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2023 ReportEmeco Holdings Limited and its Controlled Entities ABN 89 112 188 815 Annual Financial Report 30 June 2015 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 1 Contents Chairman’s Report ................................................................................................................... 3 Managing Director’s Report ..................................................................................................... 5 Operating and Financial Review ............................................................................................... 7 Regional Business Overview ................................................................................................... 14 Financial Report ..................................................................................................................... 20 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 2 Chairman’s Report Dear Shareholder, Herewith please find the Emeco Holdings Limited Annual Report for financial year 2014/2015 (FY15). Responding to challenging market conditions The sustained low commodity price environment continued to hurt the markets in which Emeco operates. Challenging market conditions resulted in further margin decline in FY15 compared to FY14. Operating performance improved during second half FY15 and as a result the earnings run rate at the start of FY16 is stronger than in the prior comparable period. The Company has worked hard to lift its operational performance over the last 12 months despite the poor financial performance. Our people have shown great flexibility in working closely with customers to identify solutions to their equipment needs. Utilisation increased to an average of 73% over the second half of FY15, compared to 50% in the prior comparable period. We are all working hard to find more cost effective ways to serve our customers, drive margin growth and return the business to profitability. A number of significant cost‐out initiatives were implemented during fourth quarter FY15 and are expected to have a positive impact from the outset of FY16. The difficult market circumstances have made it imperative that we continue to explore different ways of serving our customers to deliver more value for them and better returns for Emeco. I am pleased to advise that we have been able to diversify earnings outside Emeco’s dry hire model while still focusing on our core capabilities. This is evident from the recently commenced Esperanza wet hire contract in Chile and recently signed five year mine services contract with a major oilsands producer in Canada. Further improvements were made to our capital structure during FY15 with the successful refinancing of the syndicated debt facility. This provides greater tenure and more flexibility for our balance sheet in current depressed market conditions. During the year the Company explored the potential acquisition of the truck rental business Rentco and a possible merger with Orionstone, another dry hire mining equipment business. Each offered potential scale and earnings diversification. Unfortunately, in each case we concluded that the outcome was unlikely to be in the best interest of Emeco’s shareholders. Safety and sustainability While FY15 has been a challenging year the business worked hard to maintain its commitment to our people, the environment and the community. The cost reduction initiatives have not diminished our commitment to safety or sustainability processes or procedures. The Company is determined to continue to provide a safe work environment of the highest standard, invest in our employees’ development and support the communities in which we operate. Over FY15 we actively pursued opportunities to reduce our impact on the environment and this has included moving toward electronic based communication methods with our investor community. As such we’ve released our FY15 sustainability report on Emeco’s website. The FY15 sustainability report has been developed using the global reporting initiative (GRI) framework, providing comprehensive reporting for Emeco’s stakeholders. FY15 saw continued improvement in Emeco’s diversity program through a strong focus on building lasting relationships in the communities in which we operate and encouraging women to enter the mining industry. Across the Group we increased female workforce representation to 16% and our Canada business continues to support the Women Building Futures initiative aimed at increasing gender diversity in the mining industry. Emeco’s safety and sustainability achievements over FY15 are detailed further in our sustainability report which is accessible on our website. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 3 Building a sustainable business structure The focus over the next 12 months and beyond is on positioning Emeco to succeed notwithstanding the challenging and competitive market conditions. The recently announced Project Fit is aimed at reducing costs in our existing business, while our internally developed Emeco Operating System (EOS) is intended to generate fleet performance data to improve the efficiency of Emeco’s maintenance capabilities plus provide customers with information which they can use to operate the fleet more effectively to reduce their operating costs. While we are expecting improving market circumstances over the next few years, our plans cannot afford to be dependent on this. Our objective is to combine focused marketing, tight cost control and sound capital management to deleverage the business over the medium term irrespective of market conditions. The point does need to be made that current margins in the industry are not sustainable and generally speaking do not justify the purchase of new equipment irrespective of whether it is for dry hire or contracting. This situation has become even clearer in Australia with the decline in value of the Australian dollar. Having successfully implemented a number of improvements to the Emeco business our MD & CEO Ken Lewsey has decided to step down. Ken’s contribution has included bringing a stronger customer focus to the business which has driven utilisation growth and the recent implementation of our Project Fit cost reduction to remain competitive in this market. I’d like to thank Ken for his contribution to the board and Company. Ian Testrow, our COO has assumed the MD & CEO role. He understands the business intimately and will provide uninterrupted and dynamic leadership. In addition our CFO Greg Hawkins joins the board. Both Ian and Greg have been very strong contributors to the Company and the board looks forward to their contribution in the year ahead. We believe that the current trajectory for the business is reasonable given the market circumstances and we will all be working hard over the next 12 months to build on the substantial achievements of the past six months. Alec Brennan Chairman EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 4 Managing Director’s Report Improved operating performance over second half FY15 The challenging market conditions our business experienced over FY14 continued into this financial year, with the fall in oil price adding to the low commodity price environment. There were no recovery in rental rates as miners remain focused on minimising their operating cost base. Emeco ended FY15 with an operating EBITDA of $43.4 million and operating net loss after tax of $94.9 million. Global utilisation ended the year at 74%. Commencing the year at 50% global utilisation, contract wins in Canada, Chile and Queensland, combined with growth from existing customers in New South Wales, has driven the increase. The improved operating performance resulted in second half operating EBITDA of $27.2 million, representing 70% growth on first half FY15 operating EBITDA of $16.2 million. Having invested in stronger business development capabilities over FY14, the resulting utilisation uplift over FY15 required one‐off costs of $14.1 million to prepare idle fleet for rent. In Australia a stronger focus on customers resulted in improved utilisation in Queensland and New South Wales. Our new Queensland management team worked hard to gain market share in a highly competitive environment, resulting in a number of contract wins lifting utilisation to 85% in fourth quarter, up from 10% at the commencement of FY15. Customer preference to deal with Emeco in New South Wales resulted in consolidation of rental providers on our existing sites lifting utilisation to 95% at year end. The recent cessation of our rental contract with Saracen resulted in Western Australia utilisation falling below 40%. We are focused on identifying opportunities to return this fleet back to work. Operating conditions in Canada softened with oilsands producers responding to a fall in the oil price. Our Canada rental business maintained utilisation over 80% over the winter period despite the challenging price environment. Rental rates were renegotiated during this period of seasonally high activity. The oilsands industry has been subdued over the recent summer months. A number of rental contract wins in coal and iron ore have maintained our utilisation at 60% heading into FY16. Canada mine site services revenue increased by almost 70%. The completion of our Kearl Lake maintenance facility complements our ten year maintenance services contract on that site, while our strong relationship with oil majors resulted in an increased presence on our existing projects. The Chile business entered FY15 securing the five year Encuentro contract in conjunction with Chile mining contractor Fe Grande. During FY15 Fe Grande decided to exit the mining industry to focus on other group business. Following discussions between Emeco and AMSA (Encuentro owner), a process was entered to identify a suitable mine contractor to replace Fe Grande on site whilst retaining the equipment provided by Emeco. Commencing 1 July 2015 Emeco entered into a partnership agreement with leading global mining contractor Thiess to complete a four year mining contract for the pre‐strip operations at Encuentro. We have seen a material operational improvement at the Encuentro mine and expect this project to be more profitable in FY16. Achieving our strategic objectives We achieved a number of strategic objectives over FY15 which has driven improved operating performance and a recent uplift in margins. Restructuring of the business over the past 12 months saw our new Queensland management team achieve significant growth in market share, Emeco partnered with Thiess in Chile to secure a four year mining contract with AMSA, we further diversified operations in Chile and Canada outside the dry hire model, developed the Emeco Operating System (EOS) fleet management and mining technology platform and implemented our cost reduction program, Project Fit. The combined benefits of these strategic achievements is expected to drive greater profitability through FY16. Our Canada and Chile businesses continue to demonstrate the value of geographical and commodity diversification with recent contract wins in these regions ensuring we maintain current levels of utilisation for the foreseeable future. Canada has recently secured a five year mine site services contract with a major oilsands producer to provide fuel and lubricant support, while we currently have units utilised at coal and iron ore mines across Canada providing diversification across our Canada business. Chile has recently commenced wet hire of four units to AMSA’s Esperanza mine ensuring utilisation of over 90% for first half FY16. This wet hire contract demonstrates our ability to work closely with customers to offer effective solutions to their resource needs. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 5 We made progress differentiating ourselves from competitors with innovative technology offerings which provide significant benefits to our customers. EOS provides Emeco customers access to leading edge technology with the support of the Emeco operations team. EOS monitors Emeco fleet operating on customer sites, providing customers’ with real time access to fleet performance and production data to assist with managing their operations. Already implemented on Emeco fleet operating at Alkane’s Tomingley gold mine in New South Wales, EOS has provided Alkane management information by dig unit, haul unit and operator which the business is using to get the fleet working more efficiently and reducing their operating costs. Our strategic achievements over FY15 have ensured Emeco enters FY16 with a stronger base on which to improve our profitability. Cost reductions and identifying opportunities to grow The mining services industry remains highly competitive and we continue to seek opportunities to expand our product offering through partnerships with industry peers and finding innovative solutions to our customer’s needs. Tenure of our contracts and the current project pipeline should ensure we maintain current levels of utilisation during FY16. On top of the incremental earnings uplift generated from greater volumes, Project Fit is expected to drive cost reductions totalling $14 million for FY16 resulting in greater free cash flow generation which is intended to be used to deleverage the business. The sustained downturn in the Australian mining services industry is expected to result in a period of consolidation and rationalisation for the sector if there is no recovery over the foreseeable future. Our current increased utilisation, cost reductions and financing flexibility and tenure, allows us to evaluate opportunities to participate in this consolidation. Over FY16 we’ll continue to strengthen our core business while identifying opportunities to succeed during challenging market conditions. Ian Testrow Managing Director & Chief Executive Officer EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 6 Operating and Financial Review The Emeco Group supplies safe, reliable and maintained equipment rental solutions to the global mining industry. Established in 1972, the business listed on the ASX in July 2006 and is headquartered in Perth, Western Australia. Emeco currently employs 332 permanent and fixed term staff and owns 490 pieces of earthmoving equipment across Australia, Canada and Chile. Emeco generates earnings from two primary revenue streams, dry equipment rental and maintenance services. Operating costs principally comprise parts, labour and tooling associated with maintaining earthmoving equipment. Capital expenditure principally comprises the purchase of equipment and replacement of major components over the asset’s life cycle while owned by Emeco. Chart 1: Revenue by region Chart 2: Revenue by commodity Chart 3: Fleet composition by asset class Chile, 12% Canada, 31% Other, 7% Thermal Coal, 18% Oilsands, 28% Australia, 57% Iron Ore, 4% Coking Coal, 12% Copper, 9% Other, 8% Wheel Loader, 9% Grader, 7% Dozer, 20% Gold, 22% Excavator, 7% Dump Truck, 49% Note: Above analysis relates to 12 month period ended 30 June 2015 and excludes discontinued operations. Table 1: Group financial results A$ millions Revenue EBITDA4 EBIT4 NPAT4 ROC4 % EBIT margin EBITDA margin Operating results1 FY15 242.8 43.4 (59.2) (94.9) (9.4%) (24.4%) 17.9% FY14 241.1 67.35 (10.9)6 (21.6) (0.8)% (4.5%) 27.9% Statutory results FY14 241.1 66.15 (213.5)6 (224.2) (34.2%) (88.4%) 27.5% FY15 241.4 32.8 (96.8) (123.1) (15.2%) (40.1%) 13.6% 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. 3. Operating results are non‐IFRS. 4. EBITDA: Earnings before interest, tax, depreciation and amortisation; EBIT: Earnings before interest and tax; NPAT: Net profit after tax; ROC: Return on capital. 5. FY14 reported operating EBITDA of $72.1 million and statutory EBITDA of $27.2 million have been restated for comparative purposes. The changes relate to tangible asset impairments being reported below EBITDA (2014: $43.7 million) and foreign exchange gains and losses being reported below EBITDA (2014: $4.8 million). 6. FY14 reported operating EBIT loss of $6.1 million and statutory EBIT loss of $208.8 million have been restated for comparative purposes. The change relates to foreign exchange gains and losses being reported below EBIT (2014: $4.8 million). EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 7 Table 2: FY15 operating results to statutory results reconciliation Tangible asset impairments Redundancy Project revenue write‐back Debt establishment cost write‐off (22.4) (5.8) (2.6) (30.8) (2.6) 0.0 0.0 (2.6) 0.0 0.0 (1.4) (1.4) (1.8) 0.0 0.0 (1.8) A$ millions Operating Australia Canada Chile Statutory One‐off corporate development costs (2.6) 0.0 (0.2) (2.8) Tax effect NPAT (94.9) (20.6) (4.2) (3.4) (123.1) 8.8 1.6 0.8 11.2 Reconciliation of differences between operating and statutory results: FY15 operating results (non‐IFRS) excludes the following: 1. ‐ ‐ Tangible asset impairments: Tangible asset impairments totalling $23.9 million were recognised across the business on assets held for sale. Stock write downs on inventory items of $6.9 million were also recognised during the year due to change in valuation methodology from value in use to lower of cost and net realisable value less costs of sale; Redundancies: A number of redundancies were enacted over FY15 in response to deteriorating market conditions resulting in one‐off costs of $2.6 million before tax; ‐ Write‐back of project revenues: During FY15 Fe Grande decided to exit the mining industry and an agreement was reached to allow Emeco to find a suitable partner to replace them, without Fe Grande going to market. This agreement involved the recognition of a bad debt expense for $3.8 million and a reduction in revenue of $1.4 million. Depreciation on the machines in relation to the Fe Grande contract was also reviewed and adjusted in light of the negotiations by $3.8 million. This resulted in a net cost of $1.4 million which allowed Emeco to successfully partner with Thiess to secure a four year contract to operate the pre‐strip operations at AMSA’s Encuentro open pit copper mine; ‐ Debt establishment cost write‐off: Debt establishment costs of $1.8 million before tax were written off relating to a previous financing facility; ‐ One‐off corporate development expenses: Non‐recurring costs associated with corporate development activities over FY15 totalled $2.8 million before tax. 2. 3. Refer to our 2014 Annual Report for reconciliation of differences between FY14 operating and statutory results. All reconciling items relating to FY15 operating results are discussed in further detail later in the operating and financial review. Improving volumes in a competitive market Average utilisation for FY15 of 69% was significantly higher than the FY14 average of 48% despite continued weakness in the Australian mining sector and strong competition in our respective markets. Commencement of a number of projects in Australia combined with diversification in our Canada business and the ramp‐up of the Encuentro project in Chile resulted in the sustained higher operating performance, particularly over 2H FY15. Chart 4: FY15 average Group utilisation Average: FY15: 69%, FY14: 48% Year‐end: FY15: 74%3, FY14: 50% 100% 75% 50% 25% 0% 3 1 ‐ l u J 3 1 ‐ g u A 3 1 ‐ p e S 3 1 ‐ t c O 3 1 ‐ v o N 3 1 ‐ c e D 4 1 ‐ n a J 4 1 ‐ b e F 4 1 ‐ r a M 4 1 ‐ r p A 4 1 ‐ y a M 4 1 ‐ n u J 4 1 ‐ l u J 4 1 ‐ g u A 4 1 ‐ p e S 4 1 ‐ t c O 4 1 ‐ v o N 4 1 ‐ c e D 5 1 ‐ n a J 5 1 ‐ b e F 5 1 ‐ r a M 5 1 ‐ r p A 5 1 ‐ y a M 5 1 ‐ n u J 1 Utilisation Operating Utilisation 2 Note: 1. Utilisation defined as % of fleet rented to customers (measured by written down value). 2. Operating utilisation defined as ratio of operating hours recognised over a month, compared to a target average number of 400 operating hours over a month. 3. Excluding non‐current assets held for sale FY15 year‐end utilisation is 77%. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 8 A change in contractual arrangements within the markets Emeco operates has resulted in take or pay arrangements typically excluded from rental contracts, reducing the effectiveness of Emeco’s utilisation measure as a lead indicator of revenue. To assess our operating performance it is also useful to measure operating hours of our fleet, which management monitors internally to identify units which could generate additional earnings though being contracted to a customer. To improve reporting to readers of our financial statements we have included operating utilisation of our machines. This measure demonstrates that although a region may have high fleet utilisation, there may be potential for contracted units to drive earnings growth through increased operating hours. Group operating revenue from continuing operations remained relatively flat in FY15 at $242.8 million (2014: $241.1 million). Rental revenue was up slightly to $208.1 million (2014: $205.4 million) driven by improved utilisation, albeit on a smaller asset base. Maintenance services revenue increased 15.6% to $31.9 million (2014: $27.6 million) with the ramp up of the Kearl Lake facility in Canada. Consistent with prior reporting periods other income, including sale of parts and machines, declined in FY15 to $2.8 million, down from $8.1 million in 2014. Rental rate reductions in Canada in response to a fall in the oil price and costs associated with preparing machines to commence on new projects (prep‐for‐rent costs) were the primary contributors to a fall in operating EBITDA margins from 27.9% in FY14 to 17.9% in FY15. The FY15 operating EBIT margin of negative 24.4% (FY14: negative 4.5%) was further impacted by an increase in depreciation as a result of a change in depreciation policy on idle fleet (see below for further information). Reduced margins resulted in operating return on capital (ROC) declining to negative 9.4% in FY15, down from negative 0.8% in FY14. Refer to the regional business overview on page 14 for further detail on regional operating and financial performance. Additional costs incurred returning idle fleet to rent Table 3: Operating cost summary (statutory results) A$ millions Revenue Operating expenses Changes in machinery and parts inventory Repairs and maintenance Employee expenses Hired in equipment and labour Net other expenses1 EBITDA Impairment of tangible assets Impairment of goodwill Depreciation expense Amortisation EBIT 1. Excludes net foreign exchange (gain)/loss. Incorporates other income. 2015 2014 241.4 241.1 (11.8) (99.2) (43.6) (22.4) (31.6) 32.8 (30.8) 0.0 (98.7) (0.1) (96.8) (14.4) (84.7) (42.9) (13.1) (19.8) 66.1 (43.7) (157.9) (78.0) (0.1) (213.5) Higher average utilisation, costs associated with preparing fleet for rent, one‐off restructuring costs and increased operating leases on non‐core assets resulted in operating expenses excluding impairment of tangible assets increasing 19.3% over FY15 to $208.6 million, up from $174.9 million in FY14. Repairs and maintenance expense, which primarily comprises parts and maintenance labour associated with our rental fleet, increased 17.1% to $99.2 million (2014: $84.7 million) primarily as a result of improved utilisation across the group and costs associated with preparing machines for rent (‘prep‐for‐rent costs’). A portion of the prep‐for‐ rent costs amounting to $14.1 million is considered one off and predominantly relates to repairs and maintenance requirements resulting from off hired units in prior reporting periods. Consistent with prior reporting periods changes in machinery and parts inventory, which is primarily related to inventory management supporting third party fleet working along‐side our rental units, decreased in line with sales and parts revenue. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 9 Employee expenses increased slightly in FY15 to $43.6 million (FY14: $42.9 million), however included is $2.6 million of redundancy costs (compared to $1.2 million in FY14). Excluding redundancies FY15 employee expenses were relatively flat with FY14 as additional resources employed during FY14 to enhance business and corporate development activities continued to drive utilisation growth. Other expenses increased to $54.0 million (FY14: $32.9 million) primarily as a result of an increase in operating leases entered to source non‐core assets for new contracts and one‐off costs associated with corporate development activities. Refer to note 8 in the financial statements for further breakdown of net other expenses (page 76). Refer below for information on tangible and intangible asset impairments. Depreciation expense increased to $98.7 million in FY15 (FY14: $78.0 million) driven by higher utilisation and a change in depreciation policy for idle fleet. The change in idle fleet depreciation reflected the uncertainty on recovery in the rental market for certain asset classes. As at 30 June 2015 the majority of these asset classes have been reclassified to assets held for sale and impaired to fair market value. There remains demand for these assets on the second hand market and management intends to dispose of them over FY16. Matching the rental fleet to market demand Table 4: Asset impairments (statutory results) A$ millions Rental fleet Non‐current assets held for sale Asset impairments Stock write down Freehold land and buildings Plant and equipment Total goodwill 2015 2014 458.8 32.3 6.9 0.0 23.9 0.0 519.8 39.9 6.1 0.1 37.5 157.9 The rental fleet decreased to a written down value (WDV) of $458.8 million over FY15. The fall in WDV included the reclassification of $43.7 million of idle assets to non‐current assets held for sale (NCAHFS) and the reclassification of $18.0 million of tyres supporting the rental fleet to inventory. Reclassification of property, plant and equipment (PPE) to NCAHFS and inventory combined with a write down in parts resulted in asset impairments of $30.8 million in FY15. Stock write down on inventory increased to $6.9 million in FY15 (2014: $6.1 million) resulting from the reclassification of tyres held in PPE to inventory combined with a write down in parts, valuing the stock in line with Emeco’s inventory accounting policy (note 20). Impairment loss on plant and equipment decreased to $23.9 million in FY15, down from $37.5 million in FY14. During FY15 management reclassified $43.7 million of rental fleet to ‘non‐current assets held for sale’ with corresponding impairments to represent the expected market value of those assets. NCAHFS as at 30 June 2015 of $32.3 million included $8.0 million identified during FY14 and disclosed in Emeco’s FY14’s financial statements. Assets held for sale are not marketed for rental and as such are not considered as part of our value in use impairment testing. During FY14 Emeco recognised goodwill impairments totalling $157.9 million. Following this Emeco held nil goodwill on the balance sheet, as such no further goodwill impairments were recognised during FY15. Other than specific impairments noted above, Impairment testing conducted at 30 June 2015 did not identify impairments in the carrying value of Emeco’s tangible assets (refer to note 22 for further details on our impairment testing methodology). We continually review our rental fleet, matching fleet mix to regional demand. Idle units identified as having low rental demand are transferred to NCAHFS. Management’s assessment considers the need to right size our fleet to the markets in which we operate and where required, will increase asset classes to meet future demand. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 10 Reduced earnings impacting free cash flow Table 5: Cash flow summary A$ millions Operating cash flow General working capital Sales and parts inventory Interest and borrowing costs Income tax cash flows Operating cash flow Sustaining capital expenditure Other property, plant and equipment Disposals Free cash flow post sustaining capital expenditure Growth capital expenditure Free cash flow post growth capital expenditure Debt establishment costs Free cash flow post shareholder returns Net cash flow from discontinued operations Free cash flow from continuing operations post shareholder returns 1H FY15 13.3 (3.8) (0.6) (21.4) 0.0 (12.5) (11.6) (0.5) 15.1 (9.5) 0.0 (9.5) 0.0 (9.5) 2H FY15 19.3 11.0 0.7 (21.4) 0.0 9.6 (23.5) (2.2) 9.7 (6.4) 0.0 (6.4) (2.6) (9.0) 2015 32.6 7.2 0.1 (42.8) 0.0 (2.9) (35.1) (2.7) 24.8 (15.9) 0.0 (15.9) (2.6) (18.5) 8.0 2014 57.4 36.6 6.4 (34.3) 10.2 76.3 (29.7) (13.6) 70.8 103.8 (0.9) 102.9 (17.0) 85.9 9.8 (26.6) 76.1 Free cash flow post shareholder returns decreased in FY15 to an $18.5 million outflow, down from a net cash inflow in FY14 of $85.9 million. The decrease resulted primarily from lower earnings and decreasing cash generation from fleet disposals. Operating cash flow improved in 2H FY15 to $9.6 million (compared to 1H FY15 cash outflow of $12.5 million) however capital expenditure required to return idle fleet back to work resulted in a free cash outflow post shareholder returns of negative $9.0 million. FY15 operating cash flow dropped to a $2.9 million cash outflow in line with the fall in EBITDA, with cash generated from operations primarily used to fund financing costs of $42.8 million. No tax cash benefit was received in FY15 compared to $10.2 million in the prior period. As a result of higher utilisation capital expenditure was up on the prior period to $35.1 million. New project wins over FY15 required investment in fleet to prepare machines for rent, while a small number of asset additions were required to replace end of life units with existing customers. The successful refinancing of Emeco’s A$50 million syndicated debt facility to an A$75 million asset backed loan in December 2014 resulted in establishment fees totalling $2.6 million. These costs included legal, accounting and debt advisor fees. Refer below for further information on the refinancing. Net cash flow from the discontinued Indonesian operations totalled $8.0 million in FY15, which included $10.8 million of asset disposals. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 11 Improving balance sheet flexibility Table 6: Net debt and gearing summary A$ millions Interest bearing liabilities (current and non‐current) 2015 2014 144A bond notes Asset backed loan Lease liabilities Working capital Other Cash Net debt Derivative asset / (liability) Net debt (including hedging instruments) Gearing ratio Leverage ratio Interest cover ratio 436.2 0.0 4.9 0.0 0.6 27.8 413.9 49.4 364.5 10.29 57.1% 0.79 355.8 0.0 8.8 0.0 0.5 41.8 323.3 (10.0) 333.3 4.78 43.4% 2.83 Note: Above figures based on facilities drawn – bank guarantees are excluded Gearing ratio ‐ Net debt : Operating EBITDA Leverage ratio ‐ Net debt : Net tangible assets Interest cover ratio ‐ Operating EBITDA : Interest expense The combined impact of negative free cash flow and adverse movements in the AUD:USD exchange rate against the USD denominated bonds resulted in net debt increasing to $413.9 million at 30 June 2015. This represents a 28.0% rise in net debt from 30 June 2014. On 17 March 2014 Emeco successfully raised US$335 million in the 144A bond market. The 9.875% senior secured notes are due 2019 and pay interest on 15 March and 15 September each year. The notes are secured and guaranteed by Emeco Holdings Limited and its subsidiaries. The 144A notes do not have maintenance covenants. Over FY15 the AUD:USD exchange rate fell from $0.94 at 1 July 2014 to $0.76 at 30 June 2015, resulting in the underlying value of the 144A bonds increasing over the year by A$80.4 million. This increase in value was offset by a corresponding benefit from Emeco’s cross currency interest rate swap facilities which were recognised as a A$49.4 million derivative asset 30 June 2015. The net increase in the value of the 144A bonds results from a portion of the notes being unhedged. As announced previously, Emeco successfully refinanced it’s A$50 million syndicated debt facility with a new A$75 million Asset Backed Loan (ABL). Operating as a borrowing base facility, the ABL provides Emeco with considerably more flexible terms and conditions than those provided by the previous facility. The ABL has springing maintenance covenants which engage if the facility is utilised greater than 50% (A$37.5 million), these covenants require Emeco to have an interest cover ratio of no less than 1.25 times and leverage ratio of no more than 65%. The ABL matures in December 2017. At 30 June 2015 the ABL was undrawn with the exception of $9.6 million of bank guarantees utilised against the facility. The bank guarantees relate to the partnership arrangement with Thiess on the Encuentro project. Debt establishment fees totalling $1.8 million related to the previous syndicated debt facility were written off during FY15. Despite the increase in net debt over FY15 the refinancing of the syndicated debt facility improves the flexibility of our balance sheet by placing less onerous maintenance covenants on the business. With the exception of the bank guarantees mentioned above, the ABL remains undrawn, providing balance sheet liquidity of $92.3 million at 30 June 2015 (accounts for a further $0.8 million of property related cash backed bank guarantees). Management remains conservative with its approach to capital management and is focused on generating cash flow to deleverage the business. Refer to note 24 in the accompanying financial statements for additional information on Emeco’s financing facilities. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 12 Nil dividends declared in FY15 Table 7: Shareholder returns Dividends declared during the period Interim dividend (cents) Final dividend (cents) Total dividend (cents) Dividend payout ratio Per share statistics Earnings per share (cents) NTA per share ($) Closing share price ($) 2015 2014 0.0 0.0 0.0 0.0% (15.8) 0.37 0.08 0.0 0.0 0.0 0.0% (3.6) 0.53 0.20 Note: Dividend payout ratio is measured as dividends paid as a percentage of operating NPAT. Similar to FY14 the board declared a nil interim and final dividend for FY15 as a result of the net operating loss for the period. Strategy focus to prepare Emeco for future growth There are a number of examples of Emeco’s strategic achievements over FY15. We improved utilisation from 50% at the commencement of FY15 to averaging 74% in Q4 FY15, secured a mine site services contract with a major oilsands producer in Canada which was signed in August 2015, expanded our Canada rental business into the Labrador iron ore region, partnered with Thiess in Chile to secure a four year contract for the Encuentro project, developed the Emeco Operating System (EOS) to focus on improving the efficiency of our customers operations and Emeco’s internal maintenance systems and implemented our cost reduction program, Project Fit. The benefits of our strategic achievements will result in a more profitable business which is expected to be realised from the outset of FY16. During the year ahead our strategy will remain focused on maintaining current levels of utilisation and assisting customers to utilise our fleet more effectively to increase operating hours. Combined with cost reduction initiatives the improved profitability is expected to generate free cash flow which will be used to deleverage our balance sheet. The current market conditions are impacting heavily on the mining services industry which is evident by a number of our peers entering financing reviews during the financial year. Given the level of financial distress across the sector, there are likely to be opportunities for consolidation. As mentioned in the Managing Director’s report, our current increased utilisation, improved margins from cost reductions and flexibility and tenure of financing, positions us well to evaluate opportunities to participate in this consolidation. Further detail on Emeco’s strategy is included in the regional business overview starting on the following page. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 13 Regional Business Overview Chart 5: Rental revenue by region Chart 6: EBITDA contribution by region Chart 7: Fleet by region Canada, 32% Australia, 57% Chile, 11% Australia, 57% Australia, 49% Chile, 24% Canada, 27% Chile, 12% Canada, 31% Australia Table 8: Performance indicators Chart 8: Average fleet utilisation Operating results A$ millions Revenue EBITDA EBIT Funds employed ROFE % No. workforce FY15 137.0 35.0 (26.3) 312.9 (8.4)% 217 FY14 130.0 44.8 (3.5) 374.7 (0.9)% 226 Var % 5.4% (21.9%) 651.4% (16.5%) 100% 75% 50% 25% 0% Average: FY15: 60%, FY14: 41% Year‐end: FY15: 73%, FY14: 41% Notes: For a reconciliation of statutory to operating results refer to table 1 on page 7, table 2 on page 8 and accompanying notes. Utilisation defined as % of fleet rented to customers (measured by written down value). Operating utilisation defined as ratio of operating hours recognised over a month, compared to a target average number of 400 operating hours over a month. Australia results in table 8 represent the Australian Rental segment and does not include the Australian Sales and Parts results. Utilisation Operating Utilisation 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 leveraged to the production phase of the mining cycle. Operating unit performance is summarised below: Table 9: Operating unit average utilisation Western Region New South Wales Queensland Current 28% 95% 84% Utilisation FY15 53% 79% 49% FY14 40% 60% 23% Revenue ($ million) FY14 FY15 53.4 57.0 45.5 58.7 31.1 21.3 FY15 rental revenue commodity mix was weighted toward metals (50%), thermal coal (24%), metallurgical coal (20%) and iron ore (6%) (FY14: metals 30%, thermal coal 26%, metallurgical coal 19%, iron ore 14%, other 11%). EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 14 FY15 performance Utilisation across FY15 improved compared to FY14 as a number of contracts were secured and existing customers rented additional units, increasing average utilisation from 41% in FY14 to 60% in FY15. New South Wales and Queensland are currently operating at 95% and 84% respectively, Western Region is operating at 28%. Nil recovery in rental rates over the period combined with low machine operating hours over ramp‐up periods resulted in only a marginal increase in operating revenue to $137.0 million (up from $130.0 million in FY14). The majority of contract wins over FY15 were in Queensland and included units placed with a number of coal operations, driving the increase in Queensland utilisation compared to the commencement of FY15. Our new management team in Queensland engaged with customers to identify rental opportunities and gain significant market share, despite the competitive environment. We continued to defend our presence in New South Wales by building on our relationships with existing customers and commencing operations with a gold producer and coal mine development. Western Region recently ceased rental services with long‐term customer Saracen following a highly competitive tender process for a fleet at its Thunderbox operations. The contract represented approximately 20% of Western Region utilisation. Despite an improvement in utilisation and revenue, margins were impacted by $11.4 million of one off costs to return machines back to work and increased use of hired in equipment to meet customers fleet requirements. A change in depreciation policy over FY15 also negatively impacted EBIT margins (refer to page 10 for further details). The year ahead With FY15 year end utilisation at 73% management is focused on improving margins in FY16. Average contract tenure has improved, which combined with our customers preference to work with Emeco is expected to maintain utilisation in Australia over 70% for the foreseeable future. Margin improvement will be achieved through the cost reduction initiatives implemented as part of Project Fit, ensuring customers are utilising contracted fleet and improved preventative maintenance driven by the development of the previously announced Emeco Operating System (EOS) fleet management and mining technology platform. Medium term outlook The medium term outlook for the Australian mining market remains similar to that 12 months ago despite improved utilisation. The falling value of the Australian dollar improves the cost competitiveness of our end customers at a global level however low commodity prices continue to impact margins. While opportunities exist to put idle machines back to work, the competitive landscape across all markets reduces visibility on the timing of any rental rate recovery. Canada Table 10: Performance indicators Chart 9: Average fleet utilisation Operating results A$ millions Revenue EBITDA EBIT Funds employed ROFE % No. employees FY15 76.3 19.3 (5.2) 156.8 (3.3)% 96 FY14 81.5 27.6 8.2 186.5 4.4% 96 Var % (6.4%) (30.1%) (163.4%) (15.9%) 100% 75% 50% 25% 0% Average: FY15: 67%, FY14: 64% Year‐end: FY15: 60%, FY14: 49% Notes: For a reconciliation of statutory to operating results refer to table 1 on page 7, table 2 on page 8 and accompanying notes. Utilisation defined as % of fleet rented to customers (measured by written down value). Operating utilisation defined as ratio of operating hours recognised over a month, compared to a target average number of 400 operating hours over a month. Utilisation Operating Utilisation EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 15 Main markets The Canada business is strategically located in the Alberta region to primarily service oil sands and bulk commodity projects in Western Canada. The business supplies rental equipment and mine site services to oil majors, indigenous and non‐indigenous contractors, and bulk commodity miners. Rental revenue composition in FY15 remained heavily weighted toward oil sands (87%) with the remainder derived primarily from thermal coal. FY15 performance Heading into FY15 we announced our Canada strategy as diversifying earnings away from the oilsands business and growing our mine site services business, both of which are expected to smooth the seasonality in Canada. Over FY15 we achieved success with both strategies by identifying rental opportunities in the coal and iron ore sectors and winning a five year fuel and lubricants contract with a major oilsands producer. Canada continued to benefit from building relationships direct with miners as demonstrated by averaging 80% utilisation over the winter period despite the fall in the oil price. Rental revenue of $65.9 million for FY15 was 12.7% down on FY14 ($75.2 million) primarily as a result of an average 5% rental rate reduction across the fleet and lower operating hours as customers revised mine plans in response to the lower oil price environment. Despite the fall in rental revenue, mine site services revenue was up 69% to $10.4 million (FY14: $6.2 million) with the completion of our fleet maintenance facility at Kearl Lake. The fall in rental revenue combined with the increased use of operating leases to meet non‐core asset requirements on new project wins was the primary driver of EBITDA margin declining in FY15 to 25.2% (2014: 33.9%). The depreciation policy adopted in FY15 further compressed EBIT margin to negative 6.9% (FY14: 10.1%). The year ahead Going into FY16 our Canada business is averaging close to 60% utilisation (compared to 49% PCP) which includes approximately a third from machines operating outside the oilsands industry. As previously announced we have improved commodity diversification with units working across three sites for a large coal company and seven units rented on a three year contract in the Labrador iron ore region. Our Canada mine site services business is expected to continue growing with the recently signed fuel and lubricants contract expected to double mine services revenue in FY16. Management will continue to review capital expenditure requirements with the use of operating leases for non‐core assets required to secure rental and mine site services opportunities. Medium term outlook Embodied in the Canada oil sands industry is the seasonal nature of earth works over a year. While this limits visibility on future activity, the installed production capacity in long life oil sands projects underpins significant base load volumes over the medium term. Management continues to seek opportunities outside the oilsands industry to reduce seasonality in the business. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 16 Chile Table 11: Performance indicators Chart 10: Average fleet utilisation Operating results 100% A$ millions Revenue EBITDA EBIT Funds employed ROFE % No. employees FY15 29.6 6.6 (9.8) 146.5 (6.6%) 23 FY14 25.1 13.8 4.1 138.3 3.0% 16 Var % 17.9% (52.2%) (339.0%) 5.9% 75% 50% 25% 0% Average: FY15: 90%. FY14: 74% Year‐end: FY15: 91%, FY14: 81% Notes: For a reconciliation of statutory to operating results refer to table 1 on page 7, table 2 on page 8 and accompanying notes. Utilisation defined as % of fleet rented to customers (measured by written down value). Operating utilisation defined as ratio of operating hours recognised over a month, compared to a target average number of 400 operating hours over a month. Utilisation Operating Utilisation 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 FY15 was 100% weighted toward the copper industry. FY15 performance The Chile business entered FY15 securing the previously announced five year Encuentro contract in conjunction with Chile mining contractor Fe Grande. Commencing from July 2014 the contract was expected to generate between US$27 million and US$32 million annually and represent over 50% utilisation of the Chile fleet. The Encuentro project drove a 17.9% increase in revenue compared to FY14 however operational issues on site impacted profitability and availability of the remaining Chile fleet to be utilised on other projects. Mine operations during ramp‐up and over FY15 were below forecast with lower than expected tonnes moved on site which reduced the operational hours of our fleet. In addition we experienced reduced availability of our 793F truck fleet due to manufacturer issues which required fleet downtime to remediate under warranty and the use of other Emeco trucks to back fill. The productivity issues have been addressed and there has been a material operational improvement at the Encuentro mine. We expect this project to be more profitable in FY16 under the new contractual model. EBITDA and EBIT margins declined to 22.3% and negative 33.1% respectively in FY15 as a result of $0.9 million in one off prep‐for‐rent costs associated with preparing fleet for the Encuentro project and lower than forecast operating hours against a growing fixed cost base to service the Encuentro contract. As previously mentioned EBIT margins in FY15 were impacted by adoption of a more aggressive depreciation policy. The year ahead Emeco recently announced that its Chile rental business signed a partnership agreement with leading global mine contractor Thiess. The partnership agreement relates to the four year mining contract awarded to Thiess for the pre‐ strip operations at AMSA’s Encuentro open pit copper mine, replacing Fe Grande. Emeco will continue to provide mining and ancillary fleet support for the tenure of the contract. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 17 In addition to the Thiess partnership Chile recently placed four 793s at AMSA’s Esperanza site. This wet hire contract demonstrates the strong relationship Emeco maintains with its customers and the flexibility in our business model to meet our customer’s needs. Current contracts, potential contract extensions and the project pipeline in South America is expected to maintain utilisation above 90% for H1 FY16. Margin growth is expected in FY16 with improved productivity at Encuentro following Thiess commencement on site, reduced prep‐for‐rent costs compared to FY15 and cost reduction initiatives driven by Project Fit. Medium term outlook The Chile mining industry maintains a strong cost curve position which is expected to underpin activity over the medium term. Greater presence in Chile continues to provide Emeco new opportunities to expand its customer base, both with contractors and mining companies. In addition the partnership with Thiess provides a platform to enter further opportunities together in the South American region. On the basis that volumes continue to grow in the Chile copper market, Emeco is well positioned to maintain and grow earnings in this business in the medium term. Discontinued operations During FY14 Emeco completed a strategic review on its Indonesian business deciding to exit the market given expected poor earnings over the long term. The Indonesian business has been classified as a discontinued operation for FY15 and the prior comparable period. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 18 Table 12: Five year financial summary REVENUE Revenue from rental income Revenue from sale of machines and parts Revenue from maintenance services Total PROFIT EBITDA2 EBIT3 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 (operating goodwill) Net debt to operating EBITDA Total debt to equity 2015 2014 2013 2012 2011 206,718 205,368 314,068 440,299 386,530 2,788 31,925 8,145 27,582 23,413 41,894 66,689 58,182 62,795 53,170 241,431 241,095 379,375 565,170 502,495 32,856 (96,784) (162,595) 66,064 (213,608) (251,378) (123,131) (224,172) (4,572) (51,137) (127,703) (275,309) 148,268 32,075 7,459 12 5,992 6,004 (18,652) (202,629) (28,487) (94,813) (21,543) 28,499 (15.8) (3.6) 4.8 260,507 124,820 100,406 69,972 (227) 69,745 (1,375) 71,120 11.3 708,755 487,284 221,471 423,971 748,362 1,126,022 1,216,116 424,390 323,972 343,774 514,846 611,176 415,426 575,729 640,387 459,484 215,379 93,206 70,247 49,974 (365) 49,609 (6,395) 56,004 8.2 981,152 378,918 602,234 297,005 (2,894) (13,013) 82,072 25,032 181,303 230,467 214,931 (129,124) (281,817) (146,088) (6,733) (71,364) (119,281) 118,958 (68,947) (22,640) 35,740 (67,102) 67,608 (104) $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 cents $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 (18,495) 85,889 (9,273) (90,958) (17,800) '000 $'000 cents cents % % % x % 599,675 599,675 599,675 631,238 631,238 ‐ 0.0 0.0 69.0 (9.4) (9.6) 10.29 191.4 ‐ 0.0 0.0 48.0 (0.8) (0.9) 4.78 106.1 15,109 37,874 63,124 2.5 0.0 67.0 7.1 8.5 2.15 68.0 6.0 0.0 86.0 13.2 15.7 1.47 71.8 5.0 5.0 85.0 11.3 14.0 1.38 49.3 Financial information as reported in the corresponding financial year and includes operations now discontinued. 1 2 3 Includes capex funded via finance lease facilities (excluded from statutory cash flow). FY15 and FY14 reported exclude tangible asset impairments and foreign exchange gains and losses being reported below EBITDA. FY15 and FY14 reported exclude foreign exchange gains and losses being reported below EBIT. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 19 Financial Report Directors’ Report .................................................................................................................... 21 Directors ...................................................................................................................... 21 Company secretary ...................................................................................................... 23 Directors’ meetings ...................................................................................................... 24 Corporate governance statement ................................................................................. 24 Principal activities ........................................................................................................ 24 Operating and financial review .................................................................................... 24 Dividends ..................................................................................................................... 24 Significant changes in state of affairs ........................................................................... 24 Events subsequent to report date ................................................................................ 25 Likely developments .................................................................................................... 25 Directors’ interest ........................................................................................................ 25 Indemnification and insurance of officers and auditors ................................................ 26 Non‐audit services ....................................................................................................... 26 Lead auditor’s independence declaration ..................................................................... 26 Rounding off ................................................................................................................ 26 Remuneration report (audited) .................................................................................... 27 KPMG’s independence declaration ............................................................................... 40 Consolidated Statement of Profit or Loss and Other Comprehensive Income ......................... 41 Consolidated Statement of Financial Position ......................................................................... 43 Consolidated Statement of Changes in Equity ........................................................................ 44 Consolidated Statement of Cash Flows ................................................................................... 45 Notes to the Consolidated Financial Statements .................................................................... 46 Directors’ Declaration .......................................................................................................... 123 Independent Auditor’s Report .............................................................................................. 124 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 20 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 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) and the auditor’s report for the financial year ended 30 June 2015 (FY15). Directors The directors of the Company during FY15 were: ALEC BRENNAN AM, BSc Hons, MBA Dist, FAICD, 68 Appointment: Independent Non‐Executive Director of public company since July 2006. Chairman since November 2006. Board committee membership: Chairman of the Remuneration and Nomination Committee. Member of the Audit and Risk Management 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: Independent Director of the New South Wales Environment Protection Authority (since 2012). Fellow of Senate and Chair of Sydney University Finance and Human Resources committees (since 2006). Deputy Chancellor of the Senate of the University (since 2014). KENNETH LEWSEY BBus, MAICD, 52 Appointment: Managing Director since November 2013. Ceased as Managing Director on 20 August 2015. 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 2015 21 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 JOHN CAHILL BBus, Grad Dip Bus, FCPA, GAICD, 59 Appointment: Independent Non‐Executive Director since September 2008. Board committee membership: Chairman of the Audit and Risk Management 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 is a past Chief Executive Officer of Alinta Infrastructure Holdings and past Chief Financial Officer of Alinta Ltd. John was previously Non‐Executive Director (2007 to 2013) and President and Chairman (2011 to 2013) of CPA Australia Ltd and Non‐Executive Director (2009 to 2014) and Deputy Chairman (2010 to 2014) of Electricity Networks Corporation, Western Australia (trading as Western Power). John was made a life member of CPA Australia Ltd in 2013. Current appointments: Non‐Executive Director of Toro Energy Limited (since January 2015) and Chair of Toro Energy Limited Audit and Risk Management Committee (since April 2015).Non‐Executive Director of Accounting Professional & Ethical Standards Board (since February 2014). Councillor of Edith Cowan University and Chair of the University's Resources Committee (since 2011). PETER RICHARDS BCom, 56 Appointment: Independent Non‐Executive Director since June 2010. Board committee membership: Member of the Audit and Risk Management Committee. Skills and experience: Peter has over 35 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). EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 22 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 ERICA SMYTH MSc, FAICD, FTSE, 63 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 Chair of Toro Energy, 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). Deputy Chair of the Australian Nuclear Science and Technology Organisation (since 2009). Director of the Royal Flying Doctor Service Western Operations (since 2010). Director of the Deep Exploration Technologies CRC (since 2013). Director of the Harry Perkins Institute of Medical Research (since 2013). The following have been appointed to the board since 30 June 2015: IAN TESTROW BEng (Civil), MBA, 45 Appointment: Managing Director since 20 August 2015. Skills and experience: Ian has been Emeco’s Chief Operating Officer since 2014, responsible for the Australian and Chilean operations as well as Global Asset Management. Prior to this he was President, New and Developing Business after establishing Emeco's Chilean business in 2012 in his role as President, Americas. Ian previously managed the exit of Emeco's USA business in 2010 and commenced developing Emeco’s Canadian business in 2009. Ian joined Emeco in 2005, responsible for the business in Queensland and Northern Territory and, then in addition in 2007, New South Wales. Prior to Emeco Ian worked for Wesfarmers, BHP, Thiess and Dyno Nobel. GREGORY HAWKINS BCom, 47 Appointment: Executive Director Finance since 20 August 2015. Skills and experience: Greg joined Emeco as Chief Financial Officer in July 2014. Before joining Emeco, Greg was Chief Executive Officer of African Barrick Gold plc based in London where he made significant improvements to that business, dealt with considerable challenges in the African environment and set the company on a solid platform of improvement in performance for its long term future. Prior to this he was Chief Financial Officer at Barrick Gold Corporation's Australia Pacific division, based in Perth. Greg is a Fellow of the Institute of Chartered Accountants. Company secretary The Company Secretary of the Company during FY15 was: THAO VANDERPLANCKE LLB (Hons), BCom Thao was appointed to the position of Company Secretary to the Emeco Board and General Counsel 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 23 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 Directors’ meetings The number of board and committee meetings held and attended by each director in FY15 is outlined in the following table below: Table 13: Board and committee meetings held and director attendance Director Board meetings Audit & risk management committee meetings Remuneration & nomination committee meetings Alec Brennan Kenneth Lewsey John Cahill Peter Richards Erica Smyth A 16 16 16 16 16 B 16 16 16 16 16 A 6 B 6 6 * 6 6 6 6 6 6 * 6 A 2 B 2 2 * 2 2 2 2 * 2 2 2 A B * Number of meetings attended Number of meetings held during the time the director held office during the year Not a member of this committee Corporate governance statement The Company’s corporate governance statement is located on the Company’s website at http://www.emecogroup.com/view/investors/corporate‐governance. Principal activities The principal activity during FY15 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. Operating and financial review A review of Group operations, and the results of those operations for FY15, is set out in the operating and financial review section at pages 7 to 13 and in the accompanying financial statements. Dividends No dividends were declared or paid during FY15. No dividends have been declared or paid since the end of FY15. Significant changes in state of affairs Other than those disclosed in the operating and financial review section or the financial statements and the notes thereto, 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 24 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 Events subsequent to report date Subsequent to the period end, the Group refinanced its finance lease facility resulting in an extension to 15 February 2017 at a lower interest rate. On 1 July 2015, Emeco announced that it had signed a partnership agreement with Cimic Group company, Thiess, for pre‐strip operations at the Encuentro Oxides copper mine in Chile that was previously operated by Fe Grande. On 20 August 2015, Mr Kenneth Lewsey ceased and Mr Ian Testrow commenced in the role of Managing Director and Chief Executive Officer of the Company. Mr Gregory Hawkins also commenced in the role of Executive Director, Finance on 20 August 2015. 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 7 to 13. 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 14: Directors’ Interests Director Alec Brennan John Cahill 2,081,700 [A] 120,000 Gregory Hawkins 127,000 Peter Richards 40,000 Ordinary shares Options or rights ‐ ‐ ‐ ‐ Erica Smyth Ian Testrow 71,049 ‐ 1,015,714 [A] 2,126,639 [B] [A] [B] This number includes management incentive share plan shares which have been elected to be returned to the Company pursuant to terms of the MISP. See section 5.4. This comprises unvested performance shares issued under the Company’s long term incentive plan and unvested shares under the employee share ownership plan. See sections 3.3.3, 5.3 and 5.5. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 25 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 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 management committee to ensure they do not impact the integrity and objectivity of the auditor. 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 40 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 2015 26 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 Remuneration report (audited) Remuneration report contents This report covers the following matters: 1. 2. 3. 4. 5. 6. Introduction Remuneration governance Executive remuneration Non‐executive director remuneration Details of remuneration Service contracts 1. Introduction This report details the Group’s remuneration objectives, practices and outcomes for key management personnel (KMP), which includes directors and senior executives, for the year ended 30 June 2015. 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 FY15: Non‐executive directors Alec Brennan John Cahill Peter Richards Erica Smyth Executive director Kenneth Lewsey Chair Managing Director & Chief Executive Officer (ceased role on 20 August 2015) The following persons were also employed as executives of the Company during FY15: Other executives as at the report date Gregory Hawkins [A] Christopher Hayman Kalien Selby Ian Testrow [B] Thao Vanderplancke Other executives Kellie Benda David Greig Stuart Jenner Grant Stubbs Position Chief Financial Officer President North America (commenced role on 26 November 2014), previously President Americas Executive General Manager Strategy & Business Improvement (commenced role on 18 February 2015) Chief Operating Officer Company Secretary & General Counsel Postion Executive General Manager Strategy & Corporate Development (ceased role on 19 December 2014) President South America (1 October 2014 to 22 June 2015) Executive General Manager HR, HSE & IT (ceased role on 30 June 2015) Executive General Manager Asset Strategy & Operational Improvement (ceased role on 1 October 2014) [A] [B] Mr Gregory Hawkins commenced role of Executive Director, Finance on 20 August 2015. Mr Ian Testrow commenced role of Managing Director & Chief Executive Officer on 20 August 2015. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 27 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 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 FY15 were Mr Alec Brennan (Chair), Mr John Cahill and Ms Erica Smyth. 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: 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 resources policies and practices are consistent and complementary to the strategic direction of the Company. 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 28 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 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 August. No executive received an increase in fixed remuneration in FY15 whilst as an executive. 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. In FY15 the fixed remuneration of the chief financial officer, Mr Gregory Hawkins, was 20% lower than that of his predecessor, Mr Stephen Gobby. The fixed remuneration of the new chief executive officer and managing director, Mr Ian Testrow (appointed 20 August 2015), is 29% lower than that of his predecessor, Mr Ken Lewsey. 3.3 Variable remuneration Variable remuneration is performance linked remuneration which consists of short term incentives (STIs) and long term incentives (LTIs). STI awards are for performance assessed over one year. See section 3.3.2 for more information. LTI awards are for performance assessed over three years. See section 3.3.3 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 in FY15 is shown in the following table: Table 15: Components of variable remuneration Executive [A] Kenneth Lewsey Gregory Hawkins Christopher Hayman Stuart Jenner Ian Testrow Thao Vanderplancke Position Managing Director & Chief Executive Officer Chief Financial officer President North America Executive General Manager HR, HSE & IT Chief Operating Officer Company Secretary & General Counsel Target STI cash component 75% Target STI equity component 25% Stretch STI component [B] 33% Maximum total STI 133% Maximum total LTI 75% Maximum total variable remuneration 208% 50% 50% 50% 50% 37% 10% 10% 10% 10% 0% 20% 20% 20% 20% 9% 80% 80% 80% 80% 46% 50% 40% 40% 50% 37% 130% 120% 120% 130% 82% [A] [B] Mr Grant Stubbs and Ms Kellie Benda ceased their roles effective on 1 October 2014 and 19 December 2014 respectively and were not offered STIs or LTIs in FY15. Mr David Greig and Ms Kalien Selby were appointed as executives on 1 October 2014 and 18 February 2015 respectively and had no FY15 STI or LTI entitlements as an executive. The stretch STI component relates to additional awards for performance greater than FY15 budget EBITDA and OCF (see table 16). Stretch STI components are paid in equity to all executives, except to Ms Thao Vanderplancke which is paid in cash. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 29 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 3.3.1 Remuneration arrangements with Ms Thao Vanderplancke Ms Thao Vanderplancke was appointed to the role of company secretary and general counsel of the Company effective on 1 July 2014. Upon appointment, Ms Vanderplancke was not a direct report to the chief executive officer and managing director and, therefore, had a different variable remuneration structure to other executives. Ms Vanderplancke’s variable remuneration structure differed to that of the other executives as follows: Thao Vanderplancke STI awards are in cash only STI awards are not subject to the STI condition (see section 3.3.2) Other executives STI awards are in cash and equity STI awards are subject to the STI condition Stretch STI awards are paid in cash Stretch STI awards are paid in equity Weighting for OCF and personal goals STI KPIs are nil and 35% respectively Dividends will be paid on all LTI securities Weighting for OCF and personal goals STI KPIs are 15% and 20% respectively Dividends in respect of LTI securities will be paid only in respect of vested LTI securities at the end of the vesting period Upon an absolute change in control of the Company, all LTI securities will automatically vest Upon an absolute change in control of the Company, LTI securities will vest only if the performance condition has been met and in accordance with the vesting schedule As Ms Vanderplancke now reports directly to the chief executive officer and managing director, her remuneration structure has been amended to that of all other executives effective 1 July 2015. 3.3.2 STI remuneration Cash and equity STIs are used to reward the performance of executives over a full financial year. The actual amount of STI awarded is determined after the end of the financial year in light of the Company and executive’s performance against agreed key performance indicators (KPIs). All executive STI awards require review and approval by the remuneration and nomination committee and the board. An executive’s maximum achievable STI award is set as a percentage of TFR (refer to table 15 above for details). In respect of FY15, executive STIs were only awarded if Group FY15 EBITDA is at least that of FY14 (STI condition).* The financial KPIs provided for pro rata cash payments where FY15 EBITDA and OCF were between FY14 actual performance and FY15 budget (see the EBITDA and OCF KPIs set out in table 16). Stretch STI awards for above FY15 budget performance are made in equity.* In FY15 target STI awards are made: for the managing director and chief executive officer, 25% in equity and 75% in cash; and for all other executives*, in cash up to the target STI cash component, with additional awards made in equity. Stretch STI awards, being those above the target STI awards (refer to table 15 above for details), are made in equity.* Where an equity component is payable, the number of shares awarded is calculated by dividing the STI equity value by the June 2015 VWAP of Emeco shares. For the managing director and chief executive officer, STI awards made in equity are granted after shareholder approval at the annual general meeting and such shares are escrowed for two years until the announcement of the Company’s annual results in 2017. For all other executives, the grant of the shares are deferred and subject to the executive remaining employed by the Group the day after the announcement of Emeco’s annual results in 2016. All STI awards made in equity are acquired on‐market and, therefore, do not have the effect of diluting shareholdings. As the STI condition was not met, no executive* will be awarded any STIs in respect of FY15. ______________________________ * Does not apply to Ms Thao Vanderplancke. See section 3.3.1 above. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 30 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 Key performance indicators Along with financial 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. Table 16 below sets out the KPIs for the FY15 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 16: FY15 STI plan KPI weightings and entitlements KPI EBITDA Weighting 50% Entitlement 0% if EBITDA is less than FY14 EBITDA. 100% if EBITDA is greater than FY15 budget EBITDA. Pro‐rata payments between these levels and on the same basis up to a maximum of 150%. Rationale This profit figure quantifies the Company’s financial performance. Achievement [B] Below threshold Operating Cash Flow (OCF) 15%* 0% if OCF is less than FY15 budget OCF based on FY14 EBITDA and 85% of FY15 budget disposals. 100% if OCF is greater than FY15 budget OCF. Pro‐rata payments between these levels and on the same basis up to a maximum of 150%. OCF was chosen to reflect the Company’s focus on maintaining strong cash flow in order to reduce debt and ensure that the balance sheet remains robust. Below threshold Health, Safety & Environment (HSE) 7.5% 0% if TRIFR as at 30 June 2015 is less than 10% lower than TRIFR as at 30 June 2014. 100% if TRIFR as at 30 June 2015 is at least 25% lower than the TRIFR as at 30 June 2014. Pro‐rata payments between these levels. Notwithstanding the above, no award if there is a serious, permanently disabling injury or a fatality. [A] The board regularly reviews the Company’s safety performance in detail and is striving to achieve a 'zero‐harm' workplace at Emeco. TRIFR measures progress towards this aspiration. Below threshold 7.5% Requires involvement with proactive HSE activities. The participation in behavioural based safety programs encourages safety leadership and promotes safety throughout the workplace. Between threshold and target Personal Goals 20%* Managing director’s award is assessed by the board. Other executives’ award is assessed by the managing director and approved by the board. Between threshold and target 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 include improving the Company's talent management, liquidity, corporate governance, service offering and strategic planning and implementation. [A] TRIFR = Number of recordable injuries x 1,000,000 hours Total hours worked [B] Notwithstanding achievements, executives were not awarded any STIs* as the STI condition was not met. 3.3.3 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. ______________________________ * Does not apply to Ms Thao Vanderplancke. See section 3.3.1. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 31 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 Australian based executives In FY15, performance shares were offered to Australian based executives, with the number of performance shares offered being determined by reference to the executive’s maximum LTI entitlement and the fair value of the LTI securities as at the commencement of the vesting period. Performance shares were offered at no cost to the executive, however award of the shares is subject to the performance condition described below. Executives based outside Australia In FY15, Emeco executives who were resident outside Australia were offered performance rights instead of performance shares due to the complexity and cost of compliance issues associated with the offer of performance shares in the relevant foreign jurisdictions. These offers were on substantially identical terms to that of the performance shares granted to Australian based executives. Performance condition The performance condition for the vesting of LTI securities under the FY15 LTI plan (and the FY14 and FY13 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 FY15 LTI grant, the peer group comprised a total of 123 companies from the S&P/ASX Small Industrials (excluding banks, insurance companies, property trusts/companies and investment property trusts/companies and other stapled securities). Consideration is being given to limiting the peer group only to those considered direct peers to Emeco going forward. At the end of the vesting period, the TSR for Emeco and each company in the peer group will be measured and ranked. Emeco will be allocated a percentile rank representing 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: Percentile rank 50% or lower Between 50% and 75% 75% or higher Percentage of LTI securities that vest Nil 50% plus 2% for each percentile rank over 50% 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 reallocation. Performance shares which vest are transferred to the employee. In respect of performance rights which vest, corresponding shares are transferred to the employee. 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, 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 32 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 3.4 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. 3.5 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 an executive’s 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. In respect of FY15, no executive* was awarded any STIs and no LTIs vested. Details of the KPIs for the FY15 STI and LTI plans are set out in the following table: KPI Financial LTI Total shareholder return Non‐financial Not applicable STI Budget EBITDA Budget OCF Health, safety and environment 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 mean that STI remuneration is genuinely at risk, is highlighted by the fact that no executive will receive a STI payment in respect of FY15.* In FY11, 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 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 ‐ no STIs in respect of financial KPIs were awarded. However, executives will not receive STI payments in respect of FY15 as they were entirely subject to the STI condition.* Details of these KPIs are set out above in section 3.3. Details of the Group’s performance and benefits for shareholder wealth are set out in the following table: Profit/(loss) from continuing operations ($m) Profit/(loss) from discontinuing operations ($m) Statutory profit/(loss) ($m) Total dividends declared ($m) Statutory return on capital employed Closing share price as at 30 June FY15 (123.1) (4.6) (127.7) ‐ (20.7%) $0.08 FY14 (224.2) (51.1) (275.3) ‐ (30.7%) $0.20 FY13 (0.0) 6.0 6.0 15.0 4.2% $0.28 FY12 70.0 (0.2) 69.7 37.9 13.0% $0.87 FY11 50.0 (0.4) 49.6 63.1 10.3% $1.13 In FY15, the primary focus of the Company was to strengthen its balance sheet, improve utilisation and dispose its surplus fleet. Strategic achievements over FY15 were executed to drive the Emeco business through this current downturn in the global market and position the business for future growth, and hence greater shareholder returns. ______________________________ * Does not apply to Ms Thao Vanderplancke. See section 3.3.1 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 33 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 Throughout FY11, the Company’s share price increased nearly 100% from 58 cents at opening of trading on 1 July 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 as the share price three years prior was only 40 cents. 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. 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, 20 cents and 8 cents on 30 June 2013, 30 June 2014 and 30 June 2015 respectively. No LTI securities vested following the Company’s performance in FY13 or FY14. This highlights the genuinely challenging nature of the LTI KPI. 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 August. This did not take place in FY15 as the board had already resolved in May 2014 to reduce the fixed remuneration for non‐executive directors by 20% with effect from 1 July 2014. 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 skill sets of board members, the quantum of fees paid to non‐executive directors of comparable companies and participation in board committee work. The chair is entitled to an annual fee of $158,238. All other non‐executive directors receive an annual fee of $90,422. An additional annual fee of $6,782 is paid to a director who is a member of a board committee. This fee is increased to $9,042 for a director who chairs a committee. All amounts specified in this section are inclusive of superannuation contributions. 5. Details of remuneration 5.1 Remuneration received in relation to FY15 Details of the elements comprising the remuneration of the Group’s KMP in FY15 are set out in table 17 below. The table does not include the following components of remuneration because they were either not provided to KMP during FY15 or were not available to KMP by reason of their executive role: 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. Matching shares under the Emeco employee share ownership plan (see section 5.5). EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 34 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 Also, payments made in respect of a period before the appointment, or after the cessation, of a person as KMP are not included in table 17. Table 17: FY15 KMP remuneration (Company and consolidated) Short‐term employee benefits Post‐employment benefits annuation long term Other Termina‐ tion benefits benefits $ $ Share based payments LTIP $ % of Value of remuneration options as at % of total performance related remuneration % % Total $ Salary and fees $ STI cash bonuses [1] $ Non‐ monetary [2] $ Non‐executive directors Al ec Brenna n John Ca hi l l Peter Ri cha rds Eri ca Smyth Executive director Kenneth Lews ey TOTAL ALL DIRECTORS Executives at report date Gregory Ha wki ns Chri s topher Ha yma n [A] Ka l i en Sel by [B] Ian Tes trow Tha o Va nderpl a ncke Other executives Kel l i e Benda [C] Davi d Grei g [D] Stua rt Jenner Grant Stubbs [E] TOTAL ALL EXECUTIVES 160,495 97,594 89,288 89,288 809,330 1,245,995 468,356 343,118 96,375 443,524 244,615 184,849 280,222 235,974 158,203 2,455,236 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 40,800 ‐ ‐ ‐ ‐ 40,800 ‐ 21,717 ‐ 81,671 ‐ ‐ 115,561 ‐ ‐ 218,949 Super‐ benefits $ 13,566 8,651 7,915 7,915 73,744 111,791 41,644 ‐ 9,155 42,135 22,800 17,561 ‐ 24,292 15,029 172,616 TOTAL 3,701,231 40,800 218,949 284,407 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 174,061 106,245 97,203 97,203 333,554 333,554 1,216,628 1,691,340 39,859 70,375 3,922 201,793 40,291 549,859 435,209 109,452 769,123 348,506 (11,237) 47,774 43,115 (68,945) 366,946 191,173 443,558 303,381 104,287 3,254,547 700,500 4,945,887 ‐ ‐ ‐ ‐ 27% 7% 16% 4% 26% 12% 0% 11% 14% 0% ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ [1] [2] [A] [B] [C] [D] [E] STIs awards under the FY15 plan were finally determined on 19 August 2015 after completion of performance reviews (refer to table 18). Non‐monetary benefits include housing, vehicle and health benefits. Mr Christopher Hayman’s remuneration has been converted to Australian dollars on the basis of an AUD/CAD exchange rate of 0.9606. Ms Kalien Selby was appointed as an executive on 18 February 2015. Ms Kellie Benda ceased her role as an executive on 19 December 2014. All unvested LTI securities granted to Ms Benda were forfeited in accordance with the terms of the grant and reversed through the income statement. Mr David Greig was an executive from 1 October 2014 to 22 June 2015. Mr Greig’s remuneration has been converted to Australian dollars on the basis of an AUD/USD exchange rate of 0.8090. Mr Grant Stubbs ceased his role as an executive on 1 October 2014. All unvested LTI securities granted to Mr Stubbs were forfeited in accordance with the terms of the respective grants and reversed through the income statement. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 35 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 Comparative information relating to remuneration of the Group’s KMP for the prior financial year is set out below: Short‐term employee benefits Post‐employment benefits Share based payments annuation long term Other Termina‐ tion benefits benefits $ $ LTIP $ MISP $ STI $ Total $ % of Value of remuneration options as at % of total performance related remuneration % % Salary and fees $ 199,155 115,173 121,562 111,217 111,217 487,252 425,877 1,571,453 90,769 572,310 423,749 329,234 182,326 344,687 325,450 507,529 2,776,054 Non‐executive directors Al ec Brenna n Robert Bis hop John Ca hil l Peter Richa rds Eri ca Smyth Executive director Kenneth Lews ey [A] Kei th Gordon [B] TOTAL ALL DIRECTORS Executives Kel li e Benda [C] Stephen Gobby Anthony Ha ll s [D] Chris topher Ha yma n [E] Benny Joes oep [F] Mi cha el Ki rkpa trick Gra nt Stubbs Ia n Tes trow [G] TOTAL ALL EXECUTIVES STI cash Non‐ bonuses [1] monetary [2] $ $ ‐ ‐ ‐ ‐ ‐ 197,625 ‐ 197,625 ‐ 114,912 ‐ 72,458 ‐ 61,673 80,669 98,487 428,199 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 16,847 8,831 ‐ ‐ 72,100 97,778 Super‐ benefits $ 18,422 6,331 11,244 10,287 10,287 19,478 25,000 101,050 8,396 25,000 25,000 ‐ ‐ 27,442 27,348 12,908 126,093 TOTAL 4,347,507 625,824 97,778 227,143 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 205,560 205,560 170,759 (541,227) (370,468) ‐ ‐ ‐ ‐ 88,306 ‐ ‐ ‐ 88,306 11,237 271,729 (151,315) 37,011 ‐ 155,098 79,249 196,464 599,473 293,866 229,005 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 217,577 121,504 132,806 121,504 121,504 ‐ ‐ ‐ ‐ ‐ 65,875 ‐ 940,989 115,210 65,875 1,771,095 46.15 (469.77) (9.8) 110,402 ‐ 983,951 ‐ 297,434 ‐ 455,550 ‐ 279,463 ‐ 588,900 ‐ 512,716 ‐ 887,488 ‐ ‐ 4,115,903 10.18 39.29 (50.87) 24.47 ‐ 36.81 31.19 33.23 24.97 65,875 5,886,998 14.52 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ [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. 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 2015 36 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 5.2 FY15 STI grants The terms of the FY15 STI plan are discussed at pages 30 to 31. Details of the vesting profile of the STI grants awarded to executives in respect of FY15 are set out below: Table 18: FY15 executive STI vesting information [A] [B] Executive Kenneth Lewsey Gregory Hawkins Christopher Hayman Stuart Jenner Ian Testrow Thao Vanderplancke Maximum total STI value [1] $1,126,250 $381,600 $251,630 $222,600 $369,675 $110,400 Maximum STI cash value $637,500 $240,000 $158,258 $140,000 $232,500 $110,400 Maximum STI equity value $488,750 $141,600 $93,372 $82,600 $137,175 $0 STI cash awarded $0 $0 $0 $0 $0 $40,800 STI equity awarded $0 $0 $0 $0 $0 $0 % of STI awarded 0% 0% 0% 0% 0% 42.5% % of STI forfeited 100% 100% 100% 100% 100% 57.5% [1] [A] [B] The minimum STI value for each KMP is zero. Mr Grant Stubbs and Ms Kellie Benda ceased as an executive on 1 October 2014 and 19 December 2014, respectively, and did not have FY15 STI entitlements. Mr David Greig and Ms Kalien Selby had no FY15 STI entitlements as executives. Mr Christopher Hayman’s remuneration has been converted to Australian dollars on the basis of an AUD/CAD exchange rate of 0.9606. 5.3 FY15 LTI grants The terms of the LTI plan are discussed at pages 31 to 32. Grants and vesting of LTI securities made to executives under the Company’s LTI plans are set out in the following table: Table 19: LTI security grants and vesting to executives Executive [A] Kenneth Lewsey David Greig Gregory Hawkins Christopher Hayman Stuart Jenner Kalien Selby Ian Testrow Thao Vanderplancke Grant date 04/11/2013 24/11/2014 02/11/2011 05/10/2012 07/10/2013 24/11/2014 24/11/2014 07/10/2013 24/11/2014 05/10/2012 07/10/2013 24/11/2014 24/11/2014 18/11/2011 19/10/2012 04/12/2013 24/11/2014 18/11/2011 05/10/2012 02/11/2012 07/10/2013 24/11/2014 Equity instrument Shares Shares Rights Rights Rights Rights Shares Rights Rights Shares Shares Shares Shares Rights Rights Rights Shares Shares Shares Shares Shares Shares Number granted 4,553,571 4,250,000 53,117 94,694 357,432 794,012 1,600,000 986,967 844,040 64,286 252,941 746,667 260,000 189,000 451,371 1,633,151 1,550,000 17,105 53,571 5,357 199,456 640,000 Maximum value [1] $637,500 $637,500 $40,369 $53,029 $60,763 $119,102 $240,000 $138,175 $126,606 $36,000 $43,000 $112,000 $39,000 $143,640 $207,631 $228,641 $232,500 $13,000 $30,000 $3,000 $33,908 $96,000 % vested in FY15 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ % forfeited in FY15 ‐ ‐ 100% ‐ ‐ ‐ ‐ ‐ ‐ 100% ‐ ‐ ‐ 100% ‐ ‐ ‐ 100% ‐ ‐ ‐ ‐ Vesting date [2] Sep‐16 Sep‐17 Sep‐14 Sep‐15 Sep‐16 Sep‐17 Sep‐17 Sep‐16 Sep‐17 Sep‐15 Sep‐16 Sep‐17 Sep‐17 Sep‐14 Sep‐15 Sep‐16 Sep‐17 Sep‐14 Sep‐15 Sep‐15 Sep‐16 Sep‐17 Fair value per share/right at grant date [3] $0.15 $0.12 $0.76 $0.56 $0.18 $0.12 $0.12 $0.15 $0.12 $0.56 $0.18 $0.12 $0.12 $0.76 $0.46 $0.15 $0.12 $0.76 $0.56 $0.56 $0.18 $0.12 Number held at year end 4,553,571 4,250,000 0 94,694 357,432 794,012 1,600,000 986,967 844,040 0 252,941 746,667 260,000 0 451,371 1,633,151 1,550,000 0 53,571 5,357 199,456 640,000 [1] [2] [3] [A] The minimum value of each grant is zero. For LTI securities granted in FY12, FY13, FY14 and FY15 the vesting date is the twentieth trading day after the announcement of the Company’s annual results in 2014, 2015, 2016 and 2017 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 17) is the portion of the fair value of the LTI securities recognised in FY15. Ms Kellie Benda and Mr Grant Stubbs ceased employment with Emeco during FY15. Ms Benda and Mr Stubbs were not offered LTI securities in FY15. All unvested LTI securities granted to Ms Benda in FY14 and Mr Stubbs in FY13 and FY14 were forfeited in accordance with the terms of the respective grants. Further, in FY15 a grant of 68,684 LTI securities made to Mr Stubbs in FY12 failed to vest due to the TSR percentage not being met. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 37 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 5.4 Management incentive share plan Emeco offered shares pursuant to a management incentive share plan (MISP) between 2005 and 2008. The shares offered under this plan were not conditional on performance but rather vested over time so as to encourage participants to remain with Group. Under the MISP, the Company provided each MISP participant with an interest free, limited recourse loan (loan)* to enable them to subscribe for the MISP shares. Any dividends or capital distributions which were paid on the MISP shares were applied by the Company in reducing the amount of the loan. The shares vested over a five year period. Subject to the approval of the board, the loan was capable of repayment at any time but, in most instances, was to be repaid by 1 July 2015, being the tenth anniversary of the commencement date of the MISP.* Eligible participants of the plan at 1 July 2015 were given the option to either pay the loan amount outstanding in respect of the shares or to extinguish the loan by forfeiting their interest in the shares. All KMP participants as at the report date (see detail below) have elected to forfeit their MISP shares. As detailed below, there were no share based payments to any KMP under the MISP during FY15: Executive Alec Brennan Ian Testrow Number of shares issued 500,000 300,000 Issue price of shares $0.61 $1.16 Grant date 18/08/2005 12/06/2006 Amount of loan outstanding as at 30 June 2015 $142,500 $249,000 Highest amount of indebtedness during FY15 $142,500 $249,000 Fair value recognised as remuneration during FY15 $0.00 $0.00 5.5 Emeco employee share ownership plan Emeco’s employee share ownership plan (ESOP) is an elective plan which was open to all Australian employees in FY15. Australian based employees were able to salary sacrifice a minimum of $500 and a maximum of $5,000 of pre‐tax salary or wage to acquire Emeco ordinary shares on market in accordance with the terms of the ESOP. For every five shares acquired by the employee under the ESOP, Emeco acquired one matching share on market 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. 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. ___________________________ * Excluding participants that were shareholders at the time of the loan. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 38 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report For the year ended 30 June 2015 During FY15 four 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: Executive Stuart Jenner Kalien Selby [A] Ian Testrow Thao Vanderplancke Shares purchased Matching shares granted 35,103 35,103 35,103 35,103 7,014 7,014 7,014 7,014 [A] 6. Ms Kalien Selby purchased the shares as a participant of the ESOP in FY15 both prior to and after commencing as an executive. Service contracts Each executive is employed pursuant to contracts which provide for an indefinite term and which are terminable on either party giving six months’ notice or on the payment to the executive of up to six 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. Ian Testrow Managing Director Dated at Perth, 26 day of August 2015 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 39 ABCD 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 2015 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 26 August 2015 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 2015 Note 2015 $'000 2014 $'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 (1) Impairment of tangible assets Impairment of goodwill Depreciation expense Amortisation expense Finance income Finance costs Net foreign exchange gain/(loss) (1) Loss before tax expense Tax benefit Loss from continuing operations Discontinued operations Loss from discontinued operations (net of tax) Loss from discontinued operations Loss 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 income/(loss) for the year 8 7 8 8 8 8 8 8 8 8 10 14 206,718 2,788 31,925 241,431 (11,780) (99,216) (43,608) (22,411) 64,416 512 (32,072) (30,836) ‐ (98,720) (84) 2,781 (52,260) (16,332) (162,595) 39,464 (123,131) (4,572) (4,572) (127,703) 205,368 8,145 27,582 241,095 (14,443) (84,727) (42,931) (13,142) 85,852 1,084 (20,873) (43,656) (157,887) (77,996) (132) 6,081 (48,632) 4,781 (251,378) 27,206 (224,172) (51,137) (51,137) (275,309) 28,871 (4,306) 24,565 (5,308) (4,853) (10,161) Total comprehensive income/(loss) for the year (103,138) (285,470) 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 46 to 122. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 41 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated Statement of Profit or Loss and Other Comprehensive Income (continued) For the year ended 30 June 2015 Loss attributable to: Owners of the Company Loss for the year Total comprehensive loss attributable to: Owners of the Company Total comprehensive loss for the year Earnings per share: Basic earnings per share Diluted earning per share Earnings per share from continuing operations Basic earnings per share Diluted earnings per share 2015 $'000 2014 $'000 35 35 (127,703) (127,703) (275,309) (275,309) (103,138) (103,138) (285,470) (285,470) Note 2015 Cents 2014 Cents 35 35 35 35 (22.90) (22.90) (22.08) (22.08) (48.94) (48.94) (48.94) (48.94) (1) Comparatives have been reclassified. Refer to note 8. 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 46 to 122. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 42 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated Statement of Financial Position as at 30 June 2015 Note 2015 $'000 2014 $'000 Current Assets Cash assets Trade and other receivables Derivative financial instruments Inventories Prepayments 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 Deferred tax assets 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 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 17 18 19 20 15 18 19 21 22 12 23 19 24 26 19 24 12 26 13 27,800 60,272 12,761 20,931 2,134 32,328 156,226 5,375 38,282 1,641 482,351 24,880 552,529 708,755 45,363 ‐ 5,484 3,652 54,499 1,663 418,487 10,884 1,751 432,785 487,284 221,471 41,830 78,154 5 8,161 3,066 39,922 171,138 772 2,749 175 573,528 ‐ 577,224 748,362 53,095 2,546 4,316 2,694 62,651 10,187 339,458 11,025 1,069 361,739 424,390 323,972 593,616 2,590 (374,735) 221,471 593,616 (22,612) (247,032) 323,972 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 46 to 122. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 43 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated Statement of Changes in Equity For the year ended 30 June 2015 Share based payment reserve $'000 Foreign currency translation reserve $'000 Hedging reserve $'000 Share capital $'000 Reserve for own Accumulated shares $'000 losses $'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 for the period Profit or (loss) Other comprehensive income Foreign currency translation differences Effective portion of changes in fair value of cash flow hedge, net of tax Total comprehensive income/(loss) for the period Transactions with owners, recorded directly in Contributions by and distributions to owners Own shares acquired by employee share plan trust Share‐based payment transactions Total contributions by and distributions to owners Balance at 30 June 2014 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ (124) (5,184) (4,853) (4,977) ‐ (5,184) ‐ ‐ ‐ ‐ (275,309) (275,309) ‐ (5,308) ‐ (275,309) (4,853) (285,470) ‐ ‐ ‐ 593,616 ‐ 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 Share based payment reserve $'000 Foreign currency translation reserve $'000 Hedging reserve $'000 Share capital $'000 Reserve for own Accumulated shares $'000 losses $'000 Total equity $'000 Balance at 1 July 2014 593,616 14,598 (7,321) (9,267) (20,622) (247,032) 323,972 Total comprehensive income for the period Profit or (loss) Other comprehensive income Foreign currency translation differences Effective portion of changes in fair value of cash flow hedge, net of tax Total comprehensive income/(loss) for the period Transactions with owners, recorded directly in Contributions by and distributions to owners Own shares acquired by employee share plan trust Share‐based payment transactions Total contributions by and distributions to owners Balance at 30 June 2015 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3,408 25,463 (4,306) (898) ‐ 25,463 ‐ ‐ ‐ ‐ (127,703) (127,703) ‐ 28,871 ‐ (127,703) (4,306) (103,138) ‐ ‐ ‐ 593,616 ‐ 649 649 15,247 ‐ ‐ ‐ (8,219) ‐ ‐ ‐ 16,196 (12) ‐ (12) (20,634) ‐ ‐ ‐ (374,735) (12) 649 637 221,471 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 46 to 122. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 44 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Consolidated Statement of Cash Flows For the year ended 30 June 2015 30 June 2015 $'000 30 June 2014 $'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 received/(paid) Net cash inflow (outflow) from operating activities of discontinued operations Net cash from/(used in) operating activities 30 Cash flows from investing activities Proceeds on disposal of non‐current assets Payment for property, plant and equipment Net cash inflow from investing activities of discontinued operations Net cash from/(used in) investing activities Cash flows from financing activities Proceeds from syndicated debt borrowings Net proceeds from asset backed loan 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 Net cash outflow from financing activities of discontinued operations Net cash from/(used in) financing activities Net increase/(decrease) in cash Cash at beginning of the period Effects of exchange rate fluctuations on cash held Cash at the end of the financial period 237,151 245,567 (194,510) (144,105) 42,641 101,462 240 5,761 (42,974) (37,583) ‐ (2,801) (2,894) 10,227 2,205 82,072 14,005 (37,824) 10,806 (13,013) 30,265 (44,186) 38,953 25,032 ‐ ‐ ‐ ‐ ‐ ‐ (12) (2,576) (4,145) ‐ (6,733) (22,640) 41,830 8,610 27,800 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 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements set out on pages 46 to 122. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 45 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 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 financial 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 26 August 2015. (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: 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. 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 2015 46 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 47 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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. Certain comparative amounts in the consolidated statement of profit or loss and other comprehensive income have been reclassified to conform with the current year’s 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 translated 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 2015 48 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 49 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 50 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 51 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 reassessments 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 on a units of production method 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. All plant and equipment is depreciated to a minimum of 100 machine hours per month (2014: depreciation on equipment that is idle for more than three months is depreciated to a minimum of 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) Research and Development Expenditure on research activities is recognised in profit and loss as incurred. Development expenditure is capitalised only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognised in profit and loss as incurred. Subsequent to initial recognition, development expenditure is measured at costs less accumulated amortisation and any accumulated impairment losses. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 52 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 3 Significant accounting policies (continued) Intangible assets and goodwill (continued) (e) (iii) 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. (iv) 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: 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 53 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 3 Significant accounting policies (continued) (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. 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 54 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 3 Significant accounting policies (continued) Impairment (continued) (h) (ii) Non‐financial assets (continued) 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. 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 55 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 3 Significant accounting policies (continued) Employee benefits (continued) (j) (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. (v) 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. (b) 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 three 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 123 Companies (this number may change as a result of takeovers, mergers etc) and includes 16 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. (c) 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 2015 56 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 3 Significant accounting policies (continued) (j) (v) (k) (i) (l) (i) (ii) Employee benefits (continued) Share based payment transactions (continued) (d) 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. (e) 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. Restructure provision A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 57 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 3 Significant accounting policies (continued) Revenue (continued) (l) (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. (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 foreign currency gain or loss on financial assets and liabilities; 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 58 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 3 Significant accounting policies (continued) (o) Income tax (continued) (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. 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; or 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 resale. 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 2015 59 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 4 New standards and interpretations not yet adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 30 June 2015. The Group has not yet assessed the impact of these new or amended Accounting Standards and Interpretations. 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 2015 60 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 61 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 6 Financial instruments Overview The Group has exposure to the following risks from their use of financial instruments: credit risk; liquidity risk; and 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 management 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 2015 $'000 2014 $'000 54,147 17,374 27,800 51,043 150,364 49,298 34,819 41,830 2,754 128,701 Note 18 18 17 19 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 62 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 $700,000,000 (2014: $750,000,000). The Australian and Chilean businesses held insurance for the entire financial year ended 30 June 2015. 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 2015 the Group’s doubtful debts provision for continuing and discontinued operations was $5,874,000 (2014: $5,191,000). As at 30 June 2015 the Group recognised bad debt write offs for continuing and discontinued operations for a total amount of $4,089,000 (2014: $14,116,000) of which $3,749,000 related to one customer in Chile, $151,000 related to one customer in Indonesia and $189,000 related to Canada. 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’s maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Consolidated Consolidated Gross 2015 $'000 Impairment provision 2015 $'000 Gross 2014 $'000 Impairment provision 2014 $'000 25,002 8,233 9,762 11,150 54,147 ‐ (5,376) (172) (326) (5,874) 18,455 8,017 18,300 4,526 49,298 (486) (4,385) (320) ‐ (5,191) Australia Asia North America South America EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 63 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 6 Financial instruments (continued) Credit risk (continued) Trade and other receivables (continued) 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 The aging of the Group’s trade receivables at the reporting date was: Consolidated Carrying amount 2015 $'000 2014 $'000 21,292 12,987 9,884 9,984 54,147 20,737 16,680 314 11,567 49,298 Not past due Past due 0‐30 days Past due 31‐60 days Past due 61 days Consolidated Consolidated Gross 2015 $'000 Impairment 2015 $'000 Gross 2014 $'000 Impairment 2014 $'000 38,565 2,292 3,329 9,961 54,147 ‐ ‐ ‐ (5,874) (5,874) 11,845 15,406 4,036 18,011 49,298 (280) (206) ‐ (4,705) (5,191) 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 2015 $'000 2014 $'000 5,191 (4,089) 4,772 5,874 16,770 (3,064) (8,515) 5,191 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 64 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 6 Financial instruments (continued) Credit risk (continued) Derivatives The Group also held derivative assets in relation to cross currency interest rate swaps and forward exchange rate swaps to the total value of $51,043,000 (2014: $2,754,000) at 30 June 2015, 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‐. Cash The Group held cash and cash equivalents of $27,800,000 at 30 June 2015 (2014: $41,830,000), 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‐. Collateral Collateral is held for customers that are assessed to be a higher risk. At 30 June 2015 the Group held $9,884,000 of bank guarantees (2014: $Nil) and $Nil of prepayments (2014: $Nil). 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 2015 $10,491,000 guarantees were outstanding (2014: $866,013). 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 2015 65 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 6 Financial instruments (continued) Liquidity risk (continued) On 17 March 2014, the Group extinguished its 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 15 March 2019. The nominal interest rate is 9.875%. These notes will remain fully drawn until maturity. During the period, the Group extinguished its A$50,000,000 revolving credit facility (multicurrency) comprising of Tranche A1: 3 year A$40,000,000 trance and Tranche A2: 3 year A$10,000,000 tranche. Associated debt raising costs were expensed on the loan extinguishment. At the time of the extinguishment, the facility remained undrawn. On 31 December 2014, the revolving credit facility was replaced with an A$75,000,000 asset backed loan. The facility matures in December 2017 and will be available for general corporate purposes. When utilised, the nominal interest rate is equal to the aggregate of the margin of 1.75% per annum and bank bill swap rate (BBSY). The asset backed loan has no maintenance covenants unless the facility is more than 50% utilised, at which stage it requires Emeco to have an interest cover ratio of 1.25 times and gearing of less than 65%. At 30 June 2015 the loan was undrawn but had utilised A$9,626,000 in bank guarantees. In December 2014, the Group entered into a facility agreement comprising a credit card facility with a limit of A$750,000 and bank guarantee where the aggregate face value shall not exceed A$866,013. The facility matures in December 2015 and will be available for general corporate purposes. The facility is secured via a cash cover account. The bank guarantee is subject to a fee of 3% per annum on the face value of the bank guarantee. At 30 June 2015 the facility was utilised at A$866,013. The Group has finance lease facilities totalling A$4,915,000 (2014: A$8,770,000) which matures on 15 August 2015. Subsequent to the year end, the Group refinanced this facility extending the maturity until 15 February 2017. The Group has financed its insurance payments with A$569,000 remaining at year end which matures in October 2015. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 66 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 6 Financial instruments (continued) Liquidity risk (continued) Consolidated 30 June 2015 Non‐derivative financial liabilities Secured notes issue Finance lease liabilities Insurance financing Trade and other payables Derivative financial liabilities 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 $'000 418,487 4,915 569 15,805 439,776 608,494 4,972 569 15,805 629,840 21,537 4,972 569 15,805 42,883 21,537 ‐ ‐ ‐ 21,537 43,074 ‐ ‐ ‐ 43,074 522,346 ‐ ‐ ‐ 522,346 49,380 43,127 329 409 607 41,781 ‐ ‐ 49,380 ‐ ‐ 43,127 ‐ ‐ 329 ‐ ‐ 409 ‐ ‐ 607 ‐ ‐ 41,781 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. Consolidated 30 June 2014 Non‐derivative financial liabilities Secured notes issue Finance lease liabilities Insurance financing Trade and other payables Derivative financial liabilities 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 9,731 353,306 531,905 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 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 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 2015 67 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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). When possible, 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. If available, the Group uses forward exchange contracts to hedge this currency risk. Most of the forward exchange contracts have maturities of less than six months. In respect of other monetary assets and liabilities held in currencies other than the AUD, the Group aims to keep the net exposure to an acceptable level by matching foreign denominated financial assets with matching financial liabilities and vice versa. Interest on borrowings from the debt facility is generally denominated in currencies that match the cash flows generated by the underlying operations of the Group, primarily AUD, 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 has been applied to these instruments. When possible, the Group aims to offset the remainder of the USD foreign exchange exposure through the use of financial assets denominated in the same currency providing an economic hedge without derivatives being entered into. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 68 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 30 June 2014 USD $'000 CAD $'000 USD $'000 CAD $'000 Cash Secured notes issued (1) Gross balance sheet exposure 802 (287,342) (286,540) 2,893 (17,916) (15,023) 4,597 (271,969) (267,372) 5,146 ‐ 5,146 Cross currency interest rate swap to hedge the secured notes issued Forward exchange contracts (2) 210,000 ‐ 210,000 ‐ ‐ ‐ 210,000 4,000 214,000 ‐ ‐ ‐ Net exposure (76,540) (15,023) (53,372) 5,146 (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: Average rate Reporting date spot rate 2015 2014 2015 2014 0.9606 0.8131 0.6878 10,426 95.56 485.16 0.5309 0.9819 0.9187 0.6776 10,496 97.45 488.28 0.5699 0.9517 0.7680 0.6866 10,228 93.92 489.33 0.4885 1.0043 0.9415 0.6901 11,302 95.50 519.39 0.5527 CAD USD EURO IDR YEN CLP GBP EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 69 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 6 Financial instruments (continued) Market risk (continued) Sensitivity analysis A weakening of the Australian dollar, as indicated below, against the following currencies at 30 June 2015 would have affected the measurement of foreign currency and 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 2014, as indicated below: instruments denominated financial in a 30 June 2015 USD (10 percent movement) CAD (10 percent movement) 30 June 2014 USD (10 percent movement) CAD (10 percent movement) Consolidated Strengthening Equity $'000 Profit or loss $'000 Weakening Equity $'000 Profit or loss $'000 (2,261) (2,272) 14,032 1,732 2,763 2,777 (17,150) (2,117) (1,591) (2,552) 6,510 (78) 1,944 3,119 (7,949) 480 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 two 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 2015 70 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 Effective interest rate swaps to hedge interest rate risk Australian dollars 144A Canadian dollars 144A Fixed rate instruments: Interest bearing liabilities (notes) Interest bearing finance leases Insurance financing Consolidated 2015 $'000 2014 $'000 Note 17 27,800 41,830 32,062 17,318 77,180 (436,198) (4,915) (569) (441,682) (7,282) (2,702) 31,846 (358,144) (8,770) (461) (367,375) 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 2015 71 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 Fixed rate instruments (144A notes) Interest rate swap Cash flow sensitivity (net) 30 June 2014 Fixed rate instruments (144A notes) Interest rate swap Cash flow sensitivity (net) Profit or loss Equity 100bp increase $'000 100bp decrease $'000 100bp increase $'000 100bp decrease $'000 7,734 (7,734) ‐ (8,170) 8,170 ‐ 6,989 (6,989) ‐ (8,143) 8,143 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 72 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 6 Financial instruments (continued) Market risk (continued) Detailed below is the profit and loss impact of fair value hedges during the year. Financial instrument Fixed to floating ‐ Swap Cross currency interest rate swap ‐ Swap ‐ Hedged item (debt) Net profit and loss impact before tax Profit or loss 2015 $'000 2014 $'000 ‐ 5,536 (781) (1,762) 2,749 (2,327) (2,543) 5,958 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 2014. Cash flow hedges 30 June 2015 Variable rate instruments Interest rate swap Cash flow sensitivity (net) 30 June 2014 Variable rate instruments Interest rate swap Cash flow sensitivity (net) Profit or loss 100bp increase $'000 100bp decrease $'000 Equity 100bp increase $'000 100bp decrease $'000 118 ‐ 118 ‐ 68 68 (118) ‐ (118) (68) ‐ (68) ‐ ‐ 63 63 90 90 ‐ (119) (119) ‐ 2 2 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 73 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 2014 0.1% 0.1% ‐ 7.2% 9.9% ‐ ‐ ‐ ‐ ‐ 2.8% 2.8% ‐ 7.2% 9.9% 0.2% 0.2% 4.6% 7.2% 9.9% ‐ ‐ ‐ ‐ ‐ 2.8% 2.9% 5.3% 7.2% 9.9% 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: 30 June 2015 Carrying amount Note $'000 Fair value $'000 30 June 2014 Carrying amount $'000 Fair value $'000 Assets carried at fair value Interest rate swaps used for hedging 19 51,043 51,043 Forward exchange contracts used for hedging ‐ ‐ 51,043 51,043 ‐ 5 5 ‐ 5 5 Assets carried at amortised cost Receivables Cash and cash equivalents Liabilities carried at fair value Interest rate swaps 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 18 17 19 24 24 24 24 24 23 60,272 27,800 88,072 60,272 27,800 88,072 78,154 41,830 78,154 41,830 119,984 119,984 (1,663) (1,663) (1,663) (1,663) (9,984) (9,984) (9,984) (9,984) 1,598 ‐ ‐ ‐ (211,390) (217,318) (169,183) (177,270) (208,695) (218,880) (165,360) (178,547) (569) (569) (461) (461) (4,915) (4,972) (8,770) (9,334) (45,363) (45,363) (53,095) (53,095) (469,334) (487,102) (396,869) (418,707) (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 2015 74 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 $'000 2014 $'000 320 192 512 731 353 1,084 (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 2015 was $14,005,000 (2014: $30,265,000). 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 2015 75 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 8 Profit before income tax expense for continuing operations Loss 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: ‐ inventory ‐ property, plant and equipment held for sale Employee expenses: ‐ superannuation Other expenses: ‐ bad debts ‐ doubtful debts/(reversal) ‐ insurance ‐ motor vehicles ‐ rental expense ‐ safety expenses ‐ travel and subsistence expense ‐ telecommunications ‐ workshop consumables, tooling and labour ‐ Restructuring ‐ other expenses (1) 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 2015 $'000 2014 $'000 11,780 14,443 6,896 23,940 30,836 6,148 37,508 43,656 2,983 2,849 3,938 (328) 3,157 3,664 4,506 1,296 6,621 1,647 1,562 1,948 4,061 32,072 656 92,966 1,657 172 337 1,228 397 1,307 3,064 (2,467) 2,916 3,356 4,152 1,238 3,746 1,796 1,665 ‐ 1,407 20,873 592 73,156 525 221 430 1,428 521 1,123 21 21 98,720 77,996 84 132 ‐ 84 98,804 157,886 158,018 236,014 (1) Comparatives have been restated to exclude net foreign exchange (gain)/losses. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 76 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 8 Profit before income tax expense for continuing operations (continued) Finance costs: ‐ interest expense ‐ makewhole payment (1) ‐ witholding tax expense ‐ amortisation of debt establishment costs using effective interest rate ‐ write off previous facility costs ‐ other facility costs Net financial costs Finance income: ‐ interest income ‐ hedge gains Net financial income Foreign exchange (gain)/loss: Net realised foreign exchange (gain)/loss (2) Net unrealised foreign exchange (gain)/loss (2) Net foreign exchange (gain)/loss (1) Make whole payment related to the repayment of the USPP notes. (2) Comparatives have been restated to include net foreign exchange (gain)/losses. Consolidated 2015 $'000 2014 $'000 43,877 ‐ 2,189 3,914 1,814 466 24,206 16,063 1,960 1,918 2,993 1,492 52,260 48,632 (238) (2,543) (2,781) (334) 16,666 16,332 (123) (5,958) (6,081) (210) (4,571) (4,781) EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 77 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 $ 2014 $ 482,070 ‐ 149,622 4,804 636,496 382,782 320,000 173,118 36,872 912,772 529,917 337,641 74,792 604,709 279,639 617,280 1,241,205 1,530,052 (1) Other assurance services primarily relate to the issue of secured fixed noted in the 144A high yield bond market in FY14. (2) Taxation and other services primarily relate to corporate development activities. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 78 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 Increase in tax rate Tax expense/(benefit) Tax expense/(benefit) 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 2015 $'000 2014 $'000 Note 12 14 (62,248) 4 (62,244) 25,727 (2,947) 22,780 (39,464) (39,464) (315) (39,779) (67,325) 35 (67,290) 36,383 ‐ 36,383 (30,907) (27,206) (3,701) (30,907) Consolidated 2015 $'000 2014 $'000 (395) (395) (723) (723) Consolidated 2015 Tax Consolidated 2014 Tax Before tax $'000 (expense) Net of benefit $'000 tax $'000 Before tax $'000 (expense) Net of benefit $'000 tax $'000 Foreign currency translation differences for foreign operations Cash flow hedges 28,871 (6,151) 22,720 ‐ 1,845 1,845 28,871 (4,306) 24,565 (5,308) (6,932) (12,240) ‐ 2,079 2,079 (5,308) (4,853) (10,161) EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 79 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 10 Taxes (continued) c. Numerical reconciliation between tax expense and pre‐tax net profit/(loss) Prima facie tax expense/(benefit) 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 Increase in tax rate Blackhole expense addback Goodwill impairment Tangible asset impairment Sundry Derecognition of previously recognised tax losses Under/(over) provided in prior years Tax benefit Consolidated 2015 $'000 2014 $'000 (48,780) (75,414) 1,373 (4,725) 150 (2,947) 587 ‐ 169 314 9,666 4 (39,464) 1,494 ‐ ‐ 47,366 166 170 ‐ 36 (30,907) 11 Current tax assets and liabilities The current tax asset for the Group of $Nil (2014: $Nil) 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 2015 80 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 Receivables Accrued revenue Inventories Payables Derivatives ‐ hedge payable Derivatives ‐ hedge receivable Interest bearing loans and borrowings Employee benefits Unearned revenue 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 Property, plant and equipment Receivables Inventories Payables Derivatives ‐ hedge payable Derivatives ‐ hedge receivable Interest bearing loans and borrowings Employee benefits Equity ‐ capital raising costs Unearned revenue Provisions Tax losses carried forward Assets 2015 $'000 2014 $'000 Liabilities 2015 $'000 2014 $'000 Net 2015 $'000 2014 $'000 (49) (121) ‐ (578) (1,063) (459) ‐ (21,166) (857) (188) (477) (548) (74,580) (100,085) 75,205 (24,880) (52) (2,353) ‐ (1) (1,918) (3,085) ‐ (417) (1,028) ‐ (20) ‐ (49,325) (58,199) ‐ (58,199) 65,665 5,092 12 458 ‐ ‐ 14,203 201 ‐ ‐ ‐ ‐ 459 86,088 (75,205) 10,884 61,843 47 24 621 2,043 1 7 3,615 1,023 ‐ ‐ ‐ ‐ 69,224 ‐ 69,224 65,615 4,971 12 (120) (1,062) (459) 14,203 (20,965) (857) (188) (477) (548) (74,121) (13,996) ‐ (13,996) 61,790 (2,306) 24 620 125 (3,083) 7 3,198 (5) ‐ (20) ‐ (49,325) 11,025 ‐ 11,025 Consolidated Balance 1 July 14 $'000 Recognised in profit or loss $'000 Recognised directly in equity $'000 Recognised in other comprehensive income $'000 Balance 30 June 15 $'000 61,790 (2,282) 620 125 (3,083) 7 3,198 (5) (20) ‐ ‐ (49,325) 11,025 3,825 7,265 (740) (1,187) 2,624 16,041 (24,163) (852) (62) (188) (548) (24,796) (22,780) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ (395) ‐ ‐ ‐ (395) ‐ ‐ ‐ ‐ ‐ (1,845) ‐ ‐ ‐ ‐ ‐ ‐ (1,845) 65,615 4,983 (120) (1,062) (459) 14,203 (20,965) (857) (477) (188) (548) (74,121) (13,996) EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 81 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 12 Deferred tax assets and liabilities (continued) Movement in deferred tax balances 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 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) 61,790 ‐ (2,282) 620 125 (3,083) 7 3,198 (5) (20) ‐ (49,325) 11,025 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 Unrecognised deferred tax assets The following deferred tax assets have not been brought to account as assets: Tax losses Consolidated 2015 $'000 2014 $'000 35,511 21,109 Unutilised tax losses are in Chile, Indonesia, the United Kingdom, United States and Europe. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 82 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 13 Capital and reserves Share capital 599,675,707 (2014: 599,675,707 ) ordinary shares, fully paid Acquisition reserve Consolidated 2015 $'000 2014 $'000 669,503 (75,887) 593,616 669,503 (75,887) 593,616 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 (1) 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. During the year, 637,365 treasury shares were purchased on market at an average price of $0.14. As at 30 June 2015 the Company held 30,581,304 treasury shares (2014: 27,773,441) in satisfaction of the employee share plans. Foreign Currency Translation Reserve (1) The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. Hedging reserve (1) 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 (1) 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)). Dividends (1) No dividends were paid or declared during the year (2014: $Nil) or prior to the release of this report. ________________________ (1) Refer to Consolidated Statement of Changes in Equity. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 83 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 13 Capital and reserves (continued) Franking account The Company 2015 $'000 2014 $'000 Dividend franking account 30% franking credits available to shareholders of Emeco Holdings Limited for subsequent financial years 18,861 18,861 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 (2014: $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 (2014: $18,861,000) franking credits. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 84 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 on sale of assets Impairment of tangible assets ‐ Inventories ‐ Property, plant and equipment Other expenses Employee expenses Depreciation Finance income Finance costs Income tax (expense)/benefit Loss for the year 2015 $'000 2014 $'000 921 ‐ (93) 374 (61) (603) (4,822) (401) ‐ ‐ (202) 315 (4,572) 4,284 1 (2,794) 213 (1,580) (41,052) (5,032) (2,389) (5,524) 3 (968) 3,701 (51,137) The loss from discontinued operation of $4,572,000 (2014: loss $51,137,000) 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 2015 $'000 2014 $'000 (2,801) 10,806 ‐ 8,005 2,205 38,953 (31,290) 9,868 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 85 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 15 Disposal groups and non‐current assets held for sale During the year $26,451,000 of non‐current assets were transferred from property, plant and equipment into non‐ current assets held for sale. Assets previously classified as held for sale were further impaired by $5,923,000 to their fair value less cost to sell based on market prices of similar equipment. As at 30 June 2015, the non‐current assets held for sale comprised assets of $32,328,000 (2014: $39,922,000). These relate to plant and equipment from Indonesia (included in note 14), Canada, Chile 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 2015 $'000 2014 $'000 31,783 545 ‐ 32,328 31,564 8,354 4 39,922 16 Segment reporting 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 2015 86 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 16 Segment reporting (continued) Information about reportable segments 2015 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 inventory Reportable segment assets Capital expenditure Reportable segment liabilities Australia $'000 Indonesia (discont'd) $'000 Canada Chile Other Total $'000 $'000 $'000 $'000 136,950 2,949 (61,674) 921 8,456 ‐ 76,276 873 (24,494) 28,205 ‐ (12,552) (66,019) (4,685) (23,175) (22,826) (486) ‐ (159) 317 (19,377) (603) (4,045) (518) (3,092) 355,642 (29,389) (30,959) (61) 4,118 ‐ (473) (1,768) 164,942 (4,978) (22,064) (2,036) 156,253 (3,457) (9,737) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ (80) 242,352 12,278 (98,720) (116,705) (328) (24,543) (6,957) 680,955 (37,824) (63,313) Information about reportable segments 2014 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 inventory Impairment of intangible assets Reportable segment assets Capital expenditure Reportable segment liabilities Australia $'000 Indonesia (discont'd) $'000 Canada Chile Other Total $'000 $'000 $'000 $'000 134,539 6,739 (48,870) 4,284 11,332 (5,524) 81,451 15,009 (19,460) 25,105 ‐ (9,666) ‐ 238 ‐ 245,379 33,318 (83,520) (44,818) (53,873) (1,420) 3,117 (641) (97,635) (486) (4,385) (320) ‐ ‐ (5,191) (34,445) (4,948) (151,744) 338,197 (24,936) (39,274) (41,052) (1,580) ‐ 34,836 (1,589) (13,141) (2,051) (1,200) (6,143) 190,071 (13,601) (19,130) (1,012) ‐ ‐ 143,040 (5,649) (8,683) ‐ ‐ ‐ 388 ‐ (388) (78,560) (7,728) (157,887) 706,532 (45,775) (80,616) EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 87 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 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 Other material items 2015 Capital expenditure Depreciation Other material items 2014 Capital expenditure Depreciation 2015 $'000 2014 $'000 254,630 (12,278) (921) 241,431 278,697 (33,318) (4,284) 241,095 (116,705) 4,685 (97,635) 53,873 (1,096) (49,479) (162,595) (165,065) (42,551) (251,378) 680,955 27,800 708,755 706,532 41,830 748,362 63,313 423,971 487,284 80,616 343,774 424,390 Reportable segment totals $'000 Discontinued operations $'000 Consolidated Total $'000 (37,824) (98,720) ‐ ‐ (37,824) (98,720) (44,186) (77,996) (1,589) (5,524) (45,775) (83,520) EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 88 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 the Group had three major customers that represented $76,484,000 (2014: two customers representing $57,263,000) of the Group’s total revenues, as indicated below: Segment Australia Canada Chile 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 2015 $'000 2014 $'000 18,808 36,298 21,378 76,484 26,059 31,204 ‐ 57,263 Consolidated 2015 $'000 2014 $'000 27,800 41,830 Consolidated 2015 $'000 2014 $'000 54,147 (5,874) 48,273 5,845 6,154 60,272 5,375 5,375 49,298 (5,191) 44,107 23,415 10,632 78,154 772 772 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 2015 89 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 19 Derivatives Current Assets Forward exchange contract Cross currency interest rate swaps Non Current Assets Cross currency interest rate swaps Current Liabilities Cross currency interest rate swaps Non Current Liabilities Cross currency interest rate swaps 20 Inventories Work in progress ‐ at cost Consumables, spare parts ‐ at cost Total at cost Equipment and parts ‐ at NRV (1) Total inventory Consolidated 2015 $'000 2014 $'000 ‐ 12,761 12,761 38,282 38,282 ‐ ‐ ‐ 5 5 2,749 2,749 (2,546) (2,546) (1,663) (1,663) (10,187) (10,187) Consolidated 2015 $'000 2014 $'000 7,090 2,807 9,897 11,034 20,931 5,758 1,177 6,935 1,226 8,161 (1) Included in this balance are amounts of $18,049,000 that have been reclassified from property, plant and equipment during FY15. During the year ended 30 June 2015 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 $6,957,000 (2014: $7,728,000). EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 90 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 $'000 2014 $'000 ‐ ‐ ‐ ‐ 712 (712) ‐ 2,785 (1,144) 1,641 157,800 (157,887) 87 ‐ 712 (712) ‐ 1,329 (1,154) 175 Total intangible assets 1,641 175 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 2015 $'000 2014 $'000 84 ‐ 84 132 157,887 158,019 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 91 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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. Impairment loss (2014) In the year ended 30 June 2014, specifically the interim period ended 31 December 2013, impairment testing indicated the Australian and Canadian Rental CGU’s were impaired. The Group recognised a total goodwill impairment charge of $157,887,000 (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. 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. The Group has determined the recoverable amount of its cash generating units (CGU) using a value in use methodology 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. 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 valuations range between 7.6% and 12.0%. For future cashflows of each CGU, revenue growth to the remainder of FY15 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%. The negative CAGR of 14.6% in FY14 related to the Indonesian CGU due to the segment being designated as a discontinued operation. Refer to note 22 for information on the impairment testing methodology adopted by the Company at 30 June 2015. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 92 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 Consolidated 2015 $'000 2014 $'000 10,029 (3,416) 6,613 4,966 (3,604) 1,362 8,750 (2,678) 6,072 5,162 (3,270) 1,892 928,761 1,012,773 (470,181) (466,558) 458,580 546,215 21,228 (11,476) 9,752 883 (728) 155 2,546 (2,138) 408 8,451 (6,430) 2,021 11,458 (7,998) 3,460 21,228 (9,819) 11,409 1,132 (695) 437 2,330 (1,793) 537 8,556 (5,416) 3,140 11,035 (7,209) 3,826 Total property, plant and equipment ‐ at net book value 482,351 573,528 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 93 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 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 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 Net movement in rental inventory (1) Disposals Depreciation Impairment loss on continuing and discontinuing operations Movement from/(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 Movement from/(to) assets held for sale Effects of movement in foreign exchange Carrying amount at the end of the year Consolidated 2015 $'000 2014 $'000 6,072 1,685 (656) (803) 315 ‐ 6,613 1,892 79 (234) (397) 22 1,362 546,215 28,992 5,257 (21,007) (6,210) (92,966) (24,543) (12,926) 35,768 458,580 437 6 (136) (172) ‐ 20 155 9,585 315 (701) ‐ (315) (2,812) 6,072 2,202 219 ‐ (521) (8) 1,892 786,162 30,186 (390) (11,254) (62,365) (78,243) (78,561) (36,430) (2,890) 546,215 688 17 (26) (228) (7) (7) 437 (1) Tyres rental inventory of $18,049,000 was reclassified as Inventory during the year ended 30 June 2015. Included in this movement are purchases totalling $748,000 for the year ended 30 June 2014 ($12,761,000). EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 94 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 Movement from/(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 Movement from/(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 Movement from/(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 2015 $'000 2014 $'000 537 205 (12) (337) ‐ 15 408 3,140 98 (18) (1,228) ‐ 29 2,021 3,826 754 (21) (1,307) ‐ 208 3,460 969 128 (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 11,409 (1,657) 9,752 11,934 (525) 11,409 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 2015 95 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 (2014: 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. 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 2015. 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 CGUs valuations range between 6.5% and 8.8% (2014: 6.9% and 10.6%). 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 4.1% and 11.2% (2014: negative 2.4% and 12.3%). 30 June 2015 impairment testing resulted in the estimated recoverable amount of a CGU exceeding its carrying amount and zero impairment being recognised. 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 Australia rental Canada rental Chile rental Change required for carrying amount to equal the recoverable amount (in percent) Discount rate % 5.4 4.0 2.6 Utilisation % (26) (14) (7) The methodology used for FY15 impairment testing is consistent with prior periods. The business understands that market dynamics outside our control can impact the input assumptions to impairment testing. As such impairment testing sensitivities conducted included a broad range of scenarios impacting discount rates and revenue growth assumptions. These scenarios considered our capital structure, alternative approaches to discount rates input assumptions and downside views on forecasted outlook. No CGU impairment was indicated under sensitivity testing performed. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 96 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 23 Trade and other payables Current Trade payables Trade payables Other payables and accruals Consolidated 2015 $'000 2014 $'000 15,805 29,558 45,363 9,731 43,364 53,095 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 2015 97 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 24 Interest bearing liabilities Current Amortised cost Other financing Lease liabilities ‐ secured Non‐current Amortised cost OID (1) Notes issue ‐ secured Notes issue ‐ secured (2) Lease liabilities ‐ secured Debt raising costs (asset backed loan) Debt raising costs (2) Debt raising costs Consolidated 2015 $'000 2014 $'000 569 4,915 5,484 461 3,855 4,316 (4,214) (5,043) 217,318 218,880 ‐ (1,598) (5,971) (5,928) 177,270 178,547 4,915 ‐ (8,144) (8,086) 418,487 339,458 (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 extinguished its 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 related to the senior secured syndicated loan facility were expensed on loan extinguishment. During the year, the Group extinguished its A$50,000,000 revolving credit facility (multicurrency) comprising of Tranche A1: 3 year A$40,000,000 and Tranche A2: 3 year A$10,000,000. Associated debt raising costs were expensed on the loan extinguishment. At the time of the extinguishment, the facility remained undrawn. On 31 December 2014, the revolving credit facility was cancelled and a A$75,000,000 asset backed loan was established. The facility matures in December 2017 and is available for general corporate purposes. When utilised, the nominal interest rate is equal to the aggregate of the margin of 1.75% per annum and bank bill swap rate (BBSY). The asset backed loan has no maintenance covenants unless the facility is more than 50% utilised, at which stage it requires Emeco to have an interest cover ratio of 1.25 times and gearing of less than 65%. At year end, the Group had drawn $Nil of the available facility but had utilised $9,626,000 in bank guarantees. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 98 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 24 Interest bearing liabilities (continued) 144A notes issue Under the terms of the note agreement, the noteholders hold a joint fixed and floating charge with the asset backed loan 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 15 March 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. FY15 FY14 Funds drawn in functional currency $’000 Funds drawn translated to AUD $’000 Funds drawn in functional currency $’000 Funds drawn translated to AUD $’000 USD US$335,000 $436,198 US$335,000 $355,815 Working capital facility In December 2014, the Group entered into a facility agreement comprising a credit card facility with a limit of A$750,000 and bank guarantee where the aggregate face value shall not exceed A$866,013. The facility matures in December 2015 and will be available for general corporate purposes. The facility is secured via a cash cover account. The bank guarantee is subject to a fee of 3% per annum on the face value of the bank guarantee. At 30 June 2015 the facility was utilised at A$866,013. Finance leases At 30 June 2015, the Group held finance lease facilities totalling A$4,915,000 (2014: A$8,770,000) maturing on 15 August 2015. Assets leased under the facility are secured by the assets leased. Subsequent to year end, the Group refinanced this facility extending the maturity to 15 February 2017 at a lower interest rate. Other financial liabilities At year end the Group financed its insurance premium totalling A$569,000. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 99 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 24 Interest bearing liabilities (continued) Finance lease liabilities Finance lease liabilities of the Group are payable as follows: Future minimum lease payments Interest Present value of Future minimum minimum lease payments lease payments Interest Present value of minimum lease payments Consolidated 2015 $'000 2015 $'000 2015 $'000 2014 $'000 2014 $'000 2014 $'000 Less than one year 4,972 (57) 4,915 Between one and five years ‐ ‐ ‐ More than five years ‐ ‐ ‐ 4,972 (57) 4,915 4,362 4,972 ‐ 9,334 (507) (57) ‐ 3,855 4,915 ‐ (564) 8,770 The Group leases plant and equipment under finance leases. The Group’s lease liabilities are secured by the leased assets of $9,752,000 (2014: $8,211,000). In the event of default, the leased assets revert to the lessor. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 100 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 25 Financing arrangements The Group has the ability to access the following lines of credit: Total facilities available: Bank loans 144A notes Finance leases Insurance financing Working capital Facilities utilised at reporting date: Bank loans (1) 144A notes Finance leases Insurance financing Working capital Facilities not utilised or established at reporting date: Bank loans 144A notes Finance leases Insurance financing Working capital Consolidated 2015 $'000 2014 $'000 75,000 436,198 4,915 569 1,616 50,000 355,818 8,770 461 ‐ 518,298 415,049 9,626 ‐ 436,198 355,818 4,915 569 866 8,770 461 ‐ 452,174 365,049 65,374 50,000 ‐ ‐ ‐ 750 66,124 ‐ ‐ ‐ ‐ 50,000 (1) The facility was undrawn at 30 June 2015 however had issued $9,626,000 of guarantees backed by the facility. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 101 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 26 Provisions Current Employee benefits: ‐ annual leave ‐ long service leave ‐ other Provision for restructuring Non‐current Employee benefits ‐ long service leave Provision for restructuring Consolidated 2015 $'000 2014 $'000 2,469 2,220 557 3 623 439 35 ‐ 3,652 2,694 634 1,117 1,751 1,069 ‐ 1,069 Defined contribution superannuation funds The Group makes contributions to defined contribution superannuation funds. The expense recognised for the year was $2,983,000 (2014: $2,849,000). 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 2015 102 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 Matured in FY15: Performance shares/rights 2012 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%. 4,246,661 3 years service TSR ranking to a basket of 3 years direct and indirect peers of 123 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 2015 103 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 27 Share based payments (continued) Long term incentive plan (continued) Grant date / employees entitled Unvested plans: Number of instruments Vesting conditions Performance shares/rights 2013 6,881,251 Performance shares/rights 2014 24,491,074 Performance shares/rights 2015 19,681,416 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. 3 years service TSR ranking to a basket of direct and indirect peers of 123 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 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 104 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 27 Share based payments (continued) The movement of performance shares and performance rights on issue during the year were as follows: Number of Number of performance performance shares/rights shares/rights 2014 2015 Outstanding at 1 July Forfeited during the period Exercised during the period Granted during the period Outstanding at 30 June Exercisable at 30 June 26,483,441 (11,765,125) ‐ 19,681,416 34,399,732 16,897,192 (11,659,726) (3,245,099) 24,491,074 26,483,441 ‐ ‐ Management incentive share plan Grant date / employees entitled instruments Vesting conditions Number of MISP 2006 4,010,000 MISP 2007 1,240,000 Service requirement. Partial vesting entitlement after 2 years with full vesting after 5 years. Service requirement. Partial vesting entitlement after 2 years with full vesting after 5 years. MISP 2008 560,000 Service requirement. Partial vesting entitlement after 2 years with full vesting after 5 years. 5,810,000 Contractual life of MISP 10 years 10 years 10 years 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 2015 Number of MISP 2014 1,290,000 (230,000) ‐ ‐ 1,060,000 1,600,000 (310,000) ‐ ‐ 1,290,000 1,060,000 1,290,000 (1) The full service and vesting requirements have been satisfied under the MISP. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 105 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 27 Share based payments (continued) Employee share ownership plan Grant date / employees entitled instruments Vesting conditions Number of Contractual life of ESOP Matured in January 2014 ESOP 2013 Matured in January 2015 ESOP 2014 75,388 82,899 ESOP 2015 88,469 Service requirement. Full vesting entitlement after 1 year after the end of the calendar year in which they are acquired. Service requirement. Full vesting entitlement after 1 year after the end of the calendar year in which they are acquired. Service requirement. Full vesting entitlement after 1 year after the end of the calendar year in which they are acquired. 1 year 1 year 1 year 246,756 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) Number of ESOP 2015 Number of ESOP 2014 93,482 (7,859) 102,859 88,496 276,978 ‐ 89,686 (16,713) (62,390) 82,899 93,482 ‐ (1) The shares are not considered exercisable until the full vesting period has been satisfied. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 106 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 Chief executive officer 2014 LTIP Key manage‐ ment personnel 2015 Key manage‐ ment personnel 2014 Senior employees 2015 Senior employees 2014 ESOP 2015 ESOP 2014 $0.12 $0.19 $Nil $0.15 $0.24 $Nil $0.12 $0.19 $Nil $0.15 $0.24 $Nil $0.12 $0.19 $Nil $0.18 $0.24 $Nil $0.08 ‐ $0.22 $0.08 ‐ $0.22 $Nil $0.20 ‐ $0.34 $0.20 ‐ $0.34 $Nil 40% ‐ 65% 45% ‐ 65% 40% ‐ 65% 45% ‐ 65% 40% ‐ 65% 45% ‐ 65% 3 years 0% 3 years 8.0% 3 years 0% 3 years 8.0% 3 years 0% 3 years 8.0% 2.52% 3.0% 2.52% 3.0% 2.52% 3.0% 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. For the Group’s key management personnel 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 ESOP Total expense recoginsed as employee costs (1) Consolidated 2015 2014 1,390,172 1,694,346 19,261 12,094 1,402,266 1,713,607 (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. Should an employee be made redundant, the remaining share based payment expense for the vesting period will be accelerated and recognised in the period the employee was made redundant. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 107 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 $'000 2014 $'000 12,985 19,515 1,117 33,617 9,500 6,986 180 16,666 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 2015 an amount of $11,546,000 (continuing and discontinuing operations) was recognised as an expense in profit or loss in respect of operating leases (2014: $4,152,000). (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 2015 (2014: $Nil). 29 Contingent liabilities Guarantees The Group has guaranteed the repayments of $10,491,000 (2014: $866,013) in relation to performance guarantees and rental premises. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 108 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 $'000 2014 $'000 Cash assets 17 27,800 41,830 (ii) Reconciliation of net profit to net cash provided by operating activities Consolidated Note 2015 $'000 2014 $'000 Net loss ‐ continuing operations (123,131) (224,172) 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 and equipment Impairment of goodwill Write down on inventory Bad debts Provision for doubtful debts/(reversal) Other non‐cash items and reclassifications Equity settled share based payments (Decrease)/increase in income taxes payable (Decrease)/increase in deferred tax liabilty 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 8 8 21 8 8 8 (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories Increase/(decrease) in payables Increase/(decrease) in provisions Net cash from/(used in) operating activities (320) (731) 84 98,720 3,914 1,814 (2,543) 5,428 334 16,666 23,940 ‐ 6,896 3,938 (328) (5,619) 1,402 ‐ (25,022) (2,801) 132 77,996 1,918 2,993 (5,958) 1,960 210 (4,571) 37,508 157,887 6,148 3,064 (2,467) ‐ 1,822 (15,138) (17,971) 2,205 3,372 22,835 12,596 (12,770) (7,732) 1,640 (2,894) 21,379 6,597 32,130 (869) 82,072 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 109 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 31 Controlled entities (a) Particulars in relation to controlled entities Country of incorporation Ownership interest 2015 % 2014 % 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 International Pty Limited EHL Corporate Pty Ltd (formerly Emeco Sales Pty Ltd) Emeco Parts Pty Ltd EHL Malvern 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 Emeco Holdings South America SpA Enduro SpA (i) (ii) (iii) (i) (ii) (iii) (iv) (v) (vi) (v) Australia Australia Australia Australia Australia Australia Australia Australia Australia United Kingdom United States Indonesia Netherlands Netherlands Netherlands Canada Chile Chile Chile 100 100 ‐ ‐ ‐ 100 100 100 100 100 100 100 100 100 100 100 ‐ 100 100 100 100 100 100 100 ‐ ‐ ‐ ‐ 100 100 100 100 100 100 100 100 ‐ ‐ Notes During the year ended 30 June 2015; (i) (ii) Emeco Sales Pty Ltd changed its name to EHL Corporate Pty Ltd on and ownership was transferred from Emeco International Pty Ltd was transferred from Emeco Pty Ltd to Emeco Holdings Limited. Emeco International Pty Ltd to Emeco Holdings Limited. (iii) Emeco Parts was transferred from Emeco International Pty Ltd to Emeco Holdings Limited. (iv) EHL Malvern Pty Ltd was incorporated and remains a dormant entity. (v) Ownership of Enduro SpA was transferred from Emeco Holdings Limited to Emeco Holdings South America SpA. (vi) Emeco Holdings South America SpA was incorporated and is the parent of Enduro SpA. (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 2015 110 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 John Cahill Peter Richards Erica Smyth Executive director Kenneth Lewsey Other executives ‐ as at reporting date Gregory Hawkins [A] Chair Managing Director & Chief Executive Officer (ceased role on 20 August 2015) Position Chief Financial Officer (commenced role on 1 July 2014) Christopher Hayman President North America (commenced role on 26 November 2014), previously President Americas (ceased role on 26 November 2014) Kalien Selby Executive General Manager Strategy & Business Improvement (commenced role on 18 February 2015) Ian Testrow [B] Chief Operating Officer Thao Vanderplancke Company Secretary & General Counsel (commenced role on 1 July 2014) Other executives ‐ ceased prior to reporting date Position Kellie Benda David Greig Executive General Manager Strategy & Corporate Development (ceased role on 19 December 2014) President ‐ South America (commenced role 24 November 2014 and ceased role on 22 June 2015) Stuart Jenner Executive General Manager HR, HSE & IT (ceased role on 30 June 2015) Grant Stubbs Executive General Manager Asset Strategy & Operational Improvement (ceased role on 1 October 2014) [A] Mr Gregory Hawkins commenced role of Executive Director, Finance on 20 August 2015. [B] Mr Ian Testrow commenced role of Managing Director & Chief Executive Officer on 20 August 2015. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 111 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 32 Key management personnel disclosure (continued) 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 2015 2014 3,960,980 5,071,109 ‐ 284,407 ‐ 700,500 4,945,887 ‐ 227,143 293,866 294,880 5,886,998 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 27 to 39. 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 three 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 2015 112 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 32 Key management personnel disclosure (continued) The movement during the reporting year in the number of shares issued 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. 2015 Shares Directors & executives Kenneth Lewsey Kellie Benda (1) Stephen Gobby (2) David Greig (3) Gregory Hawkins (4) Stuart Jenner (5) Michael Kirkpatrick (2) Kalien Selby (5) Grant Stubbs (6) Ian Testrow Thao Vanderplancke (4) 2014 Shares Directors & executives Kenneth Lewsey (1) Kellie Benda (1) Stephen Gobby (2) Keith Gordon (7) Anthony Halls (7) Michael Kirkpatrick (2) Grant Stubbs (6) Ian Testrow Held at 1 July 2014 Granted as compensation Vested during the year Forfeited/ lapsed Held at 30 June 2015 4,553,571 749,143 4,250,000 ‐ ‐ ‐ (749,143) ‐ 2,997,645 ‐ ‐ (2,997,645) n/a ‐ ‐ ‐ n/a 1,600,000 ‐ ‐ n/a ‐ ‐ (317,227) 1,579,152 ‐ ‐ (1,579,152) n/a n/a ‐ ‐ ‐ 1,196,351 ‐ 1,550,000 640,000 n/a ‐ (1,196,351) ‐ ‐ (17,105) ‐ 8,803,571 n/a n/a n/a 1,600,000 ‐ n/a 260,000 n/a 1,550,000 915,489 Held at 1 July 2013 Granted as compensation Held at Ves ted Ves ted and exercis ab le Vested during the year Forfeited/ lapsed Held at 30 June 2014 n/a 4,553,571 ‐ ‐ n/a 749,143 ‐ ‐ 1,274,431 2,142,857 ‐ (419,643) 3,590,149 ‐ ‐ ‐ 811,990 1,160,187 ‐ (1,975,177) 758,101 1,071,051 231,914 1,034,080 ‐ ‐ ‐ (250,000) ‐ (69,643) ‐ ‐ 4,553,571 749,143 2,997,645 n/a n/a 1,579,152 1,196,351 ‐ 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. Ms Benda ceased to be a key management personnel on 19 December 2014. (2) Mr Gobby and Mr Kirkpatrick ceased to be a key management personnel on 1 July 2014. (3) Mr Greig become a key management personnel on 1 October 2014 and ceased to be a key management personnel on 22 June 2015. (4) Mr Hawkins and Ms Vanderplancke became key management personnel on 1 July 2014. (5) Mr Jenner and Ms Selby became key management personnel on 1 July 2014 and 18 February 2015 respectively. (6) 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. Mr Stubbs ceased to be a key management personnel on 1 October 2014. (7) Mr Gordon and Mr Halls ceased to be key management personnel on 4 November 2013 and 17 February 2014 respectively. n/a Not applicable as not in a position of key management at relevant reporting date. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 113 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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. 2015 Rights Directors & executives Stephen Gobby (1) David Greig (3) Christopher Hayman (2) Michael Kirkpatrick (1) Ian Testrow 2014 Rights Directors & executives Stephen Gobby (1) Keith Gordon Anthony Halls Christopher Hayman (2) Benny Joesoep Michael Kirkpatrick (1) Ian Testrow Held at 1 July 2014 Granted as compensation Vested during the Year Forfeited/ lapsed Held at 30 June 2015 ‐ ‐ ‐ ‐ n/a 794,012 ‐ ‐ n/a n/a 986,967 844,040 ‐ ‐ 1,831,007 ‐ ‐ ‐ ‐ n/a 2,273,522 ‐ ‐ (189,000) 2,084,522 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 (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 Greig became a key management personnel on 1 October 2014 and ceased to be a key management personnel on 22 June 2015. n/a Not applicable as not in a position of key management personnel at relevant reporting date. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 114 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 transactions disclosed occurred whilst they were deemed to be a key management person. 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. 2015 Directors Alec Brennan (1) Kenneth Lewsey (2) John Cahill Peter Richards Erica Smyth Other executives Kellie Benda (3) David Greig (4) Gregory Hawkins (5) Christopher Hayman Stuart Jenner (6) Kalien Selby (6) Grant Stubbs (7) Ian Testrow (1) Thao Vanderplancke (5) Held at 1 July 2014 ordinary shares Transferred from share plan Purchases Sales Held at 30 June 2015 ordinary shares 1,581,700 ‐ ‐ ‐ 1,581,700 315,000 ‐ 713,690 ‐ 1,028,690 120,000 ‐ ‐ ‐ 120,000 40,000 ‐ ‐ ‐ 40,000 71,049 ‐ ‐ ‐ 71,049 ‐ ‐ ‐ ‐ n/a ‐ ‐ ‐ n/a n/a 127,000 9,332 ‐ 395,238 ‐ ‐ ‐ 35,103 ‐ 522,238 ‐ 9,332 ‐ 35,103 n/a ‐ 18,412 ‐ 35,103 42,339 ‐ ‐ ‐ n/a 715,714 ‐ 35,103 ‐ 750,817 ‐ 2,911 35,103 ‐ 38,014 (1) Mr Brennan’s and Mr Testrow’s holdings are exclusive of 500,000 and 300,000 shares respectively held as part of the Management Incentive Share Plan. Subsequent to 30 June 2015, both Mr Brennan and Mr Testrow have elected to return these shares to the Company in accordance with the terms of the MISP. (2) Mr Lewsey was awarded 313,690 shares under the terms of Emeco’s short term incentive scheme in FY14 (and approved at the Company’s 2014 AGM) which are held in escrow for a period of two years until the announcement of Emeco’s annual results in 2016. (3) Ms Benda ceased to be key management personnel on 19 December 2014. (4) Mr Greig became a key management personnel on 24 November 2014 and ceased to be a key management personnel on 22 June 2015. (5) Mr Hawkins and Ms Vanderplancke became key management personnel on 1 July 2014. (6) Mr Jenner and Ms Selby became key management personnel on 1 July 2014 and 18 February 2015 respectively. (7) Mr Stubbs ceased to be a key management personnel on 1 October 2014. n/a Not applicable as not in a position of key management personnel at relevant reporting date. EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 115 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 32 Key management personnel disclosure (continued) 2014 Directors Alec Brennan Kenneth Lewsey (3) Robert Bishop (1) John Cahill Keith Gordon (2) Peter Richards Erica Smyth Other executives Kellie Benda (3) Stephen Gobby (1) Anthony Halls (2) Michael Kirkpatrick (1) Grant Stubbs Ian Testrow Held at 1 July 2013 ordinary shares Transferred from share plan Purchases Sales Held at 30 June 2014 ordinary shares 1,581,700 ‐ ‐ ‐ 1,581,700 n/a ‐ 315,000 ‐ 315,000 566,600 ‐ 222,400 ‐ n/a 120,000 ‐ ‐ ‐ 120,000 1,125,000 ‐ ‐ ‐ n/a 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 ‐ 42,339 592,541 ‐ 123,173 ‐ 715,714 (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. 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 2015 116 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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. The terms and conditions or the transactions with management persons and their related parties were no more favourable than those available, or which might be reasonably expected to be available, on similar transaction 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: Revenue Key management person and their related parties Mr P Richards ‐Sedgman Limited Total Expense Key management person and their related parties Mr P Richards ‐Bradken Limited Total Transaction Rental of heavy earthmoving equipment Transaction Purchase of heavy earthmoving equipment parts Transaction value year ended 30 June Balance outstanding as at 30 June 2015 $'000 2014 $'000 2015 $'000 2014 $'000 31 31 157 157 ‐ ‐ ‐ ‐ 1 1 29 29 ‐ ‐ ‐ ‐ EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 117 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 the cost of the groups external borrowings. Ultimate parent entity Emeco Holdings Limited is the ultimate parent entity of the Group. 34 Subsequent events Subsequent to the period end, the Group refinanced its finance lease facility resulting in an extension to 15 February 2017 at a lower interest rate. On 1 July 2015, Emeco announced that it had signed a partnership agreement with Cimic Group company, Thiess, for pre‐strip operations at the Encuentro Oxides copper mine in Chile that was previously operated by Fe Grande. On 20 August 2015, Mr Kenneth Lewsey ceased his role as Managing Director and Chief Executive Officer of the Company and Mr Ian Testrow commenced as the Managing Director and Chief Executive Officer. Mr Gregory Hawkins commenced in the role of Executive Director Finance on 20 August 2015. 35 Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 June 2015 was based on the loss attributable to ordinary shareholders of $127,703,000 (2014: $275,309,000) and a weighted average number of ordinary shares outstanding less any treasury shares for the year ended 30 June 2015 of 557,569,229 (2014: 562,504,730). Profit attributed to ordinary shareholders Consolidated 2015 2014 Continuing Discontinued operations operations $'000 $'000 Total $'000 Continuing Discontinued operations operations $'000 $'000 Total $'000 Profit/(loss) for the year (123,131) (4,572) (127,703) (224,172) (51,137) (275,309) EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 118 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 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 2015 '000 2014 '000 631,238 (73,669) 557,569 631,238 (68,733) 562,505 Diluted earnings per share The calculation of diluted earnings per share at 30 June 2015 was based on the loss attributable to ordinary shareholders of $127,703,000 (2014: $275,309,000) and a weighted average number of ordinary shares outstanding less any treasury shares during the financial year ended 30 June 2015 of 558,629,229 (2014: 565,151,687). Profit attributed to ordinary shareholders (diluted) Consolidated 2015 2014 Continuing Discontinued operations operations $'000 $'000 Total $'000 Continuing Discontinued operations operations $'000 $'000 Total $'000 Profit/(loss) attributed to ordinary shareholders (basic) (123,131) (4,572) (127,703) (224,172) (51,137) (275,309) 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 2015 '000 2014 '000 631,238 1,060 (73,669) 558,629 631,238 2,647 (68,733) 565,152 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 2015 119 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 36 Parent entity disclosure As at and throughout the financial year ending 30 June 2015 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 2015 $'000 2014 $'000 (613) ‐ (613) (148,311) ‐ (148,311) 20 398,232 398,252 ‐ (38,685) (38,685) 22 394,377 394,399 ‐ ‐ ‐ 593,616 16,649 (21,003) (270,289) 318,973 593,616 14,598 (20,622) (269,358) 318,234 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 2015 120 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 37 Deed of cross guarantee Pursuant to ASIC Class Order 98/1418 (as amended) dated 13 August 1998, Emeco International Pty Ltd is 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: 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 2015 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 Retained earnings at end of year Attributable to: Equity holders of the Company Profit/(loss) for the period Consolidated 2015 $'000 2014 $'000 136,966 (98,825) 38,141 (102,780) 2,590 18,774 (51,048) (22,553) ‐ (116,876) 34,932 (81,944) 134,538 (87,182) 47,356 (64,809) 3,609 14,271 (42,372) (39,525) (151,310) (232,780) 26,498 (206,282) 25,846 25,846 (4,977) (4,977) (257,290) (313,389) (46,031) (257,290) (313,389) (81,944) (257,290) (206,282) EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 121 EMECO HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES Notes to the Consolidated Financial Statements For the year ended 30 June 2015 37 Deed of cross guarantee (continued) Statement of financial position Current assets Cash assets Trade and other receivables Derivatives 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 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 2015 $'000 2014 $'000 12,891 29,433 12,761 6,560 22,771 84,416 195,737 38,282 1,641 288,333 222,245 53,011 799,249 17,195 21,099 5 3,507 31,242 73,048 176,528 ‐ 146 249,143 281,702 27,121 734,640 883,665 807,688 29,227 1,294 4,915 3,119 38,555 1,663 480,572 27,527 1,762 511,524 25,167 2,546 3,855 1,791 33,359 10,186 341,397 22,493 1,385 375,461 550,079 408,820 333,586 398,868 593,616 15,247 38,112 (313,389) 593,616 14,598 47,944 (257,290) Total equity attributable to equity holders of the parent 333,586 398,868 EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 122 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 41 to 122, and remuneration report in the directors’ report, set out on pages 27 to 39 are 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 2015 and of its performance for the financial year ended on that date; and 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. 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 2015. The directors draw attention to note 2(a) to the consolidated financial statements, which includes a statement of compliance with international financial reporting standards. 2. 3. 4. Dated at Perth, 26 day of August 2015 Signed in accordance with a resolution of the directors: Ian Testrow Managing Director EMECO HOLDINGS LIMITED ANNUAL REPORT 2015 123 ABCD 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 2015, 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 1 to 37 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. ABCD 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 2015 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 2015. 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 2015, complies with Section 300A of the Corporations Act 2001. KPMG Graham Hogg Partner Perth 26 August 2015
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