Emeco Holdings Limited
Annual Report 2014

Plain-text annual report

Emeco Holdings Limited and its Controlled Entities ABN 89 112 188 815 Annual Financial Report 30 June 2014 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 1 Contents Chairman’s Report ................................................................................................................ 3 Managing Director’s Report ................................................................................................... 5 Chief Financial Officer’s Report .............................................................................................. 7 Operating and Financial Review............................................................................................. 9 Regional Business Overview .................................................................................................15 Sustainability Report ............................................................................................................20 Financial Report ...................................................................................................................31 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 2 Chairman’s Report Dear Shareholder, We are pleased to present the Emeco Holdings Limited Annual Report for financial year 2013/2014 (FY14). STRENGTHENING THE BUSINESS The mining industry continued to adversely impact the business during the year. Significant downturns in Australia and Indonesia reduced earnings contributions from these regions compared to FY13. Management responded by restructuring our Australian operations. In Indonesia, following a strategic review, a decision was made to exit the market and this has now been successfully completed. Contract wins in Australia and Chile over the second half of FY14 demonstrated the new Management team’s early success in delivering improved performance to the business through an enhanced and empowered business development focus. Notwithstanding the challenging environment, the business was able to generate $85.9 million of cash during the year. In addition, to provide both balance sheet stability and flexibility as we work to restructure the business a US$335 million bond issue was completed in March to replace existing debt. Moving into FY15 Emeco is continuing to assess opportunities for further geographical expansion, working with our customers to deliver equipment solutions which generate greater productivity and focusing on growth opportunities which create greater value for our shareholders. NEW LEADERSHIP FY14 was a year of change for the Emeco leadership team with the appointment of Ken Lewsey, as CEO and Managing Director, and Greg Hawkins as CFO. With backgrounds in the mining industry, both Ken and Greg bring extensive experience and an enhanced customer focus to Emeco’s Management team. Both Ken and Greg have successfully driven earnings growth in under-performing businesses in previous roles. They are being ably supported by a new Management team made up of key people from the original team plus some new recruits. The Board is greatly encouraged by the excellent progress that the new team has made on a range of fronts – operationally, financially and strategically. I’d like to take this opportunity to again thank Keith Gordon, Stephen Gobby and Michael Kirkpatrick for their contribution to Emeco. Longstanding Non-Executive Director Bob Bishop stepped down at the end of FY14. I would like to sincerely thank Bob for his contribution to the Board and Company over many years. SAFETY AND SUSTAINABILITY The Board saw a positive shift in Emeco’s sustainability performance and reporting during the year. The development of a centrally coordinated monthly Sustainability Report produced for the Board has provided greater consistency and efficiency in relation to the information captured and presented. It is pleasing to see the Company continue to improve its safety performance, particularly during challenging times when employee numbers can reduce and people are carrying out different or new roles. During the year the Company made good progress in relation to its diversity action plan by improving diversity reporting, awareness and establishing more flexible work practices for employees. Specifically, Emeco now has a greater number of women employed across its workforce including Senior Management roles. Emeco is culturally and geographically diverse and it is essential that the Company continues to attract, retain and develop high quality people with diverse perspectives and experiences as it looks to improve its service offerings and build market share going forward. Emeco’s safety and sustainability achievements over FY14 are detailed further in our Sustainability Report (page20). EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 3 FUTURE AMBITIONS FOCUSED ON SHAREHOLDER RETURNS The Board and Management team remain committed to delivering strong shareholder returns over the long-term. Capital management remains a key focus of the business and cash flow generated over the next 12 months is likely to be directed toward further stabilising our financial position. A key measure of Management’s performance is total shareholder returns and as such, their goals are aligned with the Board on maximising returns for those shareholders who continue to support Emeco during these challenging times. The Board did not declare dividends for FY14 due to our focus on improving the Company’s balance sheet. Looking forward the Board will assess the ability to pay dividends against earnings and the financial position of the business. BUILDING A PLATFORM FOR THE FUTURE Over the next 12 months we will continue to build on our successes from FY14. Recently awarded contracts have improved utilisation from the outset of FY15. Greater earnings and divestment of underutilised assets will ensure the business continues to deliver strong cash generation. The Board’s goal is for Emeco to maximise long-term shareholder returns in this challenging market. With a motivated management team, improved balance sheet flexibility and earnings diversification Emeco is positioned to succeed and grow once under-performing markets recover. Alec Brennan Chairman EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 4 Managing Director’s Report GEOGRAPHIC DIVERSIFICATION REDUCING IMPACT OF DOWNTURN IN AUSTRALIA Continued weakness in commodity prices, and austerity and efficiency drives by major miners saw a continuation of reduced activity across most of Emeco’s operating regions. The key bulk commodities of coal and iron ore were the most affected with the miners insourcing work traditionally performed by contractors. The major miners also delivered real productivity gains internally and better utilised their own operating assets. This has driven all mining services providers to revisit their own cost bases and to assess the strength of their value proposition to the market. This led to a reset of pricing levels within the industry. Whilst this has caused considerable pain, it does ensure that there are solid foundations going forward and that the Australian mining industry in particular remains competitive and ready for the eventual upturn in the mining cycle. Emeco was not immune to this resetting of value. This has led us to a disappointing Operating EBITDA of $72.1 million and an Operating Net Loss after Tax of $21.6 million. The Australian business averaged 41% utilisation across the year. Emeco invested heavily in rebuilding its business development capability and we did see early signs of success with a series of contract wins achieved in the last quarter of FY14. These contracts therefore had a limited impact on the 2014 financial year, but provide a solid start to 2015. Group utilisation for Emeco averaged 48% over the year and finished at 50%, demonstrating the value of Emeco’s decision to target key offshore geographies. Our Canadian customer base continued to grow in FY14 with the business increasing its number of customers from eleven to thirteen. In addition, we continued to expand our external maintenance offering which generated earnings growth in FY14. Canada’s FY14 performance was down on FY13, impacted by an abnormally early cessation of the winter works program due to unfavourable weather conditions and an unplanned temporary plant shut-down at one of our major customers. Since its establishment in July 2012, the Chilean business has grown to approximately $110 million of fleet and averaged over 80% utilisation. Earnings growth in FY14 further supports Emeco’s decision to expand into the highly prospective Chilean copper market. Efforts by our Chile team over FY14 resulted in the business securing a 5 year contract in conjunction with Chilean mining contractor Fe Grande, estimated to generate revenue for Emeco of between US$27 million and US$32 million annually. Mobilisation of fleet has commenced for this project with a portion of equipment to be transferred from Australia to Chile to further grow this business. Both Canada and Chile demonstrated the value of geographical and commodity diversification over FY14 during a period of low activity in the Australian market. Along with our improved financial position, diversification provides a stable platform from which to compete in under-performing markets and positions the business well for growth when these markets recover. IMPROVEMENTS FROM STRATEGIC INITIATIVES Since my commencement with Emeco just over 8 months ago we have achieved many of our early objectives. These include: • A successful refinancing of Emeco; • A new Executive and Senior Management team with the skills to be successful in this very different market; • Strengthening our business development capability across our Australian and international businesses; • The closure of the loss making Indonesian business; • Securing the Fe Grande contract in Chile for 5 years, which provides a solid base for further growth in the region; and Continued improvement in our safety and environmental performance. • EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 5 I entered Emeco with a strategic and business development background and a belief that genuine customer intimacy and engagement is the key to successful and profitable growth. We initiated Emeco’s first independent, global customer survey to ensure that we better understand and meet our customer needs. I have recruited a new team of like minded Executives, albeit with different skills sets to develop and execute a clear strategic direction for Emeco. During FY14 Emeco’s first female Executive, Kellie Benda, was appointed to assist with the strategic direction and corporate development of the Company. Our ongoing strategic review has identified several business development initiatives which have resulted in our most recent contract wins in Australia and Chile. Our major priority was to rebuild our market share and presence in Australia. To support this, Ian Testrow returned as Chief Operating Officer to draw on his success with developing both our Canadian and Chilean businesses. We have bolstered our customer and business development capabilities in Australia broadening our exposure into adjacent geographies and markets, with fleets recently contracted into the Northen Territory and mining civils markets. The recently announced Fe Grande project replaces fleet expected to be off-hired during 1HFY15 and potential project extensions as well as a strong pipeline of smaller projects currently tendered support an expected high level of utilisation through FY15 and beyond. We continue to assess opportunities in the Latin America region with Chile now providing a platform to build on our maintenance capabilities and expand our fleet. In August 2013 Emeco announced the downsizing of the Indonesian business following a slowdown in the Indonesian coal market and a number of significant contract losses. Following a strategic review which considered a range of factors including uncertainty around government policy, unfavourable conditions for the Indonesian mining industry and poor expected earnings over the long term, Emeco announced its decision to exit Indonesia in May 2014. The Company continues to make good headway and to improve its performance in the areas of safety. We realised a 33% improvement in the total recordable injury frequency rate (TRIFR) during the year and importantly, have seen improvements across all safety lead indicators demonstrating a pro-active shift in safety behaviour. I believe that the quality of our people and the continuous improvement of our safety performance remain paramount to Emeco, particularly as we demonstrate our ability to drive value and support the aspirations of our customers. POSITION FOR FUTURE GROWTH Our new team has been charged with envisioning an Emeco in the markets of the future. Our detailed strategic review has looked at how we evolve within the context of the following challenges: reducing capital intensity; creating our value differentiator; deeper wider relationships with our customers; leveraging existing capabilities and assets; diversifying market risk; and better managing our exposure to the mining development cycle. Our strategic review and development process continues in 1HFY15. The detailed customer, equipment market and industry analysis carried out in recent months, together with our successes and learnings from FY14, will see us add greater value to our customers’ operations in the coming year and take advantage of any recovery in our operating markets. We will also continue to seek opportunities to improve utilisation of our existing fleet and to divest under- performing asset classes. Cash generation remains a key element of Emeco’s business model with free cash flow over FY15 intended to further strengthen our financial position and provide leverage to strategically grow the business in the future. The team has done an outstanding job of stabilising the business during another challenging year and I believe we are well prepared and positioned to build on this solid foundation for greater shareholder value in FY15. Kenneth Lewsey Managing Director & Chief Executive Officer EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 6 Chief Financial Officer’s Report MANAGING THROUGH THE CYCLE Our FY14 financial results were down on the prior year due to the full year impact of contract reductions in FY13 plus later than expected commencement of new projects and unexpected circumstances impacting utilisation in Canada as mentioned in the Managing Directors report. Operating revenue decreased by 36.5% in FY14 to $241.1 million, down from $379.4 million in FY13. Despite cost reductions achieved over FY13 and FY14, the full year impact of rental rate declines during FY13 resulted in lower Operating EBITDA and Operating EBIT margins in FY14. Combined with reduced utilisation FY14 Operating Net Profit after Tax reduced to a $21.6 million loss, down from a profit of $28.5 million in FY13. The Indonesian business was exited during FY14 and reported as a discontinued operation for the 12 months ended 30 June 2014. CAPITAL RESTRUCTURING TO SUPPORT THE LONG TERM As the operating landscape continued to deteriorate over FY14 the business focused on mitigating financing risks and pursuing options to improve flexibility of the capital structure. In October 2013 the business announced the negotiation of two financial covenant amendments under the previous A$450 million syndicated debt facility. Operating results pressured these amended covenants and Management pursued a covenant light debt structure, resulting in a US$335 million 144A bond issue with a 5 year term. The net proceeds from the bond issue were used to repay existing indebtedness outstanding under the USPP Notes and syndicated debt facility. On completion of the 144A bond issue Emeco was granted access to a A$50 million secured multi-currency revolving credit facility. This facility provides funding for future general corporate purposes. GENERATION OF CASH FLOW A PRIORITY FY14 free cash flow of $85.9 million was predominantly used to reduce leverage prior to the successful bond issue. Management’s strategy of releasing cash from idle assets led to fleet disposals totalling $70.8 million, mostly from the Indonesian business, while lower utilisation and replacement of end of life assets with existing fleet reduced sustaining capital expenditure to $29.7 million, down 58.7% from FY13. 30 June 2014 net debt of $323.3 million represented a 22.0% reduction on the prior year. Moving ahead Emeco’s ability to generate cash flow remains a focus for supporting the future growth of the business. Despite Emeco’s covenant light debt structure Management remains conservative in its approach to capital management. With gearing (net debt:Operating EBITDA) at 4.8 times Emeco will continue to focus on the generation of free cash flow from operations and asset divestments to drive gearing below 3.0 times. Management will also focus on a fleet strategy of matching asset classes to regional demand. At 30 June 2014 $39.9 million of assets were classified as held for sale, being units considered non-core to the business in the current market. RESETTING OF ASSET VALUES FOR CURRENT MARKET During FY14 Emeco recognised goodwill impairments totalling $157.9 million, impairment charges totalling $37.5 millon on assets transferred to non-current assets held for sale and $6.2 million of inventory write-offs associated with the wind-down of the Australian parts business. Management believes the resetting of these asset values is indicative of the current environment in which the business is operating. We intend to dispose of non-current assets held for sale over FY15 given our current level of idle fleet. Funds will be used to recycle capital by replacing highly utilised end of life assets and to manage our financial position. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 7 THE YEAR AHEAD Recent contract awards are expected to drive incremental earnings growth during FY15. Conversion of an improving project pipeline will drive utilisation growth, however the competitive landscape is likely to minimise any margin improvements over the next 12 months. The business will continue to generate cash to further strengthen our financial position and provide the business capital to fund future growth. Having recently joined the Emeco team I look forward to working with everyone in developing this business into the future. Greg Hawkins Chief Financial Officer EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 8 Operating and Financial Review The Emeco Group supplies safe, reliable and maintained equipment rental solutions to the global mining industry. Established in 1972, the business listed on the ASX in July 2006 and is headquartered in Perth, Western Australia. Emeco currently employs 388 permanent and fixed term staff and owns 432 pieces of earthmoving equipment across Australia, Canada and Chile. Emeco generates earnings from two primary revenue streams, dry equipment rental and maintenance services. Operating costs principally comprise parts, labour and tooling associated with maintaining earthmoving equipment. Capital expenditure principally comprises the original purchase of equipment and replacement of major components over the asset’s life cycle while owned by Emeco. Chart 1: Revenue by Region Chart 2: Revenue by Commodity Chart 3: Fleet Composition by Asset Class Chile 11% Canada 34% Australia 55% Iron Ore 8% Other 6% Coking Coal 10% Copper 11% Oil Sands 30% Wheel Loader 5% Dozer 12% Excavator 7% Grader 4% Other 4% Gold 16% Thermal Coal 19% Rigid Dump Truck 68% Note: Above analysis relates to 12 month period to 30 June 2014 and excludes discontinued operations Table 1: Group Financial Results A$ millions Revenue EBITDA EBIT NPAT ROC % EBIT margin EBITDA margin Operating Results FY14 241.1 72.1 (6.1) (21.6) (0.8)% (2.5%) 29.9% FY13 379.4 160.3 61.3 28.5 6.5% 16.2% 42.3% Statutory Results FY13 FY14 379.4 241.1 148.3 27.2 32.1 (208.8) 0.0 (224.2) (3.4)% (34.2)% 8.5% (86.6%) 11.3% 39.1% Note: 1. Significant items have been excluded from the statutory result to aid the comparability and usefulness of the financial information. This adjusted information (Operating Results) enables users to better understand the underlying financial performance of the business in the current period. 2. Operating and statutory results exclude discontinued operations. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 9 Table 2: FY14 Operating Results to Statutory Results Reconciliation Tangible asset impairments Intangible asset impairments Redundancy Debt establishment cost write-off Tax effect NPAT (39.4) (3.3) (1.0) (43.7) (151.7) (6.2) 0.0 (157.9) (1.0) (0.2) 0.0 (1.2) (19.1) 0.0 0.0 (19.1) (21.6) (193.3) (8.6) (0.7) (224.2) 17.9 1.0 0.3 19.2 A$ millions Operating Australia Canada Chile Statutory Reconciliation of differences between Operating and Statutory Results: FY14 Operating Results (non-IFRS) excludes the following: 1. - - Tangible asset impairments: Tangible asset impairments totalling $37.5 million were recognised across the business on assets held for sale, impacting EBITDA, EBIT and NPAT. Inventory write-offs of $6.2 million associated with the wind-down of the Australian Parts business were recognised, impacting EBITDA, EBIT and NPAT. Refer to note 8 for further information on tangible asset impairments; Intangible asset impairments: Based on impairment testing conducted for the FY14 interim period ended 31 December 2013 Emeco recognised impairment of goodwill in the Australian CGU and Canadian CGU of $151.7 million and $6.2 million respectively. Adjustment impacts EBIT and NPAT. Refer to note 21 for further information on intangible asset impairments; - One-off costs related to redundancies in the Australian and Canadian business segments totalling $1.2 million impacting EBITDA, EBIT and NPAT; - Debt establishment cost write-off: In March 2014 Emeco executed a US$335 million 144A Bond Issue using proceeds to repay existing debt. Capitalised borrowing costs on the existing facility totalling $19.1 million were subsequently written off. 2. All reconciling items relating to FY14 Operating Results are discussed in further detail later in the Operating and Financial Review. WEAKNESS IN MINING ACTIVITY OVER FY14 Weakness in the Australian and Indonesian mining sectors continued to drive down operating performance with the full year impact of significant contract losses during FY13 only partially offset by new projects commenced over FY14. As a result average utilisation declined to 48% in FY14, down from 67% in FY13. FY14 utilisation was further impacted by delays in the commencement of recent contract wins in Australia and Chile, plus a shortened oil sands winter works period due to warmer weather in Canada and an unplanned plant shut-down at one of our major oil sands customers. Chart 4: FY14 Average Group Utilisation1 Average: FY14: 48%, FY13: 67% Year-end: FY14: 50%2, FY13: 50% 100% 80% 60% 40% 20% 0% Note: 1. Utilisation defined as % of fleet rented to customers (measured by written down value) 2. Excluding non-current assets held for sale FY14 year-end utilisation is 56% Group operating revenue from continuing operations reduced by 36.5% to $241.1 million, down from $379.4 million in FY13 as a result of lower utilisation and the full year impact of market wide rental rate reductions over FY13. Rental and Maintenance revenue was down 34.6% to $233.0 million (2013: $356.0m) due to the loss of significant contracts in FY13 which were not replaced over FY14. The Group continued to downsize the sales and parts businesses driving associated revenue down to $8.1 million (2013: $23.4 million). Despite further cost reductions in FY14, reduced rental margins in Australia combined with declining utilisation across the business resulted in Operating EBITDA margin falling to 29.9% (FY13: 42.3%). Operating EBIT decreased to negative 2.5% (FY13: 16.2%) as idle fleet depreciation increased against a corresponding reduced revenue base. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 10 Lower utilisation and compressed margins resulted in Operating return on capital (ROC) declining to negative 0.8% in FY14, down from 6.5% in FY13. Refer to the Regional Business Overview on page 15 for further detail on regional operating and financial performance. FOCUS ON COST REDUCTION Table 3: Operating Cost Summary (Statutory Results) A$ millions Revenue Operating expenses Changes in machinery and parts inventory Repairs & maintenance Employee expenses Hired in equipment & labour Impairment of tangible assets Net other expenses EBITDA Impairment of goodwill Depreciation expense Amortisation EBIT 2014 2013 241.1 379.4 (14.4) (84.7) (42.9) (13.1) (43.7) (15.0) 27.2 (157.9) (78.0) (0.1) (208.8) (25.8) (114.0) (45.2) (7.8) (12.0) (26.3) 148.3 (17.8) (98.2) (0.2) 32.1 Lower utilisation and cost reduction initiatives resulted in operating expenses excluding impairment of tangible assets decreasing 22.4% over FY14 to $170.1 million, down from $219.1 million in FY13. Changes in machinery and parts inventory, which comprises the downsized sales and parts businesses in addition to inventory management supporting third party fleet working along-side our rental units, decreased in line with sales and parts revenue. Repairs and maintenance expense, which primarily comprises parts and maintenance labour associated with our rental fleet, was down 25.7% to $84.7 million (2013: $114.0 million) in line with lower Rental and Maintenance Revenue. Restructuring of the Group over FY14 focused on resizing lower utilised segments of the business in light of reduced operating performance, with additional resources employed to support our enhanced business and corporate development capabilities to drive future growth. The success of this strategy has been evident over 2HFY14 with recent contract wins expected to result in incremental utilisation improvement in early FY15. Employee expenses reduced year on year to $42.9 million (2013: $45.2 million). Redundancies over FY14 resulted in one-off costs totalling $1.2 million. Other expenses increased to $71.8 million as a result of higher impairment on tangible assets resulting from idle assets classified as assets held for sale and subsequently disposed. Excluding this item net other expenses totalled $28.1 million, down 17.6% from FY13. Refer to note 8 in the financial statements for further breakdown of net other expenses (page 103). Depreciation expense fell in line with utilisation to $78.0 million (2013: $98.2 million), however increased as a percentage of rental and maintenance revenue to 33.5% (2013: 27.6%) primarily due to higher depreciation expense associated with a larger portion of idle fleet and fixed operating depreciation expense against declining rental margins. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 11 RESETTING ASSET VALUES Table 4: Asset Impairments (Statutory Results) A$ millions Impairment loss on inventory Impairment loss on PPE Freehold land & buildings Plant & equipment Impairment of goodwill 2014 2013 6.1 8.6 0.1 37.5 157.9 3.0 0.4 17.8 Total asset impairments increased in FY14 to $201.6 million, up from $29.8 million in FY13. Impairment loss on inventory fell to $6.1 million in FY14 (2013: $8.6 million), primarily representing further write-offs associated with the wind-down of the Australian parts business. Impairment loss on property, plant and equipment increased to $37.5 million in FY14, up from $3.4 million in FY13. Over the year the Group classified a portion of idle fleet to non-current assets held for sale with corresponding impairments recognised to represent the expected market value of those assets. Assets held for sale are not marketed for rental and as such are not considered as part of our value in use impairment testing. Non-current assets held for sale at 30 June 2014 totalled $39.9 million. Impairment testing conducted as at 31 December 2013 identified goodwill impairment in the Australian and Canadian businesses totalling $151.7 million and $6.2 million respectively. Goodwill arose when Emeco was acquired by two private equity firms in 2005. Despite the Group expecting growth in mining volumes over the long-term and associated improvement in operating performance, Emeco’s Board adopted a conservative approach in determining the carrying value of the Group’s goodwill. Impairment testing conducted at 30 June 2014 and 31 December 2013 did not identify impairments in the carrying value of Emeco’s tangible assets. CASHFLOW GENERATION SUPPORTING FINANCIAL POSITION Table 5: Cash Flow Summary A$ millions Operating cash flow Sustaining capital expenditure Other property, plant & equipment Disposals Free cash flow post sustaining capital expenditure Growth capital expenditure Free cash flow post growth capital expenditure Dividends Share buy-back Debt establishment costs Free cash flow post shareholder returns Net cash flow from discontinued operations Free cash flow from continuing operations post shareholder returns 2014 76.3 (29.7) (13.6) 70.8 103.8 (0.9) 102.9 0.0 0.0 (17.0) 85.9 9.8 2013 173.8 (71.8) (16.9) 49.8 134.9 (90.2) 44.7 (37.1) (16.9) (4.7) (14.0) (0.4) 76.1 (13.6) Free cash flow post shareholder returns increased in FY14 to $85.9 million, up from a net cash outflow in FY13 of $14.0 million. The increase resulted from reduced capital expenditure against capital release from disposals. Operating cash flow dropped 58.7% to $76.3 million in line with operating EBITDA, which was impacted by lower utilisation and the full year impact of rental rate reductions over FY13. This figure included a tax benefit of $10.2 million. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 12 As a result of lower operating activity the Group reduced capital expenditure on the prior period to $30.6 million. Sustaining capital expenditure was minimised to that required to maintain operating fleet while end of life assets were replaced by idle fleet. The Company will continue this approach in FY15 however will also focus on replacing highly utilised end of life assets with capital recycled from the disposal of assets held for sale. The successful bond issue executed in March 2014 resulted in establishment fees totalling $17.0 million. These costs included legal, accounting and debt advisor fees. Net cash flow from the discontinued Indonesian operations totalled $9.8 million in FY14, representing net capital release totalling $39.0 million offset against operating costs of $2.2 million and repayment of debt associated with the Indonesian business totalling $31.3 million. STABILITY OF FINANCING Table 6: Net Debt & Gearing Summary A$ millions Interest Bearing Liabilities (current & non-current) 2014 2013 144A Bond notes Senior debt facilities USPP notes Working capital facility Lease liabilities Other Cash Net debt Gearing ratio Leverage ratio Interest cover ratio 355.8 0.0 0.0 0.0 8.8 0.5 41.8 323.3 4.78 43.4% 2.83 0.0 252.7 149.6 5.3 12.4 0.5 5.8 414.7 2.15 43.1% 7.72 Note: Gearing ratio - Net Debt : Operating EBITDA Leverage ratio - Net Debt : Net Tangible Assets Interest cover ratio - Operating EBITDA : Interest Expense Free cash flow generation over FY14 resulted in net debt decreasing $89.1 million to $323.3 million at 30 June 2014. This represents a 22.0% fall in net debt from 30 June 2013. On 17 March 2014 Emeco refinanced its existing debt facilities with the successful issue of a US$335 million bond in conjunction with a new A$50 million secured multi-currency revolving credit facility. Emeco announced that its wholly owned subsidiary Emeco Pty Ltd had completed the offering of US$335 million in aggregate principal amount of 9.875% Senior Secured Notes due 2019 in an offering to qualified institutional buyers in the United States pursuant to Rule 144A under the United States Securities Act of 1933, as amended (the ‘Securities Act’), and to certain persons outside the United States in offshore transactions in reliance on Regulation S under the Securities Act. The net proceeds of the Notes issue was used to repay Emeco’s existing USPP Notes and syndicated debt facilities. Repayment of the USPP Notes incurred make-whole payments of $16.1 million. The revolving credit facility provides funding for general corporate activities and was undrawn at 30 June 2014. The 144A Notes pay interest on 15 March and 15 September each year, commencing on 15 September 2014. The Notes are secured and guaranteed by Emeco Holdings Limited and its subsidiaries. The 144A Notes do not include maintenance covenants, the credit facility requires monitoring of the following covenants: • • Liquidity ratio – Net debt : Net Tangible Assets; no greater than 65% Interest cover ratio – Operating EBITDA : Interest Expense; no less than 2.25 times Despite Emeco’s covenant light debt structure Management remains conservative in its approach to capital management. Gearing at 30 June 2014 was 4.78 times, Emeco’s goal is to reduce gearing below 3.0 times by 30 June 2015 through improved earnings and reducing debt with free cash flow. Assets held for sale at 30 June 2014 are expected to release $39.9 million over FY15 (includes assets held in discontinued operations). EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 13 Refer to note 24 in the accompanying financial statements for additional information on Emeco’s financing facilities. NIL DIVIDENDS DECLARED IN FY14 Table 7: Shareholder Returns Dividends declared during the period Interim dividend (cents) Final dividend (cents) Total dividend (cents) Dividend payout ratio Value of share buy-back ($ million) Average price of share buy-back (cents) Per share statistics Earnings per share (cents) NTA per share ($) Closing share price ($) 2014 2013 0.0 0.0 0.0 0.0% 0.0 0.0 (3.6) 0.53 0.20 2.5 0.0 2.5 42.5% 16.5 53.4 4.8 0.76 0.28 Note: Dividend payout ratio is measured as dividends paid as a percentage of Operating NPAT. The Board declared a nil interim and final dividend for FY14 as a result of the net operating loss for the period combined with Emeco’s focus on capital preservation and maintaining a strong financial position amid poor external market conditions. The Board will assess the ability to pay dividends against earnings and the financial position of the business going forward. During FY13 the Company completed a 5% share buyback, the Company did not buy back shares during FY14. STRATEGY FOCUS TO PREPARE EMECO FOR FUTURE GROWTH During a challenging 12 months the business successfully implemented a number of strategic initiatives including Emeco removing gearing risks, restoring confidence in our financial position and restructuring the business to enhance our business development capability and focus on high demand asset classes. Emeco’s strategic efforts over the next twelve months will be to build on progress made during FY14 to position the business for future growth. We will continue to strengthen our customer relationships, improve our financial position and match our fleet to the markets in which we operate. Emeco will continue to generate cashflow from operations which the Group intends to use to further strengthen our financial position and fund corporate initiatives. Cash release from the disposal of low utilised fleet classes will partially be used to fund asset purchases targeted toward contract awards and replacing end of life assets in fleet classes with high utilisation rates. As outlined in the Managing Director’s Report, our strategic review and development process will continue into 1HFY15. Over the past six months Ken Lewsey has enhanced the Group’s corporate development team to identify opportunities to add greater value to our customers and take advantage of any recovery in our operating markets. Further detail on Emeco’s strategy is included in the Regional Business Overview starting on the following page. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 14 Regional Business Overview Chart 5: Rental Revenue by Region Chart 6: EBITDA Contribution by Region Chart 7: Fleet by Region Chile 12% Chile 16% Australia 51% Canada 32% Australia 52% Canada 37% AUSTRALIA Chile 21% Canada 29% Australia 50% Table 8: Performance Indicators Chart 8: Average Fleet Utilisation Operating Results A$ millions Revenue EBITDA EBIT Funds Employed ROFE % No. workforce LTIFR FY14 130.0 44.8 (3.5) 374.7 (0.9%) 226 1.6 FY13 250.6 121.6 53.4 467.5 11.4% 286 6.5 Var % (48.1%) (63.2%) (106.6%) (19.9%) (12.3%) Average: FY14: 41%, FY13: 60% Year-end: FY14: 41%, FY13: 41% Notes: • • • For a reconciliation of statutory to operating results refer to Table 2 on page 10 and accompanying notes Utilisation defined as % of fleet rented to customers (measured by written down value) Australia results in Table 2 represent the Australian Rental segment and do not include the Australian Sales and Parts results Main markets Comprised of three operating units, Western Region (including Western Australia, Northern Territory and South Australia), Queensland and New South Wales, the Australian rental business is well diversified across bulk commodities and metals. The business services high quality customers, primarily blue-chip miners and large contractors, leveraged to the production phase of the mining cycle. Rental revenue commodity mix is weighted toward thermal coal (26%), iron ore (14%), metallurgical coal (19%) and metals (30%). FY14 Performance Utilisation across FY14 stabilised compared to FY13, however significant contract losses over FY13 were only partially replaced during FY14 resulting in average utilisation decreasing to 41%, down from 60% in FY13. Reduced utilisation combined with nil recovery in rental rates resulted in FY14 operating revenue declining to $130.0 million, down from $250.6 million in FY13. Despite lower financial performance in FY14 an improvement in enquiry levels resulted in several contract wins toward the end of 2HFY14. Long lead times on customers converting enquiries led to these contracts not contributing to FY14 earnings. Performance of the Australian business varied across each of the business units, ranging from year end utilisation in Queensland of 10% compared to New South Wales of 68% (Western Region year end utilisation of 46%). Our Queensland business has been heavily impacted by the oversupply of mining equipment in this region driving intense competition. We successfully defended our strong presence in New South Wales, growing the business over FY14 with significant contract wins in the gold and coal markets. An increase in activity in Western Australia in 2HFY14 stabilised utilisation and resulted in several project wins toward the end of FY14. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 15 The Year Ahead Recent contract wins will drive incremental utilisation growth from the commencement of FY15. A strong project pipeline is expected to drive further improvement in utilisation over FY15 however the Australian market remains competitive. Across the business units Emeco Australia is focused on building market share in Queensland, defending our strong position in New South Wales and converting the current project pipeline in the Western Regions. Given current utilisation of 41% the business will continue to drive cost reduction initiatives, limit capital expenditure to major component replacements, use idle fleet to replace assets which reach end of life and seek opportunities to redeploy or dispose of under-utilised asset classes. Medium Term Outlook The medium term outlook for the Australian mining market remains similar to that 12 months ago, albeit an improvement in the rental market through greater enquiry levels. Low bulk commodity prices combined with the high value of the Australian dollar continue to impact the coal markets, iron ore producers continue to focus on the owner/operator model using their own equipment, while recovery in base metals market appears to be somewhat stifled by limited access to new capital sources. CANADA Table 9: Performance Indicators Chart 9: Average Fleet Utilisation A$ millions Revenue EBITDA EBIT Operating Results FY14 81.5 27.6 8.2 FY13 94.2 46.5 23.4 Var % (13.5%) (40.6%) (65.0%) Funds Employed 186.5 214.0 (12.9%) ROFE % No. Employees LTIFR 4.4% 96 0.0 10.9% 102 4.1 (6.5%) Average: FY14: 64%, FY13: 75% Year-end: FY14: 49%, FY13: 51% Notes: • • For a reconciliation of statutory to operating results refer to Table 2 on page 10 and accompanying notes Utilisation defined as % of fleet rented to customers (measured by written down value) Main Markets The Canadian business is strategically located in the Alberta region to service oil sands and coal projects in Western Canada. The business primarily supplies rental equipment and external maintenance services to oil majors, indigenous and non-indigenous contractors, and coal miners. Rental revenue composition in FY14 remained heavily weighted toward oil sands (86%) with the remainder derived primarily from thermal coal. FY14 Performance The Canadian business continued to expand its customer base in FY14 signing a third MSA with a major oil producer and partnering with large indigenous contractors. As a result the number of customers for this business increased from eleven to thirteen. Further growth in our external maintenance offering was also driven by an additional customer, driving associated revenues up 106.7% to $6.2 million (2013: $3.0 million). Despite continuing to expand our Canadian business FY14 revenue of $81.5 million was 13.5% down on FY13 due to warmer weather resulting in the early cessation of the winter oil sands works program and an unplanned temporary plant shut-down at one of our major oil sands customers. The unpredictable nature of these occurrences resulted in EBITDA and EBIT margins declining in FY14 to 33.9% and 10.0% respectively (2013: 49.4% and 24.8% respectively) as revenue decreased against a relatively stable operating cost base. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 16 The Year Ahead Over the next 12 months our Canadian business is focused on maintaining a high level of service to our existing customers whilst building business development capability outside the oil sands market. Whilst preserving high utilisation over the winter period, servicing other commodity markets is likely to reduce revenue seasonality and lessen our exposure to the oil sands industry. Growth in our external maintenance services business is reducing the capital intensity of the Canadian business. Similar to our Australian business low utilised asset classes have been targeted for disposal with a number of assets transferred to assets held for sale. Medium Term Outlook Embodied in the Canadian oil sands industry is the seasonal nature of earth works over a year. While this limits visibility on future activity, the installed production capacity in long life oil sands projects underpins significant base load volumes over the medium term. CHILE Table 10: Performance Indicators Chart 10: Average Fleet Utilisation Operating Results A$ millions Revenue EBITDA EBIT Funds Employed ROFE % No. Employees LTIFR FY14 25.1 13.8 4.1 138.3 3.0% 16 0.0 Var % 44.3% 24.3% (36.0%) 76.2% (5.2%) FY13 17.4 11.1 6.4 78.5 8.2% 8 0.0 Average: FY14 74%. FY13: 86% Year-end: FY14 81%, FY13: 95% Notes: • • For a reconciliation of statutory to operating results refer to Table 2 on page 10 and accompanying notes Utilisation defined as % of fleet rented to customers (measured by written down value) Main Markets Leveraged to the growing copper mining region of Antofagasta, Emeco services large international and domestic blue- chip miners and contractors in Chile. Rental revenue in FY14 was 100% weighted toward the copper industry. FY14 Performance During FY14 the Group invested a further $25.0 million into the Chilean fleet increasing total fleet to approximately $110 million at 30 June 2014, including $22.2 million of transfers from Canada and Indonesia. The larger fleet combined with high utilisation resulted in revenue growth of 44.3% in FY14 to $25.1 million. Operating expenses increased as further resources were invested in the regional office to build our business development and maintenance capabilities. As a result EBITDA and EBIT margins reduced in FY14 to 55.0% and 16.3% respectively, down from 63.8% and 36.8% in FY13. The Year Ahead Emeco recently announced the Chilean business secured a five year contract in conjunction with Chilean mining contractor Fe Grande, estimated to generate revenue for Emeco between US$27 million and US$32 million annually. Utilising up to US$60 million of the Chilean fleet and representing over 50% utilisation the project provides a base for high utilisation in Chile for FY15 and beyond. Combined with a strong project pipeline Management expects high utilisation in the region over the next five years. Building on this foundation the business will seek opportunities to grow the fleet with a focus on transferring idle fleet from other regions. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 17 Medium Term Outlook The Chilean mining industry maintains a strong cost curve position which is expected to underpin activity over the medium term. Greater presence in Chile is providing Emeco new opportunities to expand its customer base, both with contractors and mining companies. On the basis that volumes continue to grow in this market, Emeco is well positioned to maintain and grow earnings in this business in the medium term. INDONESIA FY14 Performance Following the cessation of its only remaining significant contract with PT Indo Muro Kencana in July 2013 the business focused on cost minimisation and reducing the fleet via disposals and transfers. As mentioned in the Operating and Financial review (page 12), net cash flow from the discontinued Indonesian operations totalled $9.9 million in FY14. At 30 June 2013 the Indonesian business held rental assets totalling $108 million. Over FY14 $11.2 million of the Indonesian fleet was transferred to other Emeco businesses, whilst $82.7 million was reclassified as assets held for sales, with disposals of $40.3 million. Discontinued business Coming into FY14 Emeco announced the downsizing of the Indonesian business subsequent to the loss of a number of significant contracts and a slowdown in Indonesian coal market activity. Following a strategic review of the Indonesian business completed in May 2014 Emeco will exit the market given expected poor earnings from the business over the long-term. The Indonesian business has been classified as a discontinuing operation for FY14 and the comparative period. As such FY14 financial results of the business have been excluded from operating and statutory results. The exit of the Indonesian business is expected to remove approximately $3.5 million in operating costs annually. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 18 Table 11: Five Year Financial Summary REVENUE Revenue from rental income Revenue from sale of machines and parts Revenue from maintenance services Total PROFIT EBITDA EBIT PBT NPAT from continuing operations Profit/Loss from discontinued operations Profit for the year One-off significant items Operating profit Basic EPS BALANCE SHEET Total Assets Total Liabilities Shareholders’ Equity Total Debt CASH FLOWS Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Free Cash Flow after repayment/(drawdown) of net debt Free Cash Flow before repayment/(drawdown) of net debt1 DIVIDENDS Number of ordinary shares at year end Total Dividends paid in respect to Financial Year Ordinary dividends per share declared Special dividends per share declared KEY RATIO'S Average fleet utilisation EBIT ROC EBIT ROFE (pre goodwill) Net Debt to EBITDA Total Debt to equity 2014 2013 2012 2011 2010 205,368 314,068 440,299 386,530 302,355 8,145 27,582 23,413 41,894 66,689 58,182 62,795 53,170 64,328 38,276 241,095 379,375 565,170 502,495 404,959 27,188 (208,827) (251,378) (224,172) (51,137) (275,309) 148,268 32,075 7,459 260,507 124,820 100,406 215,379 93,206 70,247 167,685 48,510 25,785 12 69,972 49,974 12,300 5,992 6,004 (227) (365) (61,613) 69,745 49,609 (49,313) (202,629) (28,487) (1,375) (6,395) (90,456) (21,543) 28,499 71,120 56,004 41,143 (3.6) 4.8 11.3 8.2 2.0 748,362 1,126,022 1,216,116 981,152 1,014,754 424,390 514,846 575,729 378,918 392,011 323,972 343,774 611,176 640,387 602,234 622,743 415,426 459,484 297,005 305,472 82,072 25,032 181,303 230,467 214,931 147,462 (129,124) (281,817) (146,088) (107,527) (71,364) (119,281) 118,958 (68,947) (45,377) 35,740 (67,102) 67,608 (104) (5,442) 85,889 (9,273) (90,958) (17,800) 24,900 599,675 599,675 631,238 631,238 631,238 - 0.0 0.0 48.0 (0.8) (0.9) 4.78 106.1 37,146 2.5 37,874 6.0 0.0 0.0 63,124 5.0 5.0 12,625 2.0 0.0 67.0 7.1 8.5 2.15 68.0 86.0 13.2 15.7 1.47 71.8 85.0 11.3 14.0 1.38 49.3 72.0 8.3 10.5 1.82 49.1 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 cents $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 '000 $'000 cents cents % % % x % Financial information as reported in the corresponding financial year and includes operations now discontinued. 1 Includes capex funded via finance lease facilities (excluded from statutory cash flow). EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 19 Sustainability Report (cid:1) TRIFR improved by 33% in (cid:1) Appointment of two female (cid:1) FY14 executives to senior leadership roles Independent survey of customer satisfaction levels SUSTAINABILITY FOR THE FUTURE This is Emeco’s fourth consecutive global sustainability report covering the financial year ending 30 June 2014. Despite challenging market conditions during the last financial year we maintained our commitment to employee safety, investment in our communities and the responsible stewardship of the physical environment in which we operate. During the reporting period the mining industry was confronted with many adverse economic and market conditions. As a result of these issues we were forced to make a number of difficult decisions which resulted in the announcements that we would exit our Indonesian operations and commence a redundancy program in Australia. While difficult, we believe these measures were essential to help us transition Emeco through a difficult time and to improve the future sustainability of the Company. Safety is paramount at Emeco. We had a 33% improvement in our Total Recordable Injury Frequency Rate (TRIFR) and a 74% improvement in our Lost Time Injury Frequency Rate (LTIFR) during FY14 due to a continued focus on lead indicators, improvement of health, safety and environment (HSE) systems and by ensuring that our employees are provided with the HSE training relevant to their role. In a significant step, we have made good progress to our commitment to gender diversity. We appointed the first female executive to our leadership team and also appointed our first female general manager. We have also established a structured mentoring program for our current and future women leaders within the Australian business. In FY15 we will focus on expanding the diversity of our operations. Continuing to manage our key sustainability risks remains a priority. Throughout FY14 we collected key sustainability metrics for the monthly sustainability report produced for the Emeco Board. This has enabled the Board to track our progress more closely, which has improved performance and accountability levels across the Company. Our annual sustainability reporting process has also become more streamlined and consistent as we collect information on a more regular basis. About this report This report has been developed using the Global Reporting Initiative (GRI) framework in accordance with the G3 guidelines. The report has been self-assessed as a C level report and covers our performance in the areas of safety, people, community and environment for the FY14 period across our global operations. In preparing the information disclosed in this report we have applied the GRI principles for the development of report content which help to identify the areas of greatest importance and focus. These principles are: materiality, stakeholder inclusiveness, sustainability context and completeness. Report Boundary This report covers our global operations in Australia, Indonesia, Canada and Chile. References to Emeco in this report cover all of our operations, except where explicitly stated. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 20 Table 12: Sustainability Performance and Targets Performance Areas FY14 Performance Highlights FY15 Performance Targets People Safety Further reading page 23 to 24 • TRIFR improved by 33% • iSystain system implemented in Australia to improve safety reporting • Improved levels of proactive HSE lead indicators • Canada HSE new hire assessment • Implementation of Canadian ‘Life Saving Rules’ • Global implementation of Emeco Safety Health and Environment Management System (ESHEMS) standards • Global implementation of Core Risk Control Protocols & Standard Operating Procedures • Global implementation of iSystain • Increase proactive HSE leave indicators • Reduce injury frequency rates Employee Development Further reading page 26 to 27 • Global HR Forum established. Four meetings held • Undertook fourth employee culture survey • Progressed consistent on-boarding process for new employees across Australian business • Undertake fifth annual culture survey • Implement consistent on-boarding process for new employees across the Australian business • Developed Canadian Project Manager assessment • Implement values-based employee profiling tool recognition program • Implement profiling tool for key roles in Australian business • Develop and implement leadership program for frontline leaders Diversity Further reading page 24 to 25 • Appointment of two female executives to senior • Conduct global diversity awareness leadership roles training • FY14 diversity initiatives implemented: - Global gender diversity measurement framework • Identify and target development of current and future potential women leaders - Structured mentoring program for current and future women leaders within Australia - Emeco Empowered Leaders profile raising Community Community Participation Further reading page 27 to 28 • Ongoing support of Women Building Futures • Strategic review of global community Canada engagement approach • Participation in Clontarf Foundation Careers Day • Appointment of new community engagement • Increase employee participation in community engagement representatives Environment Environmental Management Further reading page 28 to 30 • Improved waste and waste water management practices • Reduced unnecessary idling of equipment in Canada • Review existing Lifeline Australia and Clontarf partnership agreements in Australia • Implement consistent approaches to water conservation and recycling across Emeco Group • Global support of national/local clean-ups each quarter EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 21 Our stakeholders Our key stakeholder groups are listed below in table 13. The ways in which we engage with our stakeholders and their main areas of interest are also presented. Where relevant, we have responded to these concerns throughout the report as indicated by the cross-reference in the table below. We have continued to report the same material issues which we identified in our 2013 report. With the transition to the GRI G4 standard after the end of 2015, we expect to be able to refine our material issues further and ensure that they continue to accurately reflect our key impacts across the business and their level of interest to our stakeholders. Table 13: Stakeholder Engagement STAKEHOLDER GROUP HOW WE ENGAGE Shareholders Customers Employees Investor relations team, annual financial performance reporting, annual general meeting, annual meetings with proxy advisory firms and corporate governance meetings. Face to face through tender responses, business development and site managers. In FY14 we undertook an independent customer satisfaction survey. We have improved our approach to managing customer relationships and implemented a multi- level relationship engagement process with our customers. During the period we engaged with employees directly through face to face as well as through Emeco’s intranet, MD newsletter, regional newsletters, employee culture survey, inductions, performance management process, in-house training, community engagement activities, and safety meetings. Suppliers Supply related enquiries, tender/quote responses. Community members Community focused sponsorship and partnership activities Listening to our customers TOPICS AND CONCERNS (FY14) • Company performance • Value creation • Financial and non-financial risk mitigation • Capital management • Corporate governance • Safety • Hire terms and conditions • Equipment supply • Equipment performance • Workforce supply Job security • • Safety • Communication • Training and development • Work prioritisation • Workplace satisfaction and desired values • Company performance • Supply chain opportunities and/or issues • Social impact of operations • Community investment and support As a B2B organisation, we are focused on helping our customers to safely reach their performance and sustainability goals. Safe employees, customers and suppliers Our customers have told us that safety is their main priority and this aligns with Emeco’s position that the safety of our people and those we work with is paramount. Emeco is committed to maintaining a safe and healthy working environment for our employees, suppliers and customers. To that end we continued to improve our safety systems and processes in FY14 as well as our global safety performance (see page 24). Customer Feedback We undertook an independent customer satisfaction survey of customers, non-customers and industry participants in FY14. The survey sought to better understand our customers’ needs and their level of satisfaction with our products and services. Approximately 40 respondents from across Latin America, Canada and Australia participated in the survey. The information obtained will be vital as we seek to add greater value to our existing and future customers’ operations and as we develop our business strategy for the future. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 22 PEOPLE Health and Safety We take the health and safety of our people very seriously. We are proud of the progress we made in FY14 in formalising a number of systems and standard operating procedures. The Emeco Health, Safety and Environment Risk Matrix and Risk Management framework are now consistent across the entire Group. Operating, leasing and maintaining heavy vehicles in 24/7 environments can present a risk to our people, but it is also an opportunity to demonstrate leading practice in safety management and behavioural-led safety. We are pleased to report an improvement in total recordable and lost time injury frequency rates during FY14. Improved systems A new HSE information and incident management application, iSystain, was rolled out across Australia in FY14. iSystain is supported by the Emeco Safety Health Environmental Management System (ESHEMS) compromising of 16 standards which outline Emeco’s HSE requirements at the highest level. Underlying the ESHEMS Standard 10 – Risk Management are core risk control protocols and supporting standard operating procedures. The iSystain application also has a Vendor Management module which allows us to assess the HSE maturity of our suppliers to ensure that they are able to operate within Emeco’s HSE requirements. We constantly seek to improve the health and safety of not only our employees, but also our supply chain. The Vendor Management module will provide automated management of supplier prequalification, assess compliance against Emeco’s requirements and assist in the ongoing management of a supplier’s services. A key focus for the coming year will be to implement iSystain across our global operations to Canada and Chile. Monitoring and audit The Australian business developed and conducted internal audits of EHSEMS for Western Australian and New South Wales operational sites during the period. Mackay and other Queensland sites were not audited due to the downsizing of our Queensland operations. The Canadian business has undertaken audits to achieve their Certificate of Registration requirements in the province of Alberta. ESHEMS audits for Chile will commence in FY15. Global knowledge sharing The Global HSE Forum continued in FY14 and has resulted in greater information sharing across the Emeco Group. The Australian business focused on HSE communication and engagement and has since seen improvements to our Positive Attitude Safety System (PASS). We have implemented an additional level meeting in which operational leaders (including Leading Hands and Supervisors) discuss HSE improvements and provide feedback on a daily basis. By moving from lag indicators for safety to a more proactive HSE lead indicator focus, we believe that we are bringing HSE leadership from the boardroom to the frontline. During the year our Canadian business rolled out the “Emeco Canada Life Saving Rules” which are positive, proactive guiding principles for all Canadian employees to abide by. There has also been an increased focus on delivering training including topics such as risk tolerance levels, heavy duty mechanic training and administrative training around audits, injury investigations and return to work strategies. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 23 Safety Performance Table 14: FY14 Safety Performance Measures by RegionA Region Australia Canada Chile Indonesia Emeco Group TRIFRB 12.8 0 0 0 12.8 LTIFRC 1.6 0 0 0 1.6 Table 15: 5 Year LTIFR Performance LTIFR Emeco Group FY14 0.9 Table 16: 4 Year TRIFR Performance TRIFR Emeco Group FY14 7.1 * Emeco commenced reporting TRIFR in FY11. FY13 3.5 FY13 10.6 MTIFRE 4.8 0 0 0 4.8 FY10 3.4 DIFRD 6.4 0 0 0 6.4 FY12 1.7F FY12 17.4 FY11 2.4 FY11* 12.4 During the period, Emeco’s global LTIFR decreased by 74% and the Group realised a 33% improvement in TRIFR. Lead indicators such as the reporting of hazards and near misses as well as the number of inspections, audits and safe act observations also continually improved during the year. Focus on proactive HSE activities We focused heavily on safety performance and proactive HSE activities during the year. Additionally, we concentrated on a number of lead indicators which are important to help the business identify hazards, prevent injuries and encourage continuous improvement. Each region continued to improve in relation to hazard reporting, safe act observations, risk management tools (Take 5s, Job Safety Environmental Analysis, Safe Work Method Statements, Field Level Risk Assessments, Last Minute Risk Assessments and Team Based Risk Assessments). As part of our commitment to ensuring our employees are safe at work, we also encourage and empower our employees to be safe outside of the workplace. During the year, Emeco ran four free three-hour child and baby first aid courses for employees and their families in Australia. In FY15 we plan to continue with this initiative. Diversity Operating across Australia, Canada and Chile, Emeco's businesses are geographically and culturally diverse and we are focused on developing a workforce which reflects the diversity of the broader communities in which we operate. Emeco made good progress in its commitment to increasing gender diversity in FY14. The first female executive was appointed to our leadership team and we also appointed our first female General Manager. In FY14 Emeco increased overall female representation in the workforce (see table 18). Our executive leadership team participated in gender diversity workshops during FY13 and we now intend to roll this out to the senior regional management teams in FY15. We understand the value of gender diversity and are committed to equality and treating each other with respect. For the first time in FY14 we piloted a structured mentoring opportunity for current and future women leaders within Western Australia, developed in conjunction with the Australian Institute of Management Western Australia. We will look to expand this program across our other operating regions in FY15 through AIM WA’s e-mentoring capabilities and affiliated training organisations dependent on feedback from participants. A First Aid Injuries are not included in the above data as they are not a Recordable Injury B Total Recordable Injury Frequency Rate: a combination of Fatalities, Lost Time, Disabling Injury and Medical Treatment Injury. Frequency Rate (FR) the number or injuries/illness for required indicator multiplied by million hours worked divided by total exposure hours C Lost Time Injury Frequency Rate D Disabling Injury Frequency Rate E Medical Treatment Injury Frequency Rate EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 24 Emeco has begun producing and publishing a series of regular articles called ‘Empowered Leaders’. These articles showcase Emeco people who lead by example, regardless of their level or role. The articles are communicated through Emeco’s intranet (Emnet) and via email. People data In FY14 we changed the format of our reporting on gender diversity metrics so we are aligned with the Australian Government’s Workplace Gender Equality Agency (WGEA) requirements for job classifications. Our WGEA report is available in the sustainability section of our website: www.emecogroup.com. Please refer to pages 37 to 38 for further information on our approach to gender diversity. As at 30 June 2014, women represent 15.9 per cent of our workforce which is a slight increase from 14.7 per cent at 30 June 2013. Women hold 20.8 per cent of management positions and the majority of women are employed in administrative and business support roles at Emeco. Table 17: Employees by Region and Contract Region Australia Indonesia Canada Chile Total Total number of employees (2014) Full time (perm) 212 Part timeG (perm) 7 Full time (fixed term) 3 Part time (fixed term) 0 38 94 16 360 0 1 0 8 12 1 0 16 0 0 0 0 Casual Total 4 0 0 0 4 226 50 96 16 388 Table 18: Group Workforce by Job Classification, Gender and Age Job classification Total CEO Key Management Personnel Other Executives / General Managers Senior Managers Other Managers Professionals Technicians and Trade Community & Personal Service Clerical & Administrative Sales Machinery Operators & Drivers Labourers Other Graduate Apprentice Total 1 7 9 18 13 33 208 1 47 17 5 2 7 0 20 388 Gender Age Female 0 Male 1 < 30 yrs 0 31-40 0 41-50 0 51+ yrs 1 1 1 5 3 11 0 0 35 0 0 2 4 0 0 62 6 8 13 10 22 208 1 12 17 5 0 3 0 20 326 0 0 2 0 12 70 0 11 2 2 1 0 0 14 114 3 2 8 5 11 64 0 16 3 1 0 4 0 5 3 5 6 5 4 49 1 12 8 2 1 3 0 1 1 2 2 3 6 25 0 8 4 0 0 0 0 0 122 100 52 G Part-time is assessed as anything less than 38 hours week. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 25 Table 19: FY14 Turnover by Region Region Australia Indonesia Canada Chile Managing structural changes Turnover Number Turnover Rate H Male 92 171 27 8 Female 20 19 11 0 Male 35.05% 111.91% 25.78% 48.54% Female 7.59% 17.04% 10.55% 0.00% Unfortunately market conditions in Australia required a program of redundancies in FY14. Affected employees, regardless of their level or position, were provided with support and assistance to transition to alternative employment. In Australia Emeco engages the support of a third-party Employee Assistance Program (EAP). Throughout the FY14 structural changes, Emeco management regularly communicated the EAP services available to employees and in some circumstances family members. In August 2013 Emeco announced the downsizing of the Indonesian business following a slowdown in Indonesian coal mining activity and a number of significant contract losses. The Indonesian business will not be included in reports going forward and we currently have a limited team of key staff operating at the workshop to assist with the closure of the business. The decision to exit Indonesia was taken very seriously, weighing up the market conditions as well as the impacts on our employees. Throughout this process we have engaged with the relevant local organisations and authorities to provide support for affected employees and ensure that we comply with the relevant industrial relations regulations. Employee satisfaction In 2013 we undertook our fourth annual culture survey with 76% of the global workforce participating. As anticipated, given the challenging market conditions at the time the survey was conducted, employee satisfaction levels were lower than in previous years. This was a clear reflection of the downturn in the market and concerns around job security, particularly in Australia and Indonesia. Pleasingly, our culture survey did reveal that our core values of Accountability, Continuous Improvement, Integrity and Collaboration continue to remain priorities for employees. Employee Development Emeco strives to ensure that all employees have Personal Performance Plans (PPP) which include objectives, behavioural assessments and training plans. During the year, 80% of eligible employees (those starting employment prior to 1 April 2014) completed a PPP for the Australian business, 90% of employees for the Canadian business and 25% in Chile. We are in the process of appointing a human resources manager in Chile, which we hope will help to increase the number of performance plans for this region as well as further develop our in-country people systems and processes. Developing our frontline A pilot of the Frontline First supervisor training program commenced in February 2014 in Western Australia. The program incorporates a number of targeted modules catering for the specific needs of Emeco's frontline leaders. This program includes modules in safety leadership, proactive HSE tasks, maintenance operations management, communication skills, building and managing teams, contract management and performance management. Emeco nationally recognised training Working with a Registered Training Organisation (RTO) in Australia, we have commenced developing in-house, nationally recognised training and assessments in Frontline Management. On successful completion of the training, employees will receive a Certificate IV qualification which is recognised across the industry. This training is also helping to develop empowered Emeco leaders. H Turnover is defined as the number of employees leaving Emeco voluntarily and involuntarily. It is based on a rolling 12 month figure EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 26 We have established a Global Human Resources Forum focused on sharing best practice across the business in relation to our people systems, processes and practises. For example, our Canadian business has developed human resources profiles for strategically critical roles, such as project managers. As the market becomes hyper-competitive in Australia, the skills of our customer facing people have become mission critical to our business. A key human resources initiative for Australia in FY15 is to develop profiles and role scorecards to ensure employees are aware of desired job outcomes, key accountabilities and performance measures, which will assist our people in their career pathways. Table 20: Average hours of training per year per employee by region Region Australia Indonesia Canada Chile Group average COMMUNITY FY14 20.25 10.27 15.31 22.53 17.09 Emeco strives to positively support the communities of the regions where we operate and create an environment that allows our local workforce to understand the needs of their local communities. In addition to our national partnerships, dedicated employees in each region have responsibility for managing their local community engagement activities budgets. Community organisations are encouraged to apply for sponsorship from Emeco by following our community sponsorship application process. All applicants are assessed by our Community Engagement Representatives in accordance with our Sponsorship Guidelines and budget. In the past year, we have supported local community organisations across all regions in which we operate. Table 21: FY14 Community activity by region Region Australia Indonesia Canada Chile Partnership or Sponsorship Lifeline Australia (National Partnership) Clontarf (National Partnership) Activ Foundation - City to Surf Cancer Council WA (Relay for Life Corporate Triathlon & The Biggest Morning Tea) Febfast - Youth Support + Advocacy service and Family Drug Support HBF Run for a Reason (Lifeline WA) Leukaemia Foundation Movember Men’s Health Royal Flying Doctor Service WA RSPCA Million Paws Walk WA School of Mines YMCA Big Brothers Big Sisters Manggar Youth Organisations Youth Pledge Day People Empower Council Women Building Futures Community engagement activities not yet commenced. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 27 Partnering for change We also have a number of longer term, strategic partnership agreements with community organisations. In FY14 we continued to support Women Building Futures in Canada as well as Lifeline Australia and the Clontarf Foundation in Australia. ENVIRONMENT Globally, we are committed to responsible environmental practices that aim to reduce any adverse environmental impacts and improve the economic and environmental benefits related with our business activities. In FY13, we developed and implemented a monthly sustainability reporting tool. Over the past two years the tool has been streamlined which has improved the consistency and efficiency of our environmental data collection and reporting processes. We continue to inspect and monitor work areas to identify environmental risks and opportunities for improvement. Water and waste water management In FY14, a number of improvements were initiated in relation to waste water management practices. Following are some examples of the steps taken: • At our Rutherford workshop in New South Wales we have undertaken recalibration of our water/oil separator • and trained employees in the use of this equipment. The wash pad facility at our Guildford workshop in Western Australia was redesigned to ensure waste flows correctly into the waste oil area. This improvement was made after the successful redesign of the wash pad facility at our Mackay workshop in Queensland in FY13. • Also at our Guildford workshop, we recently completed a ground hydrocarbon study and report on hydrocarbon soil contamination for the workshop and yard. This identified that our hydrocarbon management practises were effective in preventing soil and water table contamination. • Across Australia we installed hydrocarbon traps in all drains to trap any hydrocarbon contaminated water entering after rain events at our workshops. These initiatives will help ensure increased water holding capacity, improved water recycling, improved safeguards to prevent hydrocarbon contamination of waterways and increased monitoring/sampling of hydrocarbon content across our Australian operations. In FY14, we have worked towards improving our reporting approaches and continue to monitor water use and management. We are working to improve water management practices across Emeco’s global operations in the future. Across our Australian operations we have invested in vehicles which have an extra quiet (XQ) specification. We offer these machines to our customers in an effort to reduce noise pollution in the areas where we operate. We currently have XQ vehicles operating at customer sites in Western Australia and New South Wales. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 28 Energy efficiency initiatives Emeco continuously looks to implement initiatives that lessen the impact of our business activities on the environment. To improve our overall carbon footprint during FY14 we implemented a number of energy efficiency improvements in our offices and sites, including: • • • Trialling induction lighting and installing LED lights at our goods inward/outward shed in Guildford, Western Australia. The use of induction and LED lighting has resulted in greater energy efficiencies and utility cost savings for Emeco as induction lighting consumes approximately 50% of what a conventional lighting system consumes. Introducing a new environmentally friendly cleaning agent to our parts cleaning process at our Rutherford workshop in New South Wales. Identifying ways to reduce the impacts of our vehicles while in use at customer sites. In New South Wales we have installed LED lighting on all fleet vehicles to improve the overall energy efficiency of the vehicles. Due to the nature of our operations, hazardous waste is an area of concern globally. Emeco has strict guidelines on the safe handling and disposal of environmental waste and hydrocarbons generated by our operations. We engage approved suppliers to handle and dispose of environmental waste and hydrocarbons. In Australia we actively recycle, reuse and reduce the amount of thinners in our paint and blast facilities. This approach has substantially reduced waste solvents onsite and overall waste production and disposal costs. Incidents and spills No significant spills were reported by any of our operations in FY14. Energy and greenhouse gas emissions Emeco provides safe, reliable and well maintained earthmoving equipment solutions for mining across Australia, Canada and Chile. Due to the nature of our business our customers continue to have sole responsibility for reporting emissions associated with the use of our equipment. Our Australian operations fall below the current emissions reporting thresholds set by the Australian Government’s National Greenhouse and Energy Reporting legislation and Energy Efficiency Opportunities legislation and as such, we are not required to report greenhouse gas emissions or energy usage under either of the aforementioned legislations. Nonetheless, we track and report energy usage and greenhouse gas emissions information each year, for the prior financial year, through our voluntary submission to the Carbon Disclosure Project (CDP) www.cdproject.net. Our most recent CDP submission shows that our FY13 GHG emissions (scopes 1 and 2) were 9,441 tCO2e (see table 23) which represented an increase of 25% on FY12 emissions. The increase in emissions was primarily due to the improved tracking of data in Chile as well as fleet fuel consumption which contributed to a 47% increase year-on-year in vehicle carbon emissions. In FY14, each region reported regularly on environmental data through our monthly sustainability reporting tool with the aim to improving the accuracy of our emissions data allowing us to respond more effectively to identifying and managing trends. We strive for continual improvement in our environmental performance in ways that are sustainable, practical, meaningful and cost-effective. We remain committed to identifying and monitoring the environmental impacts of Emeco’s business activities and continue to work with our customers to mitigate these impacts, improve energy efficiencies, manage environmental risks and reduce overall emissions associated with our service offerings. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 29 ENERGY AND GREENHOUSE GAS EMISSIONS (GHG) Table 22: FY13 Energy Consumption by Source Energy consumption Electricity Natural Gas Fleet Fuel Total energy consumed Direct energy (GJ) (Scope 1 & 2) 12,760 11,303 80,486 104,548 tCO2-e (Scope 1 & 2) 3,331 580 5,530 9,441 Table 23: 2010-13 Group Emissions (Scope 1 & 2) Year 2010 2011 2012 2013 tCO2-eI 7,397 6,447 7,543 9,441 Table 24: 2013 Group Energy Consumption and GHG Emissions by Region Region Australia Canada Indonesia Chile Total Direct energy (GJ) (Scope 1 & 2) 34,085 28,102 7,384 34,977 104,548 tCO2-e (Scope 1&2) 4,557 1,815 689 2,380 9,441 I Carbon footprint is calculated using the international best practice Greenhouse Gas Protocol. National Greenhouse Accounts (NGA) Factors July 2010 – Department of Climate Change and Energy Efficiency National Greenhouse and Energy Reporting (Measurement) Determination 2008 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 30 Financial Report Corporate Governance Statement ........................................................................................32 Directors’ Report..................................................................................................................43 Directors .................................................................................................................... 43 Company Secretary .................................................................................................... 46 Directors’ Meetings .................................................................................................... 46 Principal activities ...................................................................................................... 46 Operating and financial review ................................................................................... 47 Dividends ................................................................................................................... 47 Significant changes in state of affairs .......................................................................... 47 Events subsequent to report date ............................................................................... 47 Likely developments .................................................................................................. 47 Directors’ interest ...................................................................................................... 47 Indemnification and insurance of officers and auditors ............................................... 48 Non-audit services ..................................................................................................... 48 Lead auditor’s independence declaration.................................................................... 48 Rounding off .............................................................................................................. 48 Remuneration report (audited) .................................................................................. 49 KPMG’s Independence Declaration ............................................................................. 67 Consolidated Statement of Profit or Loss and Other Comprehensive Income .........................68 Consolidated Statement of Financial Position .......................................................................70 Consolidated Statement of Changes in Equity .......................................................................71 Consolidated Statement of Cash Flows .................................................................................72 Notes to the Consolidated Financial Statements ...................................................................73 Directors’ Declaration ........................................................................................................ 151 Independent Auditor’s Report ............................................................................................ 152 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 31 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 This Corporate Governance Statement sets out the extent to which Emeco has followed each of the Corporate Governance Principles and Recommendations with 2010 Amendments set by the ASX Corporate Governance Council (ASX Principles and Recommendations) during FY14. Principle 1 Lay solid foundations for management and oversight Roles and responsibilities of the Board and Senior Executives The Company’s Board Charter, which has been adopted by the Board, sets out the functions and responsibilities of the Board, each Director and the Chair. Under the charter, the Board is accountable to shareholders for the overall performance of the Company and management of its affairs. Key responsibilities of the Board include: • • • • • • • • • • developing, providing input into and final approval of, corporate strategy; evaluating, approving and monitoring the strategic and financial plans and performance objectives of the Company; determining the dividend policy and the amount and timing of all dividends; evaluating, approving and monitoring major capital expenditure, capital management and all major acquisitions, divestitures and other corporate transactions, including the issue of securities; reviewing, ratifying and monitoring systems of risk management and internal compliance and control, codes of conduct and legal compliance; evaluating and monitoring annual budgets and business plans; ensuring appropriate resources are available to senior executives; approving all accounting policies, financial reports and external communications by the Group; appointing, re-appointing or removing the Company’s external auditors (on recommendation from the audit and risk committee); and appointing, monitoring and managing the performance and remuneration of Executive Directors. The charter sets a minimum number of Board meetings and provides for the establishment of the Audit and Risk Committee and the Remuneration and Nomination Committee. The charter also sets minimum standards of ethical conduct of the Directors, which are further elaborated on in the Company’s Code of Conduct, and specifies the terms on which Directors are able to obtain independent professional advice at the Company’s expense. A copy of the Board Charter and the Company’s code of conduct is available on the Emeco website. Under the terms of the Board Charter, the Chief Executive Officer is responsible to the Board for the day-to-day management of the Group. The Board has formally adopted a structured delegated financial authority (DFA) which outlines the specific financial authority limits delegated to the Chief Executive Officer. The Board approves and monitors this delegation of financial authority. The DFA ensures that contract commitments and expenditure is limited to: • • • contractual commitments in the ordinary course of business; operational expenditure incurred in the day-to-day running of the business; and capital expenditure, being the purchase of assets for the purpose of deriving income. The DFA also sets levels of permitted contractual and expenditure commitment delegated by the Chief Executive Officer to employees across the Group. Authority limits have been set as a risk management tool to ensure adequate controls are in place when committing the Group to a contract or incurring costs. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 32 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 The Company has written agreements with each Director and Senior Executive setting out the terms of their appointment. Evaluating the performance of Executives The performance of the Chief Executive Officer is regularly monitored by the Non-Executive Directors. Formal reviews of the performance of each Senior Executive within the Emeco Group are conducted by the Chief Executive Officer in July/August each year. These performance reviews provide the Chief Executive Officer and each Senior Executive with the opportunity not only to review the Senior Executive’s performance against a range of financial and operational benchmarks but also to review and assess the Senior Executive’s personal and professional development objectives. A review of the performance of each Senior Executive as at July was undertaken during FY14. The Group has formal induction procedures in place to introduce new senior executives to the Group and gain an understanding of the Group’s financial position, strategies, operations, risks and other policies and responsibilities. Principle 2 Structure the Board to add value Board membership With the retirement of Mr Bishop effective from 30 June 2014, the Board is currently comprised of five Directors. Of these, four, including the Chair, are independent Non-Executive Directors. Independent Directors are expected to bring independent views and judgement to the Board’s deliberations. All of the Company’s independent Directors satisfy the criteria for independence set out in the ASX Principles and Recommendations. In considering whether a Director is independent, the Board has had regard to the relationships affecting his or her independent status and other facts, information and circumstances that the Board considers to be relevant. The Board assesses the independence of new Directors upon appointment and reviews the independence of the Directors annually and as appropriate. The test of whether a relationship is material is based on the nature of the relationship and the circumstances of the Director. Materiality is considered from the perspective of the Company, the Director, and the person or entity with which the Director has a relationship. The one Director, who is not considered to be independent due to his involvement in the management and operations of the Group, is Mr Lewsey, the Chief Executive Officer and Managing Director. The table below sets out details of the status of each of the current Directors: Table 25: Status of Current Directors Director Date of Appointment Independent? Non-Executive? Alec Brennan John Cahill Kenneth Lewsey Peter Richards Erica Smyth 16/08/2005 15/09/2008 4/11/2013 14/06/2010 15/12/2011 Yes Yes No Yes Yes Yes Yes No Yes Yes Seeking Re-election at 2014 AGM? Yes Yes No No No The biographical details of the Directors are set out on pages 43 to 45. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 33 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 Director skills, experience and expertise The following table sets out the key skills and experience of the Directors and the extent to which they are represented on the Board and its committees: Table 26: Skills and experience Strategy & Sustainability Finance Strategic skills. Contributes to the formulation, testing and approval of a business strategy. Alert to opportunities, risks and trends. Financial skills and credentials. Aware of financial risk. Understands financial reporting requirements and financial regulations. Marketing & Growth Understands growth and marketing strategies or has Corporate Governance Operations & Asset Optimisation Human Capital External Engagement Industry Knowledge Technical Knowledge Corporate Finance Legal International Business Information Technology marketing skills. Background in corporate governance and compliance. Familiar with corporate legislation and statutory requirements. Understands operational improvements and extracting maximum value from existing assets. Experience in setting management performance goals, overseeing and managing performance, developing executive bench strength and succession plans. Experience with external stakeholder groups (community, regulators, government), including networks and ability to exert influence. Expertise and knowledge pertinent to the industries or environments in which the Company operates. Skills and expertise in products or technologies relevant to the Company. Experience and skills associated with mergers, acquisitions, demergers, capital raising and debt financing. Expertise in corporate law or legislation relevant to the Company. International business experience from working with multinational companies and international expansion. Expertise in IT strategy and system design, procurement and implementation and understands associated risks. Board Audit & Risk Committee Remuneration & Nomination Committee (Total 5 Directors) (Total 3 Directors) (Total 3 Directors) 5 Directors 3 Directors 3 Directors 5 Directors 3 Directors 3 Directors 5 4 5 5 Directors Directors Directors Directors 3 2 3 3 Directors Directors Directors Directors 3 3 3 3 Directors Directors Directors Directors 4 Directors 2 Directors 3 Directors 4 3 4 1 3 2 Directors Directors Directors Director Directors Directors 2 1 3 1 3 2 Directors Director Directors Director Directors Directors 2 2 2 1 2 2 Directors Directors Directors Director Directors Directors The Directors consider that collectively they have the relevant skills, experience and expertise to fulfil their obligations to the Company, its shareholders and other stakeholders. All Directors are expected to maintain the skills required to discharge their duties to the Company. Directors are provided, on an “as needed” basis, with papers, presentations and briefings on Group businesses and on matters which may affect the operations of the Group. The Directors and a brief description of their skills, experience and expertise are set out at pages 43 to 45 of this report. Seeking Information and Independent Professional Advice Under the Board charter, a Director is entitled to seek professional advice at the Company’s expense on any matter connected with the discharge of his or her duties in accordance with the procedure set out in the charter, a copy of which is available on the Emeco website. All Directors have unrestricted access to the General Counsel and Company Secretary and employees of the Group as and when required. Subject to law, the Directors also have access to all records of the Company and information held by Group employees and external advisors. The Board receives regular detailed financial and operational reports from Senior Executives to enable it to carry out its duties. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 34 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 Remuneration and Nomination Committee The Board has established a Remuneration and Nomination Committee, whose responsibilities include the following: • Critically reviewing the performance and effectiveness of the Board and its individual members; • Periodically assessing the skills required to discharge the Board’s duties, having regard to the strategic direction of the Company; and • Reviewing the membership and performance of the Committees and making recommendations to the Board. The Members of the Remuneration and Nomination Committee are Mr Brennan (Chair), Mr Cahill and Ms Smyth. Each Member’s attendance at the three meetings held by the Committee in FY14 is set out at page 46. The charter of the Remuneration and Nomination Committee is available on the Emeco website. Director Selection The Board aims to achieve a mix of skills and diversity in its Members. Candidates recommended for appointment as new Directors are considered by the Board as a whole. If it is necessary to appoint a new Director to fill a vacancy on the Board or to complement the existing Board, a wide potential base of possible candidates is considered. The Board has established the following criteria for the appointment of Directors of the Company: • No actual or potential conflicts of interest at the time of appointment. • No prior adverse history, including bankruptcy, conviction for an offence of dishonesty or any other serious criminal conviction, ASIC or APRA disqualification. • Deserved reputation for honesty, integrity and competence. • Extensive experience at a senior executive level in a field relevant to the Group’s operations and preferably with a listed company. • High level strategic, financial and commercial capability. • Available and willing to devote the time required to meetings and Company business and a real commitment to the Group and its success. • Able to work harmoniously with fellow Directors and management. • Skills, experience and knowledge which complement the skills, experience and knowledge of incumbent Directors. The Company has formal induction procedures in place to introduce new Directors to the Group and gain an understanding of the Group’s financial position, strategies, operations, risks and other policies and responsibilities. Director Re-election Under the terms of the Company’s constitution, a Director other than the Managing Director must retire from office or seek re-election by no later than the third annual general meeting after his or her election or three years, whichever is the later. Further, at least one Director must retire from office at each annual general meeting, unless determined otherwise by a resolution of the Company’s shareholders. Messrs Alec Brennan and John Cahill will seek re-election at the 2014 annual general meeting under these provisions. Under the Company’s constitution the Directors have the power to appoint Directors to fill a vacancy or as an addition to the Board. Any Director, except a Managing Director, appointed in this way must retire from office, and is eligible for re-election, at the next annual general meeting following his or her appointment. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 35 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 The Company provides shareholders with the following material information in its possession relevant to a decision on whether or not to elect or re-elect a Director in its notice of meeting: • The Director’s biographical details, including relevant qualifications, skills and experience; • Other material Directorships held by the Director; • The term of office currently served by the Director; • Whether the Board considers the Director to be an independent Director; and • Whether the Board supports the election or re-election of the Director. Board, Committee and Director Evaluation Generally, a review of the performance of the Board is completed annually by the chair with the assistance of the Remuneration and Nomination Committee. The review is undertaken in accordance with the charter of the Remuneration and Nomination Committee using a questionnaire, the scope of which covers the performance of the Board, its Committees, the Chair and individual Directors. Directors’ questionnaire responses are collated and analysed by the chair and then presented to, and discussed with, the Board. A performance evaluation for the Board, its Committees, the Chair and individual Directors took place in FY14 in accordance with this process. Principle 3 Promote ethical and responsible decision-making The Company considers that confidence in its integrity can only be achieved if its employees and officer’s conduct themselves ethically in all of their commercial dealings on the Company’s behalf. The Company has therefore recognised that it should actively promote ethical conduct amongst its employees, officers and contractors. The Company has adopted a code of conduct, share trading policy, diversity policy, gifts and entertainment policy and whistle blower policy, which apply to all Directors, officers, employees, consultants and contractors of the Group. The Code of Conduct The objectives of the code of conduct are to ensure that: • • • high standards of corporate and individual behaviour are observed by all employees in the context of their employment with the Group; employees are aware of their responsibilities under their contract of employment and always act in an ethical and professional manner; and all persons dealing with the Group, whether it be employees, shareholders, suppliers, clients or competitors, can be guided by the stated values and practices of Emeco. Under the code of conduct, employees of the Group must, amongst other things: • • • • • act honestly and in good faith at all times and in a manner which is in the best interests of the Company as a whole; conduct their personal activities in a manner that is lawful and avoids conflicts of interest between the employee’s personal interests and those of the Company; always act in a manner that is in compliance with the laws and regulations of the country in which they work; report any actual or potential breaches of the law, the code of conduct or the Company’s other policies to the company secretary; and not permit or condone the making of payments, gifts, favours, bribes, facilitation payments or kick-backs in the expectation of preferred treatment for themselves or the Company. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 36 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 The Company actively promotes and encourages ethical behaviour and protection for those who report violations of the code of conduct or other unlawful or unethical conduct in good faith. The Company ensures that employees are not disadvantaged in any way for reporting violations of the code of conduct or other unlawful or unethical conduct and that matters are dealt with promptly and fairly. Directors are required to avoid conflicts of interest and immediately inform their fellow Directors should a conflict of interest arise. Directors are also required to advise the Company of any relevant interests that may result in a conflict. The Board has adopted the use of formal standing notices in which Directors disclose any material personal interests and the relationship of these interests to the affairs of the Company. A Director is required to notify the Company of any new material personal interests or if there is any change in the nature or extent of a previously disclosed interest. Where a matter in which a Director has a material personal interest is being considered by the Board, that Director must not be present when the matter is being considered or vote on the matter, unless all of the other Directors have passed a resolution to enable that Director to do so or the matter comes within a category of exception under the Corporations Act 2001. The Company will only use an employee’s personal information for the purposes for which it has been disclosed (unless it is necessary to protect health and safety, or as required by law). The Company’s approach to community investments (for example sponsorships and donations) is approved and managed at a corporate level with input from the business. The Company seeks to conduct its operations in a sustainable manner, and with due consideration of its social, environmental and economic impacts. Further, the Company is committed to establishing and maintaining mutually beneficial and sustainable relationships with the indigenous communities in regions where the Company operates. A copy of the code of conduct is available on the Emeco website. The Share Trading Policy The principal objective of the share trading policy is to raise awareness, and minimise any potential for breach, of the prohibitions on insider trading contained in the Corporations Act 2001. The policy is also intended to minimise any possible misunderstandings or suspicions arising from employees and officers trading in the Company’s shares, by limiting trading to fixed periods commencing after the release of half and full year results and after the annual general meeting. The Company has appropriate compliance standards and procedures in place to ensure the policy is properly adhered to. Employees are advised of the opening and closing dates of each trading period after the release of half and full year results, and after the annual general meeting. Employees are reminded of the relevant dates for these trading periods, and a copy of the share trading policy accompanies these reminder notifications. A copy of the share trading policy is available on the Emeco website. The Diversity Policy The principal objective of the diversity policy is to support a corporate culture of workplace diversity, and to work towards establishing a framework for diversity awareness and reporting. A copy of the diversity policy is available on the Emeco website. The diversity policy requires the Board to establish measureable objectives for achieving gender diversity. The Remuneration and Nomination Committee is responsible for assessing and reporting to the Board on the Company’s progress towards achieving its measurable diversity objectives on an annual basis. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 37 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 Further details regarding: • • the Company’s annual measureable objectives for achieving gender diversity set by the Board in accordance with the diversity policy and progress towards achieving them; and the proportion of women employees in the Group, in senior executive positions and on the Board, are included in the Sustainability Report at pages 20 to 30. The Company’s most recent gender equality indicators, as defined in and published under the Workplace Gender Equality Act 2012, can be found in Emeco’s Australian Workplace Gender Equality Agency Report, which is available on the Emeco website. The Gifts and Entertainment Policy The objective of the gifts and entertainment policy is to provide guidance to employees when offering or accepting gifts in order to: • • • protect the reputation of employees and the Company against allegations of improper behaviour; ensure that bribery and corruption laws are not breached; and demonstrate the Company’s commitment to treating all parties impartially. A copy of the gift policy is available on the Emeco website. The Whistle Blower Policy The objective of the whistle blower policy is to encourage employees to report misconduct without reprisal, dismissal or victimisation. The policy establishes processes for managing and investigating such reports to ensure misconduct is identified and appropriately dealt with. The policy affords the whistle blower anonymity and protection against penalty or personal disadvantage. A copy of the whistle blower policy is available on the Emeco website. Principle 4 Safeguard integrity of financial reporting Audit and Risk Committee The Board has established an Audit and Risk Committee to support and advise the Board in fulfilling its responsibilities to shareholders, employees and other stakeholders of the Company in connection with: • • the financial reporting process, the system of internal control relating to all matters affecting the Company’s financial performance, the audit process, and the Company’s process for monitoring compliance with laws and regulations and the Code of Conduct; and implementing and supervising the Company's risk management framework. During FY14, the Committee comprised of four independent Non-Executive Directors, all of whom have financial expertise. Members of the Audit and Risk Committee are Mr Cahill (Chair), Mr Bishop, Mr Brennan and Mr Richards. The qualifications of the Audit and Risk Committee Members are set out at pages 43 to 45 of this report. The Audit and Risk Committee charter sets out the role and responsibilities of the Committee and is available on the Emeco website. In FY14, the Audit and Risk Committee held five meetings. Each Committee Member’s attendance at these meetings is set out at page 46. The Managing Director and Chief Executive Officer, Chief Financial Officer, Company Secretary and any other persons considered appropriate may attend the meetings of the Audit and Risk Committee by invitation. The Committee also meets from time to time with the external auditor in the absence of management. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 38 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 External auditor The Company’s external auditor is KPMG. Mr Graham Hogg is the lead audit partner for KPMG in relation to the audit of the Company. Mr Hogg was first appointed as the lead partner responsible for Emeco for the 30 June 2014 year end audit. The lead audit partner of KPMG attends and is available to answer shareholder questions about the conduct of the audit and the preparation and content of the independent auditor’s report at the Company’s annual general meeting. The effectiveness, performance and independence of the external auditor are reviewed by the Audit and Risk Committee. If it becomes necessary to replace the external auditor for performance or independence reasons, the Audit and Risk Committee will formalise a procedure and policy for the selection and appointment of a new auditor. Section 307C of the Corporations Act 2001 requires the external auditor to make an annual independence declaration addressed to the Board declaring that the auditor has maintained its independence in accordance with the Corporations Act 2001 and the rules of the professional accounting bodies. KPMG has provided an independence declaration to the Board for FY14. This independence declaration forms part of the Directors’ report and is provided on page 48 of this annual report. During the year, KPMG, the Group’s auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • • all non-audit services were subject to the corporate governance procedures adopted by the Group and have been reviewed by the audit and risk committee to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a Management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing the risks and rewards. Details of the amounts paid to the auditor of the Group, KPMG, and its network firms, for audit and non-audit services provided during the year are found in Note 9 of the Notes to the Financial Statements. Principle 5 Make timely and balanced disclosure The Company is committed to complying with its continuous disclosure obligations under the ASX Listing Rules and disclosing to investors and other stakeholders all material information about the Company in a timely and responsive manner. The Company has adopted a Continuous Disclosure Policy which is available on the Emeco website. The Continuous Disclosure Policy specifies the processes by which the Company ensures compliance with its continuous disclosure obligations. The policy sets out the internal notification and decision making procedures in relation to these obligations, and the roles and responsibilities of the Company’s officers and employees in the context of these obligations. It emphasises a proactive approach to continuous disclosure and requires the Company to comply with the spirit as well as the letter of the ASX continuous disclosure requirements. The company secretary is responsible for overseeing and coordinating the disclosure of information by the Company to the ASX and for administering the policy. The policy specifies the Company representatives who are authorised to speak publicly on behalf of the Company and procedures for dealing with analysts. It also sets out how the Company deals with market rumour and speculation. Compliance with the policy is reviewed and monitored by the Audit and Risk Committee, and also by the Board. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 39 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 Principle 6 Respect the rights of shareholders The Company has designed and implemented an investor relations program through its adoption of a formal communications policy which describes the processes and systems implemented by the Company to facilitate effective two-way communication between the Company, its shareholders and investors. The communications policy is available on the Emeco website. The Company acknowledges the importance of effective communication with its shareholders. The Company provides information about itself and its governance via its website. All public announcements are posted on the Company’s website after they have been released to the ASX. The Company also places the full text of notices of meetings and explanatory material on its website, as well as copies of its annual report and the chair’s address at the annual general meeting. The Company offers to shareholders a number of options to receive electronic communications. Shareholders can elect to receive notification by email when payment advices, annual reports, notices of meetings and proxy forms are available online. They can also elect to receive email notification of important announcements. The Company also encourages effective shareholder participation at general meetings, which is the major forum for shareholders to ask questions of the Directors about the performance of the Group. The Company provides its external auditor with notice of general meetings of the Company, as required by section 249K of the Corporations Act 2001, and ensures that its external auditor attend its annual general meetings to answer shareholder questions about the conduct of the audit and the preparation and content of the Independent Auditor’s Report. Principle 7 Recognise and manage risk Risk management policy The Board believes that risk management is fundamental to sound management and that oversight of such matters is an important responsibility of the Board. The Board, with assistance from the Audit and Risk Committee, is responsible for ensuring there are adequate processes and policies in place to identify, assess and mitigate risk. Emeco has adopted a risk management policy which is available on the Emeco website. Emeco has also implemented a formal enterprise risk management programme to ensure that risk management concepts and awareness are embedded into the culture of the Group. This programme includes the involvement of Senior Executives and Senior Operational Management. The key elements of Emeco’s enterprise risk management programme are as follows: • Classification of risk into strategic, operational, financial and compliance risks. • Quantification and ranking of risk consequences and likelihood. • • Identification of strategic risk issues. Identification of operational risk issues through formalised regional-based risk workshops. • Development of a Company database for communicating and updating activity and progress on risk matters and maintaining risk registers. • Identification, enhancement and development of key internal controls to address risk issues, including risk treatment plans and assigning accountabilities for identified risks to senior Emeco employees. • Comprehensive insurance programme. The Audit and Risk Committee is responsible for reviewing the effectiveness of the overall risk management framework. It is also required to review the risk management policy on an annual basis. In respect of FY14, the review of the risk management policy was deferred and, therefore, was not reviewed. This was due to the pending commencement of the new Chief Financial Officer on 1 July 2014. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 40 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 Internal assurance In May 2010, the Board approved the appointment of Ernst & Young as a supplier of internal audit services. The Company considered there was a clear link between the internal audit function and delivering business improvement outcomes (noting that the focus of assurance also remains central to this function). Management formally reviews the performance of the internal auditor on an annual basis and reports its findings to the audit and risk committee. The overall internal assurance process is overseen by the Chief Financial Officer who manages the process, and reports to the audit and risk committee and the Board on the effectiveness of the Emeco Group’s risk management, governance and control frameworks. In respect of FY14, the Board has received an assurance from the Managing Director and the Chief Financial Officer that the declaration provided in accordance with section 295A of the Corporations Act 2001 is 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. Management has also reported to the Board that the Group’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects. Principle 8 Remunerate fairly and responsibly The Board has established a Remuneration and Nomination Committee. The Committee is currently comprised of three independent Non-Executive Directors. Details regarding membership of the Committee are set out under Principle 2. Each Member’s attendance at the three meetings held by the Committee in FY14 is set out at page 46. The Emeco Group remuneration policy is substantially reflected in the objectives of the Remuneration and Nomination Committee. The Committee’s remuneration objectives are to endeavour to ensure that: • • • the Directors and Senior Executives of the Group are remunerated fairly and appropriately; the remuneration policies and outcomes strike an appropriate balance between the interests of the Company's shareholders, and rewarding and motivating the Group's executives and employees in order to secure the long term benefits of their energy and loyalty; and the human resources policies and practices are consistent with and complementary to the strategic direction and human resources objectives of the Company as determined by the Board. Under its charter, the Remuneration and Nomination Committee is required to review and make recommendations to the Board about: • • • • • • • • the general remuneration strategy for the Group so that it motivates the Group's Executives and employees to pursue the long term growth and success of the Group and establishes a fair and transparent relationship between individual performance and remuneration; the terms of remuneration for the Executive Directors and other Senior Executives of the Group from time to time including the criteria for assessing performance; diversity policy compliance and reporting; remuneration reviews for Executive and Non-Executive Directors; the outcomes of remuneration reviews for Executives collectively, individual Executive Directors and other Senior Executives of the Group; changes in remuneration policy and practices, including superannuation and other benefits; employee equity plans and allocations under those plans; and the disclosure of remuneration requirements in the Company's public materials including ASX filings and the annual report. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 41 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement For the year ended 30 June 2014 The charter of the Remuneration and Nomination Committee is available on the Emeco website. Emeco clearly distinguishes the structure of Non-Executive Directors’ remuneration from that of Executive Directors and Senior Executives. Non-Executive Directors are remunerated by way of fees in the form of cash benefits and superannuation contributions. They do not receive options or bonus payments, or retirement benefits other than superannuation. A remuneration report detailing the information required by section 300A of the Corporations Act 2001 in relation to FY14 is included in the Directors’ Report on pages 43 to 67. The Company has an equity-based remuneration scheme (see section 3.3.2 of the remuneration report for more information) and, through its share trading policy, prohibits participants from entering into transactions which limit the economic risk of participating in the scheme. A summary of the share trading policy is set out on page 37. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 42 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 The Directors of Emeco Holdings Limited (Emeco or Company) present their report together with the financial reports of the consolidated entity, being Emeco and its controlled entities (Group) for the financial year ended 30 June 2014 (FY14) and the auditor’s report thereon. Directors The Directors of the Company during FY14 were: ALEC BRENNAN AM, BSc Hons, MBA, FAICD, 67 Appointment: Independent Non-Executive Director since August 2005. Chairman since November 2006. Board committee membership: Chairman of the Remuneration and Nomination Committee. Member of the Audit and Risk Committee. Skills and experience: Alec was Chief Executive Officer of CSR from April 2003 until March 2007, prior to which he held a range of positions with CSR and related companies, including time as Director of Finance and of Strategy for the group. He was Chief Executive Officer of a number of group companies including Readymix Group, Bradford Insulation and Gove Aluminium. Alec has been a public company Director for more than 20 years. Alec is a Member of the Order of Australia for significant service to business and commerce, tertiary education administration and to the community. Current Appointments: • • Director of the New South Wales Environment Protection Authority (since 2012). Pro-Chancellor of the Senate of Sydney University. Chair of the University's Finance and Human Resources committees (since 2006). KENNETH LEWSEY BBus, MAICD, 51 Appointment: Managing Director since November 2013. Skills and experience: Prior to Emeco, Ken served as Executive Vice President - Business Development at Aurizon Holdings Limited from 2011 to 2013. This included responsibility for business development, major projects, mergers and acquisitions, as well as profit and loss responsibility for Aurizon's iron ore and intermodal business units. Ken was Aurizon's Chief Executive Officer - Freight Group from 2009 to 2011 and Chief Executive Officer of Aurizon's subsidiary, ARG, from 2007 to 2011. Ken was previously Managing Director of Cleanaway Industrial, Regional Director of Brambles Industrial Services, and held Senior and General Management roles in the steel industry with Smorgon Steel and BHP Steel. Current Appointments: • Board member of Lifeline WA (since 2014) EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 43 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 KEITH GORDON BSc (Agric) Hons, MBA, MAICD, 50 Appointment: Managing Director since December 2009. Resigned as Managing Director on 4 November 2013. Skills and experience: Keith has had an extensive career in the industrials sector and joined Emeco after a decade with Wesfarmers Limited, where he held a number of senior roles and was heavily involved in major corporate transactions. Current Appointments: • Chairman of EDGE Employment Solutions (since 2012, Director since 2009). ROBERT BISHOP BSc, MSc Eng, FAICD, MIEAust, MIET(UK), 69 Appointment: Independent Non-Executive Director since June 2009. Retired as a Director on 30 June 2014. Board committee membership: Member of the Audit and Risk Committee. Skills and experience: Bob has extensive international business experience having worked in the United Kingdom, South Africa and Europe with particular focus on mergers and acquisitions, new business start-ups and international business development in the manufacturing and mining sectors. Current Appointments: • Director of Newcastle Regional Art Gallery and a member of its Investment Committee (since 2011). JOHN CAHILL BBus, Grad Dip Bus, FCPA, GAICD, 58 Appointment: Independent Non-Executive Director since September 2008. Board committee membership: Chairman of the Audit and Risk Committee. Member of the Remuneration and Nomination Committee. Skills and experience: John has over 25 years' experience working in senior treasury, finance, accounting and risk management positions, predominantly in the energy utility sector. John was previously Non-Executive Director (2007 to 2013) and President and Chairman (2011 to 2013) of CPA Australia Ltd. Current Appointments: • Non-Executive Director (since 2009) and Deputy Chairman (since 2010) of Electricity Networks Corporation, Western Australia (trading as Western Power). Chair of its Finance and Risk Committee and a member of its People and Performance Committee. Councillor of Edith Cowan University and Chair of the University's Resources Committee (since 2011). Non-Executive Director of Accounting Professional & Ethical Standards Board (since February 2014). • • EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 44 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 PETER RICHARDS BCom, 55 Appointment: Independent Non-Executive Director since June 2010. Board committee membership: Member of the Audit and Risk Committee. Skills and experience: Peter has over 30 years of international business experience with global companies including British Petroleum (including its mining arm Seltrust Holdings), Wesfarmers Limited and Dyno Nobel Limited. During his time at Dyno Nobel, he held a number of senior positions with the North American and Asia Pacific business, before being appointed as Chief Executive Officer in Australia (2005 to 2008). Peter was previously Chairman of Kangaroo Resources Limited (2010 to 2013) and Non-Executive Director (2010 to 2013), Managing Director (February 2013 to July 2013) of Norfolk Group Limited and Chairman of Minbos Resources Limited (2010 to 2014). Current Appointments: • • • • Chairman of Cockatoo Coal Ltd (since 2014). Chairman of NSL Consolidated Limited (since 2014, Non-Executive Director since 2009). Non-Executive Director of Sedgman Limited (since 2010). Non-Executive Director of Bradken Limited (since 2009). ERICA SMYTH MSc, FAICD, FTSE, 62 Appointment: Independent Non-Executive Director since December 2011. Board committee membership: Member of the Remuneration and Nomination Committee. Skills and experience: With over 30 years' experience in the mineral and petroleum industries, Erica's career highlights include her positions as Manager of BHP-Utah Minerals International's Beenup Project, Manager - Gas Market Development WA for BHP Petroleum and General Manager - Corporate Affairs with Woodside Petroleum Limited. The Chamber of Mines & Energy Western Australia awarded Erica a Lifetime Achievement Award for her contribution to the industry as part of the Women in Resources Awards 2010 and in 2012 Erica was elected as a Fellow of the Academy of Technological Science and Engineering. Current Appointments: • • • • • • Chair of Diabetes Research Foundation of Western Australia (since 2007). Chair of Toro Energy Limited (since 2009). Director of the Australian Nuclear Science and Technology Organisation (since 2009). Director Royal Flying Doctor Service Western Operations (since 2010). Director Deep Exploration Technologies CRC (since 2013). Director Harry Perkins Institute of Medical Research (since 2013). EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 45 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Company Secretary The Company Secretary of the Company during FY14 was: MICHAEL KIRKPATRICK BA, BEc, LLB (Hons) Michael was appointed as Company Secretary to the Emeco Board in April 2005. Prior to joining Emeco, Michael was a corporate lawyer with several Australian law firms and the Legal Counsel and Company Secretary of a large industry superannuation fund. Michael is admitted to practice as a barrister and solicitor of the Supreme Court of Western Australia. In his capacity as General Manager Corporate Services for Emeco, Michael is responsible for the Company's in-house legal counsel, global human resources and corporate affairs functions. Michael has been a member of the Law Society of Western Australia since 2002. The current Company Secretary of the Company is: THAO VANDERPLANCKE LLB (Hons), BCom Thao was appointed to the position of Company Secretary to the Emeco Board effective 1 July 2014. Thao joined Emeco as legal counsel in May 2011 and became senior legal counsel in October 2012. Prior to joining Emeco, Thao spent several years as a corporate/commercial lawyer with an Australian law firm. Directors’ Meetings The number of Board and committee meetings held and attended by each Director in FY14 is outlined in the following table below: Table 27: Board and Committee Meetings Held and Director Attendance Director Board Meetings Audit & Risk Committee Meeting Remuneration & Nomination Committee Meeting A 18 20 19 7 14 20 19 B 20 20 20 7 13 20 20 A 5 5 5 B 5 5 5 2 * 2 4 * 3 5 5 5 * 5 A B 2 * 3 3 3 3 3 1 * 1 2 * 2 3 * 3 3 3 Robert Bishop Alec Brennan John Cahill Keith Gordon Kenneth Lewsey [1] Peter Richards Erica Smyth A B * [1] Number of meetings attended Number of meetings held during the time the Director held office during the year Not a member of this committee Mr Kenneth Lewsey attended a Board meeting and an audit and risk committee meeting by invitation prior to his appointment as Director Principal activities The principal activity during FY14 of the Group was the provision of heavy earthmoving equipment rental solutions to mining companies and contractors. As set out in this report, the nature of the Group’s operations and principal activities, have been consistent throughout the financial year. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 46 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Operating and financial review A review of Group operations, and the results of those operations for FY14, is set out in the operating and financial review section at pages 9 to 14 and in the accompanying financial statements. Dividends No dividends were declared or paid during FY14. No dividends have been declared or paid since the end of FY14. Significant changes in state of affairs In the opinion of the Directors, there were no significant changes in the Group’s state of affairs that occurred during the financial year under review, other than those disclosed in the operating and financial review section or in the financial statements and the notes thereto. Events subsequent to report date On 1 July 2014, Mr Stephen Gobby resigned as Chief Financial Officer and Mr Gregory Hawkins commenced as the Chief Financial Officer. On 1 July 2014, Mr Michael Kirkpatrick resigned as Executive General Manager Corporate Services and Ms Thao Vanderplancke commenced as General Counsel and Company Secretary. Likely developments Likely developments in, and expected results of, the operations of the Emeco Group are referred to in the operating and financial review section at pages 9 to 14. This report omits information on likely developments in the Emeco Group in future financial years and the expected results of those operations the disclosure of which, in the opinion of the Directors, would be likely to result in unreasonable prejudice to the Emeco Group. Directors’ interest The relevant interests of each Director in the shares, debentures, and rights or options over such shares or debentures issued by the companies within the Group and other related bodies corporate, as notified by the Directors to the ASX in accordance with section 205G(1) of the Corporations Act 2001, at the date of this report are as follows: Table 28: Directors’ Interests Director Ordinary Shares Options or Rights Robert Bishop 789,000 - Alec Brennan 2,081,700 John Cahill 120,000 Keith Gordon 1,125,000 [A] Kenneth Lewsey 315,000 Peter Richards 40,000 Erica Smyth 71,049 - - - - - - [B] [A] [B] Mr Keith Gordon resigned as a Director on 4 November 2013. This is Mr Gordon’s interest in the Company as at his resignation date. Mr Kenneth Lewsey has LTI entitlements, which is subject to shareholder approval at the Company’s 2014 annual general meeting. The performance shares have not been issued as this approval has not yet been sought as at the date of this report. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 47 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Indemnification and insurance of officers and auditors The Company has entered into a deed of access, indemnity and insurance with each of its current and former Directors, the Chief Financial Officer and the Company Secretary. Under the terms of the deed, the Company indemnifies the Officer or Former Officer, to the extent permitted by law, for liabilities incurred as an officer of the Company. The deed provides that the Company must advance the officer reasonable costs incurred by the officer in defending certain proceedings or appearing before an inquiry or hearing of a government agency. Since the end of the previous financial year, the Company has paid premiums in respect of contracts insuring current and former officers of the Emeco Group, including Executives, against liabilities incurred by such an officer to the extent permitted by the Corporations Act 2001. The contracts of insurance prohibit disclosure of the nature of the liability cover and the amount of the premium. The Group has not indemnified its auditor, KPMG. Non-audit services During the year, KPMG, the Group’s auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • • all non-audit services were subject to the corporate governance procedures adopted by the Group and have been reviewed by the audit and risk committee to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing the risks and rewards. Details of the amounts paid to the auditor of the Group, KPMG, and its network firms, for audit and non-audit services provided during the year are found in Note 9 of the Notes to the Financial Statements. Lead auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 67 and forms part of the Directors’ report. Rounding off The amounts contained in the Financial Report have been rounded to the nearest $1,000 (unless otherwise stated) under the option available to the Company under ASIC Class Order 98/100 dated 10 July 1998. The Company is an entity to which the Class Order applies. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 48 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Remuneration report (audited) Remuneration Report Contents This report covers the following matters: 1. 2. 3. 4. 5. 6. 7. Introduction Remuneration Governance Executive Remuneration Non-Executive Director Remuneration Details of Remuneration Details of Share-Based Payments Service Contracts 1. Introduction This report details the Emeco Group’s remuneration objectives, practices and outcomes for key management personnel (KMP), which includes Directors and senior executives, for the year to 30 June 2014. Any reference to “Executives” in this report refers to KMP who are not Non-Executive Directors. 1.1 Emeco’s KMP The following persons were Directors of the Company during FY14: Table 29: Emeco Directors Non-Executive Directors Alec Brennan Robert Bishop (ceased Directorship on 30 June 2014) John Cahill Peter Richards Erica Smyth Executive Directors Kenneth Lewsey, Managing Director & Chief Executive Officer (commenced role on 4 November 2013) Keith Gordon, Managing Director & Chief Executive Officer (ceased role 4 November 2013) EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 49 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 The following persons were also employed as Executives of the Company during FY14: Table 30: Emeco Executives Other Executives Kellie Benda Stephen Gobby Anthony Halls Christopher Hayman Benny Joesoep Executive General Manager Strategy & Corporate Development (commenced role on 24 February 2014) Chief Financial Officer General Manager Australian Rental (ceased role on 17 February 2014) President Americas (commenced role on 17 February 2014), previously President Canada (commenced role on 8 July 2014 and ceased role on 17 February 2014) President Director Indonesia (commenced role on 9 December 2013 and ceased role on 13 May 2014) Michael Kirkpatrick Executive General Manager Corporate Services Grant Stubbs Ian Testrow Executive General Manager Asset Strategy & Operational Improvement Chief Operating Officer Australia (commenced role on 17 February 2014), previously President New & Developing Business (ceased role on 17 February 2014) 2. Remuneration governance 2.1 The Role of the Board and the Remuneration and Nomination Committee The Board is committed to implementing KMP remuneration structures which achieve a balance between: • • rewarding Executives for the achievement of the Company’s short and long term financial, strategic and safety goals; and aligning the interests and expectations of Executives, shareholders and other stakeholders. The Board engages with shareholders, Management and other stakeholders as required to continuously refine and improve KMP remuneration policies and practices. The Remuneration and Nomination Committee is responsible for reviewing and suggesting recommendations to the Board in relation to: • • • • • • the general remuneration strategy of the Company; the terms of KMP remuneration and the outcomes of remuneration reviews; employee equity plans and the allocations under those plans; recruitment, retention, performance measurement and termination policies and procedures for all KMP; disclosure of remuneration in the Company’s public materials including ASX filings and the Annual Report; and retirement payments. The members of the Remuneration and Nomination Committee in FY14 were Mr Alec Brennan (Chair), Mr John Cahill and Ms Erica Smyth. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 50 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 3. Executive remuneration 3.1 Remuneration policy The Group remuneration policy is substantially reflected in the objectives of the Company’s Remuneration and Nomination Committee. The Committee’s objectives are summarised in the following table: Table 31: Summary of Group remuneration objectives Objective Practices aligned with Objective Remunerate fairly and appropriately Maintain balance between the interests of shareholders and the reward of Executives in order to secure the long term benefits of Executive energy and loyalty. Benchmark remuneration structures to ensure alignment with industry trends. Align Executive interests with those of shareholders Provide a significant proportion of “at risk” remuneration to ensure that Executive reward is directly linked to the creation of shareholder value. Ensure human complementary to the strategic direction of the Company. resources policies and practices are consistent and Prohibit the hedging of unvested equity to ensure alignment with shareholder outcomes. Attract, retain and develop proven performers Provide total remuneration which is sufficient to attract and retain proven and experienced Executives who are capable of: fulfilling their respective roles with the Group; achieving the Group’s strategic objectives; and • • • maximising Group earnings and returns to shareholders. The remuneration structure for the Company’s Executives consists of fixed and variable components. The variable component ensures that a proportion of pay varies with Company and personal performance. 3.2 Fixed remuneration Fixed remuneration comprises base salary, employer superannuation contributions and other allowances and non-cash benefits. Each Executive’s fixed remuneration is reviewed and benchmarked annually in September. The level of remuneration is set to enable the Company to attract and retain proven performers once they are working within the business. An Executive’s responsibilities, experience, qualifications, performance and geographic location are also taken into account. Fixed remuneration for Executives has previously been set by reference to the fixed remuneration of comparable positions in comparable sized companies in the mining and mining services sectors. These sectors are considered to be appropriate as they are the key source of talent for the Company. The Company’s policy is to set the fixed remuneration for Executive positions at or near the 75th percentile of the fixed remuneration for the relevant comparable position in these sectors. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 51 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 However, the fixed remuneration of the new Managing Director and Chief Executive Officer, Mr Kenneth Lewsey, is 7.5% lower than that of his predecessor, Mr Keith Gordon, and the fixed remuneration of the new Chief Financial Officer, Mr Greg Hawkins (appointed 1 July 2014), is 20% lower than that of his predecessor, Mr Stephen Gobby. 3.3 Variable remuneration Variable remuneration is performance linked remuneration which consists of short term incentives (STIs) and long term incentives (LTIs). STI entitlements are for performance assessed over one year. See section 3.3.1 for more information. LTI entitlements are for performance over a three year period. See section 3.3.2 for more information. If maximum performance is achieved, the maximum remuneration attributable to each incentive component as a percentage of total fixed remuneration (TFR) for each Executive is shown in the following table: Table 32: Components of variable remuneration Executive [A] (% of TFR) (% of TFR) (% of TFR) (% of TFR) (% of TFR) Maximum STI Cash Component Maximum STI Equity Component Maximum STI Maximum LTI Maximum Total Variable Remuneration Kenneth Lewsey, Managing Director & Chief Executive Officer [B] Kellie Benda, Executive General Manager Strategy & Corporate Development [C] Stephen Gobby, Chief Financial Officer Anthony Halls, General Manager Australian Rental Christopher Hayman, President Canada / President Americas Michael Kirkpatrick, Executive General Manager Corporate Services Grant Stubbs, Executive General Manager Asset Strategy & Operational Improvement Ian Testrow, Chief Operating Officer Australia and President New & Developing Business 75 0 50 40 40 40 40 50 25 0 10 20 20 20 20 10 100 0 60 60 60 60 60 60 75 40 50 40 40 40 40 50 175 40 110 100 100 100 100 110 [A] [B] [C] Mr Keith Gordon announced his intention to step down as Managing Director and Chief Executive Officer on 30 July 2013. Mr Gordon had no FY14 STI or LTI entitlements. Mr Benny Joesoep was appointed as an Executive on 9 December 2013. Mr Joesoep had no FY14 STI or LTI entitlements as an Executive. Mr Kenneth Lewsey has an LTI entitlement of 75% of his fixed remuneration for FY14 which is subject to shareholder approval at the Company’s 2014 annual general meeting. As this approval had not been sought as at 30 June 2014, the relevant LTI Securities have not been issued. Ms Kellie Benda was appointed as an Executive on 24 February 2014. Ms Benda had no FY14 STI entitlement. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 52 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 3.3.1 STI remuneration Cash and Equity STIs are used to reward the performance of Executives over a full financial year. The actual amount of STI granted is determined at the end of the financial year in light of the Executive’s performance against agreed key performance indicators (KPIs). An Executive’s maximum STI entitlement is set as a percentage of TFR (refer to table 32 above for details). For the Managing Director and Chief Executive Officer, STI entitlements are made 25% in equity and 75% in cash. Any equity awards are subject to shareholder approval at the Company’s 2014 annual general meeting. For all other Executives, STI entitlements are made in cash up to the maximum STI cash component of TFR. Any STI entitlements above the maximum STI cash component are made in equity. STI entitlements are made after the financial year audit is completed and following review and approval by the Remuneration and Nomination Committee and the Board. In respect of FY14, STI entitlements made in equity are based on the Company’s June 2014 VWAP. For the Managing Director and Chief Executive Officer, STI entitlements made in equity will be issued after its approval at the Company’s 2014 annual general meeting and are escrowed for a period of two years until the announcement of the Company’s annual results in 2016. For all other Executives, the grant of the shares is deferred to, and is subject to the Executive remaining employed by the Group the day after the announcement of Emeco’s annual results in 2015. Key performance indicators The STI KPIs are chosen to ensure that important non-financial metrics which are aligned with the long term sustainability and strategic success of the Company are included, along with financial performance indicators. Table 33 below sets out the KPIs for the FY14 STI plan and the weightings attributable to each of them. In the Board’s view, these KPIs align the reward of Executives with the interests of shareholders. Table 33: FY14 STI plan KPI weightings and entitlements KPI Weighting Entitlement Rationale Outcomes EBITDA [A] 60%[B] [A] 25%[C] Group Net Profit After Tax (NPAT) 0% if EBITDA is less than $90 million. 25% if EBITDA is between $90 million and $95 million. 50% if EBITDA is between $95 million and $100 million. 75% if EBITDA is between $100 million and $105 million. 100% if EBITDA is greater than $105 million. Pro-rata payments between these levels. 0% if NPAT is less than 120% of budgeted outcomes. 25% if NPAT is equal to 120% of budgeted outcomes. 50% if NPAT is equal to 140% of budgeted outcomes. 75% if NPAT is equal to 160% of budgeted outcomes. 100% if NPAT is greater than or equal to 180% of budgeted outcomes. Pro-rata payments between these levels. 0% Company’s This profit figure quantifies the financial performance and was the guidance measure released to the market immediately prior to this STI KPI being set for Mr Kenneth who commenced his role with the Company part way through the financial reporting period. Lewsey This profit figure quantifies the financial performance. Company’s 0% EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 53 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Table 33: FY14 STI plan KPI weightings and entitlements (continued) KPI Weighting Entitlement [A] 35%[C] Operating Cash Flow (OCF) Sale of Idle Assets 15% Safety TRIFR [D] 7.5% Positive Initiatives 7.5% 0% if OCF is less than 85% of budgeted outcomes. 25% if OCF is equal to 90% of budgeted outcomes. 50% if OCF is equal to 100% of budgeted outcomes. 75% if OCF is equal to 110% of budgeted outcomes. 100% if OCF is greater than or equal to 120% of budgeted outcomes. Pro-rata payments between these levels. 0% if revenue is less than 90% of budget 25% if revenue is equal to 90% of budget 50% if revenue is equal to 100% of budget 75% if revenue is equal to 110% of budget 100% if revenue is greater than or equal to 120% of budget Pro rata payments between these levels. 0% if the TRIFR as at 30 June 2014 is up to 10% lower than the TRIFR as at 30 June 2013. 7.5% if the TRIFR as at 30 June 2014 is 20% lower than the TRIFR as at 30 June 2013. Pro-rata payments between these levels. Notwithstanding the above, no entitlement if there is a serious, permanently disabling injury or a fatality. 4.5% for the attendance at, and report of, up to four operational safety meetings. 3% for the conduct and reporting of up to three safety act observations. Rationale Outcomes 0% OFC was chosen to reflect the Company’s focus on maintaining cash flow in order to reduce debt and ensure that the balance sheet remains robust. strong 12.3% The objective of the sale of idle assets is to liquidate capital not used to generate earnings and enables the application of the proceeds from these asset sales to debt reduction. 7.5% reviews the The Board safety Company’s performance in detail at each Board meeting and is striving to achieve a “zero- harm” workplace at Emeco. TRIFR measures progress towards this aspiration. 2.1% - 7.5% The in participation behavioural based safety programs encourages safety leadership and promotes safety the workplace. throughout EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 54 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Table 33: FY14 STI plan KPI weightings and entitlements (continued) KPI Weighting Entitlement Rationale Outcomes Personal Goals 10% Managing Director’s entitlement is assessed by the Board. Executives’ entitlement is assessed by the Managing Director and approved by the Board. 3.7% - 10% The Board recognises that each Executive contributes to the Company’s business strategy differently. Progress of each Executive’s personal set goals is monitored by the Board and ensures that an appropriate balance is maintained between the Company’s short term and long term objectives. Executive personal goals the Indonesian business strategy, global HR and programs, the Company’s debt strategy and expanding the Company’s service offering. initiatives include [A] [B] [C] [D] The Board has discretion to adjust EBITDA, NPAT and OCF for abnormal items. Any such adjustment may have a positive or negative impact on the EBITDA, NPAT and OCF outcomes used by the Board to assess STI entitlements. In FY14 there was no award in respect of the EBITDA, NPAT and OCF components of the STI. This KPI applies to Mr Kenneth Lewsey only. This KPI applies to all Executives except Mr Kenneth Lewsey. TRIFR = Number of recordable injuries x 1,000,000 hours Total hours worked in 12 months 3.3.2 LTI remuneration Performance Shares and Performance Rights Emeco has established an equity-based LTI plan that provides for a reward that varies with Company performance over a three year period (Vesting Period). The LTI plan applies to the Company’s senior managers (which includes Executives). LTI remuneration aligns the interests of Emeco’s senior managers with the long term interests of its shareholders by providing Emeco’s senior managers with an ongoing incentive to deliver the long term objectives of the Emeco Group. LTI remuneration is in the form of performance shares or performance rights (LTI Securities). A performance share is a fully paid ordinary Emeco share, the vesting of which is subject to the performance condition described below being met. A performance right is a right to receive a fully paid ordinary Emeco share, the vesting of which is subject to the performance condition being met. Australian-based Executives In FY14, performance shares were granted to Australian-based Executives, with the number of shares granted being determined by reference to the Executive’s maximum LTI entitlement and the fair value of the share as at the commencement of the Vesting Period. Performance shares were granted at no cost to the Executive. Executives based outside Australia In FY14, Emeco Executives who were resident outside Australia were issued performance rights instead of performance shares due to the complexity and cost of compliance issues associated with the issue of shares in the relevant foreign jurisdictions. These grants were on substantially identical terms to that of the performance shares issued to Australian- based Executives. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 55 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Performance condition The performance condition for the vesting of LTI Securities under the FY14 LTI plan (and the FY13 and FY12 LTI plans) is based on the relative total shareholder return (TSR) of the Company measured against a peer group (Peer Group) over the Vesting Period. TSR is a performance measure that calculates the return to a shareholder taking into account share price growth, dividend payments and capital returns. At the time of the FY14 LTI grant, the Peer Group comprised a total of 99 companies from the S&P/ASX Small Industrials (excluding banks, insurance companies, property trusts/companies and investment property trusts/companies and other stapled securities) as set out in the table below. 18 companies that were considered direct peers to Emeco are shaded. Table 34: Peer Group of Companies Acrux Limited Forge Group Limited Ainsworth Game Technology Limited G.U.D. Holdings Limited Amcom Telecommunications Limited G8 Education Limited APN News & Media Limited Goodman Fielder Limited ARB Corporation Limited Ardent Leisure Group Ausdrill Limited Ausenco Limited Austin Engineering Limited GWA Group Limited Hills Holdings Limited iiNet Limited IMF (Australia) Ltd Infigen Energy Australian Agricultural Company Limited InvoCare Limited Qube Holdings Limited RCR Tomlinson Limited REA Group Ltd Retail Food Group Limited Ridley Corporation Limited SAI Global Limited Sedgman Limited Seven Group Holdings Limited Seven West Media Limited Sigma Pharmaceuticals Limited Automotive Holdings Group Limited IOOF Holdings Limited Silex Systems Limited Billabong International Limited Boart Longyear Limited Bradken Limited Breville Group Limited IRESS Limited JB Hi-Fi Limited Kathmandu Holdings Limited Singapore Telecommunications Limited Sirtex Medical Limited Skilled Group Limited M2 Telecommunications Group Limited SMS Management & Technology Limited Cabcharge Australia Limited MACA Limited Southern Cross Media Group Limited Cardno Limited Macmahon Holdings Limited Starpharma Holdings Limited Cash Converters International Macquarie Atlas Roads Group STW Communications Group Limited Chorus Limited Clough Limited Codan Limited Magellan Financial Group Limited Super Retail Group Limited McMillan Shakespeare Limited Telecom Corporation of New Zealand Limited Mermaid Marine Australia Limited Ten Network Holdings Limited Credit Corp Group Limited Mesoblast Limited CSG Limited CSR Limited Navitas Limited Nextdc Limited Decmil Group Limited NRW Holdings Limited Domino's Pizza Enterprises Limited Nufarm Limited DuluxGroup Limited Energy World Corporation Ltd Envestra Limited Fairfax Media Limited OrotonGroup Limited Pacific Brands Limited Perpetual Limited Pharmaxis Ltd The Reject Shop Limited Thorn Group Limited Tox Free Solutions Limited Tpg Telecom Limited Trade Me Group Limited Transfield Services Limited Transpacific Industries Group Ltd UXC Limited Virgin Australia Holdings Limited Fleetwood Corporation Limited Platinum Asset Management Limited Webjet Limited Fletcher Building Limited Premier Investments Limited Wotif.com Holdings Limited FlexiGroup Limited Prima Biomed Ltd Programmed Maintenance Services Limited EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 56 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 At the end of the Vesting Period, the TSR for each company in the Peer Group, and Emeco, will be measured and ranked. Emeco will be allocated a percentile rank accordingly, which represents the percentage of companies in the Peer Group that has a lower TSR than Emeco (Percentile Rank). LTI Securities will only vest if a certain Percentile Rank is achieved by Emeco. There is a maximum and minimum vesting range and vesting occurs in this range on a sliding scale as set out in the following table: Table 35: TSR vesting schedule Percentile Rank 50% or lower Percentage of LTI Securities that Vest Nil Between 50% and 75% 50% plus 2% for each Percentile Rank over 50% 75% or higher 100% LTI Securities that do not vest at the end of the Vesting Period will lapse. The shares associated with these LTI Securities will be transferred to a nominee of the Company and held on trust for subsequent re-allocation. Performance shares which vest will automatically be transferred into the name of the participant. Performance rights which vest will automatically be converted into shares on the vesting date and transferred into the name of the participant. Vesting on involuntary termination If an Executive’s employment is terminated due to death, total and permanent disability, retrenchment or retirement then the TSR of the Executive’s unvested LTI Securities will be tested at the date of termination. If the performance condition has been met then the LTI Securities will vest based on the vesting schedule. The actual amount of LTI Securities that vest will be pro-rated based on the period that the Executive has been employed with Emeco during the Vesting Period. All unvested LTI Securities lapse if an Executive resigns or is terminated for cause. Prohibition of hedging LTI Securities Emeco’s share trading policy prohibits Executives, Directors and other officers of the Company from entering into transactions intended to hedge their exposure to Emeco securities which have been issued as part of remuneration. 3.4 Relationship between Remuneration and Company Performance Emeco’s remuneration objectives effectively align the interests of Emeco’s Executives with the interests of the Company and its shareholders. This has been achieved by ensuring that a significant proportion of Executives’ remuneration is “at risk” in the form of STI and LTI components. STI awards are linked to the achievement of financial measures of the Company’s profitability and cash generating performance, and non-financial measures of operational and strategic outcomes. LTI awards are linked to total shareholder return relative to a comparator group of similar companies. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 57 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Details of the KPIs for the FY14 STI and LTI plans are set out in the following table: Table 36: Financial and Non-Financial LTI and STI measures LTI STI Financial Total shareholder return Non-financial Not Applicable Budgeted EBITDA Budgeted NPAT Budgeted OCF Budgeted sale of idle assets Safety Personal goals Further details regarding Emeco’s Executive remuneration structure are set out in sections 3.2 and 3.3. The extent to which Emeco has set financial KPIs which are genuinely challenging, and which entail that STI entitlements are genuinely at risk, is highlighted by the fact that no Executive received a STI payment in FY10. In FY11, all Executives received a STI payment in line with the improved performance of the Group and the successful execution of its strategy. STI payments to Executives in FY12 decreased from the amounts paid in FY11, with a further decrease in FY13, principally because FY12 and FY13 financial KPIs were not met to the same extent as they were in FY11. In FY14, the STI awards increased slightly from FY13 due to safety, personal goals and the sale of idle assets KPIs being met - EBITDA, NPAT and OCF KPIs were not met in FY14. Details of these KPIs are set out above in section 3.3.1. Details of the Group’s performance and benefits for shareholder wealth are set out in the following table: Table 37: Consequences of performance on shareholder wealth Profit/Loss from Continuing Operations ($m) FY14 (224.2) Profit/Loss from Discontinued Operations ($m) (51.1) Statutory Profit ($m) Total Dividends Declared ($m) Statutory Return on Capital Employed (275.3) 0 (30.7%) FY13 (0.0) 6.0 6.0 15.0 4.2% FY12 70.0 (0.2) 69.7 37.9 FY11 50.0 (0.4) 49.6 63.1 FY10 12.3 (61.6) (49.3) 12.6 13.0% 10.3% (1.1%) Closing Share Price as at 30 June $0.20 $0.28 $0.87 $1.13 $0.58 In FY14, the primary focus of the Company was to strengthen its balance sheet, exit the under-performing Indonesian business and improve utilisation through new projects and the disposal of idle fleet. Strategic achievements over FY14 were executed to drive the Emeco business through this current downturn in the Australian market and position the business for future growth, and hence greater shareholder returns. The Company’s share price declined significantly in FY10 before increasing nearly 100% from 58 cents at close of trading on 30 June 2010 to $1.13 at close of trading on 30 June 2011, which resulted in a complete vesting of LTI Securities. During FY12 the Company’s share price peaked at $1.18 and ended the financial year at 87 cents, which led to a partial vesting of LTI Securities. A factor which was a primary cause of the volatility in the Company’s share price during FY12 was the uncertainty in the global macroeconomic environment. In FY13 and FY14, continued macroeconomic uncertainty, a downturn in the resources sector globally, difficult trading conditions in Emeco’s markets and a resultant decline in the Company’s earnings saw the Company’s share price close at 28 cents and 20 cents on 30 June 2013 and 30 June 2014 respectively. No LTI Securities vested following the Company’s performance in FY13. This highlights the genuinely challenging nature of the LTI KPI. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 58 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 The Company’s dividend policy (which was amended in FY12) is to pay shareholders between 40% and 60% of the Company’s profit (Net Profit After Tax), franked to the fullest extent possible. As the business achieved a net loss in FY14 no dividends were declared or paid. The primary means available to the Company to grow shareholder wealth, whether by way of dividend distributions or increases in the Company’s share price, is to strive to increase earnings and return on capital. In this regard, the Company will maintain remuneration policies and practices which reward strong financial performance and align the interests of management with the interests of shareholders. 4. Non-Executive Director Remuneration 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. Non-Executive Director fees are reviewed and benchmarked annually in September. In FY14, this process did not result in any change in Non-Executive Director fees. An annual cap of $1,200,000 is currently prescribed in the Company’s constitution as the total aggregate remuneration available to Non-Executive Directors. 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 skillsets of Board members, the quantum of fees paid to Non-Executive Directors of comparable companies and participation in Board committee work. The Chairman is entitled to an annual fee of $197,798. All other Non-Executive Directors receive an annual base fee of $113,027. An additional annual fee of $8,477 is paid to a Director who is a member of a Board committee. This fee is increased to $11,303 for a Director who chairs a committee. All amounts specified in this section are inclusive of superannuation contributions. In May 2014, the Board resolved to reduce the fixed remuneration for Non-Executive Directors by 20% with effect from 1 July 2014. 5. Details of Remuneration 5.1 Remuneration received in relation to FY14 Details of the elements comprising the remuneration of the Group’s KMP in FY14 are set out in Table 38 below. The table does not include the following components of remuneration because they were not provided to KMP during FY14: • • • • Short term cash profit-sharing bonuses. Long term incentives distributed in cash. Post-employment benefits other than superannuation. Share based payments other than shares and units and share based payments in the form of options. Also, payments made in respect of a period before the appointment, or after the cessation, of the person as KMP are not included in Table 38. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 59 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Table 38: FY14 KMP remuneration (Company and Consolidated) [1] [2] [A] [B] [C] [D] [E] [F] [G] The amount awarded to each Executive under the FY14 STI plan was finally determined on 13 August 2014 and 20 August 2014 after completion of performance reviews (refer to Table 40). Non-monetary benefits include housing, vehicle and health benefits. Mr Kenneth Lewsey commenced employment with Emeco on 4 November 2013. Mr Lewsey was entitled to receive LTI Securities and an STI equity award in FY14 subject to shareholder approval at the Company’s 2014 annual general meeting. As this approval had not been sought as at 30 June 2014, the LTI Securities and STI equity awards have not been issued but their fair value has been included in the remuneration disclosed. Mr Lewsey’s FY14 STI bonus entitlement was not pro-rated in accordance with the terms and conditions of his employment contract. Mr Keith Gordon ceased employment with Emeco on 4 November 2013. Mr Gordon’s salary and fees includes accrued annual leave of $96,466 which was paid out upon the cessation of Mr Gordon’s employment. All unvested LTI Securities granted to Mr Gordon were forfeited in accordance with the terms of the respective grants and reversed through the income statement. Ms Kellie Benda commenced her role as KMP on 24 February 2014. Mr Anthony Halls ceased his role as KMP on 17 February 2014. Mr Halls’ salary and fees includes accrued annual leave of $102,521 and long service leave of $46,614 which was paid out upon the cessation of Mr Halls’ employment. All unvested LTI Securities granted to Mr Halls were forfeited in accordance with the terms of the respective grants and reversed through the income statement. Mr Christopher Hayman commenced his role as KMP on 8 July 2013. Mr Hayman’s remuneration has been converted to Australian dollars on the basis of an AUD/CAD exchange rate of 0.98229. Mr Benny Joesoep commenced and ceased his role as KMP on 9 December 2013 and 13 May 2014 respectively. Mr Joesoep’s remuneration has been converted to Australian dollars on the basis of an AUD/USD exchange rate of 0.905937. Part of Mr Ian Testrow’s remuneration has been converted to Australian dollars on the basis of an AUD/CAD exchange rate of 0.964462. Mr Testrow’s salary and fees includes accrued annual leave of $47,938 which was paid out upon the transfer of Mr Testrow’s employment from the Canadian Emeco entity to the Australian Emeco entity. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 60 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 Comparative information relating to remuneration of the Group’s KMP for the prior financial year is set out below: Table 39: FY13 KMP remuneration (Company and Consolidated) Short-term employee benefits Post-employment benefits Share based payments Salary STI cash Non- annuation long term tion and Fees bonuses [1] monetary benefits benefits benefits LTIP MISP Super- Other Termina- $ $ $ $ $ $ % of remuneratio n performance Value of options as a % of total Total $ related remuneration % % Non-Executive Directors Alec Brennan Robert Bishop John Cahill Peter Johnston Peter Richards Erica Smyth Executive Director Keith Gordon $ 199,612 119,189 121,841 111,472 111,472 106,327 894,360 TOTAL ALL DIRECTORS 1,664,273 Executives Stephen Gobby Anthony Halls Michael Kirkpatrick Christopher Mossman [A] Grant Stubbs [B] Ian Testrow [C] Michael Turner [D] 464,276 363,960 342,212 312,162 58,493 464,398 209,633 $ - - - - - - 228,691 228,691 74,229 59,511 55,561 49,344 - 82,617 26,735 - - - - - - - - - - - 117,729 - 80,807 - TOTAL ALL EXECUTIVES 2,215,134 347,997 198,536 17,965 2,315 10,966 10,032 10,032 9,569 25,000 85,879 25,000 25,000 21,788 - - - 18,867 90,655 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 509,113 509,113 180,058 113,714 106,977 (62,128) 5,330 112,667 74,635 531,253 1,040,366 - - - - - - - - - - - - - - - - - 217,577 121,504 132,807 121,504 121,504 115,896 1,657,164 2,487,956 743,563 562,185 526,538 417,107 63,823 740,489 329,870 3,383,575 - - - - - - 44.5 29.7 34.2 30.8 30.9 (3.1) - 26.4 30.7 26.0 5,871,531 27.5 - - - - - - - - - - - - - - - - - TOTAL 3,879,407 576,688 198,536 176,534 [1] [A] [B] [C] [D] The amount awarded to each Executive under the FY13 STI plan was finally determined on 21 August 2013 after completion of performance reviews. Mr Christopher Mossman’s remuneration has been converted to Australian dollars on the basis of an AUD/USD exchange rate of 1.0334. Mr Mossman ceased employment with Emeco on 31 May 2013. Mr Grant Stubbs commenced his role as KMP on 1 May 2013. Mr Ian Testrow’s remuneration has been converted to Australian dollars on the basis of an AUD/CAD exchange rate of 1.0306. Mr Michael Turner ceased his role as KMP on 31 December 2012. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 61 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 5.2 FY14 STI grants The terms of the FY14 STI plan are discussed at pages 53 to 55. Details of the vesting profile of the STI grants awarded to Executives in respect of FY14 are set out below: Table 40: FY14 Executive STI Vesting Information Executive [A] Kenneth Lewsey [B] Stephen Gobby Anthony Halls [C] Michael Kirkpatrick Christopher Hayman [D] Grant Stubbs Ian Testrow Maximum STI Value [1] STI Cash Awarded [2] STI Equity Awarded % of STI Awarded % of STI Forfeited [3] $ 850,000 360,000 243,000 224,921 194,258 216,270 279,000 $ $ 197,625 65,875 114,912 - % 31.00 31.92 % 69.00 68.08 - - - - 61,673 - 72,458 - 80,669 - 98,487 - 27.42 37.30 37.30 35.30 72.58 62.70 62.70 67.40 [1] [2] [3] [A] [B] [C] [D] The minimum STI value for each KMP is zero. These awards are in respect of FY14 and were approved on 13 August 2014 and 20 August 2014 based on the achievement of KPIs. Amounts forfeited were due to KPIs not being met. Mr Keith Gordon and Ms Kellie Benda had no FY14 STI entitlements. Mr Benny Joesoep had no FY14 STI entitlements as an Executive. See notes to Table 32. Mr Lewsey’s FY14 STI bonus entitlement was not pro-rated in accordance with the terms and conditions of his employment contract. Mr Lewsey’s STI equity award is subject to shareholder approval at the Company’s 2014 annual general meeting. Mr Anthony Halls ceased his role as an Executive on 17 February 2014. Mr Halls was not entitled to his FY14 STI entitlements. Mr Christopher Hayman’s remuneration has been converted to Australian dollars on the basis of an AUD/CAD exchange rate of 0.98229. The STI grants awarded to Executives in FY14 reflect the significant amount of work undertaken by the Executives to achieve the Company’s objectives, particularly in respect of strategy, the debt refinance, the sale of idle assets and the closure of the Indonesian business. In respect of FY15, in order for the Executives to be awarded any STI payment, Emeco’s FY15 EBITDA must be at least that achieved in FY14. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 62 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 6. Details of Share-Based Payments 6.1 Equity instruments 6.1.1 FY14 LTI grants The terms of the LTI plan are discussed at pages 55 to 57. Grants of LTI Securities made to Executives under the Company’s LTI plan in FY11, FY12, FY13 and FY14 are set out in the following table: Table 41: LTI Security Grants to Executives Executive Kenneth Lewsey [A] Keith Gordon [B] Kellie Benda [C] Stephen Gobby Anthony Halls [D] Christopher Hayman Benny Joesoep [E] Michael Kirkpatrick Grant Stubbs Ian Testrow Grant Date Equity Instrument Number Granted Maximum Value [1] % Vested in FY14 % Forfeited in FY14 Vesting Date [2] Fair Value Per Share/Right at Grant Date [3] Number held at year end 04/11/2013 19/11/2010 18/11/2011 20/11/2012 04/03/2014 19/11/2010 18/11/2011 19/10/2012 04/12/2013 19/11/2010 18/11/2011 19/10/2012 04/12/2013 04/12/2013 04/12/2013 19/11/2010 18/11/2011 19/10/2012 04/12/2013 19/11/2010 23/12/2011 19/10/2012 04/12/2013 19/11/2010 18/11/2011 19/10/2012 04/12/2013 Shares 4,553,571 637,500 Shares Shares 1,183,929 $663,000 907,263 $689,520 Shares 1,498,957 $410,714 Shares Shares Shares Shares Shares Shares Shares Shares 749,143 $104,880 419,643 $235,000 321,579 $244,400 531,304 $244,400 2,142,857 267,143 $300,000 $149,600 204,716 $155,584 338,226 $155,584 Shares 1,157,143 $162,000 Rights Rights Shares Shares Shares Shares Shares Shares Shares Shares Rights Rights Rights 986,967 $138,175 282,890 250,000 $48,091 $140,000 191,579 $145,600 316,522 $145,600 1,071,051 69,643 68,684 93,214 1,029,857 269,393 $149,947 $39,000 $52,200 $52,200 $144,180 $150,860 189,000 $143,640 451,371 $207,631 Rights 1,633,151 $228,641 - 0% 0% 0% - 0% - - - 0% 0% 0% 0% - 21.5% 0% - - - - 100% 100% 100% - 100% - - - 100% 100% 100% 100% - 78.5% 100% - - - 0% 100% - - - - - - 0% 100% - - - - - - Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 Sep-16 Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 Sep-13 Sep-14 Sep-15 Sep-16 $0.15 $0.56 $0.76 $0.27 $0.15 $0.56 $0.76 $0.46 $0.15 $0.56 $0.76 $0.46 $0.15 $0.15 $0.18 $0.56 $0.76 $0.46 $0.15 $0.56 $0.76 $0.56 $0.15 $0.56 $0.76 $0.46 $0.15 0 0 0 0 749,143 0 321,579 531,304 2,142,857 0 0 0 0 986,967 60,914 0 191,579 316,522 1,071,051 0 68,684 93,214 1,029,857 0 189,000 451,371 1,633,151 [1] [2] [3] [A] [B] [C] [D] [E] The minimum value of each grant is zero. For LTI Securities granted in FY12, FY13 and FY14 the earliest vesting date is the twentieth trading day after the announcement of the Company’s annual results in 2014, 2015 and 2016 respectively. The fair value of the LTI Securities was determined using a Monte Carlo share price simulation model, and is allocated to each reporting period evenly over the period from Grant Date to vesting date. The value disclosed in the KMP remuneration table (table 38) is the portion of the fair value of the LTI Securities recognised in FY14. Mr Lewsey was entitled to receive LTI Securities in FY14 subject to shareholder approval at the Company’s 2014 annual general meeting. As this approval had not been sought as at 30 June 2014, these LTI Securities have not been issued or included in the table above. Mr Keith Gordon ceased employment with Emeco on 4 November 2013. Accordingly, all unvested LTI Securities granted to Mr Gordon were forfeited in accordance with the terms of the respective grants. Ms Kellie Benda commenced her role as KMP on 24 February 2014. Mr Anthony Halls ceased employment with Emeco on 21 March 2014. Accordingly, all unvested LTI Securities granted to Mr Halls were forfeited in accordance with the terms of the respective grants. Mr Benny Joesoep commenced his role as KMP on 9 December 2013, after the FY14 LTI grant date. The number of performance rights granted to Mr Joesoep in respect of the FY14 LTI grant was $0.18 per right, which was the value of the LTI Securities issued to non-KMP. Mr Joesoep ceased employment on 13 May 2014 due to retrenchment. Accordingly, Mr Joesoep’s FY14 LTI Securities were tested as at his termination date and a portion of them vested. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 63 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 6.1.2 Management Incentive Share Plan Emeco established a Management Incentive Share Plan (MISP) in 2005. The MISP was closed in 2008 at which time the last allocation of shares was made to KMP. MISP Terms and Conditions The Company provided each MISP participant with an interest-free, limited recourse loan (Loan) to enable them to subscribe for the MISP shares. The shares vest over a five year period as set out in the following table: Table 42: TSR Vesting Schedule Vesting Date % of Shares Which Vest Total % of Vested Shares % of Unvested Shares 2 years after the issue date 3 years after the issue date 4 years after the issue date 5 years after the issue date 6.25% 18.75% 31.25% 43.75% 6.25% 25.00% 56.25% 100.00% 93.75% 75.00% 43.75% 0.00% If a MISP participant ceases employment with the Group before all of the MISP shares vest on the fifth anniversary of the issue date, the Company is required to buy back, cancel or transfer to a nominee of the Board all of the shares for a purchase price which is subject to the Company setting off the Loan amount outstanding in respect of the shares. In relation to the unvested shares, the purchase price is the Loan amount outstanding in respect of these shares. In relation to the vested shares, the purchase price is the market value of these shares. Subject to the approval of the Board, the Loan can be repaid at any time but must be repaid by the tenth anniversary of the commencement date of the MISP, being 1 July 2015. Any dividends or capital distributions which may become payable in respect of the MISP shares may be applied by the Company in reducing the amount of the Loan. The share issues under the MISP to each MISP participant, and the time based vesting conditions in respect of the shares, are not dependent on the satisfaction of a performance condition because the issue of shares and the inclusion of time based vesting conditions in the terms of issue were intended to provide participants with an incentive to remain with the Group. That is, the terms upon which the shares were issued to the participants were intended to operate as a retention incentive arrangement rather than a performance incentive arrangement. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 64 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 FY14 MISP entitlements The last allocation of shares to KMP under the Company’s MISP was made to Mr Ian Testrow in June 2006. During FY14, the Company recognised share based payments to Mr Testrow under the MISP as set out below: Table 43: MISP grant to Ian Testrow MISP Grant to Ian Testrow Number of shares issued Issue price of shares Grant date Amount of Loan outstanding as at 30 June 2014 Highest amount of indebtedness during FY14 Fair value recognised as remuneration during FY14 6.1.3 Emeco Employee Share Ownership Plan 300,000 $1.16 12/06/2006 $249,000 $249,000 $0.00 Emeco’s Employee Share Ownership Plan (ESOP) is an elective plan which is open to all Australian employees. Australian- based employees may salary sacrifice a minimum of $500 and a maximum of $5,000 of pre-tax salary or wage to acquire Emeco ordinary shares in accordance with the terms of the ESOP. For every 5 shares acquired by the employee under the ESOP, Emeco provides one matching share at no cost to the employee. The matching shares are subject to a vesting condition. Under the ESOP, a participating employee must remain employed with Emeco for one year after the end of the calendar year in which the matching shares are acquired (Restriction Period). If an employee leaves the Company before the expiry of the Restriction Period, the matching shares are forfeited. All shares acquired under the ESOP are held in a trust on behalf of ESOP participants by the trustee, Pacific Custodians Pty Limited, which is an independent party separate from the Company. The ESOP shares are held by the trustee during the Restriction Period. The ESOP administrator, Link Market Services, releases the ESOP shares from the trust at the earlier of the expiry of the Restriction Period and the termination of the employee’s employment with Emeco. During FY14 two Executives participated in the ESOP. Details of the shares purchased on their behalf and the matching shares allocated to them under the ESOP are set out below: Table 44: ESOP shares purchased and acquired by Executives Executive Anthony Halls Grant Stubbs Shares Purchased Matching Shares Granted 15,233 21,132 3,044 4,223 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 65 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2014 7. Service contracts 7.1 Managing Director & Chief Executive Officer: Mr Kenneth Lewsey Mr Lewsey’s employment is for an indefinite term. Mr Lewsey’s employment may be terminated by either party by giving a notice period of 6 months or a period expiring on the day before the second anniversary of the commencement of Mr Lewsey’s employment, whichever is greater (Notice Period). However, Emeco may terminate Mr Lewsey’s employment by making a payment of his fixed remuneration for the Notice Period in lieu of notice. 7.2 Executive General Manager Strategy & Corporate Development: Ms Kellie Benda Ms Benda’s employment agreement is for an indefinite term and provides that it is terminable on either party giving a notice period of 12 months if the termination occurs in the first 12 months of employment, or otherwise, 6 months (Notice Period). However, Emeco may terminate Ms Benda’s employment by making payment of her fixed remuneration for the Notice Period in lieu of notice. Under Ms Benda’s employment agreement Ms Benda may terminate her employment if there is a change of control event in respect of Emeco Holdings Ltd or her duties are materially changed (Change Event), and Emeco must pay her fixed remuneration for the following period: (i) (ii) (iii) 12 months, if the Change Event occurs within 12 months of her commencement date; 9 months, if the Change Event occurs between 12 months and 24 months of her commencement date; or 6 months, if the Change Event occurs after two years of her commencement date. 7.3 Other Executives Except as outlined above in sections 7.1 and 7.2, each Executive is employed pursuant to contracts which provide for an indefinite term and which are terminable on either party giving 6 months’ notice or on the payment to the Executive of up to 6 months’ salary in lieu of notice. No termination payments other than salary in lieu of notice and accrued statutory leave entitlements are payable under these contracts. Signed in accordance with a resolution of the Directors. Kenneth Lewsey Managing Director Dated at Perth, 20 day of August 2014 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 66 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To: the directors of Emeco Holdings Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2014 there have been: (i) (ii) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Graham Hogg Partner Perth 20 August 2014 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. EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2014 Note 2014 $'000 2013 $'000 Continuing operations Revenue from rental income Revenue from the sale of machines and parts Revenue from maintenance services Changes in machinery and parts inventory Repairs and maintenance Employee expenses Hired in equipment and labour Gross profit Other income Other expenses Impairment of tangible assets EBITDA (1) Impairment of goodwill Depreciation expense Amortisation expense EBIT (2) Finance income Finance costs (Loss)/Profit before tax expense Tax expense (Loss)/Profit from continuing operations Discontinued operations (Loss)/Profit from discontinued operations (net of tax) (Loss)/Profit from discontinued operations (Loss)/Profit for the year Other comprehensive (loss)/income Items that are or may be reclassified to profit and loss: Foreign currency translation differences for foreign operations Effective portion of changes in fair value of cash flow hedges Total other comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year 8 7 8 8 8 8 8 8 8 10 14 205,368 8,145 27,582 241,095 (14,443) (84,727) (42,931) (13,142) 85,852 1,084 (16,092) (43,656) 27,188 (157,887) (77,996) (132) (208,827) 6,081 (48,632) (251,378) 27,206 (224,172) (51,137) (51,137) (275,309) 314,068 23,413 41,894 379,375 (25,822) (114,022) (45,208) (7,752) 186,571 2,926 (29,252) (11,977) 148,268 (17,844) (98,157) (192) 32,075 1,439 (26,055) 7,459 (7,447) 12 5,992 5,992 6,004 (5,308) (4,853) (10,161) 16,731 1,697 18,428 (285,470) 24,432 The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 73 to 150. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 68 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated statement of profit or loss and other comprehensive income (continued) For the year ended 30 June 2014 (Loss)/Profit attributable to: Owners of the Company (Loss)/Profit for the year Total comprehensive (loss)/income attributable to: Owners of the Company Total comprehensive (loss)/income for the year Earnings per share: Basic earnings per share Diluted earning per share Earnings per share-continuing operations Basic earnings per share Diluted earnings per share 2014 $'000 2013 $'000 (275,309) (275,309) 6,004 6,004 (285,470) (285,470) 24,432 24,432 Note 35 35 35 35 2014 Cents (48.94) (48.94) (48.94) (48.94) 2013 Cents 1.03 1.02 1.03 1.02 (1) EBITDA - Earnings before net finance costs, tax, depreciation and amortisation. (2) EBIT - Earnings before net finance costs and tax. The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 73 to 150. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 69 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated Statement of Financial Position as at 30 June 2014 Current Assets Cash assets Trade and other receivables Derivative financial instruments Inventories Prepayments Current tax asset Assets held for sale Total current assets Non-current Assets Trade and other receivables Derivative financial instruments Intangible assets and goodwill Property, plant and equipment Total non-current assets Total assets Current Liabilities Trade and other payables Derivative financial instruments Interest bearing liabilities Provisions Total current liabilities Non-current Liabilities Other payables Derivative financial instruments Interest bearing liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity attributable to equity holders of the Company Note 2014 $'000 2013 $'000 17 18 19 20 11 15 18 19 21 22 23 19 24 26 23 19 24 12 26 13 41,830 78,154 5 8,161 3,066 - 39,922 171,138 772 2,749 175 573,528 577,224 5,754 97,073 691 14,758 2,975 13,940 7,200 142,391 856 4,489 158,076 820,210 983,631 748,362 1,126,022 53,095 2,546 4,316 2,694 62,651 - 10,187 339,458 11,025 1,069 361,739 40,562 1,281 9,308 3,388 54,539 1,284 1,502 406,118 50,159 1,244 460,307 424,390 514,846 323,972 611,176 593,616 (22,612) (247,032) 323,972 593,616 (10,717) 28,277 611,176 The consolidated statement of financial position is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 73 to 150. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 70 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated Statement of Changes in Equity For the year ended 30 June 2014 Share based payment reserve $'000 Foreign currency translation reserve $'000 Reserve for own shares $'000 Hedging reserve $'000 Share capital $'000 Retained earnings $'000 Total equity $'000 Balance at 1 July 2012 610,424 9,155 (4,041) (20,814) (13,756) 59,419 640,387 Total comprehensive income/(loss) for the year Profit /(loss) Other comprehensive income/(loss) Foreign currency translation differences Effective portion of changes in fair value of cash flow hedge, net of tax Total comprehensive income/(loss) for the year Transactions with owners of the Company Contributions by and distributions to owners Own shares acquired by employee share plan trust Share Buy-back Dividends to equity holders Share-based payment transactions Total contributions by and distributions to owners Balance at 30 June 2013 - - - - - (16,919) 96 15 (16,808) 593,616 Share capital $'000 - - - - - - - 2,989 2,989 12,144 - - 1,697 1,697 - 16,731 - 16,731 - - - - 6,004 6,004 - 16,731 - 6,004 1,697 24,432 - - - - - (2,344) - - - - - (4,083) (2,678) - - - (2,678) (16,434) - - (37,146) - (37,146) 28,277 (2,678) (16,919) (37,050) 3,004 (53,643) 611,176 Share based payment reserve $'000 Foreign currency translation reserve $'000 Reserve for own shares $'000 Hedging reserve $'000 Retained earnings $'000 Total equity $'000 Balance at 1 July 2013 593,616 12,144 (2,344) (4,083) (16,434) 28,277 611,176 Total comprehensive income/(loss) for the year Profit /(loss) Other comprehensive income/(loss) Foreign currency translation differences Effective portion of changes in fair value of cash flow hedge, net of tax Total comprehensive income/(loss) for the year Transactions with owners of the Company Contributions by and distributions to owners Own shares acquired by employee share plan trust Dividends to equity holders Share-based payment transactions Total contributions by and distributions to owners Balance at 30 June 2014 - - - - - - - - 593,616 - - - - - - (124) (5,184) (4,853) (4,977) - (5,184) - - - - (275,309) (275,309) - - (275,309) (5,308) (4,853) (285,470) - - 2,454 2,454 14,598 - - - - (7,321) - - - - (9,267) (4,188) - - (4,188) (20,622) - - - - (247,032) (4,188) - 2,454 (1,734) 323,972 The consolidated statement of changes in equity is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 73 to 150. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 71 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated Statement of Cash Flows For the year ended 30 June 2014 30 June 2014 $'000 30 June 2013 $'000 Note Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Finance income received Finance expense paid Taxes paid/(received) Net cash inflow from operating activities of discontinued operations Net cash from operating activities 30(ii) Cash flows from investing activities Proceeds from disposal of non-current assets Payment for property, plant and equipment Net cash inflow/(outflow) from investing activities of discontinued operations Net cash from/(used) in investing activities Cash flows from financing activities Proceeds from syndicated debt borrowings Proceeds from 144A Notes Repayment of syndicated debt borrowings Repayment of USPP Notes Repayment of Westpac working capital Purchase of own shares Payment for debt establishment costs Payment of finance lease liabilities Dividends paid Net cash outflow from financing activities of discontinued operations Net cash from/(used) in financing activities Net increase/(decrease) in cash Cash at 1 July Effects of exchange rate fluctuations on cash held Cash at 30 June 30(i) 245,567 (144,105) 101,462 5,761 (37,583) 10,227 2,205 82,072 389,034 (190,623) 198,411 1,440 (23,240) (20,935) 25,627 181,303 30,265 40,532 (44,186) (144,452) 38,953 25,032 (25,204) (129,124) 63,501 364,282 (282,566) (154,457) (5,256) (4,188) (17,027) (4,363) - (31,290) (71,364) 35,740 5,754 336 41,830 553,453 - (607,169) - - (19,597) (4,709) (3,339) (37,146) (774) (119,281) (67,102) 73,091 (235) 5,754 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements set out on pages 73 to 150. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 72 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 1 Reporting entity Emeco Holdings Limited (the “Company”) is domiciled in Australia. The address of the Company’s registered office is Level 3, 71 Walters Drive, Osborne Park WA 6017. The consolidated financial statements of the Company as at and for the year ended 30 June 2014 comprise the Company and its subsidiaries (together referred to as the “Group”). The Group is a for profit entity and primarily involved in the provision of safe, reliable and maintained heavy earthmoving equipment solutions to customers in the mining industry (refer note 16). 2 Basis of preparation (a) Statement of compliance The consolidated statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRSs) adopted by the International Accounting Standards Board (IASB). The consolidated financial statements were authorised for issue by the Board of Directors on 20 August 2014. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position: (cid:1) (cid:1) derivative financial instruments are measured at fair value; and financial instruments at fair value through profit or loss are measured at fair value. The methods used to measure fair values are discussed further in note 5. (c) Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group. The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. (d) Use of estimates and judgements The preparation of the consolidated financial statements in conformity with the IFRSs requires Management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below: Impairment of assets Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets that are subject to amortisation 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. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use, in accordance with the Company’s accounting policy note 3(h)(ii). For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 73 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 2 Basis of preparation (continued) (d) Use of estimates and judgements (continued) Recognition of tax losses In accordance with the Company’s accounting policies for deferred taxes (refer note 3(o)), a deferred tax asset is recognised for unused tax losses only if it is probable that future taxable profits will be available to utilise these losses. This includes estimates and judgements about future profitability and tax rates. Changes in these estimates and assumptions could impact on the amount and probability of unused tax losses and accordingly the recoverability of deferred tax assets. The carrying amount of deferred tax assets are set out in note 12. Share based payments The share based payments are recognised in accordance with the Company’s accounting policies (refer note 3(j)(v)) where the value of the share based payment is expensed from the grant date to vesting date. This valuation includes estimates and judgements about volatility, risk free rates, dividend yields, total shareholder return (TSR) and underlying share price. Changes in these estimates and assumptions could impact on the measurement of the share based payment as set out in note 27. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 74 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities except for the changes in accounting policies as explained in note 2(e). Certain comparative amounts in the consolidated statement of profit or loss and other comprehensive income have been reclassified to conform with the current years presentation. (a) (i) (ii) (b) (i) (ii) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has the rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to the functional currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve (FCTR) in equity. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the FCTR related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. (c) (i) Financial instruments Non-derivative financial assets and financial liabilities recognition and derecognition The Group initially recognises loans and receivables and deposits and debt securities issued on the date when they are originated. All other financial assets and financial liabilities are recognised initially on the trade date. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in such transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 75 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) (c) (i) Financial instruments (continued) Non-derivative financial assets and financial liabilities recognition and de-recognition (continued) Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. The Group has non-derivative financial assets being: loans and receivables. (ii) Non-derivative financial assets - measurement Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. (iii) Non-derivative financial liabilities - measurement The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method unless the Group has applied fair value hedging, in which case amortised cost is adjusted to reflect the movement in the fair value of the underlying hedge item. This adjustment is recorded in the statement of profit and loss. Other financial liabilities comprise loans and borrowings, debt securities issued, bank overdrafts, and trade and other payables. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the statement of cash flows. (iv) Derivative financial instruments, including hedge accounting The Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognised in profit or loss. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 76 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) Financial instruments (continued) (c) (iv) Derivative financial instruments, including hedge accounting (continued) On initial designation of the derivative as the hedging instrument, the Group formally documents the relationship between the hedging instrument and hedged item, including the risk management objectives and strategy in undertaking the hedge transaction and the hedged risk, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items attributable to hedged risk and whether the actual results of each hedge are within a range of 80-125 percent. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported profit or loss. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are accounted for as described below. Fair value hedges The risk being hedged in a fair value hedge is a change in the fair value of an asset or liability or unrecognised firm commitment that may affect the income statement. Changes in fair value might arise through changes in interest rates or foreign exchange rates. The Group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates. The application of fair value hedge accounting results in the fair value adjustment on the hedged item attributable to the hedged risk being recognised in the income statement at the same time the hedging instrument impacts the income statement. If a hedging relationship is terminated, the fair value adjustment to the hedged item continues to be recognised as part of the carrying amount of the item or group of items and is amortised to the income statement as a part of the effective yield over the period to maturity. Where the hedged item is derecognised from the Group’s balance sheet, the fair value adjustment is included in the income statement as a part of the gain or loss on disposal. Cash flow hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with the recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. When the hedged item is a non-financial asset, the amount accumulated in equity is retained in other comprehensive income and reclassified to profit or loss in the same period or periods during which the non- financial item affects profit or loss. In other cases the amount accumulated in equity is reclassified to profit or loss in the same period that the hedged item affects profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the balance in equity is reclassified in profit or loss. Other non-trading derivatives When a derivative financial instrument is not designated in a hedge relationship that qualifies for hedge accounting, all changes in its fair value are recognised immediately in profit or loss. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 77 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) (c) (v) Financial instruments (continued) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares net of any tax effects are recognised as a deduction from equity. Purchase of share capital (treasury shares) When share capital recognised as equity is purchased by the employee share plan trust, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Purchased shares are classified as treasury shares and are presented in the reserve for own shares net of any tax effects. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to/from retained earnings. Dividends Dividends are recognised as a liability in the period in which they are declared. Repurchase and reissue of share capital (treasury shares) When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the reserve for own shares. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented in retained earnings. (d) (i) Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self- constructed assets includes the following: • the cost of materials and direct labour; • any other costs directly attributable to bringing the assets to a working condition for their intended use; • when the Group has an obligation to remove the assets or restore the site, and estimate of the costs of dismantling and removing the items and restoring the site on which they are located; and capitalised borrowing costs. • Cost includes transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Any gain or loss on disposal of an item of property, plant and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in profit or loss. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 78 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) (d) (ii) Property, plant and equipment (continued) Subsequent costs Subsequent expenditure is capitalised only when it is probable that the future economic benefits associated with the expenditure will flow to the Group. Expenditure on major overhauls and refurbishments of equipment is capitalised in property, plant and equipment as it is incurred, where that expenditure is expected to provide future economic benefits. The costs of the day-to-day servicing of property, plant and equipment and on-going repairs and maintenance are expensed as incurred. (iii) Depreciation Items of property, plant and equipment, excluding freehold land, are depreciated over their estimated useful lives and are charged to the statement of comprehensive income. Estimates of remaining useful lives, residual values and the depreciation method are made on a regular basis, with annual re-assessments for major items. Assets are depreciated from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. Where subsequent expenditure is capitalised into the asset, the estimated useful life of the total new asset is reassessed and depreciation charged accordingly. Depreciation on buildings, leasehold improvements, furniture, fixtures and fittings, office equipment, motor vehicles and sundry plant is calculated on a straight-line basis. Depreciation on plant and equipment is calculated and charged on machine hours worked over their estimated useful life. In certain specific contracts, depreciation methodology on some items of plant and equipment are reassessed in line with their effective lives. In these situations, depreciation is recognised in line with the pattern of economic benefits expected to be consumed. For plant and equipment that is idle for under 3 months, no depreciation is charged. Depreciation on plant and equipment that is idle for more than 3 months is calculated on 100 machine hours per month. The estimated useful lives are as follows: Leasehold Improvements Plant and Equipment Furniture, Fixtures and Fittings Office Equipment Motor Vehicles Sundry Plant 15 years 3 – 15 years 10 years 3 – 10 years 5 years 7 – 10 years (e) (i) Intangible assets and goodwill Goodwill Goodwill (negative goodwill) arises on the acquisition of subsidiaries. Goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. (ii) Other intangible assets Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 79 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) Intangible assets and goodwill (continued) (e) (iii) Amortisation Except for goodwill, intangible assets are amortised on a straight line basis in profit or loss over their estimated useful lives, from the date they are available for use. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives for the current and comparative periods are as follows: (cid:1) Software 0 – 3 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (f) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and estimated costs necessary to make the sale. Inventory is occasionally sold under a Rental Purchase Option (RPO). Under the RPO the purchaser is entitled to a rebate upon exercising the option. A charge is recognised against the carrying value of inventory on RPOs to reflect the consumption of economic benefits related to that inventory. (g) Work in progress Progressive capital work to inventory and fixed assets are carried in work in progress accounts within their respective statement of financial position classifications with fixed assets being disclosed as a “capital work in progress”. Upon work completion the balance is capitalised. (h) (i) Impairment Non-derivative financial assets Financial assets not classified as at fair value through profit or loss are assessed at each reporting date to determine whether there is objective evidence of impairment. Objective evidence that financial assets are impaired includes: • default or delinquency by a debtor; • • • • • observable data indicating that there is measurable decrease in expected cash flows from a group restructuring of an amount due to the Group on terms that the Group would not consider otherwise; indications that a debtor or issuer will enter bankruptcy; adverse changes in the payment status of borrowers or issuers; the disappearance of an active market for a security; or of financial assets. For an investment in an equity security, objective evidence of impairment includes a significant or prolonged decline in its fair value below its cost. The Group considers a decline of 20% to be significant and a period of nine months to be prolonged. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 80 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) (h) (i) Impairment (continued) Non-derivative financial assets (continued) Financial assets measured at amortised cost The Group considers evidence of impairment for these assets measured at both an individual asset and a collective level. All individually significant assets are individually assessed for specific impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of the impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss. (ii) Non-financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 81 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) Impairment (continued) (h) (ii) Non-financial assets (continued) Goodwill assets were fully impaired at 31 December 2013 as part of the Group’s process of testing goodwill for impairment, when impairment triggers were present. (i) Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets which continue to be measured in accordance with the Group’s other accounting policies. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on re-measurement are recognised in profit or loss. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortised or depreciated, and any equity-accounted investee is no longer equity accounted. (j) (i) Employee benefits Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which related services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (ii) Other long-term employee benefits The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Re-measurements are recognised in profit or loss in the period in which they arise. (iii) Termination benefits Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. (iv) Short-term benefits Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 82 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) (j) (v) Employee benefits (continued) Share based payment transactions (a) A management incentive share plan (MISP) allows certain consolidated entity employees to acquire shares of the Company. Employees have been granted a limited recourse 10 year interest free loan in which to acquire the shares. The loan has not been recognised as the Company only has recourse to the value of the shares. The arrangement is accounted for as an in-substance option over ordinary shares. The grant date fair value of the shares granted to employees is recognised as an employee expense with a corresponding increase in equity, over the period during which the employees become unconditionally entitled to the shares. The fair value of the MISP granted is measured using a Black Scholes pricing model, taking into account the terms and conditions upon which the in-substance options were granted. The amount recognised as an expense is adjusted to reflect the actual number of shares that vest except where forfeiture is only due to shares prices not achieving the threshold for vesting. increase (b) The share option programme allows certain employees to acquire shares of the Company. The grant date fair value of options granted to employees is recognised as an employee expense with a corresponding in equity, over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option-pricing model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to market conditions not being met, i.e. share prices not achieving the threshold for vesting. The share option programme concluded on 4 August 2011. (c) A long term incentive plan (LTIP) allows certain management personnel to receive shares or rights of the Company upon satisfying performance conditions. Under the LTIP rights or shares granted to each LTIP participant vest to the employee after 3 years if the prescribed performance condition is met. The performance condition is a performance hurdle based on relative total shareholder return (TSR). The peer group that the Company’s TSR is measured against consists of 99 Companies (this number may change as a result of takeovers, mergers etc) and includes 18 Companies that are considered direct peers to Emeco, in addition to the S&P/ASX Small Industrials (excluding banks, insurance companies, property trust companies and investment property trust/companies and other stapled securities). The fair value of the performance rights or shares granted under the LTIP have been measured using Monte Carlo simulation analysis and are expensed evenly over the period from grant date to vesting date. If the terms of the LTIP are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. (d) In FY11 an employee share ownership plan (ESOP) was established to allow certain employees to acquire shares in the Company via salary sacrifice up to a limit of $5,000 each year. For every five shares purchased by the employee, recognised as treasury shares, the Company provides one matching share, recognised as a share based payment. Under the ESOP, the matching share will vest to the employee after one year after the end of calendar year in which the matching shares are acquired. These matching shares are fair valued and are expensed evenly over the period from grant date to vesting date. ESOP employees are entitled to dividends on the matching share when the dividends are declared. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 83 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) (j) (v) (k) (l) (i) (ii) Employee benefits (continued) Share based payment transactions (continued) (e) Dividends received while satisfying the performance conditions of share issues under the MISP are allocated against the employee outstanding loan. For all previous LTIP and ESOP plans, all LTIP and ESOP recipients are entitled to any dividends that are declared during the vesting period. For the Group’s Executives, commencing with the FY13 grant and all subsequent grants, dividends or shadow dividends will not be paid on any unvested securities and dividends or shadow dividends will accrue on unvested LTI Securities and will only be paid at the time of vesting on those LTI Securities that vest, provided all vesting conditions are met. (f) A short term incentive (STI) plan allows the Executive Leadership Team to receive shares of the Company upon satisfying performance conditions. This is determined at the end of each financial year based on the Executive’s performance. The performance conditions related to KPIs include EBITDA, Group Net Profit After Tax, Operating Cash Flow, Sale of Idle Assets, Safety and Personal Goals. For the Managing Director and Chief Executive Officer, STI entitlements are made 25% in equity and 75% in cash with shares issued after their approval at the announcement of the Company’s annual general meeting in the financial year that they relate to and are escrowed until the announcement of the Company’s annual results two financial years after the financial year to which it relates. For all other Executives, STI entitlements are made in cash up to the maximum STI cash component, with the remainder made in equity. The equity component is subject to a service vesting condition of the Executive remaining employed by the Group, and will vest the day after the announcement of Emeco’s annual results one financial year after the financial year to which it relates. The fair value of the performance shares granted under the STIP have been measured and are expensed in the financial year the STIP relates to. Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Revenue Rental revenue Revenue from the rental of machines is recognised in profit and loss based on the number of hours the machines operate each month. Contracts generally have a minimum hour clause which is triggered should the machine operate under these hours during each month. Customers are billed monthly. Revenue is measured at the fair value of consideration received or receivable. In certain specific contracts, Emeco recognises revenue when it is legally enforceable on another basis that reflects the services performed. Goods sold Revenue from the sale of goods in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates. Revenue is recognised when significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. (iii) Maintenance services Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 84 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) (m) Leases Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. On initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and are not recognised in the Group’s statement of financial position. Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (n) Finance income and finance costs The Group’s finance income and finance costs include: • interest income; • interest expense; • dividend income; • dividends on preference shares issued classified as financial liabilities; • • the net gain or loss on the disposal of available-for-sale financial assets; the net gain or loss on financial assets at fair value through profit or loss; • • • • • the fair value loss on contingent consideration classified as financial liability; impairment losses recognised on financial assets (other than trade receivables); the net gain or loss on hedging instruments that are recognised in profit or loss; the reclassification of net gains previously recognised in OCI; and amortisation of borrowing costs capitalised using the effective interest method Interest income or expense is recognised using the effective interest method. Dividend income is recognised in profit or loss on the date that the Group’s right to receive payment is established. (o) Income Tax Income Tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. (i) Current tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date. (ii) Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 85 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 3 Significant accounting policies (continued) (o) Tax (continued) (ii) Deferred tax (continued) Deferred tax is not recognised for: • • • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future taxable temporary differences arising on the initial recognition of goodwill. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (iii) Tax exposures The Company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 16 December 2004 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Emeco Holdings Limited. (p) Discontinued operations A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: • • • represents a separate major line of business or geographical area of operations; is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to re-sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale or distribution, if earlier. When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year. (q) Segment reporting Segment results that are reported to the Board of Directors include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly cash, interest bearing liabilities and finance expense. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 86 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 4 New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 July 2013, and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these standards early. (i) AASB 9 Financial Instruments (2010), AASB 9 Financial instruments (2009) AASB 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under AASB 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. AASB 9 (2010) introduces additions relating to financial liabilities. The IASB currently has an active project that may result in limited amendments to the classification and measurement requirements of AASB 9 and add new requirements to address the impairment of financial assets and hedge accounting. AASB 9 (2010 and 2009) are effective for annual periods beginning on or after 1 January 2015 with early adoption permitted. The adoption of AASB 9 (2010) is expected to have an impact on the Group's financial assets, but no impact on the Group's financial liabilities. 5 Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) (ii) (iii) Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably. The fair value of items of plant, equipment, fixtures and fittings is based on the market approach and cost approaches using quoted market prices for similar items when available and depreciated replacement cost when appropriate. Depreciated replacement cost estimates reflects adjustments for physical deterioration as well as functional and economic obsolescence. Intangible assets The fair value of contract intangibles is based on the discounted estimated net future cash flows that are expected to arise as a result of the contracts that are in place when the business combination was finalised. Inventory The fair value of inventory is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. (iv) Trade and other receivables The fair value of trade and other receivables, excluding construction work in progress, are estimated as the present value of future cash flows, discounted at the market rate of interest at the measurement date. Short- term receivables with no stated interest rate are measured at the original invoice amount if the effect of discounting is immaterial. Fair value is determined at initial recognition and, for disclosure purposes, at each annual reporting date. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 87 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 5 Determination of fair values (continued) (v) Forward exchange contracts and interest rate swaps The fair value of forward exchange contracts is based on the discounted value of the difference between the rate the contractual forward price and the current forward price for the residual maturity of the contract using a credit adjusted risk free rate. The fair value of interest rate swaps is based on third party valuations provided by financiers. Those valuations are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty when appropriate. (vi) Other non-derivative financial liabilities Other non-derivative financial liabilities are measured at fair value at initial recognition and for disclosure purposes, at each annual reporting date. Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the measurement date. For finance leases the market rate of interest is determined by reference to similar lease agreements. (vii) Share-based payment transactions The fair value of employee share options, management incentive plan shares, and long term incentive plan shares are measured using an option pricing model. Measurement inputs include share price on issue, exercise price of the instrument, expected volatility, weighted average expected life of the instruments, market performance conditions, expected dividends, and the risk-free interest rate. Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. The employee share ownership plan shares are measured at cost. (viii) Equity and debt securities The fair value of equity and debt securities is determined by reference to their quoted closing bid price at the reporting date, or if unquoted determined using a valuation technique. Valuation techniques employed include market multiples and discounted cash flow analysis using expected future cash flows and a market related discount rate. The fair value of held to maturity investments is determined for disclosure purposes only. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 88 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments Overview The Group has exposure to the following risks from their use of financial instruments: (cid:1) credit risk (cid:1) liquidity risk (cid:1) market risk This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board of Directors has established the Audit and Risk Committee (Committee), which is responsible for developing and monitoring the Group’s risk management policies. The Committee reports regularly to the Board of Directors on its activities. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training, management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Committee oversees how management monitors compliance with the Group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Committee is assisted in its oversight role by the Internal Audit function. Internal Audit undertakes reviews of risk management controls and procedures at the direction of the Committee. The results of the reviews are reported to the Committee. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument or financial asset fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. Exposure to credit risk The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was: Trade receivables Other receivables Cash and cash equivalents Derivatives Consolidated Carrying amount 2014 $'000 2013 $'000 49,298 34,819 41,830 2,754 128,701 86,357 28,342 5,754 5,180 125,633 Note 18 18 17 19 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 89 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Credit risk (continued) Trade and other receivables The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, Management also considers the demographics of the Group’s customer base, including the default risk of the industry and country in which customers operate, as these factors may have an influence on credit risk. The Group sets individual counter party limits and where possible insures its rental income within Australia, Indonesia, Chile and Canada, and generally operates on a “cash for keys” policy for the sale of equipment and parts. Both insured and uninsured debtors are subject to the Group’s credit policy. The Group’s credit policy requires each new customer to be analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer according to the external rating and are approved by the appropriate management level dependent on the size of the limit. In the instance that a customer fails to meet the Group’s creditworthiness and the Group is unable to secure credit insurance, future transactions with the customer will only be on a prepayment basis, or appropriate security such as a bank guarantee or letter of credit. Where commercially available the Group aims to insure the majority of rental customers that are not considered either blue chip customers, subsidiaries of blue chip companies or Government. Blue chip customers are determined as those customers who have a market capitalisation of greater than $750,000,000 (2013: $750,000,000). The Australian and Chilean businesses held insurance for the entire financial year ended 30 June 2014. The Indonesian business held credit insurance from 1 July 2013 to 30 November 2013. The Canadian business does not have credit risk insurance. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures. The specific loss component is made up of the insurance excess for insured debts that have been classified as doubtful and uninsured customers that are classified as doubtful. As at 30 June 2014 the Group’s doubtful debts provision for continuing and discontinued operations was $5,191,000 (2013: $16,770,000). The change in provision for doubtful debts was $11,579,000 during the financial year primarily due to following: • • $9,020,000 related to a customer in Indonesia where the Company received $7,900,000 from credit insurance with the remainder written off as a bad debt; and $2,462,000 represents the reversal of doubtful debts due to customers who became insolvent in Australia and Canada totalling $1,675,000 and $787,000 respectively. As at 30 June 2014 the Group recognised bad debt write-offs for continuing and discontinued operations for a total amount of $14,116,000 (2013: $2,053,000) of which $11,052,000 related to two customers in the Indonesian business and $1,675,000 and $787,000 related to one customer in the Australian business and the Canadian business respectively. $602,000 related to the impairment of a USA debtor fully provided for in the previous period. $2,537,000 was provided for as doubtful debts at 30 June 2014. The Group believes that the unimpaired amounts that are past due by more than 30 days are still collectible, based on historic payment behaviour and extensive analyses of the underlying customers’ credit ratings. The Group held cash and cash equivalents of $41,830,000 at 30 June 2014 (2013: $5,754,000), which represents its maximum credit exposure on these assets. The cash and cash equivalents are held with bank and financial institution counterparties which are rated greater than AA-. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 90 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Credit risk (continued) Trade and other receivables (continued) The Group also held derivative assets in relation to cross currency interest rate swaps and forward exchange rate swaps to the total value of $2,754,000 (2013: $5,180,000) at 30 June 2014, which represents its maximum credit exposure on these assets. The interest rate swaps and cross currency interest rate swaps are held with bank and financial institution counter parties which are rated greater than A-. The Group’s maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Consolidated Gross 2014 $'000 Impairment 2014 $'000 Consolidated Gross 2013 $'000 Impairment 2013 $'000 Australia Asia North America South America 18,455 8,017 18,300 4,526 49,298 (486) (4,385) (320) - (5,191) 34,359 29,536 14,876 7,586 86,357 (1,675) (13,503) (1,592) - (16,770) The Group’s maximum exposure to credit risk for trade receivables at the reporting date by type of customer was: Insured Blue Chip (including subsidiaries) Other security Uninsured Consolidated Carrying amount 2014 $'000 2013 $'000 20,737 16,680 314 11,567 49,298 49,103 22,628 319 14,307 86,357 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 91 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Credit risk (continued) Trade and other receivables (continued) The aging of the Group’s trade receivables at the reporting date was: Not past due Past due 0-30 days Past due 31-60 days Past due 61 days Consolidated Consolidated Gross 2014 $'000 Impairment 2014 $'000 Gross 2013 $'000 Impairment 2013 $'000 11,845 15,406 4,036 18,011 49,298 (280) (206) - (4,705) (5,191) 19,311 26,625 15,213 25,208 86,357 (1,667) - (415) (14,688) (16,770) The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 July Bad debt written off Change in provision for doubtful debts Balance at 30 June Consolidated 2014 $'000 2013 $'000 16,770 (3,064) (8,515) 5,191 2,089 (2,053) 16,734 16,770 Collateral Collateral is held for customers that are assessed to be a higher risk. At 30 June 2014 the Group held $Nil of bank guarantees (2013: $Nil) and $Nil of prepayments (2013: $300,000). Guarantees Financial guarantees are generally only provided to wholly-owned subsidiaries or when entering into a premise rental agreement. Details of outstanding guarantees are provided in note 29. At 30 June 2014 $866,013 guarantees were outstanding (2013: $75,000). Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group monitors working capital limits and employs maintenance planning and life cycle costing models to price its rental contracts. These processes assist it in monitoring cash flow requirements and optimising cash return in its operations. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 60 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 92 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Liquidity risk (continued) On 17 March 2014, the Group extinguished it’s A$450,000,000 senior secured syndicated debt facility and USPP Notes by repaying its outstanding liabilities by issuing US$335,000,000 of 144A Notes in the High Yield market. The Group issued secured fixed interest notes in the 144A High Yield Bond market comprising US$335,000,000 which matures on 17 May 2019. The nominal interest rate is 9.875%. These notes will remain fully drawn until maturity. The Group established an A$50,000,000 revolving credit facility comprising of Tranche A1: 3 year A$40,000,000 tranche and Tranche A2: 3 year A$10,000,000 tranche, which matures on 17 March 2017. At year end, the undrawn portion of the facility was A$50,000,000. The Group has finance lease facilities totalling A$8,770,000 (2013: A$12,358,000) which matures on 15 August 2015. The Group has also financed its insurance payments with $461,000 remaining at year end which matures in August 2014. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements. Consolidated 30 June 2014 Non-derivative financial liabilities Secured bank loans Secured notes issue Finance lease liabilities Insurance financing Working capital facility Trade and other payables Derivative financial liabilities Interest rate swaps used for hedging asset/(liability) Interest rate swaps used for hedging asset/(liability) Cross-currency interest rate swaps used for hedging asset/(liability) Forward exchange contracts used for hedging: Outflow Inflow Carrying amount $'000 Contract- ual cash flows $'000 6 mths or less $'000 6-12 mths 1-2 years 2-5 years $'000 $'000 $'000 - 334,544 8,770 461 - 9,731 353,506 - 531,905 9,334 461 - 9,731 551,431 - 17,582 2,181 461 - 9,731 29,955 - 17,582 2,181 - - - 19,763 - 35,163 4,972 - - - 40,135 - 461,578 - - - - 461,578 - - - - - - - - - - - - (9,984) (28,426) (2,204) (2,060) (10,053) (14,109) - 5 (9,979) (4,249) 4,244 (28,431) (4,249) 4,244 (2,209) - - (2,060) - - (10,053) - - (14,109) More than 5 years $'000 - - - - - - - - - - - - It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 93 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Liquidity risk (continued) Consolidated 30 June 2013 Non-derivative financial liabilities Secured bank loans (1) Secured notes issue (1) Finance lease liabilities Insurance financing Working capital facility Trade and other payables Derivative financial liabilities Interest rate swaps used for hedging asset/(liability) (1) Interest rate swaps used for hedging asset/(liability) (1) Cross-currency interest rate swaps used for hedging asset/(liability) (1) Forward exchange contracts used for hedging: Outflow Inflow Carrying amount $'000 Contract- ual cash flows $'000 6 mths or less $'000 6-12 mths 1-2 years 2-5 years $'000 $'000 $'000 More than 5 years $'000 (249,646) (283,689) (5,645) (5,645) (11,289) (261,110) - (147,702) (214,075) (13,696) (464) (5,256) (41,846) (457,272) (559,026) (12,358) (464) (5,256) (41,846) (3,832) (2,181) (464) (5,256) (40,562) (57,940) (3,832) (2,181) - - - (11,658) (7,665) (4,362) - - - (22,994) (4,973) - - (1,284) (23,316) (290,361) (175,752) - - - - (175,752) (1,700) (1,844) (1,578) (161) (148) 43 - (1,063) (1,434) 407 399 688 9 (2,937) 5,180 5,722 (422) (262) (854) (5,306) 12,566 (20) - 2,397 (9,477) 9,497 2,464 (9,477) 9,497 (1,573) - - (24) - - (314) - - (5,254) - - 9,629 (1) These assets and liabilities were extinguished during FY14. The gross inflows/(outflows) disclosed in the previous table represents the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes and which are usually not closed out prior to contractual maturity. The disclosure shows net cash flow amounts for derivatives that are net cash settled and gross cash inflow and outflow amounts for derivatives that have simultaneous gross cash settlement, e.g. forward exchange contracts. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 94 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Group enters into derivatives, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Group’s hedging policy. Generally the Group seeks to apply hedge accounting in order to manage volatility in profit or loss. Currency risk The Group is exposed to currency risk on revenue, expenditure, assets and borrowings that are denominated in a currency other than the respective functional currencies of Group entities, primarily the Australian dollar (AUD), but also the United States Dollars (USD) and Canadian Dollars (CAD). The currencies in which these transactions primarily are denominated are AUD, USD, CAD, Euro dollars (EURO), Indonesian Rupiah (IDR) and Chilean Peso (CLP). The Group hedges all trade receivables and trade payables that are denominated in a currency that is not the functional currency of the respective subsidiary exposed to the transaction, and is an amount greater than $50,000. The Group uses forward exchange contracts to hedge this currency risk. Most of the forward exchange contracts have maturities of less than 6 months. In respect of other monetary assets and liabilities held in currencies other than the AUD, the Group ensures that the net exposure is kept to an acceptable level by matching foreign denominated financial assets with matching financial liabilities and vice versa. Interest on borrowings from the syndicated debt facility is denominated in currencies that match the cash flows generated by the underlying operations of the Group, primarily AUD, but also USD and CAD. This provides an economic hedge without derivatives being entered into and therefore no application of hedge accounting. The Group’s investments in its subsidiaries and their earnings for the year are not hedged as these currency positions are considered long term in nature. In March 2014 the Group issued US$335,000,000 of notes in the 144A high yield market of which US$110,000,000 and US$100,000,000 were swapped into AUD and CAD respectively through the use of cross currency interest rate swaps. As derivatives have been entered into, hedge accounting will apply to these instruments. The remainder of the USD foreign exchange exposure at 30 June 2014 is generally offset by financial assets denominated in the same currency providing an economic hedge without derivatives being entered into. However, due to timing delays the Group is still in the process of hedging its US$50,000,000 exposure, which is expected to be completed in FY15. In addition, some of the Group’s subsidiaries operate in USD which further mitigates the USD foreign currency exposure. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 95 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Market risk (continued) Exposure to currency risk The Group’s exposure to foreign currency risk at balance date was as follows, based on notional amounts: 30 June 2014 30 June 2013 USD $'000 CAD $'000 USD $'000 CAD $'000 Cash Senior secured debt Secured notes issued (1) Gross balance sheet exposure Cross currency interest rate swap to hedge the secured notes issued Forecast purchases Forward exchange contracts (2) 4,597 - (271,969) (267,372) 210,000 - 4,000 214,000 5,146 - - 5,146 - - - - 124 (15,000) (43,802) (58,678) 50,000 - 8,800 58,800 Net exposure (53,372) 5,146 122 - - - - - - - - - (1) Net USD exposure of US$335,000,000 in an AUD denominated entity. (2) Trade payables does not include future purchase commitments denominated in foreign currencies. The Group hedges these purchases in accordance with its hedging policy. The payable is not recognised until the asset is received. The fair value of outstanding derivatives are recognised in the balance sheet at period end. The following significant exchange rates applied during the year: CAD USD EURO IDR YEN CLP GBP Average rate Reporting date spot rate 2014 2013 2014 2013 0.9819 0.9187 0.6776 10,496 97.45 488.28 0.5699 1.0306 1.0266 0.7947 9,885 89.70 491.47 0.6545 1.0043 0.9415 0.6901 11,302 95.50 519.39 0.5527 0.9701 0.9266 0.7100 9,254 91.58 467.24 0.6075 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 96 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Market risk (continued) Sensitivity analysis A strengthening of the Australian dollar, as indicated below, against the following currencies at 30 June 2014 would foreign currency and have affected the measurement of increased/(decreased) equity and profit or loss by the amounts shown below. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2013, as indicated below: instruments denominated financial in a 30 June 2014 USD (10 percent movement) CAD (10 percent movement) 30 June 2013 USD (10 percent movement) CAD (10 percent movement) Consolidated Strengthening Equity $'000 Profit or loss $'000 Weakening Equity $'000 Profit or loss $'000 (1,591) (2,552) 6,510 (78) 1,944 3,119 (7,949) 480 (703) 35 (78) - 860 (43) 96 - Interest rate risk In accordance with the Board’s policy the Group is required to maintain a range between a maximum of 70% and a minimum of 30% of its exposure to changes in interest rates on borrowings on a fixed rate basis, taking into account assets with exposure to changes in interest rates for an average tenure of no less than 2 years into the future. This is achieved by entering into cross currency interest rate swaps and the issue of fixed interest notes. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 97 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Market risk (continued) Profile At the end of the reporting date the interest rate profile of the Group’s interest-bearing financial instruments as reported to the management of the Group was: Variable rate instruments: Cash at bank Working capital facility Interest bearing liabilities Effective interest rate swaps to hedge interest rate risk Australian dollars (2013: USPP US$50m) United States dollars USPP (2013: USPP US$40m) Australian dollars (2013: A$80M) Canadian dollars (2013: C$80M) United States dollars (2013: US$15M) Australian dollars 144A (US$110M) (2013: Nil) Canadian dollars 144A (US$100M) (2013: Nil) Fixed rate instruments: Interest bearing liabilities (notes) Interest bearing finance leases Insurance financing Consolidated 2014 $'000 2013 $'000 41,830 - - - - - - - (7,282) (2,702) 31,846 (358,144) (8,770) (461) (367,375) 5,754 (5,256) (252,746) 5,180 (1,063) (1,061) (557) (82) - - (249,831) (149,557) (12,358) (464) (162,379) Note 17 24 24 24 The Group classifies its debt related derivatives into the category of cross currency interest rate swaps. Cash flow hedges and fair value hedges The floating-to-fixed interest rate swaps (hedging instrument) are designated as cash flow hedges through equity. Therefore a change in interest rates at the reporting date would not affect profit or loss to the extent they are effective hedges. The interest rate swaps are designated to hedge the exposure to variability in cash flows attributed to market interest rate risk. The fixed-to-floating interest rate swaps (hedging instrument) are accounted for as fair value hedges. Therefore a change in interest rates at the reporting date affects profit or loss. The interest rate swaps are designated to hedge the exposure to liquidity risk through the benchmark interest rate. The cross currency interest rate swaps (hedging instrument) are accounted for as both cash flow hedges and fair value hedges. The cross currency interest rate swaps are designated to hedge the exposure to variability in foreign exchange rates and exposure to liquidity risk through the benchmark interest rate. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 98 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Market risk (continued) Fair value sensitivity analysis for fixed rate instruments The Group accounts for a portion of its fixed rate financial liabilities at fair value through profit or loss, as the Group designates derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at the reporting date would affect profit or loss and not equity on these instruments. A change of 100 basis points in interest rates at the reporting date would have increased (decreased) profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. Fair Value Hedges 30 June 2014 Fixed rate instruments (144A) Interest rate swap Cash flow sensitivity (net) 30 June 2013 Fixed rate instruments (USPP) Interest rate swap Cash flow sensitivity (net) 100bp increase $'000 100bp decrease $'000 100bp increase $'000 100bp decrease $'000 6,989 (6,989) - (8,143) 8,143 - 8,241 (8,241) - (6,723) 6,723 - - - - - - - - - - - - - EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 99 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Market risk (continued) Detailed below is the profit and loss impact of fair value hedges during the year. Financial Instrument Floating to fixed - Swap - Hedged Item (debt) Fixed to floating - Swap - Hedged item (debt) Cross currency interest rate swap - Swap - Hedged item (debt) Net profit/(loss) impact before tax Profit or loss 2014 $'000 2013 $'000 - - - - 5,536 - (1,063) 1,085 2,749 (2,327) 5,958 (472) 448 (2) Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased/(decreased) equity and profit or loss by the amounts shown below. The analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2013. Cash Flow Hedges 30 June 2014 Variable rate instruments Interest rate swap Cash flow sensitivity (net) 30 June 2013 Variable rate instruments Interest rate swap Cash flow sensitivity (net) EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 Profit or loss 100bp increase $'000 100bp decrease $'000 Equity 100bp increase $'000 100bp decrease $'000 - 68 68 522 - 522 (68) - (68) (543) - (543) - 90 90 - (1,181) (1,181) - 2 2 - 458 458 100 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Market risk (continued) Fair values Interest rates used for determining fair value The range of interest rates used to discount estimated cash flows, when applicable, are based on the Government yield curve at the reporting date plus an adequate credit spread excluding margins, and were as follows: Derivatives Loans and borrowings USPP Leases 144A Notes 2014 2013 0.2% 0.2% 4.6% 7.2% 9.9% - - - - - 2.8% 2.9% 5.3% 7.2% 9.9% 0.3% 0.2% 4.6% 7.2% - - - - - - 4.2% 3.6% 5.3% 7.2% - Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: Assets carried at fair value Interest rate swaps used for hedging Forward exchange contracts used for hedging Assets carried at amortised cost Receivables Cash and cash equivalents Liabilities carried at fair value Interest rate swaps used for hedging Forward exchange contracts used for hedging Liabilities carried at amortised cost Secured bank loans Secured notes issue Secured notes issue (1) Insurance financing Finance lease liabilities Trade and other payables 30 June 2014 Fair Value $'000 Carrying Amount $'000 30 June 2013 Fair Value $'000 Carrying Amount $'000 Note 19 19 18 17 19 19 24 24 24 24 24 23 - 5 5 - 5 5 5,180 - 5,180 5,180 - 5,180 78,154 41,830 119,984 78,154 41,830 119,984 97,073 5,754 102,827 97,073 5,754 102,827 (9,984) - (9,984) (9,984) - (9,984) (2,763) (20) (2,783) (2,763) (20) (2,783) - - (169,183) (178,547) (165,360) (461) (8,770) (53,095) (396,869) (4,915) (461) (9,334) (53,095) (246,352) (249,646) (53,299) (252,746) (53,961) (94,403) (464) (12,358) (41,846) (452,016) (95,596) (464) (14,181) (41,846) (458,794) (1) Carried at amortised cost with movements in fair value of the underlying hedge item recorded in the profit and loss statement. The basis for determining fair values is disclosed in note 5. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 101 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 6 Financial instruments (continued) Market risk (continued) Fair value hierarchy All the Group’s financial instruments carried at fair value would be categorised at level 2 in the fair value hierarchy as their value is based on inputs other than the quoted prices that are observable for these assets/(liabilities), either directly or indirectly. Capital management Underpinning Emeco’s strategic framework is consistent value creation for shareholders. Central to this is the continual evaluation of the Company’s capital structure to ensure it is optimised to deliver value to shareholders. The Board’s policy is to maintain diversified, long-term sources of funding to maintain investor, creditor and market confidence and to support the future growth of the business. Historically, the Board maintained a balance between higher returns possible with higher levels of borrowings and the security afforded by a sound capital position. However, given current market condition, the Board seeks to increase levels of cash held to maintain a strong capital position. The Company’s primary return metric is return on capital (ROC), which the Group defines as earnings before interest and tax (EBIT) divided by Invested Capital defined as the average over the period of equity, plus interest bearing liabilities, less cash and cash equivalents. 7 Other income Net profit on sale of non current assets (1) Sundry income (2) Consolidated 2014 $'000 2013 $'000 731 353 1,084 1,658 1,268 2,926 (1) (2) Included in net profit on the sale of non-current assets is the sale of rental equipment, including those non- current assets classified as held for sale. The gross proceeds from the sale of this equipment in 2014 was $30,265,000 (2013: $45,565,000). Included in sundry income are fees charged on overdue accounts, bad debts recovered and procurement fees on machines sourced for third parties. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 102 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 8 Profit before income tax expense for continuing operations Profit before income tax expense has been arrived at after charging/(crediting) the following items: Cost of sale of machines and parts Impairment of tangible assets held for sale: - inventory - property, plant and equipment Employee expenses: - superannuation Other expenses: - bad debts (1) - doubtful debts/(reversal) - insurance - motor vehicles - rental expense - safety expenses - travel and subsistence expense - telecommunications - workshop consumables, tooling and labour - other expenses/(reversals) Depreciation of: - buildings - plant and equipment - owned - plant and equipment - leased - furniture fittings and fixtures - office equipment - motor vehicles - leasehold improvements - sundry plant Amortisation of: - other intangibles Impairment of: - goodwill Total depreciation, amortisation and impairment of goodwill Note 20 Consolidated 2014 $'000 2013 $'000 14,443 25,822 6,148 37,508 43,656 2,849 3,064 (2,467) 2,916 3,356 4,152 1,238 3,746 1,796 1,666 (3,375) 8,641 3,336 11,977 3,424 - 370 1,974 3,264 3,644 3,605 1,549 2,883 1,691 3,148 7,124 16,092 29,252 592 73,156 525 221 430 1,428 521 1,123 77,996 839 90,102 3,167 179 479 1,615 548 1,228 98,157 21 21 132 192 157,887 158,019 17,844 18,036 236,015 116,193 (1) $1,675,000 of the $3,064,000 bad debt expense in FY14 relates to a debtor in the Australian entity. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 103 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 8 Profit before income tax expense for continuing operations (continued) Finance costs: - interest expense - makewhole payment (1) - withholding tax expense - amortisation of debt establishment costs using effective interest rate - write off previous facility costs - hedge losses - other facility costs Finance income: - interest income - hedge gains Net financial expenses Consolidated 2014 $'000 2013 $'000 24,206 16,063 1,960 1,918 2,993 - 1,492 48,632 (123) (5,958) 42,551 21,138 - - 762 1,910 32 2,213 26,055 (1,439) - 24,616 Net foreign exchange (gain)/loss (4,571) (110) (1) Makewhole payment related to the repayment of the USPP Notes. 9 Auditor’s remuneration Audit services Auditors of the Company KPMG Australia: - audit and review of financial reports - other assurance services (1) Overseas KPMG Firms: - audit and review of financial reports - other assurance services (1) Other services Auditors of the Company KPMG Australia: - taxation services (2) Overseas KPMG Firms: - taxation services Consolidated 2014 $ 2013 $ 382,782 320,000 173,118 36,872 912,772 458,300 - 195,536 - 653,836 337,641 174,016 279,639 617,280 134,896 308,912 1,530,052 962,748 (1) Other assurance services includes services relating to the issue of secured fixed notes in the 144A High Yield Bond market. (2) The increase in taxation services during FY14 includes assistance provided for the Australian Taxation Office risk review and the issue of secured fixed notes in the 144A high yield bond market. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 104 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 10 Taxes a. Recognition in the income statement Current tax expense/(benefit): Current year Adjustments for prior years Deferred tax expenses/(benefit): Origination and reversal of temporary differences Tax expense/(benefit) Tax expense from continuing operations Tax expense/(benefit) from discontinued operations Total tax expense/(benefit) b. Current and deferred tax expense recognised directly in equity Share purchase costs Tax recognised in other comprehensive income Consolidated 2014 $'000 2013 $'000 Note (67,325) 35 (67,290) 36,383 36,383 (30,907) (27,206) (3,701) (30,907) 27,302 (130) 27,172 (17,092) (17,092) 10,080 7,447 2,633 10,080 12 14 Consolidated 2014 $'000 2013 $'000 (723) (723) 374 374 Consolidated 2014 Tax Before Tax $'000 (expense) Net of benefit $'000 tax $'000 Consolidated 2013 Tax Before (expense) Net of benefit $'000 Tax $'000 tax $'000 Foreign currency translation differences for foreign operations Cash flow hedges (5,308) (6,932) (12,240) - 2,079 2,079 (5,308) (4,853) (10,161) 16,731 3,394 20,125 - (1,697) (1,697) 16,731 1,697 18,428 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 105 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 10 Taxes (continued) c. Numerical reconciliation between tax expense and pre-tax net profit/(loss) Prima facie tax expense calculated at 30% on net profit Increase/(decrease) in income tax expense due to: Effect on tax rate in foreign jurisdictions Current year losses for which no deferred tax asset was recognised Goodwill impairment Tangible asset impairment Sundry Under/(over) provided in prior years Tax expense Consolidated 2014 $'000 2013 $'000 (75,414) 4,825 (4,725) (1,205) 1,494 47,366 166 169 36 (30,907) 53 5,353 938 246 (130) 10,080 11 Current tax assets and liabilities The current tax asset for the Group of $Nil (2013: $13,940,000) represents income taxes recoverable in respect of prior periods and that arise from payment of taxes in excess of the amount due to the relevant tax authority. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 106 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 12 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated Property, plant and equipment Intangible assets Receivables Accrued revenue Inventories Payables Derivatives - hedge payable Derivatives - hedge receivable Interest-bearing loans and borrowings Employee benefits Equity - capital raising costs Provisions Tax losses carried forward Tax (assets)/liabilities Set off of tax Net tax (assets)/liabilities Movement in deferred tax balances Assets 2014 $'000 2013 $'000 Liabilities 2014 $'000 2013 $'000 Net 2014 $'000 2013 $'000 (52) - (2,353) - (1) (1,918) (3,085) - (417) (1,028) (20) - (49,325) (58,199) - (58,199) (16) (30) (8,481) - (3) (1,280) (510) - (2,081) (1,475) (24) (15) (3,473) (17,388) 17,388 - 61,843 - 47 24 621 2,043 1 7 3,615 1,023 - - - 69,224 - 69,224 59,060 - 2,781 215 571 - - 1,695 3,054 171 - - - 67,547 (17,388) 50,159 61,790 - (2,306) 24 620 125 (3,083) 7 3,198 (5) (20) - (49,325) 11,025 - 11,025 59,044 (30) (5,700) 215 568 (1,280) (510) 1,695 973 (1,304) (24) (15) (3,473) 50,159 - 50,159 Consolidated Balance 1 July 13 $'000 Recognised in profit or loss $'000 Recognised directly in equity $'000 Recognised in other comprehensive income $'000 Balance 30 June 14 $'000 Property, plant and equipment Intangible assets Receivables Inventories Payables Derivatives - hedge payable Derivatives - hedge receivable Interest-bearing loans and borrowings Employee benefits Equity - capital raising costs Provisions Tax losses carried forward 59,044 (30) (5,485) 568 (1,280) (510) 1,695 973 (1,304) (24) (15) (3,473) 50,159 2,746 30 3,203 52 1,405 (2,573) 392 2,225 1,299 727 15 (45,852) (36,331) - - - - - - - - - (723) - - (723) - - - - - - (2,080) - - - - - (2,080) EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 61,790 - (2,282) 620 125 (3,083) 7 3,198 (5) (20) - (49,325) 11,025 107 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 12 Deferred tax assets and liabilities (continued) Movement in deferred tax balances Consolidated Balance 1 July 12 $'000 Recognised in profit or loss $'000 Recognised directly in equity $'000 Recognised in other comprehensive income $'000 Balance 30 June 13 $'000 Property, plant and equipment Intangible assets Receivables Inventories Payables Derivatives - hedge payable Derivatives - hedge receivable Interest-bearing loans and borrowings Employee benefits Equity - capital raising costs Provisions Tax losses carried forward 40,797 (37) (3,902) 1,361 (6,707) (1,683) 1,296 4,967 (1,706) (8) (110) (3,272) 30,996 18,247 7 (1,583) (793) 5,427 - (125) (3,994) 402 (390) 95 (201) 17,092 - - - - - - - - - 374 - - 374 - - - - - 1,173 524 - - - - - 1,697 59,044 (30) (5,485) 568 (1,280) (510) 1,695 973 (1,304) (24) (15) (3,473) 50,159 Unrecognised deferred tax assets The following deferred tax assets have not been brought to account as assets: Tax losses Consolidated 2014 $'000 2013 $'000 21,109 18,308 Unutilised tax losses are in Indonesia, the United Kingdom, United States and Europe. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 108 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 13 Capital and reserves Share capital 599,675,707 (2013: 599,675,707 ) ordinary shares, fully paid Acquisition reserve Consolidated 2014 $'000 2013 $'000 669,503 (75,887) 593,616 669,503 (75,887) 593,616 Share buy back On 23 August 2012 the Board announced an on market share buy-back program to acquire up to 5% of shares on issue. The share buy-back was completed on 23 November 2012 having acquired a total of 31,561,879 shares at an average price of 53.4 cents. Shares on issue at 30 June 2014 totalled 599,675,707 (30 June 2013: 599,675,707). Terms and conditions Ordinary shares The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at shareholders' meetings. Shares have no par value. In the event of winding up of the Company, the ordinary shareholder ranks after all other creditors are fully entitled to any proceeds of liquidation. Reserve of own shares The reserve of own shares comprises of shares purchased on market to satisfy the vesting of shares and rights under the LTIP. Shares that are forfeited under the Company’s MISP due to employees not meeting the service vesting requirement will remain in the reserve. As at 30 June 2014 the Company held 27,773,441 treasury shares (2013: 16,804,359) in satisfaction of the employee share plans. Foreign Currency Translation Reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in fair value of hedging instruments used in cash flow hedges pending subsequent recognition of hedged cash flows. Share based payment reserve The share based payment reserve comprises the expenses incurred from the issue of the Company’s Securities under its employee share/option plans (refer note 3(j)(v)). EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 109 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 13 Capital and reserves (continued) Dividends (i) The following dividends were declared and paid by the Group: 2014 Final 2013 ordinary Interim 2014 ordinary Cents per share Total amount $'000 Franked/ unfranked Date of payment Nil Nil - - - - - - - Subsequent to 30 June 2014 The Directors have declared that no Final dividend will be paid and no amount has been paid or declared by way of dividends since March 2013, or to the date of this report. The following dividends were declared and paid by the Group in the prior year: 2013 Final 2012 ordinary Interim 2013 ordinary Cents per share Total amount $'000 Franked/ unfranked Date of payment 3.5 2.5 22,154 14,992 37,146 Franked Franked 28 September 2012 27 March 2013 Franked dividends declared or paid during the year were franked at the tax rate of 30%. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 110 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 13 Capital and reserves (continued) Dividends (continued) (ii) Franking account Dividend franking account 30% franking credits available to shareholders of Emeco Holdings Limited for subsequent financial years The Company 2014 $'000 2013 $'000 18,861 29,391 The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: (a) (b) (c) (d) franking credits that will arise from the payment of current tax liabilities and recovery of current tax receivables; franking debits that will arise from the payment of dividends recognised as a liability at the year end; franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the year-end; and franking credits that the entity may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by $Nil (2013: $Nil). In accordance with the tax consolidation legislation, the Company as the head entity in the Australian tax-consolidated group has also assumed the benefit of $18,861,000 (2013: $29,391,000) franking credits. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 111 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 14 Discontinued operations In May 2014 the Board resolved to exit the Indonesian business after a strategic review of the operations. The Board’s decision to close this business was to address the underperformance in returns being generated combined with the unfavourable conditions in the Indonesian mining industry. Losses of discontinued operations Revenue Other income Direct costs Profit/(loss) on sale of assets Impairment of tangible assets - Inventories - Property, Plant and Equipment Other expenses Employee expenses EBITDA Depreciation EBIT Finance income Finance costs Income tax (expense)/benefit (Loss)/Profit for the year 2014 $'000 2013 $'000 4,284 1 (2,794) 213 (1,580) (41,052) (5,032) (2,389) (48,349) (5,524) (53,873) 3 (968) 3,701 (51,137) 60,316 84 (11,344) 342 (23) (116) (19,152) (2,932) 27,175 (14,390) 12,785 9 (4,169) (2,633) 5,992 The loss from discontinued operation of $51,137,000 (2013: profit $5,992,000) is attributable entirely to the owners of the Company. Cash flows from/(used in) discontinued operation Net cash used in operating activities Net cash from investing activities Net cash from financing activities Net cash from/(used in) discontinued operation 2014 $'000 2013 $'000 2,205 38,953 (31,290) 9,868 25,627 (25,204) (774) (351) EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 112 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 15 Disposal groups and non-current assets held for sale During the year $177,242,000 of non-current assets was transferred from property, plant and equipment and inventory into non-current assets held for sale and subsequently impaired by $74,816,000 (2013: $3,040,000) to their fair value less cost to sell based on market prices of similar equipment. As at 30 June 2014, the non-current assets held for sale comprised assets of $39,922,000 (2013: $7,200,000). These relate to land and buildings and plant and equipment from Indonesia (included in note 14), Canada and Australia. The Group is actively marketing these assets and they are expected to be disposed of within 12 months. Assets classified as held for sale Property, plant and equipment - continuing operations Property, plant and equipment - discontinuing operations Inventories - discontinuing operations 16 Segment reporting 2014 $'000 2013 $'000 31,564 8,354 4 39,922 7,200 - - 7,200 The Group has four reportable segments, as described below, which are the Group’s strategic business units. The strategic business units offer different products and services, and are managed separately because they require different operational strategies for each geographic region. For each of the strategic business units, the Managing Director and Board of Directors review internal management reports on a monthly basis. The following summary describes the operations in each of the Group’s reportable segments: Australia Canada Chile Provides a wide range of earthmoving equipment and maintenance services to customers in Australia. Provides a wide range of earthmoving equipment and maintenance services to customers who are predominately within Canada. Provides a wide range of earthmoving equipment and maintenance services to customers in Chile. Indonesia (Discontinued) Provides a wide range of earthmoving equipment and maintenance services to customers in Indonesia. This segment was discontinued in May 2014. Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before interest and income tax as included in the internal management reports that are reviewed by the Group’s Managing Director and Board of Directors. Segment profit before interest and income tax is used to measure performance as Management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter- segment pricing is determined on an arm’s length basis. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 113 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 16 Segment reporting (continued) Information about reportable segments 2014 Australia $'000 134,539 6,739 (48,870) Indonesia (1) (discont'd) $'000 Canada Chile Other Total $'000 $'000 $'000 $'000 4,284 11,332 (5,524) 81,451 15,009 (19,460) 25,105 - (9,666) - 238 - (44,818) (53,873) (1,420) 3,117 (641) 245,379 33,318 (83,520) (97,635) - (486) (4,385) (320) - - (5,191) (34,445) (151,744) 338,197 (24,936) (39,274) (41,052) - 34,836 (1,589) (13,141) (2,051) (6,143) 190,071 (13,601) (19,130) (1,012) - 143,040 (5,649) (8,683) - - 388 - (388) (78,560) (157,887) 706,532 (45,775) (80,616) External revenues Inter-segment revenue Depreciation Reportable segment profit/(loss) before interest and income tax Other material non-cash items: Impairment of receivables Impairment on property, plant and equipment Impairment of intangible assets Reportable segment assets Capital expenditure Reportable segment liabilities Information about reportable segments 2013 Australia $'000 267,829 27,156 (70,317) Indonesia (1) (discont'd) $'000 Canada Chile Other Total $'000 $'000 $'000 $'000 60,316 5,102 (14,390) 94,179 17,198 (23,131) 17,367 3,182 (4,709) - 285 - 439,691 52,923 (112,547) 45,375 (8,162) 23,340 6,281 (399) 66,435 (1,675) (13,503) (990) (3,257) (17,844) 607,637 (56,295) (37,369) (116) - (79) - 135,011 (14,363) (12,887) 233,661 (23,665) (32,045) 143,477 (63,995) (16,671) - - - (602) (16,770) - - 482 - (448) (3,452) (17,844) 1,120,268 (158,318) (99,420) External revenues Inter-segment revenue Depreciation Reportable segment profit/(loss) before interest and income tax Other material non-cash items: Impairment of receivables Impairment on property, plant and equipment Impairment of intangible assets Reportable segment assets Capital expenditure Reportable segment liabilities (1) Indonesia has been separated out as if it was discontinued in 30 June 2013. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 114 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 16 Segment reporting (continued) Reconciliation of reportable segment revenues, profit or loss, assets and liabilities and other material items Revenues Total revenue for reportable segments Elimination of inter-segment revenue Elimination of discontinued operations Consolidated revenue from continuing operations Profit or loss Total EBIT for reportable segments Elimination of discontinued operations Unallocated amounts: Other corporate expenses Net interest expense Consolidated (loss)/profit before income tax from continuing operations Assets Total assets for reportable segments Unallocated assets Consolidated total assets Liabilities Total liabilities for reportable segments Unallocated liabilities Consolidated total liabilities 2014 $'000 2013 $'000 278,697 (33,318) (4,284) 241,095 492,614 (52,923) (60,316) 379,375 (97,635) 53,873 66,435 8,162 (165,065) (42,551) (251,378) (42,522) (24,616) 7,459 706,532 41,830 748,362 1,120,268 5,754 1,126,022 80,616 343,774 424,390 99,420 415,426 514,846 Other material items 2014 Capital expenditure Depreciation Other material items 2013 Capital expenditure Depreciation Reportable segment totals $'000 Discontinued operations $'000 Consolidated Total $'000 (44,186) (77,996) (1,589) (5,524) (45,775) (83,520) (143,955) (98,157) (14,363) (14,390) (158,318) (112,547) EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 115 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 16 Segment reporting (continued) Geographical information Operating segments are the same as the geographical segments. Refer to the segment table for the geographical segments. Major customer In the year ended 30 June 2014 the Group had two major customers that represented $57,263,000 (2013: $Nil) of the Group’s total revenues, as indicated below: Segment Australia Canada Total 17 Cash assets Cash at bank 18 Trade and other receivables Current Trade receivables Less: Impairment of receivables VAT/GST receivable Other receivables Non-Current Other receivables 2014 $'000 2013 $'000 26,059 31,204 57,263 - - - Consolidated 2014 $'000 2013 $'000 41,830 5,754 Consolidated 2014 $'000 2013 $'000 49,298 (5,191) 44,107 23,415 10,632 78,154 772 772 86,357 (16,770) 69,587 21,100 6,386 97,073 856 856 The Group’s exposure to credit risks, currency risks and impairment losses associated with trade and other receivables are disclosed in note 6. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 116 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 19 Derivatives Current Assets Forward exchange contract Cross currency interest rate swaps Non Current Assets Cross currency interest rate swaps Current Liabilities Forward exchange contract Cross currency interest rate swaps Interest rate swaps Non Current Liabilities Cross currency interest rate swaps Interest rate swaps 20 Inventories Equipment and parts - at cost Work in progress - at cost Consumables, spare parts - at cost Total at cost Equipment and parts - at NRV (1) Total inventory Balance at 1 July Additions Impairment loss on inventory for continuing operations (1) Impairment loss on inventory for discontinued operations (1) Transferred to Disposal Group Held for Sale Disposals Balance at 30 June Consolidated 2014 $'000 2013 $'000 5 - 5 2,749 2,749 - (2,546) - (2,546) (10,187) - (10,187) - 691 691 4,489 4,489 (20) - (1,261) (1,281) - (1,502) (1,502) Consolidated 2014 $'000 2013 $'000 - 5,758 1,177 6,935 1,227 8,161 14,758 48,081 (6,148) (1,580) (4) (46,946) 8,161 5 4,496 2,851 7,352 7,406 14,758 34,669 58,766 (8,641) (23) - (70,013) 14,758 (1) During the year ended 30 June 2014 the write-down of inventories to net realisable value (NRV) recognised as an expense in the consolidated statement of profit or loss and other comprehensive income amounted to $7,728,000 (2013: $8,664,000). EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 117 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 21 Intangible assets and goodwill Goodwill Carrying amount at the beginning of the year Impairment of goodwill Effects of movement in foreign exchange Contract intangibles - at cost Less: Accumulated amortisation Other intangibles - at cost Less: Accumulated depreciation Consolidated 2014 $'000 2013 $'000 157,800 (157,887) 87 - 173,636 (17,844) 2,008 157,800 712 (712) - 1,329 (1,154) 175 712 (712) - 1,306 (1,030) 276 Total intangible assets 175 158,076 Amortisation and impairment of goodwill The amortisation charge and impairment of goodwill are recognised in the following line item in the income statement: Amortisation expense Impairment of goodwill Total expense for the year for continuing operations Consolidated 2014 $'000 2013 $'000 132 157,887 158,019 192 17,844 18,036 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 118 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 21 Intangible assets and goodwill (continued) Impairment tests for cash generating units containing goodwill For the purpose of impairment testing, goodwill is allocated to the Group’s geographical operating divisions. The aggregate carrying amounts of goodwill allocated to each unit are as follows: Australian rental Canada rental Asian rental Total rental Consolidated 2014 $'000 2013 $'000 - - - - 151,744 6,056 - 157,800 Impairment loss For the interim period ended 31 December 2013, impairment testing indicated the Australian and Canadian Rental CGU’s were impaired. The deterioration in the business over the FY14 interim period due to the challenging external environment, including lower margins, increased volatility in the mining sector and the expectation that these factors would be sustained for a period of time caused the Group to assess the recoverable amount of its rental assets. The Group determined the recoverable amount of its rental assets by using a discounted cash flow analysis. Determining recoverable amount requires the exercise of significant judgements for both internal and external factors. Judgements for external factors, including but not limited to foreign exchange, equipment hire rates and utilisation, have been made with reference to historical data and observable market data using a combination of consensus views. The recoverable amount estimate is particularly sensitive to hire rates and utilisation rates. Judgements for internal factors, including but not limited to applicable discount rate and operating costs, have been made with reference to historical data and forward looking business plans. Changes in the long term view of both internal and external judgements may impact the estimated recoverable value. As a result a total goodwill impairment charge of $157,887,000 was recognised for the interim period ended 31 December 2013 (Australian CGU: $151,744,000, Canadian CGU $6,143,000). The impairment charge is included in the Consolidated Statement of Profit or Loss and Other Comprehensive Income for the financial year ended 30 June 2014 (page 70). Refer to note 2(d). The Group has determined the recoverable amount of its cash generating units (CGU) using a value in use methodology (June 2013: value in use) which is based on discounted cash flows for five years plus a terminal value. Impairment testing is intended to assess the recoverable amount of both tangible and intangible assets. As such, although the Indonesian and Chile Rental CGU’s have nil goodwill, impairment testing has been performed for these CGUs. Nominal post tax discount rates have been derived as a weighted cost of equity and debt. Cost of equity is calculated using country specific ten year bond rates plus an appropriate market risk premium. The cost of debt is determined using the appropriate CGU three year swap rate plus a margin for three year tenor debt of equivalently credit rated businesses at 31 December 2013. The three year swap rates were used as the base rate to reflect the relative illiquidity for longer tenure debt in the current market. The nominal post tax discount rates for determining the rental CGU’s valuations range between 7.6% and 12.0% (2013: 9.2% and 12.8%). For future cashflows of each CGU, revenue growth to the remainder of FY14 for each business reflects the best estimate for the coming year taking account of macroeconomic, business model, strategic and market factors. Growth rates for subsequent years are based on Emeco’s five year outlook taking into account all available information at this current time and are subject to change over time. Compound annual growth rates (CAGR) over the five years of the forecast range between negative 14.6% and negative 2.9% (2013: 0.5% and 1.0%). The negative CAGR of 14.6% relates to the Indonesian CGU which disposed $17.8 million of rental fleet assets over the half year ended 31 December 2013, reducing forecast revenue growth for this business. The CAGR range excludes the Chilean CGU given its full first year of operation will be FY14. Refer to note 22 for further information on the impairment testing methodology adopted by the Company at 30 June 2014. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 119 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 22 Property, plant and equipment Freehold land and buildings - at cost Less: Accumulated depreciation Leasehold improvements - at cost Less: Accumulated depreciation Plant and equipment - at cost Less : Accumulated depreciation Leased plant and equipment - at capitalised cost Less : Accumulated depreciation Furniture, fixtures and fittings - at cost Less : Accumulated depreciation Office equipment - at cost Less : Accumulated depreciation Motor vehicles - at cost Less : Accumulated depreciation Sundry plant - at cost Less : Accumulated depreciation Total property, plant and equipment - at net book value Consolidated 2014 $'000 2013 $'000 8,750 (2,678) 6,072 5,162 (3,270) 1,892 12,808 (3,223) 9,585 4,950 (2,748) 2,202 1,012,773 (466,558) 546,215 1,284,734 (498,572) 786,162 21,228 (9,819) 11,409 1,132 (695) 437 2,330 (1,793) 537 8,556 (5,416) 3,140 21,228 (9,294) 11,934 1,378 (690) 688 2,606 (1,637) 969 9,644 (5,005) 4,639 11,035 (7,209) 3,826 573,528 14,171 (10,140) 4,031 820,210 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 120 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 22 Property, plant and equipment (continued) Reconciliations Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Freehold land and buildings Carrying amount at the beginning of the year Additions Depreciation Disposals Effects of movement in foreign exchange Impairment Reclassified to assets held for sale Carrying amount at the end of the year Leasehold improvements Carrying amount at the beginning of the year Additions Disposals Depreciation Effects of movement in foreign exchange Impairment Reclassified to assets held for sale Carrying amount at the end of the year Plant and equipment Carrying amount at the beginning of the year Additions Net movement in capital work in progress Transferred from leased plant and equipment Net movement in rental inventory (1) Disposals Depreciation Impairment loss on continuing and discontinuing operations Reclassified to assets held for sale Effects of movements in foreign exchange Carrying amount at the end of the year Furniture, fixtures and fittings Carrying amount at the beginning of the year Additions Disposals Depreciation Impairment Reclassified to assets held for sale Effects of movement in foreign exchange Carrying amount at the end of the year Consolidated 2014 $'000 2013 $'000 9,585 315 (701) - (315) - (2,812) 6,072 2,202 219 - (521) (8) - - 19,883 643 (957) (468) 686 (3,031) (7,171) 9,585 2,538 367 (124) (548) 5 (7) (29) 1,892 2,202 786,162 30,186 778,027 132,504 (390) (13,270) - (11,254) (62,365) (78,243) (78,561) (36,430) (2,890) 546,215 - (376) (46,679) (103,953) (377) - 40,286 786,162 688 17 (26) (228) - (7) (7) 437 758 178 (41) (187) (37) - 17 688 (1) Included in this movement are purchases totalling $12,761,000 for the year ended 30 June 2014 (2013: $19,900,000). EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 121 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 22 Property, plant and equipment (continued) Reconciliations (continued) Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Office equipment Carrying amount at the beginning of the year Additions Disposals Depreciation Reclassified to assets held for sale Effects of movement in foreign exchange Carrying amount at the end of the year Motor vehicles Carrying amount at the beginning of the year Additions Disposals Depreciation Reclassified to assets held for sale Effects of movement in foreign exchange Carrying amount at the end of the year Sundry plant Carrying amount at the beginning of the year Additions Disposals Depreciation Reclassified to assets held for sale Effects of movement in foreign exchange Carrying amount at the end of the year Leased plant and equipment Carrying amount at the beginning of the year Depreciation Carrying amount at the end of the year Consolidated 2014 $'000 2013 $'000 969 128 (5) (482) (67) (6) 537 4,639 250 (234) (1,444) (46) (25) 3,140 4,031 1,899 (134) (1,377) (555) (38) 3,826 1,077 432 (17) (543) 20 969 4,565 1,881 (234) (1,649) 76 4,639 3,270 2,379 (214) (1,543) 139 4,031 11,934 (525) 11,409 15,101 (3,167) 11,934 Security The Group’s assets are subject to a fixed and floating charge under the terms of the 144A notes issued. Refer note 24 for further details. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 122 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 22 Property, plant and equipment (continued) Impairment tests for cash generating units The Group has determined the recoverable amount of its cash generating units (CGU) using a value in use methodology (2013: value in use) which is based on discounted cash flows for five years plus a terminal value. Impairment testing is intended to assess the recoverable amount of both tangible and intangible assets. As such, although the Chile Rental CGU has nil intangible assets, impairment testing has been performed for this CGU. Nominal post tax discount rates have been derived as a weighted cost of equity and debt. Cost of equity is calculated using country specific ten year bond rates plus an appropriate market risk premium. The cost of debt is determined using the appropriate CGU three year swap rate plus a margin for three year tenor debt of equivalently credit rated businesses at 30 June 2014. The three year swap rates were used as the base rate to reflect the relative illiquidity for longer tenure debt in the current market. The nominal post tax discount rates for determining the rental CGU’s valuations range between 6.9% and 10.6% (2013: 9.2% and 12.8%). For future cashflows of each CGU, the revenue growth in the first year of the business reflects the best estimate for the coming year taking account of macroeconomic, business model, strategic and market factors. Growth rates for subsequent years are based on Emeco’s five year outlook taking into account all available information at this current time and are subject to change over time. Compound annual growth rates (CAGR) over the five years of the forecast range between negative 2.4% and 12.3% (2013: negative 0.5% and 1.0%). The upper end of the range represents forecast revenue growth in Chile underpinned by the recently announced project win which is expected to utilise over 60% of the Chilean fleet for a 5 year period. 30 June 2014 impairment testing which resulted in the estimated recoverable amount of a CGU exceeding its carrying amount are as follows: Australian rental Canada rental Chile rental Amount by which CGU recoverable amount exceeds its carrying amount (in $ millions) 103.2 115.9 14.9 Impairment testing sensitivities The CGU valuations are sensitive to changes in the discount rate and underlying fleet utilisation assumptions for cashflow forecasts and terminal value. The following table shows the amount by which these two assumptions would need to change individually in order for the estimated recoverable amount of the CGU to be equal to the carrying amount: CGU Australian rental Canada rental Chile rental Change required for carrying amount to equal the recoverable amount (in percent) Discount Rate % 7.5 11.1 3.9 Utilisation % (10.0) (20.0) (13.0) EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 123 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 23 Trade and other payables Current Trade payables Trade payables Other payables and accruals Non-current Other payables Other payables and accruals Consolidated 2014 $'000 2013 $'000 9,731 43,364 53,095 - - 13,780 26,782 40,562 1,284 1,284 The Group’s exposure to currency and liquidity risk associated with trade and other payables is disclosed in note 6. The Company has also entered into a Deed of Cross Guarantee with certain subsidiaries as described in note 37. Under the terms of the Deed, the Company has guaranteed the repayment of all current and future creditors in the event any of the entities party to the Deed are wound up. Details of the consolidated financial position of the Company and subsidiaries party to the Deed are set out in note 37. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 124 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 24 Interest bearing liabilities Current Amortised cost Working capital facility Other financing Lease liabilities - secured Non-current Amortised cost OID (1) Bank loans - secured Notes issue - secured Notes issue - secured (2) Lease liabilities - secured Debt raising costs (bank loans) Debt raising costs Debt raising costs Consolidated 2014 $'000 2013 $'000 - 461 3,855 4,316 5,256 464 3,588 9,308 (5,043) - 177,270 178,547 4,915 - (8,144) (8,086) 339,458 - 252,746 53,961 95,596 8,770 (3,100) (1,193) (662) 406,118 (1) Originating Issue discount – the discount from par value at the time the 144A Notes were issued. This is amortised using the effective interest rate method over the life of the Notes. (2) Carried at amortised cost with movements in fair value of the underlying hedge item recorded in the profit and loss statement. Bank loans The Group’s extinguished it’s A$450,000,000 senior secured syndicated loan facility on 17 March 2014 and repaid any outstanding liabilities with the proceeds from the 144A Notes issue. Associated debt raising costs were expensed on loan extinguishment. The Group established an A$50,000,000 revolving credit facility comprising of Tranche A1: 3 year A$40,000,000 tranche and Tranche A2: 3 year A$10,000,000 tranche. Tranche A2 provides the Group’s working capital facility needs. This is a revolving multicurrency facility of AUD, USD and CAD which matures on 17 March 2017. The nominal interest rate is based on USD Libor, BBSW and CDOR (2013: n/a) for their respective currencies plus a margin. The Group’s revolving credit facility is secured and is measured at amortised cost. At year end, the Group had the following drawn: FY14 FY13 Funds drawn in functional currency $’000 Funds drawn translated to AUD $’000 Funds drawn in functional currency $’000 Funds drawn translated to AUD $’000 AUD CAD USD - - - - - - $151,000 C$83,000 US$15,000 $151,000 $85,558 $16,188 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 125 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 24 Interest bearing liabilities (continued) Bank loans (continued) Covenant Amendment On 22 October 2013 the Group announced to the market amendments to the Group’s senior secured syndicated loan facility. Amendments apply for the period 22 October 2013 to 30 June 2014. After 30 June 2014 the covenants were to revert to the original levels. Current and amended ratios were as follows: Gearing (Gross Debt: EBITDA(1) ) Interest Cover (EBITDA: Net Interest Expense(2)) (1) Rolling 12 month trailing Operating EBITDA (2) Rolling 12 month trailing Net Interest Expense (3) Amended covenants apply to the USPP Notes Original Covenants Amended Covenants (3) < 3.0 x > 4.0 x < 3.5 x > 3.5 x All other key terms of the bank debt facility, including pricing, remained unchanged and the Group retained full access to the bank debt facility. Emeco did not incur any fees or charges from providers of the bank debt facility in relation with this amendment. On 17 March 2014, the Group repaid the secured syndicated debt facility and USPP Notes by issuing US$335,000,000 of 144A Notes in the High Yield market. The covenants outlined above no longer apply. 144A notes issue Under the terms of the note agreement, the noteholders hold a joint fixed and floating charge with the syndicated bank group over the assets and undertakings of the Group. In March 2014, the Group issued secured fixed interest notes in the 144A High Yield Bond market comprising US$335,000,000 which matures on 17 May 2019. The nominal interest rate is 9.875%. These notes will remain fully drawn until maturity. Of the notes, US$166,900,000 is measured at amortised cost. The remaining notes are also measured at amortised cost and are subject to adjustment for the impact of fair value movements on the hedged risk. The Group designated derivatives (cross currency interest rate swaps) as hedge instruments against this underlying debt. FY14 FY13 Funds drawn in functional currency $’000 Funds drawn translated to AUD $’000 Funds drawn in functional currency (1) $’000 Funds drawn translated to AUD $’000 USD US$335,000 $355,815 US$140,000 $149,557 (1) US Private Placement in FY13. Working capital facility The Group no longer has the working capital facility that was secured under the syndicated loan facility. A working capital facility has been incorporated as part of the revolving credit facility – Tranche A2. At 30 June 2014, the Group had $Nil drawn (2013: $5,256,000). Finance leases The Group has finance lease facilities totalling A$8,770,000 (2013: A$12,358,000) which matures on 15 August 2015. Assets leased under the facility are secured by the assets leased. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 126 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 24 Interest bearing liabilities (continued) Other financial liabilities At year end the Group financed its insurance premium totalling $461,000. Finance lease liabilities Finance lease liabilities of the Group are payable as follows: Future minimum lease payments Interest Present value of minimum lease payments Future minimum lease payments Interest Present value of minimum lease payments 2014 $'000 2014 $'000 2014 $'000 2013 $'000 2013 $'000 2013 $'000 4,362 4,972 - 9,334 (507) (57) - (564) 3,855 4,915 - 8,770 4,362 9,334 - 13,696 (774) (564) - (1,338) 3,588 8,770 - 12,358 Consolidated Less than one year Between one and five years More than five years The Group leases plant and equipment under finance leases. The Group’s lease liabilities are secured by the leased assets of $8,211,000 (2013: $11,934,000). In the event of default, the leased assets revert to the lessor. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 127 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 25 Financing arrangements The Group has the ability to access the following lines of credit: Total facilities available: Bank loans 144A Notes USPP Notes Finance leases Other financing Working capital Facilities utilised at reporting date: Bank loans 144A Notes USPP Notes Finance leases Insurance financing Working capital Facilities not utilised or established at reporting date: Bank loans 144A Notes USPP Notes Finance leases Insurance financing Working capital Consolidated 2014 $'000 2013 $'000 50,000 355,817 - 8,770 461 - 415,048 450,000 - 149,557 12,358 464 22,062 634,441 - 252,746 355,817 - 8,770 461 - 365,048 50,000 - - - - - 50,000 - 149,557 12,358 464 5,256 420,381 197,254 - - - - 16,805 214,059 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 128 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 26 Provisions Current Employee benefits: - annual leave - long service leave - other Non-current Employee benefits - long service leave Consolidated 2014 $'000 2013 $'000 2,220 439 35 2,694 2,807 533 48 3,388 1,069 1,244 Defined contribution superannuation funds The Group makes contributions to defined contribution superannuation funds. The expense recognised for the year was $2,849,000 (2013: $3,424,000). 27 Share-based payments During the year the Company issued performance shares and performance rights to key management personnel and senior employees of the Group under its LTIP (refer note 3(j)(v)). During the prior year’s LTIP performance shares and rights were also issued under similar terms and conditions and priced relative to the time of issue. Prior to establishing the LTIP certain key management personnel and senior employees were issued shares in the Company under the Company’s MISP (refer note 3(j)(v)). During the year the Company issued matching shares to certain employees of the Group under its ESOP (refer note 3(j)(v)). Performance shares, performance rights, options and shares issued under the MISP are all equity settled. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 129 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 27 Share-based payments (continued) Long term incentive plan Grant date / employees entitled Matured in FY11: Performance shares/rights 2008 Number of Instruments 1,290,000 Matured in FY12: Performance shares/rights 2009 9,819,790 Matured in FY13: Performance shares/rights 2010 (1) 4,608,076 Contractual life of performance shares/rights 5 years 5 years 3 years Vesting conditions 3 years service TSR ranking to a basket of direct and indirect peers of 98 listed companies. 50% entitlement for a 50.1% ranking within TSR group. Pro rata entitlement up to 100% vesting for a ranking of 75% better to TSR group 3 years service TSR ranking to a basket of direct and indirect peers of 98 listed companies. 50% entitlement for a 50.1% ranking within TSR group. Pro rata entitlement up to 100% vesting for a ranking of 75% better to TSR group 3 years service TSR ranking to a basket of direct and indirect peers of 98 listed companies. 50% entitlement for a 50.1% ranking within TSR group. Pro rata entitlement up to 100% vesting for a ranking of 75% better to TSR group Matured in FY14: Performance shares/rights 2011 5,889,200 3 years service TSR ranking to a basket of 3 years direct and indirect peers of 98 listed companies. 50% entitlement for a 50.1% ranking within TSR group. Pro rata entitlement up to 100% vesting for a ranking of 75% better to TSR group. No shares/rights vested due to TSR being less than 50%. (1) On 16 November 2010 shareholders approved the grant of 925,926 performance rights and 1,183,929 performance shares for nil consideration for the 2010 and 2011 financial year respectively to the former Managing Director. The 925,926 and 1,183,929 instruments have been included in the number of instruments for the performance shares/right 2010 and 2011 respectively above. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 130 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 27 Share-based payments (continued) Long term incentive plan (continued) Grant date / employees entitled Unvested plans: Number of Instruments Vesting conditions Performance shares/rights 2012 4,246,661 Performance shares/rights 2013 6,881,251 Performance shares/rights 2014(1) 24,491,074 3 years service TSR ranking to a basket of direct and indirect peers of 97 listed companies. 50% entitlement for a 50.1% ranking within TSR group. Pro rata entitlement up to 100% vesting for a ranking of 75% better to TSR group 3 years service TSR ranking to a basket of direct and indirect peers of 93 listed companies. 50% entitlement for a 50.1% ranking within TSR group. Pro rata entitlement up to 100% vesting for a ranking of 75% better to TSR group 3 years service TSR ranking to a basket of direct and indirect peers of 99 listed companies. 50% entitlement for a 50.1% ranking within TSR group. Pro rata entitlement up to 100% vesting for a ranking of 75% better to TSR group Contractual life of performance shares/rights 3 years 3 years 3 years (1) This includes 4,553,571 of performance shares relating to the Managing Director. This is subject to the approval of shareholders at the Company’s 2014 annual general meeting to be held in November 2014. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 131 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 27 Share-based payments (continued) The movement of performance shares and performance rights on issue during the year were as follows: Outstanding at 1 July Forfeited during the period Exercised during the period Granted during the period Outstanding at 30 June Exercisable at 30 June Management incentive share plan Number of performance shares/rights 2014 16,897,192 (11,659,726) (3,245,099) 24,491,074 26,483,441 - Number of performance shares/rights 2013 16,970,271 (3,355,878) (3,598,452) 6,881,251 16,897,192 3,364,390 Grant date / employees entitled Number of Instruments Vesting conditions Contractual life of MISP MISP 2006 4,010,000 Service requirement. Partial vesting 10 years entitlement after 2 years with full vesting after 5 years. MISP 2007 1,240,000 Service requirement. Partial vesting 10 years entitlement after 2 years with full vesting after 5 years. MISP 2008 560,000 Service requirement. Partial vesting 10 years entitlement after 2 years with full vesting after 5 years. 5,810,000 The number of MISPs are as follows: Outstanding at 1 July Forfeited during the period Exercised during the period Granted during the period Outstanding at 30 June Exercisable at 30 June (1) Number of MISP 2014 1,600,000 (310,000) - - 1,290,000 1,290,000 Number of MISP 2013 1,600,000 - - - 1,600,000 1,600,000 (1) The full service and vesting requirements have been satisfied under the MISP. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 132 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 27 Share-based payments (continued) Employee share ownership plan Grant date / employees entitled Number of Instruments Vesting conditions Contractual life of ESOP Matured in January 2012 ESOP 2011 Matured in January 2013 ESOP 2012 Matured in January 2014 ESOP 2013 ESOP 2014 The number of ESOPs are as follows: Outstanding at 1 July Forfeited during the period Exercised during the period Granted during the period Outstanding at 30 June Exercisable at 30 June (1) 26,976 Service requirement. Full vesting entitlement after 1 year after the end of the calendar year in which they are acquired. 28,898 Service requirement. Full vesting entitlement after 1 year after the end of the calendar year in which they are acquired. 75,388 Service requirement. Full vesting entitlement after 1 year after the end of the calendar year in which they are acquired. 82,899 Service requirement. Full vesting entitlement after 1 year after the end of the calendar year in which they are acquired. 214,161 1 year 1 year 1 year 1 year Number of ESOP 2014 Number of ESOP 2013 89,686 (16,713) (62,390) 82,899 93,482 - 44,215 (3,584) (26,333) 75,388 89,686 - (1) The shares are not considered exercisable until the full vesting period has been satisfied. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 133 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 27 Share-based payments (continued) The fair value of services received in return for the performance shares and rights granted during the year are based on the fair value of the LTIPs granted, measured using Monte Carlo simulation analysis. Expected volatility is estimated by considering the Company’s historical daily and monthly share price movement and an analysis of comparable companies. Market conditions are detailed in note 3(j)(v). The inputs used in the measurement of the fair values at grant date are as follows: Chief Executive Officer 2014 Chief Executive Officer 2013 LTIP Key Manage- ment personnel 2014 Key Manage- ment personnel 2013 Senior employees 2014 Senior employees 2013 ESOP 2014 ESOP 2013 $0.15 $0.24 $Nil $0.27 $0.51 $Nil $0.15 $0.24 $Nil $0.46 $0.70 $Nil $0.18 $0.24 $Nil $0.56 $0.70 $Nil $0.20 - $0.34 $0.20 - $0.34 $Nil $0.28 - $0.86 $0.28 - $0.86 $Nil 45% - 65% 40% - 60% 45% - 65% 40% - 60% 45% - 65% 40% - 60% 3 years 8.0% 3 years 7.6% 3 years 8.0% 3 years 8.7% 3 years 8.0% 3 years 8.7% 3.0% 2.6% 3.0% 2.7% 3.0% 2.7% n/a 1 year n/a n/a n/a 1 year n/a n/a Fair value of performance shares/rights Fair value at grant date Share price Exercise price Expected volatility (weighted average volatility) Maturity (expected weighted average life) Expected dividends Risk-free interest rate (based on government bonds) The fair value assumptions for unvested MISPs have no further expense to be recognised and have not changed since the fair value was determined at grant date in previous years. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 134 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 27 Share-based payments (continued) For the Group’s key management personnel commencing with the FY14 grant and all subsequent grants of LTI Securities the following applies: Dividends: • • dividends (or shadow dividends) will not be paid on unvested LTI Securities; dividends (or shadow dividends) will accrue on unvested LTI Securities and will only be paid at the time of vesting on those LTI Securities that vest, provided all vesting conditions are met; and Absolute change in control: • • • the proportion of vesting LTI Securities will be pro-rated to reflect the performance achieved; the proportion of vesting LTI Securities will be in accordance with the relevant TSR vesting schedule for each grant; and the Board retains the discretion to vest a greater amount. Employee expenses In AUD Performance shares/rights MISP ESOP Total expense recognised as employee costs (1) Consolidated 2014 2013 1,694,346 - 19,261 1,713,607 2,811,633 583 41,188 2,853,404 (1) Included in share based employee expenses for the year is the write back of prior year share based employee expenses as a result of the shares, rights or options being forfeited during the year because the employee does not meet the required performance hurdles or service requirements. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 135 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 28 Commitments (a) Operating lease commitments Future non-cancellable operating leases not provided for in the financial statements and payable: Less than one year Between one and five years More than five years Consolidated 2014 $'000 2013 $'000 9,500 6,986 180 16,666 7,850 19,491 3,351 30,692 The Group leases the majority of their operating premises. The terms of the lease are negotiated in conjunction with the Group’s internal and external advisors and are dependent upon market forces. During the year ended 30 June 2014 an amount of $4,152,000 (continuing and discontinuing operations) was recognised as an expense in profit or loss in respect of operating leases (2013: $5,703,000). (b) Capital commitments The Group has not entered into commitments for purchases of fixed assets, primarily rental fleet assets, in the year ended 30 June 2014 (2013: $1,413,000). 29 Contingent Liabilities Guarantees The Group has guaranteed the repayments of $866,013 (2013: $75,000) in relation to office premises with varying expiry dates out to 30 June 2015. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 136 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 30 Notes to the statement of cash flows (i) Reconciliation of cash For the purposes of the statements of cash flow, cash includes cash on hand and at bank and short term deposits at call, net of outstanding bank overdrafts. Cash as at the end of the financial year as shown in the statements of cash flows is reconciled to the related items in the statements of financial position as follows:- Consolidated Note 2014 $'000 2013 $'000 Cash assets 17 41,830 5,754 (ii) Reconciliation of net profit to net cash provided by operating activities Consolidated 2014 $'000 2013 $'000 Note Net loss - continuing operations (224,172) 12 Add/(less) items classified as investing/financing activities: Net profit on sale of non-current asests Add/(less) non-cash items: Amortisation Depreciation Amortisation of borrowing costs using effective interest rate Write off previous deferred borrowing costs (Gain)/loss on fair value hedge Withholding tax expense Realised foreign currency exchange (gain)/loss Unrealised foreign exchange (gain)/loss Impairment losses on property, plant & equipment Impairment of goodwill Write down on inventory Bad debts Provision for doubtful debts/(reversal) Equity settled share based payments (Decrease)/increase in income taxes payable (Decrease)/increase in deferred taxes Net cashflow from operating activities of discontinued operations Net cash from operating activities before change in assets/(liabilities) adjusted for assets and (liabilities) acquired 7 21 8 8 8 21 20 8 8 (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories Increase/(decrease) in payables Increase/(decrease) in provisions Net cash from operating activities (731) (1,658) 132 77,996 1,918 2,993 (5,958) 1,960 210 (4,571) 37,508 192 98,157 762 1,910 32 - 406 (110) 3,336 157,887 17,844 6,148 3,064 (2,467) 1,822 8,641 370 1,974 2,849 (15,138) (27,502) (17,971) 2,205 19,162 25,627 22,835 152,004 21,379 6,597 32,130 2,273 20,355 7,049 (869) (378) 82,072 181,303 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 137 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 31 Controlled entities (a) Particulars in relation to controlled entities Country of Incorporation Ownership Interest 2014 % 2013 % Note Parent entity Emeco Holdings Limited Controlled entities Pacific Custodians Pty Ltd as trustee for Emeco Employee Share Ownership Plan Trust Emeco Pty Limited Emeco International Pty Limited Emeco Sales Pty Ltd Emeco Parts Pty Ltd Emeco (UK) Limited Emeco Equipment (USA) LLC PT Prima Traktor IndoNusa (PTI) Emeco International Europe BV Emeco Europe BV Euro Machinery BV Emeco Canada Ltd Enduro SPA (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Australia Australia Australia Australia Australia United Kingdom United States Indonesia Netherlands Netherlands Netherlands Canada Chile 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Notes (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Emeco (UK) Limited was incorporated in and carries on business in the United Kingdom. Emeco (UK) Limited is the parent entity of Emeco Equipment (USA) LLC, PT Prima Traktor IndoNusa (PTI), Emeco International Europe BV and Emeco Canada Limited. Emeco Equipment (USA) LLC was incorporated in and carries on business in the United States. This was classified as a discontinued operation in 2010 but was reclassified as a continuing operation at 30 June 2012. PT Prima Traktor IndoNusa was incorporated in and carries on business in Indonesia. This was classified as a discontinued operation in 2014. Emeco International Europe BV was incorporated in and carries on business in the Netherlands. Emeco International Europe BV is the parent entity of Emeco Europe BV, and Euro Machinery BV. This was classified as a discontinued operation in 2012 but was reclassified as a continuing operation in 2013. Emeco Europe BV was incorporated in and carries on a business in the Netherlands. This was classified as a discontinued operation in 2012 but was reclassified as a continuing operation in 2013. Euro Machinery BV was acquired on 4 January 2007 and carries on business in the Netherlands. This was classified as a discontinued operation in 2012 but was reclassified as a continuing operation in 2013. Emeco Canada Ltd was incorporated and carries on business in Canada. On 2 August 2005 Emeco Canada Ltd acquired River Valley Equipment Company Ltd, which operates within Emeco Canada Ltd. Enduro SpA was incorporated on 24 February 2012 and carries on business in Chile. (b) Acquisition of entities in the current year There was no acquisition of entities this financial year. (c) Acquisition of entities in the prior year There was no acquisition of entities in the prior year. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 138 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 32 Key management personnel disclosure The following were key management personnel of the Group at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period. Non-Executive Directors Alec Brennan, Chairperson Robert Bishop (resigned role on 30 June 2014) John Cahill Peter Richards Erica Smyth Executive Director Kenneth Lewsey, Managing Director & Chief Executive Officer (commenced on 4 November 2013) Keith Gordon, Managing Director & Chief Executive Officer (resigned role on 4 November 2013) Other Executives Kellie Benda, Executive General Manager, Strategy & Corporate Development (commenced role on 24 February 2014) Stephen Gobby, Chief Financial Officer (resigned on 1 July 2014) Anthony Halls, General Manager Australian Rental (resigned role 17 February 2014) Christopher Hayman, President Canada (commenced role on 8 July 2013 and resigned role on 17 February 2014)/President Americas (commenced role on 17 February 2014) Benny Joesoep, President Director Indonesia (commenced role 9 December 2013 and resigned role on 13 May 2014) Michael Kirkpatrick, Executive General Manager Corporate Services (resigned role on 1 July 2014) Grant Stubbs, Executive General Manager Asset Strategy & Operational Improvement Ian Testrow, Chief Operating Officer Australia (commenced role on 17 February 2014) / President New & Developing Business Key management personnel compensation The key management personnel compensation is as follows: In AUD Short-term employee benefits Other long term benefits Post-employment benefits Termination benefits Equity compensation benefits Consolidated 2014 2013 5,071,109 4,654,631 - 227,143 293,866 294,880 5,886,998 - 176,534 - 1,040,366 5,871,531 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 139 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 32 Key management personnel disclosure (continued) Remuneration of key management personnel by the Group The compensation disclosed above represents an allocation of the key management personnel’s compensation from the Group in relation to their services rendered to the Company. Individual Directors and Executives compensation disclosures Information regarding individual Directors and Executives compensation and some equity instruments disclosures as required by Corporations Regulations 2M.3.03 and 2M.6.04 are provided in the Remuneration Report section of the Directors’ report on pages 43 to 67. Apart from the details disclosed in this note, no Director has entered into a material contract with the Company or the Group since the end of the previous financial year and there were no material contracts involving Directors’ interests existing at year-end. Equity Instruments Shares and rights over equity instruments granted as compensation under management incentive share plan The Company has an ongoing management incentive share plan in which shares have been granted to certain Directors and employees of the Company. The shares vest over a five year period and are accounted for as an option in accordance with AASB 2 Share Based Payments. The Company has provided a ten year interest free loan to facilitate the purchase of the Shares under the management incentive share plan. Shares and rights over equity instruments granted as compensation under long term incentive plan The Company has an ongoing long term incentive plan in which shares have been granted to certain employees of the Company. The shares vest after 3 years depending upon the Company’s total shareholder return ranking against a peer group of 99 Companies. The shares have been accounted for as an option in accordance with AASB 2 Share Based Payments. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 140 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 32 Key management personnel disclosure (continued) The movement during the reporting year in the number of shares issued under the management incentive share plan, performance shares under the long term incentive plan and matching employee share ownership plan in the Company held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows. These plans have been combined for the purposes of this note as they represent direct interests over the shares. Directors or Executives with no holdings are not included in the following tables. The disclosure table has included all vested shares to the key management personnel’s equity holdings. The prior year comparatives have been restated to reflect this change. 2014 Shares Directors & Executives Kellie Benda (1) Stephen Gobby (2) Keith Gordon (3) Anthony Halls (3) Kenneth Lewsey (1) Michael Kirkpatrick (2) Grant Stubbs (5) Ian Testrow Held at 1 July 2013 Granted as compensation Vested during the year Forfeited n/a 749,143 - - 1,274,431 2,142,857 - (419,643) 3,590,149 - - - 811,990 1,160,187 - (1,972,177) n/a 4,553,571 - - 758,101 1,071,051 - (250,000) 231,914 1,034,080 - (69,643) Held at 30 June 2014 749,143 2,997,645 n/a n/a 4,553,571 1,579,152 1,196,351 - - - - - L C Freedman R L C A dair - - 2,400,000 800,000 - - 2,400,000 800,000 - - - - Held at Gran ted as 30 June Held at Ves ted exercis ab le du ring at 30 June Ves ted and 2013 Shares Directors & Executives Stephen Gobby Keith Gordon Anthony Halls Michael Kirkpatrick Christopher Mossman (4) Ian Testrow Michael Turner (4) Grant Stubbs (5) Held at 1 July 2012 Granted as compensation Vested during the year Forfeited 743,127 531,304 2,091,192 1,498,957 473,764 338,226 441,579 316,522 - - - - 556,717 397,391 - - - - - - - - - - - - n/a n/a n/a - - n/a Held at 30 June 2013 1,274,431 3,590,149 811,990 758,101 n/a - n/a 231,914 Dividends paid under the management incentive share plan are paid against the employee’s outstanding loan and is reflected in issued capital. (1) Ms Benda and Mr Lewsey became key management personnel on 24 February 2014 and 4 November 2013 respectively. (2) Mr Gobby and Mr Kirkpatrick ceased to be a key management personnel on 1 July 2014. (3) Mr Gordon and Mr Halls ceased to be key management personnel on 4 November 2013 and 17 February 2014 respectively. (4) Mr Turner and Mr Mossman ceased to be key management personnel on 31 December 2012 and 31 May 2013 respectively. (5) Mr Stubbs became a key management personnel on 1 May 2013. The shares held at 30 June 2014 were granted as compensation prior to Mr Stubbs becoming a key management personnel. n/a Not applicable as not in a position of key management at relevant reporting date. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 141 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 32 Key management personnel disclosure (continued) The movement during the reporting year in the number of performance rights issued under the long term incentive plan in the Company held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows. Directors or Executives with no holdings are not included in the following tables. 2014 Rights Directors & Executives Stephen Gobby (1) Keith Gordon Anthony Halls Christopher Hayman (2) Benny Joesoep Michael Kirkpatrick (1) Ian Testrow 2013 Rights Directors & Executives Stephen Gobby Michael Turner (3) Ian Testrow Michael Kirkpatrick Anthony Halls Christopher Mossman (3) Keith Gordon Held at 1 July 2013 Granted as compensation Vested during the Year Forfeited/ lapsed Held at 30 June 2014 - - - n/a n/a - - - - - - - - - - - n/a n/a 986,967 - - 986,967 282,890 60,914 (221,976) - - - n/a - 909,764 1,633,151 - (269,393) 2,273,522 Held at 1 July 2012 Granted as compensation Vested during the Year Forfeited/ lapsed Held at 30 June 2013 300,926 - (154,375) (146,551) 240,741 - (123,500) (117,241) - n/a 697,470 451,371 (122,647) (116,430) 909,764 185,185 - (95,000) (90,185) 166,667 - (85,500) (81,167) 369,679 323,875 (36,204) (34,370) 925,926 - (475,000) (450,926) - - n/a - (1) Mr Gobby and Mr Kirkpatrick ceased to be key management personnel on 1 July 2014. (2) Mr Hayman became a key management personnel on 8 July 2013. (3) Mr Turner and Mr Mossman ceased to be key management personnel on 31 December 2012 and 31 May 2013 respectively. n/a Not applicable as not in a position of key management personnel at relevant reporting date. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 142 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 32 Key management personnel disclosure (continued) Equity holdings and transactions The shares in the Company held, directly, indirectly or beneficially, by each key management person, including their personally-related entities at year end, are as follows. The disclosure table has been adjusted to include the transfer of vested shares from the employee share plans to the equity holdings of the members of key management personnel. The prior year comparatives have been restated to reflect this change. 2014 Directors Robert Bishop (1) Alec Brennan John Cahill Keith Gordon (2) Kenneth Lewsey (3) Peter Richards Erica Smyth Other Executives Kellie Benda (3) Stephen Gobby (1) Anthony Halls (2) Michael Kirkpatrick (1) Grant Stubbs Held at 1 July 2013 Ordinary Shares Transferred from Share Plan Purchases Sales Held at 30 June 2014 Ordinary Shares 566,600 - 222,400 - n/a 1,581,700 - - - 1,581,700 120,000 - - - 120,000 1,125,000 - - - n/a n/a - 315,000 - 315,000 40,000 - - - 40,000 71,049 - - - 71,049 n/a - - - - 366,299 1,263 - - 367,562 267,604 1,263 15,233 - n/a - - - - - 19,942 1,263 21,134 - 42,339 Ian Testrow 892,541 - 123,173 - 1,015,714 (1) Mr Bishop, Mr Gobby and Mr Kirkpatrick ceased to be a key management personnel on 30 June 2014, 1 July 2014 and 1 July 2014 respectively. (2) Mr Gordon and Mr Halls ceased to be key management personnel on 4 November 2013 and 17 February 2014 respectively. (3) Ms Benda and Mr Lewsey became a key management personnel on 24 February 2014 and 4 November 2013 respectively. n/a Not applicable as not in a position of key management personnel at relevant reporting date. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 143 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 32 Key management personnel disclosure (continued) 2013 Directors Robert Bishop Alec Brennan John Cahill Keith Gordon Peter Johnston (1) Peter Richards Erica Smyth Other Executives Stephen Gobby Anthony Halls Michael Kirkpatrick Christopher Mossman (1) Grant Stubbs Ian Testrow M A Turner (1) Held at 1 July 2012 Ordinary Shares Transferred from Share Plan Purchases Sales Held at 30 June 2013 Ordinary Shares 300,000 - 266,600 - 566,600 1,581,700 - - - 1,581,700 120,000 - - - 120,000 650,000 475,000 - - 1,125,000 100,000 - - - n/a 40,000 - - - 40,000 - - 71,049 - 71,049 201,547 155,778 8,974 - 366,299 171,817 86,813 8,974 - 267,604 - - - - - 184,167 36,204 - - n/a n/a n/a 1,869 - 19,942 892,541 - - - 892,541 3,187,151 124,903 3,816 (1,190,000) n/a (1) Mr Turner, Mr Mossman and Mr Johnston ceased to be key management personnel on 31 December 2012, 31 May 2013, and 30 June 2013 respectively. n/a Not applicable as not in a position of key management personnel at relevant reporting date. Loans Other than the loan issued under the management incentive share plan no specified Director or Executive has entered into any loan arrangements with the Group. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 144 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 32 Key management personnel disclosure (continued) Other key management personnel transactions A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Company or its subsidiaries in the reporting period. The terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to Non-Director related entities on an arm’s length basis. The aggregate value of transactions recognised during the year related to key management personnel and their related parties were as follows: Transaction value year ended 30 June 2014 $'000 2013 $'000 Balance outstanding as at 30 June 2014 $'000 2013 $'000 Note Key management person and their related parties Mr Peter Richards - Kangaroo Resources Limited Total current assets Transaction Rental of heavy earthmoving equipment (1) - - 399 399 - - - - (1) PT Prima Traktor IndoNusa rented heavy earthmoving equipment to PT Mamahak Coal Mining, a subsidiary of Kangaroo Resources Limited for an annual revenue of A$Nil (2013: A$399,000) (inclusive of VAT) translated at an AUD/USD average exchange rate of Nil for FY14 (2013: 1.0378). The balance outstanding as at 30 June 2014 was A$Nil (2013: A$Nil). The rental contract was negotiated on an arm’s length basis. One of the Group’s Non- Executive Directors, Mr Peter Richards, was a Non-Executive Director of Kangaroo Resources Limited. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 145 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 33 Other related party transactions Subsidiaries Loans are made between wholly owned subsidiaries of the Group for capital purchases. Loans outstanding between the different wholly owned entities of the Company have no fixed date of repayment. Loans made between subsidiaries within a common taxable jurisdiction are interest free. Cross border subsidiary loans are charged at LIBOR plus a relevant arm’s length mark up. Ultimate parent entity Emeco Holdings Limited is the ultimate parent entity of the Group. 34 Subsequent events On 1 July 2014, Mr Stephen Gobby resigned as Chief Financial Officer and Mr Gregory Hawkins commenced as the Chief Financial Officer. On 1 July 2014, Mr Michael Kirkpatrick resigned as General Counsel and Company Secretary and Ms Thao Vanderplancke commenced as General Counsel and Company Secretary. 35 Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 June 2014 was based on the profit/(loss) attributable to ordinary shareholders of $(275,309,000) (2013: $6,004,000) and a weighted average number of ordinary shares outstanding less any treasury shares for the year ended 30 June 2014 of 562,504,730 (2013: 585,137,181). Profit attributed to ordinary shareholders Consolidated 2014 2013 Continuing Discontinued operations operations $'000 $'000 Total $'000 Continuing Discontinued operations operations $'000 $'000 Total $'000 Profit/(loss) for the year (224,172) (51,137) (275,309) 6,004 - 6,004 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 146 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 35 Earnings per share (continued) Weighted average number of ordinary shares Issued ordinary shares at 1 July Effect of purchased treasury shares Weighted average number of ordinary shares at 30 June Consolidated 2014 '000 2013 '000 631,238 (68,733) 562,505 631,238 (46,101) 585,137 Diluted earnings per share The calculation of diluted earnings per share at 30 June 2014 was based on profit attributable to ordinary shareholders of $(275,309,000) (2013: $6,004,000) and a weighted average number of ordinary shares outstanding less any treasury shares during the financial year ended 30 June 2014 of 565,151,687 (2013: 588,094,138). Profit attributed to ordinary shareholders (diluted) Consolidated 2014 2013 Continuing Discontinued operations operations $'000 $'000 Total $'000 Continuing Discontinued operations operations $'000 $'000 Total $'000 Profit/(loss) attributed to ordinary shareholders (basic) (224,172) (51,137) (275,309) 6,004 - 6,004 Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares at 30 June Effect of the vesting of contingently issuable shares Effect of purchased treasury shares Weighted average number of ordinary shares (diluted) at 30 June Consolidated 2014 '000 2013 '000 631,238 2,647 (68,733) 565,152 631,238 2,957 (46,101) 588,094 Comparative information The average market value of the Company’s shares for the purpose of calculating the dilutive effect of ordinary share was based on quoted market prices for the period during which the shares were outstanding. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 147 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 36 Parent entity disclosure As at and throughout the financial year ending 30 June 2014 the parent entity (the “Company”) of the Group was Emeco Holdings Limited. Result of the parent entity Profit/(loss) for the period Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Share based payment reserve Reserve for own shares Retained earnings Total equity Company 2014 $'000 2013 $'000 (148,311) - - (96,802) - - 22 394,377 394,399 10,595 544,519 555,114 - - - - - - 593,616 14,598 (20,622) (269,358) 318,234 593,616 12,144 (16,433) (121,047) 468,280 Parent entity guarantees in respect of debts of its subsidiaries The parent entity has entered into a Deed of Cross Guarantee with the effect that the Company guarantees debts in respect of its subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed, are disclosed in Note 37. EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 148 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 37 Deed of cross guarantee Pursuant to ASIC Class Order 98/1418 (as amended) dated 13 August 1998, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of Financial reports, and Directors’ reports. It is a condition of the Class Order that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are: (cid:1) (cid:1) Emeco Pty Ltd Emeco International Pty Limited A consolidated statement of comprehensive income and consolidated statement of financial position, comprising the Company and controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, for the year ended 30 June 2014 is set out as follows: Statement of profit or loss and other comprehensive income and retained earnings Revenue Cost of sales Gross profit Operating expense Other income Finance income Finance costs Impairment of assets Impairment of investment Profit before tax Tax expense Net profit after tax Other comprehensive income Total comprehensive income for the period Retained earnings at beginning of year Dividends recognised during the year Retained earnings at end of year Attributable to: Equity holders of the Company Profit/(loss) for the period Consolidated 2014 $'000 2013 $'000 134,538 (87,182) 47,356 (64,809) 3,609 14,271 (42,372) (39,525) (151,310) (232,780) 26,498 (206,282) 270,757 (188,210) 82,547 (62,213) - 5,377 (21,048) - (120,278) (115,615) (2,892) (118,507) (4,977) (4,977) 1,697 1,697 (46,031) - (257,290) 107,925 (37,146) (46,031) (257,290) (206,282) (46,031) (118,507) EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 149 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2014 37 Deed of cross guarantee (continued) Statement of financial position Current assets Cash assets Trade and other receivables Derivatives Current tax assets Inventories Assets Held for sale Total current assets Non-current assets Trade and other receivables Derivatives Intangible assets Investments Property, plant and equipment Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Derivatives Interest bearing liabilities Current tax liabilities Provisions Total current liabilities Non-current liabilities Derivatives Interest bearing liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Share based payment reserve Reserves Retained earnings/(losses) Consolidated 2014 $'000 2013 $'000 17,195 21,099 5 - 3,507 31,242 73,048 176,528 - 146 249,143 281,702 27,121 734,640 218 37,717 691 11,376 9,739 - 59,741 101,138 4,489 151,555 211,310 400,556 - 869,048 807,688 928,789 25,167 2,546 3,855 - 1,791 33,359 10,186 341,397 22,493 1,385 375,461 23,486 1,281 9,308 - 2,327 36,402 1,502 321,399 27,050 1,484 351,435 408,820 387,837 398,868 540,952 593,616 14,598 47,944 (257,290) 593,616 12,144 (18,777) (46,031) Total equity attributable to equity holders of the parent 398,868 540,952 EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 150 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Declaration 1. In the opinion of the Directors of Emeco Holdings Limited (the “Company”): (a) the consolidated financial statements and notes as set out on pages 68 to 150, and Remuneration report in the Directors’ report, set out on pages 43 to 67 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2014 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. 3. 4. There are reasonable grounds to believe that the Company and the group entities identified in Note 37 will be able to meet any obligation or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those group entities pursuant to ASIC Class Order 98/1418. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2014. The Directors draw attention to note 2(a) to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Dated at Perth, 20 day of August 2014 Signed in accordance with a resolution of the Directors: Kenneth Lewsey Managing Director EMECO HOLDINGS LIMITED ANNUAL REPORT 2014 151 Independent auditor’s report to the members of Emeco Holdings Limited Report on the financial report We have audited the accompanying financial report of Emeco Holdings Limited (the Company), which comprises the consolidated statement of financial position as at 30 June 2014, and 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 ended on that date, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of the Group is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 30 June 2014 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2(a). Report on the remuneration report We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2014. 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 responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Emeco Holdings Limited for the year ended 30 June 2014, complies with Section 300A of the Corporations Act 2001. KPMG Graham Hogg Partner Perth 20 August 2014 

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