX, financial presentations, Annual Reports,
Half Year Reports and company newsletters. Downer printed
communications for shareholders include the Annual Report
which is available on request.
Dividends
Dividends are determined by the Board having regard to a range
of circumstances within the business operations of Downer
including operating profit and capital requirements. The level
of franking on dividends is dependent on the level of taxes paid
to the Australian Taxation Office by Downer and its incorporated
joint ventures.
International shareholders can use Computershare’s Global
Payments System to receive dividend payments in the currency
of their choice at a nominal cost to the shareholder.
Dividend reinvestment plan
Downer’s Dividend Reinvestment Plan (DRP) is a mechanism
to allow shareholders to increase their shareholding in the
Company without the usual costs associated with share
acquisitions, such as brokerage. Details of the DRP are available
from the Company’s website or the Easy Update website at
www. computershare.com.au/easyupdate/dow.
Shareholders and investors seeking information about Downer
shareholdings or dividends should contact the Company’s share
registry, Computershare Investor Services Pty Ltd (Computershare):
Level 5
115 Grenfell Street
Adelaide SA 5000
GPO Box 1903
Adelaide SA 5001
Tel: 1300 556 161 (within Australia)
+61 3 9415 4000 (outside Australia)
Fax: 1300 534 987 (within Australia)
+61 3 9473 2408 (outside Australia)
www. computershare.com
Shareholders must give their holder number (SRN/HIN) when
making inquiries. This number is recorded on issuer sponsored
and CHESS statements.
Updating your shareholder details
Shareholders can update their details (including bank accounts,
DRP elections, tax file numbers and email addresses) online at
www. computershare.com.au/easyupdate/dow.
Shareholders will require their holder number (SRN/HIN) and
postcode to access this site.
Tax file number information
Providing your tax file number to Downer is not compulsory.
However, for shareholders who have not supplied their tax file
number, Downer is required to deduct tax at the top marginal
rate plus Medicare levy from unfranked dividends paid to
investors residing in Australia. For more information please
contact Computershare.
Lost issuer sponsored statement
You are advised to contact Computershare immediately,
in writing, if your issuer sponsored statement has been
lost or stolen.
136 Downer EDI Limited
Annual Report mailing list
Shareholders must elect to receive a Downer Annual Report
by writing to Computershare Investor Services Pty Ltd at the
address provided. Alternatively shareholders may choose to
receive this publication electronically.
Change of address
So that we can keep you informed, and protect your interests in
Downer, it is important that you inform Computershare of any
change of your registered address.
Registered office and principal
administration office
Downer EDI Limited
Level 2, Triniti III
Triniti Business Campus
39 Delhi Road
North Ryde NSW 2113
Tel: +61 2 9468 9700
Fax: +61 2 9813 8915
Auditor
KPMG
International Towers Sydney 3
300 Barangaroo Avenue
Sydney NSW 2000
Australian securities exchange information as at 30 June 2018
Number of holders of equity securities:
Ordinary share capital
594,702,512 fully paid listed ordinary shares were held by 18,599 shareholders. All issued ordinary shares carry one vote per share.
Substantial shareholders
The following shareholders have notified that they are substantial shareholders of Downer as at 30 June 2018.
Shareholders
AustralianSuper Pty Ltd
FIL Limited
Ausbil Investment Management Limited
Ordinary
shares held
42,508,165
37,184,187
29,840,376
% of issued
shares
7.15
6.25
5.02
Distribution of holders of quoted equity securities
Shareholder distribution of quoted equity securities as at 30 June 2018 is as follows.
Range of holdings
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Holding less than a marketable parcel of shares
Number of
shareholders
10,368
6,360
1,118
690
63
18,599
832
Shareholders %
55.75
34.20
6.01
3.71
0.34
Ordinary shares
held
4,463,959
14,644,650
8,029,373
14,817,193
552,747,337
594,702,512
Shares
%
0.75
2.46
1.35
2.49
92.95
100.00
Annual Report 2018 137
Information for Investors – continued
for the year ended 30 June 2018
Twenty largest shareholders
Downer’s 20 largest shareholders of ordinary fully paid shares as at 30 June 2018 are as follows.
Shareholders
HSBC Custody Nominees (Australia) Limited
Chase Manhattan Nominees Limited
Citicorp Nominees Pty Limited
National Nominees Limited
BNP Paribas Nominees Pty Ltd
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