More annual reports from Emeco Holdings Limited:
2023 ReportALLOWED 6mm SPINE EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 1 Emeco Holdings Limited and its Controlled Entities ABN 89 112 188 815 Annual Financial Report 30 June 2020 EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 2 Contents Chairman’s Report ............................................................................................................ 3 Managing Director’s Report ............................................................................................. 4 Operating and Financial Review ..................................................................................... 6 Segment Business Overview..........................................................................................11 Financial Report ...............................................................................................................13 EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 3 Chairman’s ReportDear Shareholder, I am pleased to present the Emeco Holdings Limited Annual Report for the 2020 financial year (FY20). People and safety As always, Emeco continues to maintain its commitment to our workforce of approximately 1,000 people,the environment and the communities in which we operate. However, with the onset of the COVID-19 pandemic this year, our commitment to ensuring the health, safety and mental wellbeing of our people was immediately magnified. I was proud of the response our team made to implement policies and guidelines to ensure the safety of our workforce and customers and to minimise the impact on our operations. Additionally, Emeco significantly reduced its total recordable injury frequency rate from 4.6 to 2.9. Further, the lost time injury frequency rate remained at zero for the fourth year in a row. For more information on our sustainability performance and policies, please refer to Emeco’s FY20 Sustainability Report available on our website. Growing earnings and cash flow Despite the challenges of COVID-19, Emeco continued to execute upon its strategy of creating a more sustainable and resilient business. Supported by our large fleet of in-demand assets, and the acquisition of specialist underground mining services business, Pit N Portal, Emeco’s earnings continued to grow in FY20. We now possess a broader customer value proposition, more balanced commodity mix and a more diverse customer base. Our focus on managing costs while prudently allocating capital to generate strong returns, drove the strong free cash flow earned through the year. Reduction in net debt and leverage The strong earnings and cash flow generation in FY20 further reduced the Company’s net debt. This has resulted in leverage falling from 2.0x in FY19 to below our 1.5x FY20 target to 1.46x. The first call date on the US notes was on 1 April 2020 and the Company will continue to explore all options to refinance the notes prior to maturity on 31 March 2022. Whilst our focus on cash flow and deleveraging is unchanged, a stronger and more resilient balance sheet will provide the board with more flexibility to capital deployment moving forward. I would like to take this opportunity to thank our shareholders for their continued support of Emeco. I would also like to thank management for their dedication in building a sustainable business and other achievements this year. Finally, I would like to pass on a special thank you to all of our employees for their efforts in what has been, and continues to be, a challenging period. This continued commitment is critical to Emeco’s sustained success, and we wish for everyone to stay healthy and remain safe. Peter Richards Chairman EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 4 Managing Director’s ReportDear Shareholder, I am pleased to report that during FY20, Emeco continued to execute on its stated strategy of being the lowest cost, highest quality provider of mining equipment while building on our business model and widening our customer value proposition to achieve growth and sustainability. People and safety Emeco’s workforce has now expanded to approximately 1,000 people nationwide. Pleasingly, however, our lost time injury frequency rate remained at zero for the fourth year in a row. Our total recordable injury frequency rate also decreased from 4.6 to 2.9. We are committed to maintaining a safe and healthy workforce and will continue to target zero harm. With the onset of COVID-19 in 2020, our management team immediately prioritised the health, safety and welfare of all Emeco people, investing significant time and energy into implementing policies and procedures. These policies and procedures also ensured minimal disruption to the workforce and our operations. I am very proud of the work management, and the wider team, continue to do ensuring the health and safety of our people. Building a sustainable business Emeco’s overarching objective is to build a sustainable business that generates shareholder value through the cycles. Emeco has made considerable progress against this objective throughout FY20. We continued to grow our rental operations, securing a number a key, longer-term contracts across Australia. We also continued to build our Force workshops business, thereby broadening our customer service offering. The Force business also allowed the Group to reduce the cost of rebuilding our own equipment, materially improving the return we achieve on our capital invested. As part of our journey in FY20, Emeco acquired the Pit N Portal business. Pit N Portal further expands Emeco’s service offering to include hard-rock underground equipment and mining services (including on-site infrastructure, operators and technical and engineering services). Pit N Portal also vastly improves our commodity and customer diversification through a number of long-term hard rock projects with mid-tier mining customers. It is great to see continued progress against our commodity diversification strategy in FY20. With Pit N Portal coming into the Emeco Group, coal revenue now constitutes less than half of the Company’s revenue as the business grows around coal. We also significantly improved our commodity diversification, as demonstrated by gold and iron ore revenue increasing by 2.7 times1. Strong earnings and returns in FY20 I am pleased to report another year of increased profitability in FY20, with operating EBITDA of $246.1 million (up 15% on FY19) and operating EBIT of $138.2 million – up 10% on FY19 and the highest in Emeco’s history. The rental business continued to achieve growth in earnings and margins, driven by strong customer demand and our ongoing cost focus. We secured several long tenure contracts and extensions (3 to 5 years) with Whitehaven, Saracen and Evolution, further increasing the resilience of the business. Since the acquisition completed on 28 February 2020, Pit N Portal has performed in line with expectations, with customers showing interest in Pit N Portal providing a combined open cut and underground mining solution. The Force workshops business continued to see significant growth in activity as a result of servicing the Emeco and Pit N Portal fleet, in addition to growth in retail works. Together with Emeco’s mid-life equipment model, the workshops rebuild capability is integral to reducing costs and has facilitated another year of strong return on capital at 21.0%, well above our cost of capital. 1 Annualised Q4 FY20 commodity revenue compared to FY19 EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 5 While COVID-19 did not substantially impact Emeco’s business, in Q4 we saw a slight decline in utilisation and received some off-hire notices in the Eastern Region. In the Western Region there were some increased costs related to social distancing and due to border closures. We have since seen the COVID-19 situation stabilise. Increasing free cash flow and reduction in leverage Combined with the strong profitability in FY20, Emeco generated free cash flow of $71.2 million, accelerating our deleveraging path and pushing our net debt / operating EBITDA down further to 1.46x, below our FY20 target of 1.5x and down from 2.0x in FY19. Emeco’s deleveraging strategy has been unwavering over the past five years and generating strong earnings and cash flows continues to drive our operational focus. Emeco remains committed to optimising its capital structure by further reducing net debt, refinancing the US notes on improved terms in the future and, when prudent, being in a position to pay a dividend to shareholders. Outlook for FY21 The Company is expecting another solid year in FY21, with focus on new longer tenure, fully maintained contracts which provides additional commodity diversification. Although equipment off-hired by notices received in Q4 FY20 is expected to impact earnings in the Eastern Region, the lower coal prices have resulted in increased bidding activity as customers look for more cost effective, less capital-intensive solutions. With the equipment market remaining tight, Emeco is well placed to service market demand and we are confident in our ability to redeploy fleet into new projects. Following long term contract awards and extensions with Saracen and Evolution in FY20, strong demand in gold and iron ore will support continued growth in earnings and margins in the Western Region. Growth is also expected for Pit N Portal, particularly following the award of a large nickel project commencing in FY21. Workshops activity levels are expected to remain high, as we focus on internal Emeco and Pit N Portal works, retail works on the east coast and building on our boiler making, fabrication and field maintenance services. Emeco is a more sustainable business than ever, underpinned by our low-cost model, and we continue to focus on building and diversifying our operations to build further strength into the core business. Whilst we are in challenging times, I believe Emeco will be in a stronger position this time next year and ready to continue growing in FY22. Once again, I would like to thank the Emeco team for their continued hard work throughout FY20, and welcome Steve Versteegen and the Pit N Portal team to the Emeco Group. And finally, thanks our shareholders and investors for their continued support. Ian Testrow Managing Director & Chief Executive Officer EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 6 Operating and Financial Review The Emeco Group is a provider of open cut and underground mining equipment, maintenance and project support solutions and services. The Group supplies safe, reliable and maintained open cut and underground equipment rental solutions, together with onsite infrastructure, to its customers. The Group also provides repair and maintenance, and component and machine rebuild services for its customers’ equipment and operator, technical and engineering solutions and services. Established in 1972, the business listed on the ASX in July 2006 and is headquartered in Perth, Western Australia. Emeco generates earnings from the provision of open cut and underground mining equipment, maintenance and project support solutions and services to the mining industry. Operating costs principally comprise parts and labour associated with maintaining earthmoving equipment. Capital expenditure principally comprises the replacement of major components over the life cycle of Emeco’s assets. Table 1: Group financial results Operating results1,2,3,4 Statutory results A$ millions 2020 2019 2020 2019 Revenue 540.4 464.5 540.4 464.5 EBITDA3,5 246.1 214.0 234.1 195.1 EBIT3,5 138.2 125.4 105.3 99.1 NPAT5 87.5 63.1 66.1 33.7 ROC5 % 21.0% 21.0% 14.9% 18.0% EBIT margin 25.6% 27.0% 19.5% 21.3% EBITDA margin 45.5% 46.1% 43.3% 42.0% 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. Refer to Table 2. 2.Operating results are continuing operations only and therefore exclude the Chile discontinued operations.3.Non IFRS measures.4.Operating results are pre AASB16.5.EBITDA: Earnings before interest, tax, depreciation and amortisation; EBIT: Earnings before interest and tax;NPAT: Net profit after tax; ROC: Return on capital (EBIT / Average capital employed). EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 7 Table 2: 2020 operating results to statutory results reconciliation A$ millions Statutory Tangible asset impairments Redundancy and restructuring costs Non-recurring project costs Long-term incentive program Impairment of investments and Ineffective hedge gain Tax Benefit Subtotal AASB 16 Leases Operating EBITDA 234.1 - 2.0 3.5 14.3 0.5 -254.4(8.3) 246.1 EBIT 105.3 13.8 2.0 3.5 14.3 0.5 -139.4(1.2) 138.2 NPAT 66.1 13.8 2.0 3.5 14.3 (1.6) (10.9) 87.20.3 87.5 Reconciliation of differences between operating and statutory results: 1.FY20 operating results are non IFRS measures and exclude the following: Tangible asset impairments: During FY20 net impairments totalling $13.8 million were recognised across the business on assets held for sale and subsequently disposed during the period. Redundancy and restructuring costs: One-off costs related to redundancy and restructuring totalled $2.0 million before tax. Non-recurring project costs: One-off costs of $3.5 million were incurred in relation to the acquisition of Pit N Portal in FY20 and other corporate development initiatives. Long-term incentive program: During FY20, Emeco recognised $14.3 million of non-cash expenses relating to the employee incentive plan. Impairment of investments and ineffective hedge gain: One-off gain of $2.1 million for an adjustment for ineffectiveness of hedge derivatives in line with AASB 13 and a $0.5m million cost relating to the impairment of an investment. AASB 16 Leases: The impact of the implementation of AASB 16 (Leases) by the Group has been added back to the operating results to provide the user with a like for like comparative with the FY19 results. The impact of the change in this standard was a $8.3 million increase to EBITDA, a $1.2 million increase to EBIT and a $0.3 million decrease to NPAT. Excluding this adjustment, FY20 Operating EBITDA would have been $254.4 million. Tax benefit: Tax credit of $10.9 million principally arising from the full recognition of historic tax losses. 2.Refer to the 2019 Annual Report for a reconciliation of differences between FY19 operating and statutory results.15% YoY INCREASE IN EARNINGS Operating EBITDA increased to $246.1 million (up $32.1 million or 15.0% on FY19) as a result of a larger fleet, increased utilisation of the fleet by customers and continued focus on cost management throughout the business. In addition, the acquisition of Pit N Portal Mining Services Pty Ltd and Pit N Portal Equipment Hire Pty Ltd (together, Pit N Portal) on February 28, 2020 contributed $9.0 million to operating EBITDA in the four months of ownership in FY20. Group operating revenue from continuing operations increased to $540.4 million in FY20 (FY19: $464.5 million). Rental revenue increased to $388.0 million (FY19: $363.3 million) as a result of increased operating utilisation of the rental fleet and improvements in rental rates on new and renewed contracts. Maintenance services revenue from both rental maintenance services and workshops increased 13.6% to $113.1 million (FY19: $99.5 million) as a result of higher turnover in the Workshop segment and a greater number of contracts providing maintenance services to Rental customers. Operating EBITDA margins decreased to 45.5% (FY19: 46.1%) as a result of the addition of lower margin earnings with a greater services content from Pit N Portal for the four months of ownership and some minor additional costs incurred in response to COVID-19. Excluding the contribution of PnP, the EBITDA margin of the underlying business improved from 46.1% to 46.9% in FY20 as strong cost controls and operating efficiencies continued to support earnings. Operating EBIT increased 10.2% with the operating return on capital (ROC) remaining high at 21.0% (FY19: 21.0%). EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 8 Table 3: Operating cost summary (operating results) A$ millions 2020 2019 Revenue 540.4 464.5 Operating expenses Repairs and maintenance (94.1) (89.1) External maintenance services (84.8) (75.3) Employee expenses (57.9) (38.1) Cartage and fuel (18.2) (13.8) Other direct costs (21.4) (17.5) Net other expenses (17.9) (16.7) Operating EBITDA 246.1 214.0 Depreciation expense (107.0) (87.4) Amortisation (0.9) (1.2) Operating EBIT 138.2 125.4 Note: Operating results are non IFRS and have been adjusted as per reconciliation in Table 2. Repairs and maintenance expense increased to $94.1 million (FY19: $89.1 million) driven by the acquisition of Pit N Portal in FY20. Repairs and maintenance as a percentage of rental and mining services revenue decreased from 24.5% in FY19 to 22.2% in FY20. External maintenance services expense increased materially in line with the increase in the revenue with external maintenance service, with maintenance services margins increasing from 24.4% to 25.1% in FY20. Cartage and fuel increased to $18.2 million (FY19: $13.8 million) due to the transportation of fleet between customer sites during the period. Due to the acquisition of Pit N Portal and increased operational activity, employee expenses increased 52.0% in FY20 to $57.9 million (FY19: $38.1 million). Total headcount has increased from approximately 543 to over 900 over FY20. Net other expenses increased to $17.9 million (FY19: $16.7 million) primarily as a result of the acquisition of Pit N Portal. Depreciation expense increased to $107.0 million in FY20 (FY19: $87.4 million) driven by the increased scale of fleet from recent acquisitions and increased utilisation of equipment. DIVERSIFICATION INTO UNDERGROUND EQUIPMENT The written down value (WDV) of the equipment fleet including capital WIP and inventory increased by $47.4 million to $624.9 million in FY20 primarily due to the acquisition of Pit N Portal adding an additional $54.4 million of fleet. Table 4: Equipment fleet A$ millions 2020 2019 Equipment fleet 624.9 577.5 Non-current assets held for sale 3.2 2.9 We continually review our fleet mix to ensure it meets long term rental demand and to maximise returns on investment. Assets which are surplus to the fleet or are approaching the end of their useful lives are transferred to non-current assets held for sale and are actively marketed through Emeco’s global network of brokers. EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 9 CONTINUED STRONG FREE CASH FLOW Table 5: Free cash flow summary A$ millions 2020 2019 Operating EBITDA 246.1 214.0 Working capital (19.8) 21.4 Net sustaining capital expenditure (110.3) (88.5) Component inventory 1.4 (7.3) Finance costs (46.1) (49.5) Net free cash flow (pre-growth assets) 71.2 90.1 Growth capex - 85.1 Net free cash flow 71.2 5.0 Note: 1.Results exclude Chile discontinued operations.2.Free cash flow excludes any non-recurring items (FY20: Redundancy and restructure expense $2.0 million, non-recurringproject costs $3.5 million, impairment of investments and hedge ineffectiveness ($1.6) million, AASB 16 leases impact $8.3million) (FY19: Redundancy and restructure expense $4.4 million, Acquisition expense refund $0.3 million).3.Financing costs cash outflow has been adjusted $1.5m, EBITDA by ($8.3m) and financing repayments $6.8m for theimpact of AASB 16 Leases for comparative purposes to FY19. Operating EBITDA increased from $214.0 million in FY19 to $246.1 million in FY20 which provided the base for strong operating cash flow for the Group for FY20. The working capital outflow was in line with expectations due to timing of cash payments and increased operating activity in FY20. There was a continued strong focus on working capital controls within the business. No debtor issues have arisen as a result of COVID-19. Net sustaining capital expenditure increased from $88.5 million in FY19 to $110.3 million in FY20 in line with a larger fleet as a result of the acquisition of Pit N Portal, in addition to a $13.4 million decrease in disposals during FY20. No growth capital expenditure was incurred in FY20. Finance costs were lower in FY20 due to the reduction in the outstanding Notes in FY19 and implementation of additional hedging in FY19 to fully hedge the outstanding Notes. EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 10 CONTINUED LEVERAGE REDUCTION IN LINE WITH TARGET Table 6: Net debt and gearing summary A$ millions 2020 2019 Interest bearing liabilities (current and non-current)1 Secured Notes (USD denominated) 4 441.7 441.7 Revolving credit facility5 97.0 0.0 Lease liabilities (pre transition to AASB 16)6 18.1 21.9 Total debt1 556.8 463.6 Cash (198.2) (36.2) Net debt1 358.6 427.4 Leverage ratio (pre transition to AASB 16)2 1.46x 2.00x Additional lease liabilities on transition to AASB 166 44.5 n/a Net debt including additional lease liabilities on transition to AASB 166 403.1 427.4 Leverage ratio 1.58x 2.00x Interest cover ratio3 4.9 4.6 Note: 1. Figures based on facilities drawn. Debt in the table above is a non-IFRS measure. Excludes debt raising costs included in interest bearing liabilities in note 24 and US$ 322.1 million secured notes converted at the effective hedge rate of 0.7293. 2.Leverage ratio Pre AASB-16. Net debt / Operating EBITDA. The transition to AASB 16 has been excluded for comparativepurposes.3.Interest cover ratio - Operating EBITDA / Net Interest expense. Net interest expense has been adjusted by $1.5 million for theimpact of AASB 16 leases in FY20.4.US$322.1 million converted at the effective hedge rate of 0.7293.5.Refer to note 24 in the financial report.6.In future periods AASB 16 leases will be included within net debt and have only been excluded for comparative purposes.Total outstanding debt increased by $137.7 million due to inception of AASB 16 Leases increasing lease liabilities by $44.5 million and the A$97.0 million drawdown of the revolving credit facility (RCF). The impact of AASB 16 Leases has been reversed to provide a comparable net debt, leverage ratio and interest cover ratio to FY19. The secured notes mature in March 2022 and a semi-annual coupon of 9.25% is payable in January and July each year. The note terms do not contain maintenance covenants. At 30 June 2020, US$322.1 million of the notes were outstanding (FY19: US$322.1 million). The notes are fully hedged at an effective rate of 0.7293. Due to the movements in the Australian dollar between the inception of the hedge on 31 March 2017 and 30 June 2020 as well as movements in USD and AUD interest rates, a net hedge asset of $28.0 million has been recognised at June 2020. The first call date on the US secured notes was 1 April 2020 and the Company will continue to explore all options to refinance the notes prior to maturity on 31 March 2022. The A$100.0 million RCF matures in September 2021 (with an option to extend for two years). In order to ensure the Group was not impacted by potential global liquidity shortages as a result of COVID-19, it was decided to fully draw-down the RCF facility by A$97.0 million and place the funds on deposit as a safeguard should they be required. At no time up to the date of this report were the funds used or required by the Group and it is intended that the RCF be repaid once global markets stabilise. Accordingly, this has been recorded as a current liability. A$1.7 million of the facility was utilised for bank guarantees at 30 June 2020 and A$1.3 million of the facility was unutilised at 30 June 2020. Emeco’s cash balance increased to $198.2 million at 30 June 2020, largely due to the conversion of EBITDA to net operating free cash flow and the A$97.0 million drawdown of the RCF facility. Refer to note 24 in the accompanying financial statements for additional information on Emeco’s financing facilities. Emeco’s leverage ratio has improved from 2.00x at 30 June 2019 to 1.46x at 30 June 2020 in line with market guidance albeit in a time of significant disruption in the world economy. The achievement of the 1.5x target places Emeco in a strong position to refinance the outstanding notes on more favourable terms in the future. No dividends were declared or paid during FY20. EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 11 Segment Business OverviewMain markets The Company’s business operations comprised of three segments: Rental, Pit N Portal and Workshops. Rental Revenue in the Rental segment increased by 5.9% to $425.1 million with operating EBITDA margins increasing from 58.3% in FY19 to 61.0% in FY20 as strong cost controls and operating efficiencies continued to impact positively on the results. Group operating utilisation2 increased over FY20 averaging 64.4%, up from 63.9% in FY19. Operating utilisation is a measure of how hard the equipment is working. Gross operating utilisation averaged 90.5% in FY20 (FY19: 90.1%). Management is focused on increasing the operating utilisation of machines currently on rent and looking for opportunities to dispose of underutilised fleet to generate greater returns. Workshops Total Workshops activity (as measured by retail and internal revenue pre-intercompany eliminations) increased from $114.7 million in FY19 to $163.8 million in FY20, a significant increase of 42.8% YoY. The internal portion of Workshops activity increased in FY20 to 51% (FY19: 45%). The Operating EBITDA contribution from the retail earnings increased 11% to $5.2 million (FY19: $4.7 million). All overheads are allocated to the external retail earnings. Given the greater percentage of internal works being completed by the Workshops, Operating EBITDA margin for the period decreased to 6.5% (FY19: 7.5%) with a greater benefit being provided to the Rental segment in FY20. Pit N Portal This segment was established via the acquisition of Pit N Portal on 28 February 2020 and provides a range of mining services solutions and associated services to customers in Australia. For the four months of ownership under Emeco in FY20, Pit N Portal earned revenue of $35.3 million and Operating EBITDA of $9.0 million (pre-AASB116) at a margin of 25.5%. The lower margin of this segment is expected to impact the overall group EBITDA margin in future periods. 2 Operating utilisation defined as average operating hours per asset as a percentage of 400 hours per month EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 12 Table 7: Five year financial summary 2020 2019 2018 2017 2016 REVENUE Revenue from rental income $'000 387,959 363,258 323,986 208,286 139,545 Revenue from sale of machines and parts $'000 4,129 1,680 1,835 2,648 5,470 Revenue from mining services $'000 35,212 - - - - Revenue from maintenance services $'000 113,129 99,548 55,171 22,080 22,956 Total $'000 540,429 464,486 380,992 233,014 167,970 PROFIT Operating EBITDA2 $'000 246,073 213,966 153,004 83,504 54,246 Operating EBIT2 $'000 138,176 125,352 83,193 (97,066) (14,219) Operating NPAT2 $'000 87,460 63,126 20,068 (90,891) (90,519) Statutory profit/(loss) for the year $'000 66,129 33,961 11,376 (180,463) (225,389) Basic EPS3 cents 20.2 11.2 0.4 (3.7) (15.1) BALANCE SHEET Total assets $'000 1,088,591 768,669 716,052 520,679 427,692 Total liabilities $'000 731,346 570,591 562,570 552,686 421,695 Shareholders’ equity $'000 357,245 198,078 153,482 (32,007) 5,997 Total debt $'000 628,932 481,243 484,581 474,109 377,818 CASH FLOWS Net cash flows from operating activities $'000 181,973 169,464 125,533 14,223 70,644 Net cash flows from investing activities $'000 (169,852) (251,024) (127,087) 486 (23,112) Net cash flows from financing activities $'000 149,825 (53,718) 156,730 (21,318) (49,311) Free cash flow after repayment/(drawdown) of net debt $'000 161,946 (135,278) 155,174 (6,609) (1,779) Free cash flow before repayment/(drawdown) of net debt1 $'000 75,308 (130,373) 162,856 (334) 5,561 DIVIDENDS Number of ordinary shares at year end3 '000 368,551 323,212 3,178,859 2,436,860 599,675 Total dividends paid in respect to financial year $'000 0 0 0 0 0 Ordinary dividends per share declared cents 0.0 0.0 0.0 0.0 0.0 Special dividends per share declared cents 0.0 0.0 0.0 0.0 0.0 KEY RATIO'S Average fleet utilisation % 90.5 90.1 89.6 87.3 76.5 Average fleet operating utilisation % 64.4 63.9 57.4 52.9 44.0 Operating EBIT ROC2 % 21.0 21.0 19.6 3.3 (2.7) Leverage ratio2 x 1.46 2.00 2.62 5.47 6.74 Financial information as reported in the corresponding financial year and includes operations now discontinued. 1 Includes capex funded via finance lease facilities (excluded from statutory cash flow). 2 Operating results and therefore these are non IFRS measures. Please refer to previous annual reports for reconciliation between Statutory and Operating Results. 3 Weighted average number of shares restated at 30 June 2019 due to FY2020 bonus rights issue. 30 June 2019 includes the impact of a 10:1 share consolidation that occurred on 27 November 2018. EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 13 Financial Report Directors’ Report ..................................................................................................................... 14 Directors .......................................................................................................................... 14 Company secretary ........................................................................................................ 16 Directors’ meetings ....................................................................................................... 17 Corporate governance statement ................................................................................ 17 Principal activities ......................................................................................................... 17 Operating and financial review .................................................................................... 17 Dividends ........................................................................................................................ 17 Significant changes in state of affairs ......................................................................... 18 Events subsequent to report date ............................................................................... 18 Likely developments ...................................................................................................... 18 Directors’ interest .......................................................................................................... 18 Indemnification and insurance of officers and auditors ........................................... 19 Non-audit services ......................................................................................................... 19 Lead auditor’s independence declaration .................................................................. 19 Rounding off ................................................................................................................... 19 Letter from the chair of the remuneration and nomination committee ................... 20 Remuneration report (audited) ..................................................................................... 22 Deloitte Touche Tohmatsu independence declaration ............................................. 37 Financial Statements .............................................................................................................. 38 Consolidated Statement of Profit or Loss and Other Comprehensive Income ...... 38 Consolidated Statement of Financial Position ........................................................... 40 Consolidated Statement of Changes in Equity .......................................................... 41 Consolidated Statement of Cash Flows ...................................................................... 42 Notes to the Consolidated Financial Statements ....................................................... 43 Directors’ Declaration........................................................................................................... 115 Independent Auditor’s Report ............................................................................................. 116 Shareholder Information ...................................................................................................... 120 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 14 Directors’ Report For the year ended 30 June 2020 The board of directors (Board) 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 2020 (FY20). Directors The directors of the Company during FY20 were: PETER RICHARDS BCom Appointment: Independent Non-Executive Director since June 2010. Chairman since January 2016. Board committee membership: Member of the Remuneration and Nomination Committee (Chairman until 1 April 2020). Member of the Audit and Risk Management Committee. Skills and experience: Peter has over 40 years of international business experience with global and regional companies including British Petroleum (including its mining arm Seltrust Holdings), Wesfarmers Limited, Dyno Nobel Limited and Norfolk Holdings 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). Current appointments: Chairman of Elmore Limited (previously IndiOre Limited and NSL Consolidated Limited) since 2018 (Non-Executive Director 2009 to 2014; previously Chairman 2014 to 2017). Chairman of Graincorp Limited since March 2020 (Non-Executive Director since 2015). Non-Executive Chairman of Cirralto Limited since December 2017. IAN TESTROW BEng (Civil), MBA Appointment: Managing Director since 20 August 2015. Skills and experience: Ian was appointed Chief Executive Officer and Managing Director in August 2015. Prior to this, Ian was Emeco’s Chief Operating Officer, responsible for the Australian and Chilean operations as well as Global Asset Management. Ian has also held the positions of President, New and Developing Business after establishing Emeco's Chilean business in 2012 and President, Americas where Ian managed the exit of Emeco's USA business in 2010 and Emeco’s Canadian business commencing 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 Limited, BHP Billiton Ltd, Thiess Pty Ltd and Dyno Nobel. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 15 Directors’ Report For the year ended 30 June 2020 PETER FRANK BSEE, MBA Appointment: Non-Executive Director since April 2017. Skills and experience: Peter is a Senior Managing Director at Black Diamond Capital Management. Prior to joining Black Diamond, Peter was President of GSC Group, a SEC-registered investment advisor, where he worked since 2001. From 2005 until 2008, he served as the Senior Operating Executive for GSC’s private equity funds. Prior to 2001, Peter was the CEO of Ten Hoeve Bros Inc. and was an investment banker at Goldman Sachs & Co. Peter has also served as chairman of the board of Kolmar Labs Group Inc., Scovill Inc. and Worldtex Inc. and was previously a director of IAP Worldwide Services Inc., Grede Holdings LLC, Color Spot Holdings Inc. and Viasystems Group Inc.. Peter graduated from the University of Michigan with a BSEE degree and earned an MBA from the Harvard Business School. Current appointments: Director of Specialty Chemicals International Limited. Director of Harvey Gulf International Marine LLC. Director of North Metro Harness Initiative LLC. KEITH SKINNER B.Comm, FCA, FAICD Appointment: Independent Non-Executive Director since April 2017. Board committee membership: Chairman of the Audit and Risk Management Committee. Member of the Remuneration and Nomination Committee. Skills and experience: Keith was the Chief Operating Officer of Deloitte Touche Tohmatsu for 13 years until his retirement from the firm in May 2015. Previously Keith was one of the leading Restructuring and Insolvency practitioners in Australia, leading many corporate turnarounds. Keith was on the Board of Deloitte Touche Tohmatsu (1995 to 1997) and on the Board of the Global Deloitte Organisation (2013 to 2015), and a member of the Deloitte Global Governance (2013 to 2015) and Deloitte Global Risk Committees (2013 to 2015). Keith has also been the Chairman of Emue Technologies Limited (2013 to 2015). Keith was the Independent Chairman of the Audit and Risk Committee for the Australian Digital Health Agency (2016 to 2019) and was a director of the Lysicrates Foundation Limited (2015 to 2020). Current appointments: Director of Invocare Limited since September 2018. Chair of the Audit and Risk Committee and member of the Finance and Investment Committee. Director of the North Sydney Local Health District since 2017. Member of the Finance, Risk and Performance Committee. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 16 Directors’ Report For the year ended 30 June 2020 DARREN YEATES B Eng., Executive MBA, FAICD, Grad Dip Mgt, Grad Dip App. Fin Appointment: Independent Non-Executive Director since April 2017. Board committee membership: Chairman of the Remuneration and Nomination Committee from 1 April 2020 (previously member). Member of the Audit and Risk Management Committee. Skills and experience: Darren has over 35 years' mining industry experience, most recently as COO of MACH Energy Australia and CEO of Hancock Coal. He has over 22 years' experience with Rio Tinto including as Acting Managing Director and Chief Operating Officer for Coal Australia, General Manager Ports and Infrastructure for Pilbara Iron and General Manager Tarong Coal. Prior to joining Rio Tinto he worked for 6 years for BHP in coal operations and metalliferous exploration. Current appointments: Interim Chief Executive Officer since January 2020 and Director since January 2018 of WorkPac Pty Ltd. Director of Peabody Energy, Inc since February 2020. Company secretary The company secretary of the Company during FY20 was: PENELOPE YOUNG LLB, LLM, BBus Appointment: Company Secretary since April 2017. Penny was appointed General Counsel in July 2017 and Company Secretary to the Emeco Board in April 2017. Penny joined Emeco as Senior Legal Counsel in May 2015. Prior to joining Emeco, Penny spent the majority of her career as a corporate and commercial lawyer in private practice. Penny holds a Bachelor of Laws, Master of Laws and a Bachelor of Business. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 17 Directors’ Report For the year ended 30 June 2020 Directors’ meetings The number of board and committee meetings held and attended by each director in FY20 is outlined in the following table below: Table 8: Board and committee meetings held and director attendance Board meetings Audit & risk management committee meetings Remuneration & nomination committee meetings Director A B A B A B Peter Richards 7 7 4 4 4 4 Ian Testrow 7 7 4 * 4 4 * 4 Peter Frank 6 7 0 * 4 1 * 4 Keith Skinner 7 7 4 4 4 4 Darren Yeates 7 7 4 4 4 4 A Number of meetings attended. B 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 https://www.emecogroup.com/investors-overview/corporate-governance. Principal activities The principal activity of the Group during FY20 was the provision of open-cut mining equipment, maintenance and project support solutions and services. As set out in this report, the nature of the Group’s operations and principal activities have largely been consistent throughout the financial year however with the acquisition of Pit N Portal in February 2020, expanded to include the provision of underground mining equipment, maintenance, operator, technical and engineering solutions and services. Operating and financial review A review of Group operations, and the results of those operations for FY20, is set out in the operating and financial review section at pages 6 to 12 and in the accompanying financial statements. Dividends No dividends were declared or paid during FY20. No dividends have been declared or paid since the end of FY20. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 18 Directors’ Report For the year ended 30 June 2020 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. Events subsequent to report date No significant events have occurred subsequent to the year ended 30 June 2020. Likely developments Likely developments in, and expected results of, the operations of the Group are referred to in the operating and financial review section at pages 6 to 12. This report omits information on likely developments in the 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 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 9: Directors’ Interests Director Ordinary shares Options Rights Peter Richards 7,481 - - Ian Testrow 11,708,461 [A] - 3,013,646 [B] Peter Frank - - - Keith Skinner - - - Darren Yeates - - - [A] This comprises ordinary shares in which Mr Testrow has a relevant interest. [B] This comprises unvested rights issued under the Company’s incentive plans. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 19 Directors’ Report For the year ended 30 June 2020 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 strategy officer, 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, Deloitte Touche Tohmatsu. Non-audit services During the year, Deloitte Touche Tohmatsu, the Group’s auditor, has performed certain other services in addition to their statutory duties. This is for provision of audit and tax services as well as other specific assurance and due diligence services around business acquisitions. No other advisory or consulting services were provided by Deloitte during the year. 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, Deloitte Touche Tohmatsu 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 37 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 as referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016. The Company is an entity to which the class order applies. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 20 Directors’ Report For the year ended 30 June 2020 Letter from the chair of the remuneration and nomination committee Dear Shareholders, On behalf of the Board of Directors of Emeco Holdings Limited (Emeco) I am pleased to present the Company’s 2020 Remuneration Report. Emeco is continuing on its journey of building a sustainable and resilient business through scale, customer and commodity diversification and creating value through services that improve customer project economics to an extent that Emeco becomes embedded in our customers’ operations. The Board has sought to ensure that the remuneration strategies for the executive team and management are progressive and consistent with company strategy, objectives and shareholder values. FY20 remuneration strategy The Board recognises that in FY20, the COVID-19 pandemic has had a significant effect on the Australian and global economy. The uncertainty in the global economy that has resulted from the COVID-19 pandemic can make remuneration decisions challenging. However, the Australian mining and mining services industry has remained relatively strong throughout the turbulence of this year due to COVID-19. Further, in response to COVID-19, Emeco’s management team acted with urgency and worked tirelessly to implement health and safety protocols and guidelines to ensure the safety of our workforce and minimise the impact on operations. As a result, Emeco has managed to see through the unpredictable situation and deliver a strong FY20 result without significant disruption to operations (including staffing and salary levels across the Group). The Board acknowledges that variable remuneration can be a key influencer of behaviour and KPIs must be considered in the context of the Company’s current performance and longer-term objectives. In determining the remuneration for our executives, the Board considers their roles, responsibilities and performance, together with the operational and financial performance of the Company. In FY20, to ensure Emeco’s incentive plan evolved with the growth and maturity of the Company, the Board separated the Emeco Hybrid Incentive Plan (EHIP) into short term incentives (STI) and long term incentives (LTI). Under the revised structure: STIs are awarded based on the performance of the executive for FY20, with the award being paid in cash at the end of this period. LTIs are awarded based on the performance of the executive and the Company over a three-year period, with one-third of the maximum entitlement being tested each year. The three-year performance period ensures alignment with long term shareholder interests. FY20 performance KPIs for the FY20 STI and year 1 of the FY20 LTI were partially met, reflecting Emeco’s strong financial performance and success in creating a more sustainable and resilient business. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 21 Directors’ Report For the year ended 30 June 2020 A more detailed explanation of the FY20 remuneration outcomes for all executives is included in section 5 of this report. Management has continued to work tirelessly throughout FY20 to evolve Emeco’s business model and create additional growth avenues for the Company. In particular, the acquisition of Pit N Portal in February 2020 widens the Company’s value proposition; diversifies its commodity exposure and creates project tenure as it helps the Company become more embedded in customers’ operations. Looking ahead The Company is continuing to build a sustainable and resilient business and we believe this remuneration framework will appropriately support Emeco to deliver on the outcomes desired by its shareholders. Thank you for your ongoing support of Emeco. Darren Yeates Remuneration and Nomination Committee Chairman Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 22 Directors’ Report For the year ended 30 June 2020 Remuneration report (audited) Contents This Remuneration Report for the year ended 30 June 2020 outlines the remuneration arrangements of the Company and is in accordance with the requirements of the Corporations Act 2001 (Act) and its regulations. This information has been audited as required by section 308(3C) of the Act. This report covers the following matters: 1. Introduction 2. Remuneration governance 3. Executive remuneration arrangements A. Remuneration principles and strategy B. Approach to setting remuneration and details of incentive plans 4. Relationship between executive remuneration and company performance 5. Executive remuneration outcomes for FY20 6. Executive contracts 7. Non-executive director remuneration 8. Additional disclosures relating to share-based payments 9. Loans to key management personnel and their related parties 10. Other transaction balances with key management personnel and their related parties 1. Introduction This report details the Group’s remuneration objectives, practices and outcomes for key management personnel (KMP), who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company, directly or indirectly, including any director (whether executive or otherwise) of the Company. Any reference to ‘executives’ in this report refers to KMP who are not non-executive directors. The following persons were directors of the Company during FY20: Non-executive directors Peter Richards Chair Peter Frank Non-Executive Director Keith Skinner Independent Non-Executive Director Darren Yeates Independent Non-Executive Director Executive directors Ian Testrow Managing Director & Chief Executive Officer Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 23 Directors’ Report For the year ended 30 June 2020 The following persons were also employed as executives of the Company during FY20: Other executives Position Thao Pham Chief Strategy Officer Neil Siford Chief Financial Officer (commenced 18 March 2020) Justine Lea Chief Financial Officer (ceased 18 March 2020) 2. Remuneration governance Remuneration and Nomination Committee The Remuneration and Nomination Committee reviews and makes recommendations to the Board on remuneration packages and policies applicable to the Managing Director, executives and Directors themselves. The Remuneration and Nomination Committee’s role also includes responsibility for general remuneration strategy, superannuation and other benefits, and employee share plans. The members of the remuneration and nomination committee in FY20 were Mr Darren Yeates (commenced as Chair 1 April 2020), Mr Peter Richards (ceased as Chair 1 April 2020) and Mr Keith Skinner. Further information on the Remuneration and Nomination Committee’s role and responsibilities can be found at https://www.emecogroup.com/investors-overview/corporate-governance. Use of remuneration consultants To ensure the Remuneration and Nomination Committee is fully informed when making remuneration decisions, it seeks external remuneration advice from time to time. Remuneration consultants are engaged by, and report directly to, the Committee. In selecting remuneration consultants, the Committee considers potential conflicts of interest and requires independence from the Company’s key management personnel and other executives as part of their terms of engagement. During the year, the Remuneration and Nomination Committee sought advice from The Reward Practice Pty Ltd as remuneration consultants to provide general insights for executive remuneration structures. During the period, no remuneration recommendations (as defined by the Act) were provided by The Reward Practice Pty Ltd. Prohibition of hedging securities Emeco’s share trading policy prohibits executives, directors, officers and employees of the Group from entering into transactions intended to hedge their exposure to Emeco securities which have been issued as part of remuneration. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 24 Directors’ Report For the year ended 30 June 2020 3. Executive remuneration arrangements 3.A Remuneration principles and strategy Emeco’s executive remuneration strategy is designed to attract, motivate and retain high performing individuals and align the interests of executives and shareholders. The following diagram illustrates how the Company’s remuneration strategy aligns with its strategic direction and links remuneration outcomes to performance. Remuneration strategy linkages to business 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. Remuneration component Vehicle Purpose Link to performance Total Fixed Remuneration (TFR or fixed remuneration) Comprises base salary, employer superannuation contributions and other non-cash benefits. To provide competitive base salary set with reference to Company size, achievements, role, market and experience. Changes to an executive’s scope of responsibilities are considered during the annual remuneration review and, along with performance, drive remuneration changes. Variable short term incentive plan (STI) Paid in cash. Rewards executives for their contribution to achievement of Company key performance indicators (KPIs) during the financial year. Emeco health and safety (total recordable injury frequency rate (TRIFR)), earnings before interest, tax, depreciation and amortisation (EBITDA) and leverage are the key performance measures in FY20 which determine if any short term component is payable. Targets are discussed in section 5. Variable long term incentive plan (LTI) Awards are made in the form of rights to ordinary Emeco shares (Rights). Rewards executives for their contribution to achievement of Company KPIs over the three-year performance period. Awards of Rights dependent on achievement of the LTI KPIs. Maximum number of Rights calculated by reference to Emeco’s share price at the beginning of the three-year performance period. Vested Rights convert into shares after the end of the three-year performance period. Accordingly, executive interests are directly aligned with shareholder value over the three-year period. Creation of growth avenues for the business and a more sustainable and resilient business. Further, the incentive’s value is ultimately dependent on the Company’s share price so drives executives to maximise shareholder return. Targets are discussed in section 5. Business objective Build a sustainable and resilient business through scale, customer and commodity diversification and creating value through services that improves customer project economics to an extent that Emeco becomes embedded in our customers’ operations Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 25 Directors’ Report For the year ended 30 June 2020 3.B Approach to setting remuneration and details of incentive plans In FY20, the executive remuneration framework consisted of fixed remuneration and short-term and long-term incentives as outlined below. Overall remuneration level and mix How is overall remuneration and mix determined? The Company aims to reward executives with a level and mix (proportion of fixed remuneration, short term incentives and long-term incentives) of remuneration appropriate to their position, responsibilities and performance within the Company and that which is aligned with targeted market comparators. The chart below summarises the Managing Director and other executives’ overall remuneration mix (assuming maximum performance) for fixed remuneration, short term incentives and long-term incentives. The target mix is considered appropriate for Emeco based on the Company’s short term and long-term objectives. Fixed remuneration How is fixed remuneration reviewed and approved? Fixed remuneration is reviewed periodically from benchmarked remuneration data. Any fixed remuneration changes for executives take into account changes in responsibilities and performance within the Company and are aligned with targeted market comparators. Changes to an executive’s fixed remuneration is subject to approval from the Board considering recommendations from the Remuneration and Nomination Committee. Variable remuneration What are the Emeco STI and LTI plans? In FY20 the Company separated the STI and LTI plans, moving away from the Emeco hybrid incentive plan (EHIP) of FY18 and FY19. The Board considers this more traditional structure helps ensure executives’ performance is appropriately assessed across both short-term and long-term measures. The FY20 STI plan is a cash incentive that rewards executives for their contribution to achievement of certain KPIs in the current financial year. The FY20 LTI plan is an equity incentive that rewards executives for their contribution to achievement of certain KPIs over a three-year period. KPIs are reviewed annually, but achievement is assessed over a three-year period with one-third of the maximum entitlement being tested each year. As the Emeco Group is dynamic and operating within a cyclical market, the Board believes that this gives the Company the flexibility necessary to ensure that goals for the upcoming year remain relevant and aligned with the interests and expectations of shareholders and other stakeholders. Assessing achievement annually also ensures that executives are rewarded for their performance in each year over the three-year period. By assessing outcomes in this manner, consistent high performance over each year within the three-year performance period is required in order to achieve maximum award. Awards under the FY20 LTI plan are made in the form of Rights. Fixed33%Short term27%Long term40%Managing DirectorFixed50%Short term30%Long term20%Executives Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 26 Directors’ Report For the year ended 30 June 2020 Variable remuneration What are the performance criteria and how do they align with business performance? Retaining senior management is particularly important to the Company given the Group’s significant growth and focus on deleveraging in order to drive the success and sustainability of the Company and position the Group well for refinancing the Group’s notes due in 2022. The KPIs for the FY20 STI plan are based on a balance of financial and non-financial measures which provide the platform for the long-term performance and sustainability of the Company. In FY20, a safety KPI was again included given the importance of safety to the Group’s workforce, customers and stakeholders. A financial KPI (EBITDA) was included to further focus executive efforts on strengthening the Group’s financial position to support the long-term sustainability and success of the Group. Net leverage was the second financial KPI. The KPI under the FY20 LTI plan for year 1 was to create additional growth avenues for the business and to create a more sustainable and resilient business, in line with the Company’s broader strategic objectives. The same KPI will apply for year 2 of the FY20 LTI plan. See section 5 for more information on the FY20 KPIs. How much can executives earn? The below table sets out the maximum incentive opportunity for each executive under the FY20 STI and LTI plans, expressed as a percentage of total fixed remuneration (TFR). Table 10: components of variable remuneration Executive Position Maximum STI % of TFR Maximum LTI % of TFR Maximum Total % of TFR Ian Testrow Managing Director & Chief Executive Officer 80% 120% 200% Thao Pham Chief Strategy Officer 60% 40% 100% Justine Lea Chief Financial Officer (until 18 March 2020) 60% 40% 100% Neil Siford Chief Financial Officer (from 18 March 2020) 60% 40% 100% When is performance measured? Achievement against variable remuneration KPIs are measured once the Company’s full year results has been approved by the Board. The FY20 LTI plan spans a three-year performance period. Performance is assessed annually following approval of the full year results by the Board across the three-year period. How are awards determined? Awards are determined by the Board, on recommendation of the Remuneration and Nomination Committee, after consideration of performance against the applicable KPIs. How is it paid? FY20 STI and LTI awards are determined after the Company’s FY20 full year results have been approved by the Board and to the extent KPIs have been achieved. FY20 STI awards are paid in cash. FY20 LTI awards are paid by issuing rights (Rights) to fully paid ordinary Emeco shares (Shares). Rights issued under the FY20 LTI plan are scheduled to vest after announcement of Emeco’s annual results in 2022. Executives have the option to convert the Rights into Shares at any time within 2 years from the vesting date, unless the executive leaves Emeco earlier (refer to “What happens if an executive leaves?” below). The maximum possible award of Rights under the FY20 LTI plan was calculated by reference to the 30-day VWAP of Emeco shares ending 31 July 2019, being $2.19. Tested Rights will be issued at no cost to the executive. The ultimate value of the FY20 LTI award is determined by the Emeco share price once the Rights have vested and are converted into Shares, providing further alignment with the long-term interests of shareholders. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 27 Directors’ Report For the year ended 30 June 2020 Variable remuneration What happens if an executive leaves? The STI award is only paid to executives employed by the Group after performance is assessed against the STI KPIs. Under the FY20 LTI plan, if Emeco has terminated the executive’s employment for misconduct or other breach of employment contract, the Board may, in its absolute discretion, determine that all or part of the Rights issued to them under the FY20 LTI plan will lapse. If the executive leaves the Emeco Group for any other reason, Rights that have been tested and issued to the executive under the FY20 LTI plan will immediately vest and must be exercised into Shares within 2 weeks from vesting. The executive will have no entitlement to untested awards. What happens if there is a change in control? In the event of absolute change in control (i.e. the acquisition by a third party and its associates of more than 50% of Emeco’s shares) or an effective change of control (i.e. a third party acquiring the capacity to determine Emeco’s financial and operating policies): Rights which have been tested and issued under the FY20 LTI plan; and awards in respect of any component of the FY20 LTI that has not been tested, will vest on the change date. What other terms apply to the Rights? Dividends are not payable, and there are no voting entitlements, on Rights issued under the LTI plan (whether vested or unvested). Rights cannot be disposed of, other than by conversion of vested Rights into Shares (which, can then be transferred or sold subject to Emeco’s share trading policy). Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 28 Directors’ Report For the year ended 30 June 2020 4. Relationship between executive 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, by ensuring that a significant proportion of an executive’s remuneration is “at risk”. In FY20, the Company returned to more traditional STI and LTI plans for the variable component of executive remuneration, reinforcing the need to balance short-term reward and long-term value creation. The KPIs for the STI and LTI plans focus on driving and rewarding leadership performance and behaviours consistent with the Company’s strategy and objectives. The STI KPIs (detailed in section 5) focussed on safety, earnings and deleveraging performance. The LTI KPI focussed on strengthening the fundamentals of the business to create a more sustainable and resilient business, providing a platform for continued growth. Strong performance against each of those measures in FY20 is reflected in the partial awards of LTIs and STIs to executives. Retaining senior management, and acknowledging their hard work and success in positioning the business for sustainability and resilience, is key in driving Company performance and therefore value for shareholders. Company performance Emeco’s ongoing transformation process has resulted in strong year on year improvements since FY16 in profit, EBITDA and return on capital deployed, with management playing an integral role in that financial strength. Details of the Group’s performance (as measured by a range of financial and other indicators, including disclosure required by the Act) and movements in shareholder wealth are set out in the following table: FY20 FY19 FY18 FY17 FY16 Operating EBITDA ($m) [1] 246.1 214.0 153.0 83.5 54.3 Operating EBIT ($m) [1] 138.2 125.4 83.2 (97.1) (14.2) Operating NPAT ($m) [1] 87.5 63.1 20.1 (90.9) (90.5) Net leverage 1.46x 2.00x 2.60x 5.50x 6.70x Return on capital [1] 21.0% 21.0% 19.6% 3.3% (2.7)% Total dividends declared ($m) - - - - - Closing share price as at 30 June [2] $0.99 $2.10 $0.38 $0.11 $0.03 [1] Non IFRS measures. [2] A 10 to 1 share consolidation was approved by the Company’s shareholders at the 2018 AGM and effected on 27 November 2018. This is reflected in the share price for FY19 and FY20. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 29 Directors’ Report For the year ended 30 June 2020 5.Executive remuneration outcomes for FY205.1 Fixed remuneration outcomes There was no change to fixed remuneration for existing key management personnel in FY20. 5.2 Variable remuneration outcomes In FY20, the executives had identical KPIs to focus executive efforts on the overall performance and strategic objectives of the Group in addition to promoting collaboration and support between the executives. Set out below is information regarding satisfaction of the applicable KPIs for the FY20 STI and FY20 LTI plans. 5.2.1 FY20 STI plan Table 11 below sets out the KPIs under the FY20 STI plan and the respective weightings. In the Board’s view, these KPIs align the reward of executives with the interests of shareholders. The FY20 STI plan provided for pro-rata entitlements where performance in respect of the KPIs was between the thresholds and targets. Table 11: FY20 STI KPI weightings, payment schedule and achievement KPI Metric Weight Payment schedule Rationale Achievement Health & Safety TRIFR [1] 20% 0% if the TRIFR as at 30 June 2020 is ≤20% lower than the TRIFR as at 30 June 2019. 20% if the TRIFR as at 30 June 2020 is ≥50% lower than the TRIFR as at 30 June 2019. Pro-rata payments between these levels. Notwithstanding the above, no entitlement if there is a serious, permanently disabling injury or a fatality. 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 goal. Between threshold and target Financial (Group) Operating EBITDA [2]60% 0% if actual FY20 Operating EBITDA is equal to or less than 95% of budget FY20 EBITDA. 100% if actual FY20 Operating EBITDA is equal to or greater than budget FY20 EBITDA. Pro-rata payments between these levels. Reflects the Company's financial performance and ability to pay STI awards. Between threshold and target Net Leverage [2],[3]20% 0% if actual net leverage is equal to or greater than the net leverage for the prior financial year. 100% if actual net leverage is equal to or less than budget net leverage. Pro rata payments between the two. Reflects the Company's focus on deleveraging and ensuring a sustainable business. Exceeded target [1]TRIFR = Number of recordable injuries x 1,000,000 hoursTotal hours worked [2]Operating EBITDA and Net Leverage exclude the benefit of any acquisitions in the year.[3]Net Leverage = Net Debt/ Operating EBITDA. Net debt means total financial indebtedness (excluding any leases which met the definition of operating leases prior to the transition to AASB 16) less; total cash plus the mark to market value of any foreign currency derivative transaction in relation to hedging any outstanding loan notes. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 30 Directors’ Report For the year ended 30 June 2020 5.2.2 FY20 LTI plan The FY20 LTI KPIs are reviewed and tested annually for each respective financial year during the three-year performance period. The KPI for year 1 of the FY20 LTI was 100% strategy based, assessing performance against the Company’s broader strategic objectives of creating additional growth avenues and a more sustainable and resilient business. In assessing performance against this KPI, the Board’s key guidelines (set in 2019) were diversifying the Group’s commodity mix, securing longer term contracts and enhancing the Group’s value proposition by providing customers with a wider suite of services. Management has worked hard to continue to evolve the Company’s business model over the year and made strong progress against the above framework. In assessing the Company’s performance against the year 1 KPI for the FY20 LTI, the Board was mindful that the current Australian and global environment presents unique challenges, with uncertainty surrounding the ultimate impact of the COVID-19 pandemic to operations. The Board continues to monitor that situation, but recognises that to date the Emeco Group has seen minimal impact to its employees, operations and financial performance. Accordingly, the Board considers the LTI framework continues to provide an appropriate basis for assessing long term performance. 5.2.3 Performance against KPIs The following table outlines the proportion of maximum incentive opportunity that was earned (i.e awarded following testing), forfeited (i.e not awarded following testing) and deferred (to be tested in FY21 or FY22) in relation to the FY20 LTI Plan. As noted above, the FY20 LTI Plan is assessed progressively over a three-year period with one-third of the maximum entitlement being tested each year. Accordingly, a maximum of one-third of each executive’s award was available to be earned in FY20. Table 12: FY20 STI and LTI outcomes [1] Executive STI (cash) LTI (Rights) [2] Maximum STI STI earned in FY20 STI forfeited in FY20 Maximum LTI [3] LTI tested and earned in FY20 LTI tested and forfeited in FY20 LTI to be tested across FY21 & FY22 Ian Testrow 80% 69.86% 10.14% 120% 34% 6% 80% Thao Pham 60% 52.39% 7.61% 40% 11.33% 2% 26.67% Justine Lea 60% 52.39% 7.61% 40% 11.33% 2% 26.67% Neil Siford 60% 52.39% 7.61% 40% 11.33% 2% 26.67% [1] All figures are expressed as a percentage of total fixed remuneration. [2] LTI is assessed over 3 years, meaning 1/3 of maximum LTI entitlement was tested in FY20, with 1/3 deferred to FY21 and 1/3 deferred to FY22. Mr Testrow’s entitlement to Rights under the FY20 LTI plan is subject to shareholder approval. [3] This figure is the maximum LTI achievable across the three-year performance period applicable to the FY20 LTI plan. EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 31 Directors’ Report For the year ended 30 June 2020 Statutory Executive KMP remuneration The following table sets out total remuneration for executive KMP in FY20 and FY19, calculated in accordance with statutory accounting requirements. Table 13 – Statutory Executive KMP remuneration Short Term Employee Benefits Post-Employment Benefits Share Based Payments % of Remuneration Performance Related KMP Salary & Fees Short Term Bonus Payments [1] Non-Monetary Superannuation Other Long Term Benefits Termination Benefits Long Term Equity Incentives [2] Total Executive director Ian Testrow FY20 1,060,684 706,943 - 16,792 17,731 - 8,155,793 9,957,943 89% FY19 1,077,862 809,600 - 26,321 45,327 - 9,480,523 11,439,633 90% Other executives Thao Pham FY20 490,844 256,272 - 22,026 8,566 - 1,237,562 2,015,270 74% FY19 555,661 124,379 - 26,389 25,573 - 1,223,083 1,955,085 69% Justine Lea [3] FY20 294,014 151,459 - 20,957 5,325 - 518,410 990,165 67% FY19 430,943 102,689 - 25,754 21,485 - 608,680 1,189,551 60% Neil Siford [4] FY20 119,671 63,879 - 9,439 2,119 12,632 207,740 37% FY19 - - - - - - - - - TOTAL KMP remuneration FY20 1,965,213 1,178,553 - 69,214 33,741 - 9,924,397 13,171,118 84% FY19 2,064,466 1,036,668 - 78,465 92,385 - 11,312,286 14,584,270 85% [1] The FY20 figure includes cash awards under the FY20 STI as approved by the Board after review of performance against applicable key performance indicators (see table 11). [2] The FY20 figure includes Rights granted (for accounting purposes) by the Company in FY19 and FY20 however no Rights under the FY20 LTI plan were issued in FY20. [3] Ms Lea ceased her role as Chief Financial Officer (and thus acting as a KMP) on 18 March 2020. [4] Mr Siford commenced as Chief Financial Officer on 18 March 2020. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 32 Directors’ Report For the year ended 30 June 2020 6. Executive Contracts Remuneration arrangements for executives are formalised in employment agreements which provide for an indefinite term. The executives’ termination provisions are as follows: Executive Resignation Termination for cause Termination payment* Managing Director notice period (by company or executive) 12 months’ notice No notice Nil Other executives notice period (by company or executive) 6 months’ notice No notice Nil * Other than salary in lieu of notice and accrued statutory leave entitlements. 7. 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 usually reviewed and benchmarked annually in August against fees paid to NEDs of comparable companies with similar market capitalisation and industry of the Company. The Board may consider advice from external consultants when undertaking the annual review process. The ASX listing rules specify that the NED fee pool shall be determined from time to time by a general meeting. The Company’s constitution has provided for an aggregate fee pool of $1,200,000 per year since its listing on the ASX. The Board will not seek any increase for the NED pool at the 2020 AGM. Structure 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. Due to the small number of Australian based non-executive directors in FY20, all Australian non-executive directors sit on more than one committee. However, non-executive directors only get paid for sitting on one committee. The table below summarises the NED fee policy for FY20 (inclusive of superannuation): Board fees FY20 FY19 Chairman $158,238 $158,238 Directors $100,000 $100,000 Committee fees FY20 FY19 Committee Chair $13,333 $13,333 Committee Member $10,000 $10,000 NEDs do not receive retirement benefits, nor do they participate in any incentive programs. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 33 Directors’ Report For the year ended 30 June 2020 The remuneration of NEDs for the year ended 30 June 2020 and 30 June 2019 is detailed in table 14 below. Table 14 – Statutory Non-executive director remuneration Short-term employee benefits Post-employment benefits Long-term benefits NED Salary and fees Superannuation benefits Long term equity incentives Total Peter Richards FY20 155,691 14,791 - 170,481 FY19 148,470 23,503 - 171,973 Peter Frank FY20 91,324 8,676 - 100,000 FY19 90,869 8,633 - 99,501 Keith Skinner FY20 105,658 10,086 - 115,743 FY19 102,841 9,770 - 112,611 Darren Yeates FY20 101,452 9,638 - 111,090 FY19 99,848 9,486 - 109,334 TOTAL NEDs FY20 454,125 43,190 - 497,314 FY19 442,028 51,392 - 493,420 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 34 Directors’ Report For the year ended 30 June 2020 8. Additional disclosures relating to share-based payments Table 15: Summary of executive KMP allocated, vested or lapsed equity Grants and vesting of equity settled awards made to executives in connection with the FY20 LTI, and the Company’s long term incentive plans in FY17, FY18 and FY19 are set out in the following table: Number granted [3] Fair value per share/right at grant date [6] Executive Grant date [1] Instrument [2] Pre-share consolidation Post-share consolidation % vested in FY20 % forfeited in FY20 Vesting date [4][5] Ian Testrow [A] 31/03/2017 Right / performance share 108,674,758 10,867,476 100% - 1/04/2020 $0.08 15/11/2018 Right / performance share 8,250,000 825,000 100% - 31/03/2020 $0.33 15/11/2018 Right / performance share 15,000,000 1,500,000 100% - 25/10/2019 $0.33 15/11/2018 Right / performance share 10,000,000 1,000,000 - - Aug-21 $0.33 15/11/2018 Right / performance share 10,000,000 1,000,000 - - Aug-22 $0.33 15/11/2018 Right / performance share 10,000,000 1,000,000 - - Aug-23 $0.33 14/11/2019 Right / performance right - 13,646 - - Jul-20 $2.03 Thao Pham 31/03/2017 Right / performance right 24,368,606 2,436,861 100% - 1/04/2020 $0.08 20/08/2018 Right / performance right 1,095,000 109,500 100% - 30/06/2020 $0.36 26/07/2018 Right / performance right 5,535,566 553,557 - - 30/06/2023 $0.36 09/09/2019 Right / performance right - 23,490 - - 30/06/2021 $2.06 14/11/2019 Right / performance right - 29,918 [B] - - Aug-22 $1.83 14/11/2019 Right / performance right - 29,917 [B] - - Aug-22 $1.83 14/11/2019 Right / performance right - 29,917 [B] - - Aug-22 $1.83 Justine Lea 31/03/2017 Right / performance right 8,122,868 812,287 100% - 1/04/2020 $0.08 20/08/2018 Right / performance right 1,026,563 102,657 100% - 30/06/2020 $0.36 26/07/2018 Right / performance right 3,321,340 332,134 - - 30/06/2023 $0.36 09/09/2019 Right / performance right - 19,393 - - 30/06/2021 $2.06 14/11/2019 Right / performance right - 24,700 [B] - - Aug-22 $1.83 14/11/2019 Right / performance right - 24,700 [B] - - Aug-22 $1.83 14/11/2019 Right / performance right - 24,700 [B] - - Aug-22 $1.83 Neil Siford 18/03/2020 Right / performance right - 7,458 [B] - - Aug-22 $1.48 18/03/2020 Right / performance right - 7,458 [B] - - Aug-22 $1.48 18/03/2020 Right / performance right - 7,458 [B] - - Aug-22 $1.48 [A] Mr Ian Testrow’s grant of awards under the: (i) FY17 MIP was approved by shareholders on 13 March 2017, subject to completion of the transaction including the mergers with Andy’s Earthmovers and Orionstone; (ii) FY18 EHIP and FY19 MIP were approved by shareholders on 15 November 2018; (iii) FY19 EHIP was approved by shareholders at the 2019 annual general meeting on 14 November 2019; and (iv) FY20 LTI is subject to shareholder approval at the 2020 annual general meeting. [B] This figure represents maximum entitlement under the FY20 LTI plan across each year in the three-year performance period and does not reflect the number of Rights that may be issued in each year across the performance period after testing of the relevant KPIs. [1] Grant date in this table relates to the grant of the long term incentive for accounting purposes only and, in respect of the FY20 incentive plan, differs from the date Rights may be issued over the course of the life of the plan. [2] A ‘performance share’ is a right to one fully paid ordinary Emeco share currently on issue. A ‘performance right’ is a right to receive one fully paid ordinary Emeco share. The vesting of performance shares and performance rights is subject to satisfaction of vesting conditions. [3] For grants made prior to the Share Consolidation being implemented, both pre-share consolidation and post-share consolidation figures are provided. [4] Vesting of Rights is subject to satisfaction of vesting and performance conditions and, in some circumstances, may be earlier than the date stated above (see section 3B, ‘What if an executive leaves?’ in respect of the FY20 LTI plan). The minimum total value of the grants for future financial years is zero if the service condition is not satisfied. An estimate of the maximum possible total value in future financial years is the fair value at grant date multiplied by the number of equity instruments awarded. See section 5 for details of the year 1 KPI applicable to awards under the FY20 LTI. Full details of the vesting conditions for all prior year equity settled grants to executives are included in the remuneration report for the relevant year. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 35 Directors’ Report For the year ended 30 June 2020 [5]Where exact vesting dates are not noted, the vesting date will follow release of the Company’s full year results.[6]The fair value of awards granted under the MIP in FY17 and FY19, under the MIP in FY18, under the EHIP in FY19 and the LTI inFY20 was determined using the 30-day volume weighted average price on the grant date. For all securities, the fair value is allocatedto each reporting period evenly over the period from grant date to vesting date. The value disclosed in the KMP remuneration table(table 13) is the portion of the fair value of the securities recognised in FY20. The fair value of all securities is not related to orindicative of the benefit (if any) that an executive may ultimately realise if the equity instruments vest.Table 16: KMP Rights Details of Rights held by KMP, including their personally related entities, for FY20 are as follows: Executives Rights [1] Holding at 1 July 2019 Rights issued in FY20[2] Rights vested in FY20 Holding at 30 June 2020 Potential future Rights[3] Ian Testrow Rights / performance shares 16,192,476 -13,192,4763,000,000 Rights / performance rights 13,646 -13,646529,212 Thao Pham Rights / performance rights 3,099,918 23,490 2,546,361 577,047 85,265 Justine Lea [A] Rights / performance rights 1,247,078 19,393 - NA 74,100 Neil Siford Rights / performance rights - - - - 21,254 [1]A ‘performance share’ is a right to one fully paid ordinary Emeco share currently on issue. A ‘performance right’ is a right to receive one fully paid ordinary Emeco share. The vesting of performance shares and performance rights is subject to satisfaction of vestingconditions.[2]Rights issued to executives in the FY20 under the FY19 incentive plan.[3]Maximum possible entitlement to Rights under the FY20 LTI plan across the three year performance period. On 26 July 2020, theBoard approved, on recommendation of the Remuneration and Numeration Committee, awards in respect of performance against the FY20 year 1 KPI. As such, Rights will be awarded as follows for year 1 of the FY20 LTI plan: Mr Testrow: 157,836 Rights (subject toshareholder approval), Ms Pham: 25,431 Rights and Mr Siford: 6,340 Rights. These amounts are included within each individual’srespective amount in the table.[A]Information in respect of Ms Lea is only included for the period she was a KMP. Ms Lea ceased as a KMP on 18 March 2020.Table 17: KMP Shareholding Details of Shares held by KMP, including their personally related entities, for FY20 are as follows: Holding at 1 July 2019 Shares received on exercise of vested Rights in FY20 Shares otherwise issued in FY20 Net changes other Holding at 30 June 2020 Non-executive directors Peter Richards 6,818 - - 663 7,481 Executives Ian Testrow 15,985 13,192,476 -(1,500,000)11,708,461 Thao Pham - 2,546,361 - - 2,546,361 Justine Lea [A] 522 - - NA NA [A]Information in respect of Ms Lea is only included for the period she was a KMP. Ms Lea ceased as a KMP on 18 March 2020.- - Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 36 Directors’ Report 3 For the year ended 30 June 2020 9. Loans to key management personnel and their related parties There are no loans to key management personnel and their related parties. 10. Other transactions and balances with key management personnel and their related parties There are no other transactions and balances with key management personnel and their related parties. Signed in accordance with a resolution of the directors. Ian Testrow Managing Director Dated at Perth, 26th day of July 2020 Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Asia Pacific Limited and the Deloitte Network. Deloitte Touche Tohmatsu ABN 74 490 121 060 Tower 2, Brookfield Place 123 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au The Board of Directors Emeco Holdings Limited Level 3, 71 Walters Drive Osborne Park WA 6017 26 July 2020 Dear Board Members Emeco Holdings Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Emeco Holdings Limited. As lead audit partner for the audit of the financial statements of Emeco Holdings Limited for the financial year ended 30 June 2020, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Leanne Karamfiles Partner Chartered Accountants Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 38 Financial Statements Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 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 43 to 114. 20202019Note$'000$'000Continuing operationsRevenue from rental income387,959 363,258 Revenue from the sale of machines and parts4,129 1,680 Revenue from maintenance services113,129 99,548 Revenue from mining services35,212 - 540,429 464,486 Repairs and maintenance(94,129) (89,092) Employee expenses8(72,187) (52,809) External maintenance services(84,766) (75,256) Cartage and fuel(18,172) (13,763) Other direct costs8(21,401) (17,457) Depreciation expense8(114,014) (87,409) 135,760 128,700 Other income73,592 6,494 Other expenses8(17,793) (27,735) Impairment of tangible assets8(13,750) (6,684) Amortisation expense20(974) (1,930) Business acquisition expenses8(1,500) 262 Finance income82,307 962 Finance costs8(52,821) (55,124) Net foreign exchange loss8366 (11,271) Profit before tax expense55,187 33,674 Tax benefit1010,945 - Profit from continuing operations66,132 33,674 Discontinued operations(Loss)/profit from discontinued operations (net of tax)15(3) 287 (Loss)/profit from discontinued operations(3) 287 Profit for the year66,129 33,961 Other comprehensive (loss)/incomeItems that are or may be reclassified to profit and loss:Foreign currency translation differences for foreign operations (net of tax)(10,373) (16,715) Changes in fair value of cash flow hedges (net of tax)16,251 13,075 Total other comprehensive income/(loss) for the year5,877 (3,640) Total comprehensive income for the year72,007 30,321 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 39 Consolidated Statement of Profit or Loss and Other Comprehensive Income (continued) For the year ended 30 June 2020 The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 43 to 114. 20202019Note$'000$'000Profit attributable to:Owners of the Company3566,129 33,961 Profit for the year66,129 33,961 Total comprehensive profit attributable to:Owners of the Company3572,007 30,321 Total comprehensive profit for the year72,007 30,321 20202019NotecentscentsProfit per share:Basic profit per share3520.21 11.18 Diluted profit per share3519.83 10.43 Profit per share from continuing operationsBasic profit per share3520.21 11.09 Diluted profit per share3519.83 10.34 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 40 Consolidated Statement of Financial Position as at 30 June 2020 The consolidated statement of financial position is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 43 to 114. 20202019Note$'000$'00016198,169 36,189 17113,788 87,259 1914,767 6,345 3,279 4,719 143,192 2,906 333,195 137,418 1838,918 18,496 2010,252 9,076 21629,170 579,668 2244,132 - 1232,555 23,212 369 799 755,396 631,251 1,088,591 768,669 2389,236 83,714 1810,884 11,465 24122,986 4,023 2610,629 7,072 233,735 106,274 24497,030 463,911 26581 406 497,611 464,317 731,346 570,591 357,245 198,078 131,024,442 931,199 131,181 1,386 (668,378)(734,507)Current assetsCash and cash equivalentsTrade and other receivablesInventories and work in progressPrepaymentsAssets held for saleTotal current assetsNon-current assetsDerivative financial instrumentsIntangible assetsProperty, plant and equipmentRight of use assetDeferred tax assetsInvestments designated at fair value through profit or loss Total non-current assetsTotal assetsCurrent liabilitiesTrade and other payablesDerivative financial instrumentsInterest bearing liabilitiesProvisionsTotal current liabilitiesNon-current liabilitiesInterest bearing liabilitiesProvisionsTotal non-current liabilitiesTotal liabilitiesNet assetsEquityShare capitalReservesRetained lossesTotal equity attributable to equity holders of the Company357,245 198,078 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 41 Consolidated Statement of Changes in Equity For the year ended 30 June 2020 The consolidated statement of changes in equity is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 43 to 114. ShareForeignbased currencySharepaymentHedgingtranslationTreasuryAccumulated Totalcapitalreservereservereserveshareslossesequity$'000$'000$'000$'000$'000$'000$'000Balance at 1 July 2018915,224 28,207 (4,644) 15,789 (33,026) (768,068) 153,482 Adjustment from adoption of AASB 9- - - - - (400) (400) Adjusted balance at 1 July 2018915,224 28,207 (4,644) 15,789 (33,026) (768,468) 153,082 Total comprehensive income for the periodProfit or (loss)- - - - - 33,961 33,961 Other comprehensive incomeForeign currency translation differences- - (15,875) (840) - - (16,715) Changes in fair value of cashflow hedge, net of tax- - 13,075 - - - 13,075 Total comprehensive income/(loss) for the period- - (2,800) (840) - 33,961 30,321 Transactions with owners, recorded directly in equityContributions by and distributions to ownersShares issued during the period, net of issue costs15,975 - - - - - 15,975 Shares purchased by the trust-- - - (15,975) - (15,975) Share-based payment transactions- 14,675 - - - - 14,675 Total contributions by and distributions to owners15,975 14,675 - - (15,975) - 14,675 Balance at 30 June 2019931,199 42,882 (7,444) 14,949 (49,001) (734,507) 198,078 ShareForeignbased currencySharepaymentHedgingtranslationTreasuryAccumulated Totalcapitalreservereservereserveshareslossesequity$'000$'000$'000$'000$'000$'000$'000Balance at 1 July 2019931,199 42,882 (7,444) 14,949 (49,001) (734,507) 198,078 Total comprehensive income for the periodProfit for the period- - - - - 66,129 66,129 Other comprehensive incomeForeign currency translation differences- - (10,039) (334) - - (10,373) Changes in fair value of cashflow hedge, net of tax- - 16,251 - - - 16,251 Total comprehensive income/(loss) for the period- - 6,211 (334) - 66,129 72,007 Transactions with owners, recorded directly in equityContributions by and distributions to ownersShares issued during the period, net of issue costs72,872 - - - - - 72,872 Shares vested during the period- (29,784) - - 29,784 - - Shares purchased by the trust20,372 - - - (20,372) - - Share-based payment transactions- 14,289 - - - - 14,289 Total contributions by and distributions to owners93,243 (15,495) - - 9,412 - 87,161 Balance at 30 June 20201,024,442 27,387 (1,233) 14,615 (39,589) (668,378) 357,245 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 42 Consolidated Statement of Cash Flows For the year ended 30 June 2020 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements set out on pages 43 to 114. 20202019Note $'000 $'000 Cash flows from operating activitiesCash receipts from customers538,846 479,166 Cash paid to suppliers and employees(309,262) (257,019) Cash generated from operations229,584 222,147 Finance income received216 286 Finance costs paid(47,797) (53,083) Net cash (outflow)/inflow from operating activities of discontinued operations(29) 114 Net cash from operating activities30181,973 169,464 Cash flows from investing activitiesProceeds on disposal of non-current assets9,909 23,355 Payment for property, plant and equipment(118,831) (180,507) Cash acquired from acquired business36- 549 Payment for acquired entities36(57,421) (94,327) Acquisition and corporate development costs(3,509) (235) Dividends received- 141 Net cash inflow from investing activities of discontinued operations- - Net cash used in investing activities(169,852) (251,024) Cash flows from financing activitiesNet proceeds from issue of shares63,186 - Proceeds from borrowings99,708 - Repayment of borrowings(2,708) (47,516) Payment for debt establishment costs- (1,297) Repayment of lease liabilities(10,361) (4,905) Net cash outflow from financing activities of discontinued operations- - Net cash generated by/(used in) financing activities149,825 (53,718) Net increase/(decrease) in cash and cash equivalents161,946 (135,278) Cash and cash equivalents at beginning of the period36,189 171,431 Effects of exchange rate fluctuations on cash held34 36 Cash and cash equivalents at the end of the financial period198,169 36,189 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 43 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 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 2020 comprises 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 earthmoving equipment solutions and mining services solutions to its customers as well as the maintenance and remanufacturing of major components of heavy earthmoving equipment. 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 (AAS) 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 Group has adopted all of the new and revised Standards and Interpretations issued by the AASB that are relevant to its operations and effective for an accounting period that begins on or after 1 July 2019. Comparative information within the Consolidated Statement of Profit or Loss and Other Comprehensive Income relating to Employee expenses of $14,675,000 and Other direct costs of $14,108,000 has been reclassified from Other expenses to be comparable to the current year presentation. The consolidated financial statements were authorised for issue by the board of directors on 26 July 2020. (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; assets held for sale at fair value less costs of disposal; 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 a company of the kind referred to in ASIC Corporations (Rounding in Financial /Directors’ Reports) Instrument, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the financial report are rounded off to the nearest thousand unless otherwise stated. (d) Use of estimates and judgements The preparation of the consolidated financial statements in conformity with the AASB 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. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 44 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 2 Basis of preparation (continued) (d) Use of estimates and judgements (continued) Estimates and underlying assumptions are reviewed on an ongoing basis and for FY20 this review has considered any relevant implications of the global COVID-19 pandemic. The impact of 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: Recognition of tax losses In accordance with the Company’s accounting policies for deferred taxes (refer note 3(q)), 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, capital structure 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. Due to the recent history of operating profits, the company has brought to account all previously unrecognised Australian tax losses as a deferred tax asset totalling $86,638,000 (2019: $49,695,000 partial recognition) on the balance sheet. Impairment of assets The Group performs annual impairment testing as at 30 June for any intangible assets with indefinite useful lives. More frequent reviews are performed of both intangible and tangible assets or asset groups where there are potential indicators of impairment. The identification of impairment indicators involves management judgement. When an indicator of impairment is identified, a formal impairment assessment is performed. Impairment testing involves comparing an asset's recoverable amount to its carrying amount. At 30 June 2020, the Group has identified the global economic impact of COVID-19 as a potential indicator of impairment. Accordingly, a detailed impairment assessment was performed for the Group's key cash generating units (CGUs), being Rental, Workshops and Pit N Portal, at 30 June 2020. The Group has prepared value-in-use models for the purpose of impairment testing as at 30 June 2020, using five-year discounted cash flow models. Cash flows beyond the five-year period are extrapolated using a terminal value growth rate. The accounting policies applied by the Group in relation to the preparation of the impairment models are the same as those applied in its Annual Financial Report for the year ended 30 June 2019. Key areas of judgement relate to the forecast utilisation rates and pricing for the fleet as well as forecasts of repairs and maintenance expenditure and other operating costs and capital expenditure. In contemplating the impact of COVID-19, and other general factors, the Group has considered: long term commodity prices and therefore the demand for earthmoving equipment and associated services; supply chain risks and therefore the impact on the ability of the Group to deliver its products and services; and the likelihood of disruption to the operations of the Group’s customers. The Group is actively managing the impacts and risks arising from COVID-19 on its people and operations and to date there are no known significant long-term structural changes that affect the future cash flows of the CGUs. As a result, the recoverable amounts of all of the Group's CGUs continued to exceed their carrying amounts at 30 June 2020. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 45 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 2 Basis of preparation (continued) (d) Use of estimates and judgements (continued) Impairment of assets (continued) The post-tax discount rate used in the calculations is 9.0% (2019: 9.6%). The rate reflects the underlying cost of capital adjusted for market and asset specific risks. For the future cashflows of the CGU’s, 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 depend on the level of tendering activity and the Group’s conversion rate and for subsequent years were based on Emeco’s five-year outlook taking into account all available information at this current time and are subject to change over time. A compound annual growth rate (CAGR) of 2.0% was used over the five years of the forecast. The terminal value growth rate represents the long term forecast consumer price index (CPI) of 2.0% (2019: 2.0%) for all CGUs. Sensitivity analyses on the discount and growth rates, considering the current volatile market conditions, are provided below. Sensitivity analysis As part of its COVID-19 response plan, the Group has run several sensitivity analyses under different scenarios that could impact operations in the short term for its CGU’s. These scenarios include but are not limited to disruption to customer site operations and the transport of assets and employees to sites, customer demand reduction and supply chain interruption. These short-term scenarios are currently forecast to have no significant structural impacts that affect the long-term cash flows of the Group's CGUs. In addition, the Group prepared sensitivity analyses of the recoverable amounts of the two key CGUs for which detailed impairment testing was undertaken relating to key long term assumptions considering reasonably possible change scenarios. The Group considers that the two key change scenarios relate to: a change in the post-tax discount rate and; the impact on operating cash flows from any change in equipment utilisation, rates charged to customers, and the associated impact on repairs and maintenance costs and capital expenditure. The impact of these change scenarios on the recoverable amount of the two key CGUs at 30 June 2020 are included below: Post-tax discount rate Operating cash flows +1% -10.0% Rental CGU AU$m AU$m Change in recoverable amount (122.9) (71.0) Impairment charge - - Post-tax discount rate Operating cash flows +1% -10.0% PnP CGU AU$m AU$m Change in recoverable amount (24.2) (13.9) Impairment charge - - Each of the sensitivities above assumes that a specific assumption moves in isolation, while all other assumptions are held constant. A change in one of the aforementioned assumptions could be accompanied by a change in another assumption, which may increase or decrease the net impact. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 46 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 2 Basis of preparation (continued) (d) Use of estimates and judgements (continued) Assets held for sale In accordance with the Company’s accounting policies for assets held for sale (refer note 3(j)), 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 of disposal. Fair value less costs of disposal includes estimates and judgements about the market value of these assets which is dependent on the supply of and demand for the specific categories of equipment being held for sale. Changes in these estimates and assumptions could impact on the carrying amount of these assets held for sale. The carrying amount of assets held for sale are set out note 14. Business combinations In accordance with the Company’s accounting policies for business combinations (refer note 3(t)), assets and liabilities acquired under business combinations are recognised at their fair value at the date of acquisition. Estimates and assumptions have been made about the collectability of trade and other receivables, intangibles and fair value of inventory and items of property, plant and equipment and provisions. The acquisition of Pit N Portal was completed on 28 February 2020, where the fair value is assessed at acquisition date and does consider subsequent events related to COVID-19. The assessment of fair value is based on facts and circumstances as at the acquisition date. A provisional customer intangible asset has been disclosed, being the excess of consideration over the net of the fair value of the asset and liabilities at acquisition. Management has 12 months from acquisition date to finalise the acquisition accounting including a full assessment of the intangible assets. Refer to note 36 for further information on business combinations and note 5(h) for details on determination of fair value. Provision for doubtful debts The Company uses significant judgment and assumptions in the expected credit loss model used to measure the fair value of financial assets not classified as fair value through profit or loss. Refer to note 3(i) for further detail on how the Company determines expected credit losses. (e) Covid-19 Assistance The Company did not qualify for nor receive any financial assistance through the Federal Government funded Job Keeper package or any other Federal or State Government program. 3 Significant accounting policies The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those followed in the preparation of the Group’s annual consolidated financial statements for the year ended 30 June 2019, except for the adoption of new standards effective as of 1 July 2019. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. (a) Basis of consolidation (i) 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. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 47 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (a) Basis of consolidation (continued) (ii) 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. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the 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. (ii) 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 the average exchange rates for the period. 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) AASB 16 Leases The Group as lessee The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise: Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable; Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; The amount expected to be payable by the lessee under residual value guarantees; The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 48 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (c)AASB 16 Leases (continued)There has been no impact on lease payments as a result of COVID-19, either through deferral or reduction in lease payments.The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under AASB 137. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The right-of-use assets are presented as a separate line in the consolidated statement of financial position. The Group applies AASB 136 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the ‘Property, Plant and Equipment’ policy (as outlined in the financial report for the annual reporting period. Variable rents that do not depend on an index or rate are not included in the measurement the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included in the line “Other expenses” in profit or loss. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 49 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (c) AASB 16 Leases (continued) AASB 16 changed the amount and presentation of lease related expenses. Under AASB 117, operating lease expenses were presented as operating expenses, whereas AASB 16 splits the lease expenses into depreciation of the right-of-use assets recognised and finance costs on lease liabilities. This has driven a decrease in the operating lease expense and increases in depreciation and finance costs. Consequently, this has also impacted the Group’s key performance indicators such as Operating EBITDA and EBIT. Overall, the adoption of AASB 16 had an immaterial impact on the comprehensive income for the Group with a reduction in profit of $0.3 million in the 12 months to 30 June 2020. As a practical expedient, AASB 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Group has not used this practical expedient. For contracts that contain a lease component and one or more additional lease or non-lease components, the Group allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components. On transition The Group adopted AASB 16 on 1 July 2019 and applied the cumulative catch-up approach, electing to measure the right of use asset at an amount equal to the lease liability, and as a result: The use of a single discount rate to a portfolio of leases with reasonably similar characteristics; The accounting for operating leases with a remaining lease term of less than 12 months as at 30 June as short-term leases; have not adjusted comparatives; there is no impact on opening retained earnings; existing lease liabilities were carried forward; and lease liabilities were calculated for existing operating leases using the incremental borrowing rate at the date of transition. (d) Financial instruments AASB 9 Financial Instruments sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. (i) Classification The Group classifies its financial assets and liabilities in the following measurement categories: Those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss), and Those to be measured at amortised cost. The classification depends on the Group’s business model for managing financial assets and liabilities, and the contractual terms of the cash flows. Derivatives are presented as current assets or liabilities to the extent of the cashflows occurring within 12 months after the end of the reporting period. For assets and liabilities measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income. The Group reclassifies debt investments when and only when its business model for managing those assets changes. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 50 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (d) Financial instruments (continued) (ii) Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Measurement of cash and cash equivalents and trade and other receivables remains at amortised cost consistent with the comparative period. Non-derivative financial liabilities Interest bearing liabilities All loans and borrowings are initially recognised at fair value, being the amount received less attributable transaction costs. After initial recognition, interest bearing liabilities are stated at amortised cost with any difference between cost and redemption value being recognised in the statement of profit or loss over the period of the borrowings on an effective interest basis. Trade and other payables Liabilities are recognised for amounts to be paid for goods or services received. Trade payables are settled on terms aligned with the normal commercial terms in operations. Equity instruments The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as other income when the Group’s right to receive payments is established. Impairment losses (and reversal of impairment losses) on equity investments measured at Fair Value through Other Comprehensive Income (FVOCI) are not reported separately from other changes in fair value. Changes in the fair value of financial assets at fair value through profit or loss are recognised in other expenses in the statement of profit or loss as applicable. Derivative financial instruments Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity, limited to the cumulative change in fair value of the hedged item on a present value basis from the inception of the hedge. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, within other expenses. Amounts accumulated in equity are reclassified in the periods when the hedged item affects profit or loss, as follows: The gain or loss relating to the effective portion of the interest rate swaps hedging variable rate borrowings is recognised in profit or loss within ‘finance cost’. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 51 Notes to the Consolidated Financial Statements For the year ended 30 June 2019 3 Significant accounting policies (continued) (d) Financial instruments (continued) (ii) Measurement (continued) When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remains in equity until the forecast transaction occurs, resulting in the recognition of a non-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported in equity are immediately reclassified to profit or loss. Hedge ineffectiveness is recognised in profit or loss within other expenses. Accounting policies for remaining hedges and derivatives are consistent with the comparative period. (iii) Impairment The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, contract assets and lease receivables, the Group applies the simplified approach permitted by AASB 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. (iv) 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 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. (e) Property, plant and equipment (i) 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, an estimate of the costs of dismantling and removing the items and restoring the site on which they are located; and capitalised borrowing costs. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 52 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (e) Property, plant and equipment (continued) (i) Recognition and measurement (continued) 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 equipment 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. (ii) 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 ongoing 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 and residual value 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. The estimated useful lives are as follows: Buildings and leasehold improvements Plant and equipment Office equipment Motor vehicles Sundry plant 15 years 3 – 15 years 3 – 10 years 5 years 7 – 10 years Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 53 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (f) Intangible assets (i) 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. (ii) Goodwill 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 tangible and intangible assets, liabilities and contingent liabilities of the acquiree. Subsequent measurement Goodwill is measured at cost, less accumulated impairment losses. (iii) Other intangible assets Software that is acquired and internally developed by the Group and has finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. Intangibles that are acquired by the Group as part of a business combination and have finite useful lives are measured at fair value less accumulated amortisation and any accumulated impairment losses. (iv) Amortisation Intangible assets with a finite useful life 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 from the date that they are available for use. The estimated useful lives for the current and comparative periods are as follows: Software 0 – 4 years Customer contracts 0 – 3 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (g) Inventories Inventories consist of equipment and parts and 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. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 54 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (h)Work in progressProgressive work to inventory and fixed assets are carried in work in progress accounts within inventory and property, plant and equipment being (disclosed as a ‘capital work in progress’) respectively. Upon work completion the balance is reclassified from capital work in progress to the relevant category of asset within property, plant and equipment.Workshop work in progress represents jobs started but not completed by period end. Upon completion the job is invoiced to the customer.(i)Impairment (i)Non-derivative financial assetsThe expected credit loss model under AASB 9 is used to measure the fair value of financial assetsnot classified as at fair value through profit or loss. To assist in this process, the Group segregatestrade receivables into various customer segments where they may have similar loss patterns.The loss allowance is calculated by taking the following factors into consideration:Grouping of receivablesThe Group has classified its receivables into three main segments of Australian Rental, AustralianWorkshops and Pit N Portal in line with the main segments and work undertaken. The debtors ineach segment is then further classified as follows:Rental – blue chip customers, insured customers, uninsured customers and cash salecustomers.Workshop – blue chip customers, insured customers, uninsured customers, cash sales andsmall retail customers.Pit N Portal – blue chip customers, insured customers, uninsured customers, cash sales andsmall retail customers.These categories are defined as: Blue chip customers – those that are typically defined as having a market capitalisation ofgreater than $750m. The classification of Blue Chip is determined under the credit risk of theGroups Insurance Policy.Insured customers – those that are trading within terms with their trade receivable exposureunder the insured limit.Underinsured customers - those that have not been granted sufficient credit limits by the insurerto cover sales within credit terms.Cash sales – customers that pay cash and are not on terms.Uninsured customers – are all other customers that are not recognised in the above category.Historical loss rates and forward looking information The Group uses a combination of historical losses recognised for receivables in the above categories and takes a view on the future economic conditions that are representative of those expected to exist; this includes an assessment of the potential impacts of COVID-19 on the business. Specifically, the Group has considered the macro-economic impacts of the likelihood of any potential and significant decreases to commodity prices on its customers operations and therefore their potential capacity to repay amounts owing to the Group. For an investment in an equity security, objective evidence of impairment includes a significant or prolonged decline in its fair value below its cost. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 55 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (i) Impairment (continued) (i) Non-derivative financial assets (continued) Bad debt policy A provision for a doubtful debt is made when the Group receives notification a customer is placed into administration or liquidation, or information becomes available to the Group indicating collection may be in doubt. The realisation of a bad debt subsequently comes into effect when all avenues of collection have been exhausted without success, and a commercial decision is made that it is uneconomical to pursue debt recovery. Definition of default The Group considers the following as constituting an event of default for internal credit risk management purposes as historical experience indicates that financial assets that meet either of the following criteria are generally not recoverable: when the customer breaches their agreed credit limit; or information obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Group, in full. Irrespective of the above analysis, the Group considers that default has occurred when a financial asset is more than 120 days past due unless the Group has reasonable and supportable information to demonstrate that alternative default criterion is more appropriate. (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. 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 cash generating units (CGUs). The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs of disposal. Value in use is based on the estimated future cash flows, discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset 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 to reduce the carrying amounts of the assets in the CGU on a pro rata basis. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 56 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (j) 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 of disposal. Any impairment loss on a disposal group is allocated to the assets and liabilities on a pro rata basis, except for 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. (k) Employee benefits (i) Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which related services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (ii) Other long term employee benefits The Group’s net obligation in respect of long term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Re-measurements are recognised in profit or loss in the period in which they arise. (iii) Termination benefits Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. (iv) Short term benefits Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short term cash bonus or profit sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 57 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (k) Employee benefits (continued) (v) Share based payment transactions Under the Emeco FY20 long term incentive plan (LTI) and the legacy hybrid incentive plan (EHIP) and management incentive plan (MIP), certain executives have been granted rights (Rights) to receive fully paid ordinary shares (Shares) in the Company, the award and vesting of which is subject to varying performance and or service conditions. There is no entitlement to dividends (or shadow dividends) on Rights. Under the FY20 LTI plan, Rights are issued based on the performance of the executive and the Company over a three-year period, with one-third of the maximum LTI entitlement being tested each year. Issued Rights vest at the end of the three year performance period. If Emeco terminates the executive’s employment for misconduct or other breach of the executive’s employment contract, the Board may lapse some or all of the Rights issued to the executive. Rights issued under the LTI will otherwise vest. The fair value of Rights issued are based on a volume weighted average price of Shares (VWAP). The grant date in respect of the FY20 LTI Plan, for all eligible employees excluding the MD, was the day the plan was approved by the Board. Any issue of awards to the MD under the FY20 LTI plan is subject to shareholder approval. The fair value of rights granted are expensed over the three-year period from grant date to vesting date based on the maximum LTI available in each year. At the completion of the annual testing, when the final number of rights are approved with respect to the specific financial year, the expense is adjusted in the year of approval to align with the actual Rights approved which may be less than the maximum Rights available for that financial year. With respect to the MD and upon approval by the shareholders the fair value of the of the rights will be remeasured at the date of the shareholder meeting (being grant date) at which point they will be treated consistently to the other employees. If the reward to the MD by shareholders is not approved, the previously recognised expense will be reversed. Under the EHIP, Rights granted to participants have vesting dates up to two years. The fair value of rights granted are based on a VWAP and are expensed evenly over the period from grant date to vesting date. Under the MIP, Rights granted to participants are subject to service conditions. These have various vesting dates ranging up to 5 years. The fair values of these Rights are based on VWAP and are expensed evenly over the period from grant date to vesting date. In the event of death, total and permanent disability, retrenchment or retirement of the participant, Rights granted under the MIP or EHIP may vest on an accelerated basis. Rights granted under the MIP or EHIP will lapse if the executive ceases employment for any other reason. (l) 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. (m) 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. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 58 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (n) Revenue The Group has applied AASB 15 Revenue from Contracts with Customers. Revenue is disclosed based on the type of good or service provided. This is detailed below: (i) Rental revenue Revenue from the rental of both open cut and underground equipment is recognised in profit and loss based on the number of hours the machines operate each month. The rental of each machine is considered to be a separate performance obligation with the transaction price generally set at a rate per hour. Customers are billed monthly. (ii) 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. Sales are recognised when control of the products has transferred, being when the products are delivered and accepted by the customer. The group’s obligation to repair or replace faulty products under the standard warranty terms is recognised as a provision. (iii) Maintenance services Maintenance services relates to the provision of both major component and full equipment rebuilds for both internal and external customers equipment and the provision of mobile workshops and infrastructure to support both Emeco and external customers equipment fleets. Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. (iv) Mining services Mining services relate to the provision of equipment, equipment operator, technology and engineering solutions and the provision and maintenance of onsite infrastructure (electrical, ventilation, pumping, lighting services and special purpose vehicles). Mining services revenue is measured when or as the control of the goods or services is transferred to a customer. If control of the goods and services transfers over time, revenue is recognised over the period of the contract by reference to progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognised at a point in time when the customer obtains control of the goods and services. Revenue recognition relating to the provision of services is determined with reference to the stage of completion of the transactions at the end of the reporting period where the outcome of the contract can be estimated reliably. Stage of completion is determined with reference to the services performed to date as a percentage of total anticipated services to be performed. (o) Contract costs Costs incurred to prepare assets for work on a specific contract (or specific anticipated contract) that can be separately identified, such as freight of earthmoving equipment to customer sites and modifying assets to meet customer specifications, are recognised as a contract cost asset and amortised to direct costs over the term of the contract. The Group accepts that an anticipated contract is a contract where it is more likely than not that the contract will be obtained. In determining the contract asset value, the following is taken into account: costs of obtaining a contract: the incremental costs of obtaining a contract with a customer are recognised as an asset if the entity expects to recover those costs; and costs of fulfilling a contract: costs that are required to be incurred in order to fulfil contract obligations that are not already costs accounted for under other accounting standards i.e. inventory or property, plant and equipment. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 59 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (o) Contract costs (continued) Costs that relate directly to a contract (or a specific anticipated contract) include any of the following: direct labour; direct materials; allocations of costs that relate directly to the contract or to contract activities; costs that are explicitly chargeable to the customer under the contract; and other costs that are incurred only because an entity entered into the contract. Amortisation and impairment An asset recognised shall be amortised to direct costs on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. An impairment loss is recognised in direct costs in the profit or loss, to the extent that the carrying amount of the contract asset exceeds the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates; less the costs that relate directly to providing those goods or services and that have not been recognised as expenses. (p) Finance income and finance costs The Group’s finance income and finance costs include: interest income; interest expense; dividend income; discount on repurchased debt; 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; withholding tax; premium paid on repurchase of debt; the net gain or loss on hedging instruments that are recognised in profit or loss; 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. (q) Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. (i) Current tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date. (ii) Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 60 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (q) Income tax (continued) Deferred tax is not recognised for: temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; 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 and increased to the extent unrecognised tax losses are now considered probable. (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 entities acquired during the period were added to the tax consolidated group on the date of acquisition. The head entity of the tax consolidated group is Emeco Holdings Limited. (r) 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. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 61 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 3 Significant accounting policies (continued) (s) 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. (t) Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition related costs are generally recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with AASB 112 Income Taxes and AASB 119 Employee Benefits respectively. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 62 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 4 New standards and interpretations The new Australian Accounting Standards and Interpretations which are mandatory and have been adopted by the Group are set out below: (i) AASB 16 Leases AASB 16 Leases has been adopted by the Group in the current reporting period. Please refer to the Group’s lease accounting policy in note 3(c). Overall, the adoption of AASB 16 had an immaterial impact on the comprehensive income for the Group with a reduction in net profit after tax of $0.3 million in the 12 months to 30 June 2020. (ii) IFRIC 23 Uncertainty over Income Tax Treatments The Group has adopted IFRIC 23 for the first time in the current year. IFRIC 23 sets out how to determine the accounting tax position when there is uncertainty over income tax treatments, under AASB 112 Income Taxes. The Interpretation requires the Group to: determine whether uncertain tax positions are assessed separately or as a group; and assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings: – If yes, the Group should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income tax filings. – If no, the Group should reflect the effect of uncertainty in determining its accounting tax position using either the most likely amount or the expected value method. There were no adjustments to the amounts recognised in the financial report as a result of adopting IFRIC 23. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 63 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 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. (a) 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 property, plant and equipment has been determined with reference to an independent external valuation in addition to comparisons to similar assets currently on market. (b) Trade and other receivables The fair value of trade and other receivables, 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 and interim reporting date. (c) Cross currency interest rate swaps 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. (d) 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 and interim 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 leases the market rate of interest is determined by reference to similar lease agreements. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 64 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 5 Determination of fair values (continued) (e) Share based payment transactions The fair value of the Rights awarded under the LTI plan, MIP and EHIP are measured using the volume weighted average price of Shares as at the grant date. The volume weighted average price inputs include the weighted average of the closing share price and volume traded over a specified period of time. (f) 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. (g) Assets held for sale The fair value of assets designated as held for sale are determined with reference to an independent external valuation, market demand and costs of disposal. (h) Business combinations The fair value of consideration paid for the acquisition of entities has been determined using the market price of the Company’s listed share price. The methodology has also been applied to the valuation of investments acquired through the business combination. The fair value of property, plant and equipment has been determined with reference to an independent external valuation in addition to comparisons to similar assets currently on market. The fair value of work in progress inventory acquired has been valued by agreement between the buyer and seller. The collectability of trade and other receivables has been assessed and compared to subsequent receipt of payment in determining the fair value of this asset class. The fair value of customer contracts has been assessed using the multi-period excess earnings methodology. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 65 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 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. The consolidated entity holds the following financial instruments (a) The carrying value of each of these items approximates fair value 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 controlled 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. 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. Carried at fair value through profitor loss using level one valuationtechnique (based on share pricesquoted on the relevant stock exchanges)Investments in equity securitiesTrade and other payables (note 23) (a)Derivatives designated under two valuation techniqueCarried at amortised costCash and bank balances (note 16) (a)hedge accounting using levelTrade and other receivables (note 17) (a)Derivative financial instruments (note 18)Interest bearing liabilities (note 24) Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Credit risk (continued) 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 (including VAT/GST) Cash and cash equivalents Derivatives Consolidated Carrying amount 2020 $'000 2019 $'000 93,516 20,808 198,169 38,918 351,411 82,009 5,766 36,189 18,496 142,460 Note 17 17 16 18 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 and generally operates on a ‘cash for keys’ policy for the sale of equipment and parts. In response to the COVID-19 pandemic the Group has also increased its internal review and authorisation procedures that are applied to new clients and in the ongoing strengthening of appropriate credit limits for existing customers. 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 assessed on a case by case basis and where possible, prepayment or appropriate security such as a bank guarantee or letter of credit. Where commercially available the Group aims to insure the majority of rental customers that are not considered either blue chip customers, subsidiaries of blue chip companies or Government. Blue chip customers are determined as those customers who have a market capitalisation of greater than $750,000,000 (2019: $750,000,000). The Australian business held insurance for the entire financial year ended 30 June 2020. EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 66 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 67 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Credit risk (continued) The aging of the Group’s trade receivables at the reporting date was: Using the expected credit loss model (ECL), the Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. To effectively apply the ECL, the Group has categorised its trade receivables as follows: - Blue chip customers: defined as having a market capitalisation of greater than $750,000,000; - Insured customers: those that are trading within terms and their trade receivable exposure under the insured limit; - Underinsured: those that have not been granted sufficient credit limits by the insurer to cover sales within credit terms; - Uninsured customers: all other customers that are not recognised in the above category. The Group’s maximum exposure to credit risk for trade receivables at the reporting date by type of customer was: The Group considers blue chip and insured customers and assumes no risk. The Group only assess uninsured customers, underinsured customers and customers that have breached their current credit limit in the ECL calculation. The Group uses a combination of historical losses recognised for receivables in the above classifications and takes a view on the economic conditions that are representative of those expected to exist during the life of the receivable. This is based on the historical loss rates, ageing of debtors and economic factors that include commodity prices. GrossImpairmentGrossImpairment2020202020192019$'000$'000$'000$'000Not past due74,109 - 71,542 - Past due 0-30 days9,348 - 8,068 - Past due 31-60 days9,804 (282) 1,443 - Past due 61 days254 (254) 956 (516) 93,516 (536) 82,009 (516) ConsolidatedConsolidated20202019$'000$'000Blue chip (including subsidiaries)33,982 32,911 Insured38,222 38,430 Underinsured11,701 - Uninsured9,612 10,668 93,516 82,009 ConsolidatedCarrying amount Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 68 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Credit risk (continued) Economic data It is anticipated that a movement in key economic data i.e. commodity prices, impacts the expected credit loss as it may drive the way our customers’ run their operations, achieve profitability and cash flows to pay their receivables. As part of this assessment, the Group has considered the potential impact of COVID-19 on commodity demand and prices. The Group determined potential scenarios primarily driven by changes in commodity prices, which have been weighted by probability to determine the expected credit loss provision. Loss history Given the significant change in operations and customer mix due to the acquisition of Orionstone and Andy’s in March 2017, Force in November 2018, Matilda in July 2018, and Pit N Portal in February 2020 the Group have determined it is not appropriate to include a history earlier than FY18. Therefore, only loss history from FY18 is used for this assessment. Going forward, management plan on using an average loss history over 3-5 years depending on what is appropriate for the business at that point in time and in line with expected future operations. Based on the factors outlined above, the Group’s expected credit loss at reporting date was $80,000. In addition to the $130,000 provision calculated based on historical loss trends and economic factors, $406,000 relating to specific customers is considered doubtful by the Group and has been provided for. The movement in the credit loss allowance in respect of trade receivables during the year was as follows: The Group believes that the unimpaired amounts that are past due by more than 30 days are still collectible, based on industry standards, historic payment behaviour and extensive analysis of the underlying customers’ credit ratings. Credit-impaired financial assets The Group will assess if a financial asset is impaired when amounts are past due by more than 120 days. A provision for impairment will be recognised unless the Group has reasonable and supportable information that an impairment is not required to be recognised. Cash The Group held cash and cash equivalents of $198,169,000 at 30 June 2020 (2019: $36,189,000), 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 2020 the Group held $Nil of bank guarantees (2019: $Nil) and $Nil of prepayments (2019: $Nil). ImpairmentImpairment20202019$'000$'000Impairment allowance as at 1 July under AASB139- 352 Credit loss allowance recognised on AASB 9 transition- 400 Opening loss allowance as at 1 July 516 752 Net remeasurement of loss allowance1,029 (187) Write-offs(1,009) (49) Loss allowance as at 30 June 2020536 516 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 69 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Credit risk (continued) Guarantees Financial guarantees are generally only provided to wholly owned subsidiaries or when entering into a premise rental agreement or asset lease liability. Details of outstanding guarantees are provided in note 29. At 30 June 2020 $1,654,900 guarantees were outstanding (2019: $1,744,000).Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group monitors working capital limits and employs maintenance planning and life cycle costing models to price its rental contracts. These processes assist it in monitoring cash flow requirements and optimising cash return in its operations. Typically, the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 60 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. The Group has issued secured fixed interest notes to the value of US$322,131,000 which mature on 30 March 2022. The nominal fixed interest rate is 9.25%. These notes will remain fully drawn until maturity. On 8 January 2020, the Group increased the Revolving Credit Facility (RCF) facility to $100,000,000 (30 June 2019: $65,000,000), with its existing lenders. This facility matures in September 2021 with a two year option to extend, which has two sub facilities consisting of a Loan Note Agreement Facility (LNA) of A$97,000,000 (30 June 2019 $62,000,000) and a Bank Guarantee Facility of A$3,000,000. The bank guarantee facility attracts a fee of up to 1.57% on the unutilised portion of the facility, and a fee of 3.5% on the outstanding balance of guarantees on issue. The nominal interest rate on the LNA is equal to the aggregate of the bank bill swap rate (BBSY) plus a margin of between 3.25% and 3.5% dependant on the portion of the facility utilised (3.25% if less than 25% drawn and 3.5% if greater than 25% drawn). The facilities require the Group to maintain a collateral coverage ratio greater than 3.0x and a fixed charge coverage ratio greater than 1.5x. At 30 June 2020 the Group had drawn all $97,000,000 of the LNA and had utilised A$1,654,900 of the bank guarantee facility. The LNA was drawn due to global bank liquidity concerns at the start of COVID-19, and at 30 June 2020 is held in an “at call” deposit account with a leading Australian bank. The Group has a facility agreement comprising a credit card facility with a limit of A$150,000 and is secured via a cash cover account. The Group has lease facilities totalling A$62,559,000 (2019: A$21,909,000) which have various maturities up to July 2024. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 70 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Liquidity risk (continued) The following are the contractual maturities of non-derivative financial liabilities and net derivative financial assets/liabilities, including estimated interest payments and excluding the impact of netting agreements. It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. Contract-Carryingual cash6 mths orMore thanConsolidatedamountflowsless6-12 mths1-2 years2-5 years5 years30 June 2020$'000$'000$'000$'000$'000$'000$'000Non-derivative financialliabilitiesSecured notes issue461,138563,44421,70921,709520,026- - Secured credit facility97,00097,000- - 97,000- - Lease liabilities62,55969,5098,07820,42911,76522,3336,904 Trade and other payables46,75146,75146,751- - - - 667,448776,70576,53842,138628,79122,333 6,904 Derivative financialasset/(liability)Net cross currency interest rate swapsused for hedging asset/(liability)28,03439,9311,6211,59536,715- - 28,03439,9311,6211,59536,715- - Contract-Carryingual cash6 mths orMore thanConsolidatedamountflowsless6-12 mths1-2 years2-5 years5 years30 June 2019$'000$'000$'000$'000$'000$'000$'000Non-derivative financialliabilitiesSecured notes issue446,984593,88021,24421,24442,488508,904 - Lease liabilities21,90925,7012,9832,2144,20316,301 - Trade and other payables28,79528,79528,795- - - - 497,688648,37653,02223,45846,691525,205- Derivative financialasset/(liability)Net cross currency interest rate swapsused for hedging asset/(liability)7,03143,1551,6211,6033,21636,715- 7,03143,1551,6211,6033,21636,715- Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 71 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Liquidity risk (continued) The gross inflows/(outflows) disclosed in the previous tables 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. cross currency interest rate swaps. 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 functional currency of the Group is the Australian dollar (AUD). The Group holds borrowings in United States Dollars (USD) for which currency risk exists. In order to manage this risk, the Group has entered into cross currency interest rate swaps. Each of the USD interest and principle repayments due in the future have been hedged, the average USD/AUD rate across these future payments is 0.7293 at year end (2019: 0.7293). 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. 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. At 30 June 2020, the Group had issued secured fixed interest notes to the value of US$322,131,000 notes on issue. The full face value of the principle and interest of the notes have been hedged to Australian dollars until maturity. As derivatives have been entered into, hedge accounting has been applied to these instruments. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 72 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Market risk (continued) The Group is holding the following cash flow hedges: The hedges expire in March 2022. The impact of hedged items on the statement of financial position is, as follows: The effect of the cash flow hedges in the statement of profit or loss and other comprehensive income is as follows: Change in fairvalue used formeasuringNotionalNotionalCarryingAverage ineffectivenessamountamountamountfixed interestfor the periodUS$'000AU$'000AU$'000rate$'000As at 30 June 2020Cross currency interest rate swaps322,131 441,668 28,034 9.87%6,211 As at 30 June 2019Cross currency interest rate swaps322,131 441,668 7,031 9.87%(2,800) Derivative financial instrumentsLine item in thestatementof financial positionDerivative financial instrumentsChange in fairChange in fairvalue used forvalue used formeasuringHedgemeasuringHedgeineffectivenessreserveineffectivenessreserve$'000$'000$'000$'000Foreign exchange6,211 (1,233) (2,800) (7,444) 20202019Total hedgingIneffectivenessAmountgain/(loss)recognisedLine itemreclassifiedrecognised in profit in thefrom OCI to in OCIor lossstatement ofprofit or loss$'000$'000profit or loss$'000As at 30 June 2020Foreign exchange6,211 (2,091) - (10,039) As at 30 June 2019Foreign exchange(2,800) - - (15,875) Net foreign exchange lossNet foreign exchange lossLine item in thestatementof profit or loss Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 73 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 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: The following significant exchange rates applied during the year: USDUSD20202019$'000$'000Cash113 253 Secured notes issued(322,131) (322,131) Gross balance sheet exposure(322,018) (321,878) Cross currency interest rate swap to hedge the secured notes issued322,131 322,131 322,131 322,131 Net exposure 113 253 2020201920202019US Dollars0.67140.69430.68630.7013Reporting date spot rateAverage rate Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 74 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Market risk (continued) Sensitivity analysis A weakening of the Australian dollar, as indicated below, against the US dollar, would have affected the measurement of financial instruments denominated in US dollars 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 2020, as indicated below: Interest rate risk In accordance with the board’s policy the Group is required to maintain an appropriate exposure to changes in interest rates on borrowings on a fixed rate basis, taking into account assets with exposure to changes in interest rates. This is achieved by entering into cross currency interest rate swaps and the issue of fixed interest notes. 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: EquityProfit or lossEquityProfit or loss$'000$'000$'000$'00030 June 2020USD (10 percent movement)(4,694) (10) 5,737 13 30 June 2019USD (10 percent movement)(5,814) (23) 7,105 28 ConsolidatedStrengtheningWeakening20202019Note$'000$'000Variable rate instruments:Cash at bank16 198,169 36,189 198,169 36,189 Fixed rate instruments:Effective interest rate swaps to hedge interest rate risk28,034 7,031 Interest bearing liabilities (notes)24 (469,373) (459,334) Interest bearing liabilities (loan note agreement)24 (97,000) - Interest bearing finance leases24 (62,559) (21,909) (600,898) (474,212) Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 75 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Market risk (continued) Cash flow hedges The cross currency interest rate swaps (hedging instrument) are accounted for as cash flow 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 of the USD fixed rate interest payments on the debt principal amount of the Company’s outstanding debt and the foreign currency remeasurement risk arising on the principal balance every six months on the Company’s outstanding debt. Cash flow sensitivity analysis for fixed rate instruments A change of 100 basis points in interest rates at the reporting date would have increased/(decreased) equity 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 2019. Detailed below is the profit and loss impact of cash flow hedges during the year. 100bp100bp100bp100bpincreasedecreaseincreasedecreaseBBSWBBSWLiborLiborCash flow hedges$'000$'000$'000$'00030 June 2020Cross currency interest rate swaps8,340 (8,505) (8,913) 9,225 Cash flow sensitivity (pre-tax)8,340 (8,505) (8,913) 9,225 30 June 2019Cross currency interest rate swaps13,275 (13,658) (13,486) 13,915 Cash flow sensitivity (pre-tax)13,275 (13,658) (13,486) 13,915 EquityEquity Profit or loss20202019Financial instrument$'000$'000Cross currency interest rate swap- Close out of hedges- (676) - Hedge ineffectiveness(2,091) - Net profit and loss impact before tax(2,091) (676) Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 76 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Market risk (continued) 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: (1)Carried at amortised cost with movements in fair value of the underlying hedged item is recorded in thestatement of other comprehensive income. Any movements in the fair value of unhedged items arerecognised in the statement of profit or loss.The basis for determining fair values is disclosed in note 5. Fair value hierarchy 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 with the exception of certain investments in shares that are categorised at level 1. Fair value estimates of the cross currency interest rate swaps are based on relevant market information and information about the financial instruments which are subjective in nature. The fair value of these financial instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, spot rates, and forward rates. To comply with the provisions of AASB 13 Fair Value Measurement, the Group incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. CarryingFairCarryingFairamountvalueamountvalueNote$'000$'000$'000$'000Assets carried at fair valueCross currency interest rate swaps1838,918 38,918 18,49618,49638,918 38,918 18,49618,496Assets carried at amortised costReceivables17113,788113,78887,25987,259Cash and cash equivalents16198,169198,16936,18936,189311,957311,957123,448123,448Liabilities carried at fair valueCross currency interest rate swaps18(10,884) (10,884) (11,465) (11,465) (10,884) (10,884) (11,465) (11,465) Liabilities carried at amortised costSecured bank loans24527 - 959 - Secured notes issue (1)24(461,138) (469,373) (446,984) (459,334) Lease liabilities24(62,559) (69,509) (21,909) (25,701) Loan Note Agreement2497,000 97,000 - - Trade and other payables2389,237 89,237 (83,714) (83,714) (336,932) (352,646) (551,648) (568,749) 20202019 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 77 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 6 Financial instruments (continued) Market risk (continued) 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. The Group’s ROC for the year was 14.9% (2019: 18.0%). The Group’s return on invested capital at the end of the reporting period was as follows: (1)Average invested capital is average net assets add net debt, less intangibles.7 Other income (1)Included in net profit on the sale of non-current assets is the sale of rental equipment, including thosenon-current assets classified as held for sale. The gross proceeds from the sale of this equipment in2020 was $9,909,000 (2019: $23,355,000).(2)Included in sundry income are fees charged on overdue accounts and bad debts recovered.20202019$'000$'000105,335 99,107 705,907 549,167 EBIT (continuing and discontinued operations) Average invested capital (1)EBIT return on capital at 30 June14.9%18.0%Consolidated20202019$'000$'000Net profit/(loss) on sale of non current assets (1)945 492 Dividend income- 141Sundry income (2)2,647 5,861 3,592 6,494 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 78 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 8 Profit before income tax expense for continuing operations 20202019Note$'000$'000Profit before income tax expense has been arrived atafter charging/(crediting) the following items:Impairment of tangible assets:- inventory194,915 43 - property, plant and equipment8,835 6,641 13,750 6,684 Other direct costs:- motor vehicles2,914 3,398 - safety expenses1,320 896 - travel and subsistence expense3,948 3,925 - hired in equipment and labour5,432 3,439 - workshop consumables, tooling and labour7,787 5,799 21,401 17,457 Employee expenses:- salaries, wages and superannuation57,898 38,134 - employee share plan expenses14,289 14,675 72,187 52,809 Other expenses:- bad debts1,009 49 - doubtful debts/(reversal)(57) (236) - insurance2,442 2,949 - rental expense945 5,596 - telecommunications and IT1,331 1,230 - restructuring and redundancies2,054 4,423 - corporate development expenses2,009 98 - impairment of investments461 - - consulting fees3,581 4,673 - other expenses4,018 8,953 17,793 27,735 Depreciation of:- buildings120 153 - plant and equipment - owned102,100 83,731 - plant and equipment - leased3,163 2,039 - office equipment134 210 - motor vehicles501 387 - leasehold improvements192 174 - sundry plant795 715 less discontinuing operations depreciation expense- - 21107,004 87,409 Right of use asset227,010 - Total depreciation114,014 87,409 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 79 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 8 Profit before income tax expense for continuing operations (continued) (1) On 22 October 2018, Emeco undertook an excess cash offer to buy back notes on market at a price of 1.0675. The total face value of notes bought back and subsequently cancelled was US$33,797,000 leaving US$322,131,000 notes outstanding. 20202019$'000$'000Finance costs:- interest expense47,474 46,244 - writeoff previous facility costs- 642 - amortisation of debt establishment costs using effective interest rate4,594 3,977 - other facility costs753 1,054 - premium paid on buyback of issued debt (1)- 3,207 Net finance costs52,821 55,124 Finance income:- interest income(216) (286) - hedge gains(2,091) (676) Net finance income(2,307) (962) Foreign exchange (gain)/loss:Net realised foreign exchange (gain)/loss- 3,326 Net unrealised foreign exchange (gain)/loss(366) 7,945 Net foreign exchange (gain)/loss(366) 11,271 Business acquisition expenses- acquisition expenses 1,500 (262) Total business acquisition expenses1,500 (262) Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 80 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 9 Auditor’s remuneration The Company has engaged with Deloitte for the provision of audit and tax services as well as other specific assurance including provision of a comfort letter and investigating accountants reports in relation to rights issues. No other advisory or consulting services were provided by Deloitte during the year. 20202019$$Audit services Auditors of the Company Deloitte Touche Tohmatsu Australia: - audit and review of financial reports538,602 557,750 Overseas Deloitte Firms: - other assurance services19,322 37,940 557,924 595,690 Other assurance and agreed upon procedures Auditors of the Company Deloitte Touche Tohmatsu Australia: - other assurance services223,142 91,374 223,142 91,374 Other services Auditors of the Company Deloitte Touche Tohmatsu Australia: - taxation services141,846 227,223 Overseas Deloitte Firms: - taxation services28,688 91,500 170,534 318,722 951,600 1,005,787 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 81 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 10 Taxes a. Recognition in the income statement b. Current and deferred tax expense/(benefit) recognised directly in equity c. Numerical reconciliation between tax expense and pre-tax net profit 11 Current tax assets and liabilities The current tax asset for the Group of $Nil (2019: $Nil) represents income taxes recoverable in respect of prior periods and that arise from payment of taxes in excess of the amount due to the relevant tax authority. 20202019Note$'000$'000Deferred tax benefit:Origination and reversal of temporary differences and tax losses in the current year(10,945) - Tax benefit12(10,945) - Consolidated20202019$'000$'000Share issue costs(507) - Cashflow hedges2,662 (1,200) 2,155 (1,200) Consolidated20202019$'000$'000Prima facie tax expense calculatedat 30% on net profit16,555 10,189 Increase/(decrease) in income tax expense due to:Australian tax losses not previously recognised(28,579) (8,010) Dercognition / (recoupment) of foreign tax losses56 (41) Non-deductible acquisition costs1,053 (105) Other non-deductible expenses166 6 Under/(over) provided in prior years(196) (2,039) Tax benefit(10,945) - Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 82 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 12 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Movement in deferred tax balances 202020192020201920202019Consolidated$'000$'000$'000$'000$'000$'000Property, plant and equipment- - (62,567) (43,475) (62,567) (43,475) Intangibles- - (4) (29) (4) (29) Receivables- - (491) (402) (491) (402) Deriative contracts- - (8,410) (2,109) (8,410) (2,109) Right of use contracts- - 33 - 33 - Other financial assets- - (31) (127) (31) (127) Inventories- 4,562 (105) - (105) 4,562 Payables1,257 1,146 - - 1,257 1,146 Interest bearing loans and borrowings14,387 11,376 - - 14,387 11,376 Unearned revenue- - (25) (21) (25) (21) Business costs1,176 1,189 - - 1,176 1,189 Provisions3,354 2,215 - - 3,354 2,215 Borrowing costs31 56 - - 31 56 Employee share costs- - (2,688) (864) (2,688) (864) Tax losses carried forward86,638 49,695 - - 86,638 49,695 Tax assets/(liabilities)106,843 70,239 (74,288) (47,027) 32,555 23,212 Set off of tax(74,288) (47,027) 74,288 47,027 - - Net tax assets32,555 23,212 - - 32,555 23,212 NetAssetsLiabilitiesRecognisedBalancesRecognisedRecognisedin otherBalanceacquiredin profitdirectly comprehensiveBalance1 July 1928 Feb 20or lossin equityincome30 June 20$'000$'000$'000$'000$'000$'000Property, plant and equipment(43,475) (323) (18,769) - - (62,567) Intangible assets(29) - 25 - - (4) Receivables(402) 33 (122) - - (491) Derivative - hedge receivable(2,109) - (3,639) (2,662) - (8,410) Right of use contracts- 23 10 - - 33 Other financial assets(127) - 96 - - (31) Inventories4,562 - (4,667) - - (105) Payables1,146 164 (53) - - 1,257 Interest bearing loans and borrowings11,376 - 3,011 - - 14,387 Unearned revenue(21) (207) 203 - - (25) Business costs1,189 - (520) 507 - 1,176 Provisions2,215 863 276 - - 3,354 Borrowing costs56 - (25) - - 31 Employee share costs(864) - (1,824) - - (2,688) Tax losses carried forward49,695 - 36,943 - - 86,638 23,212 553 10,945 (2,155) - 32,555 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 83 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 12 Deferred tax assets and liabilities (continued) Movement in deferred tax balances Unrecognised deferred tax assets RecognisedBalancesRecognisedRecognisedin otherBalanceacquiredin profitdirectly comprehensiveBalance1 July 182 Jul 18or lossin equityincome30 June 19$'000$'000$'000$'000$'000$'000Property, plant and equipment(8,540) - (34,935) - - (43,475) Intangible assets- (241) 212 - - (29) Receivables3,335 - (3,737) - - (402) Derivative - hedge receivable647 - (1,847) 1,200 - - Other financial assets(324) - (1,912) - - (2,236) Inventories(2,090) - 6,652 - - 4,562 Payables724 19 403 - - 1,146 Interest bearing loans and borrowings4,782 - 6,594 - - 11,376 Unearned revenue- - (21) - - (21) Employee benefits482 - (482) - - - Business costs1,704 9 (524) - - 1,189 Provisions1,550 48 617 - - 2,215 Borrowing costs- - 56 - - 56 Employee share costs(473) - (391) - - (864) Tax losses carried forward20,380 - 29,315 - - 49,695 22,177 (165) -1,200 - 23,212 Consolidated20202019$'000$'000The following deferred tax assets have not beenbrought to account as assets:Tax losses - Australia- 28,579 Tax losses - Outside Australia82,289 82,234 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 84 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 13 Capital and reserves 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. Movements in ordinary share capital (1)On 29 January 2020, Emeco announced a fully underwritten pro-rata accelerated non-renounceableentitlement offer. The retail and institutional components were both completed on 21 February 2020,with an issue price of $2.07.20202019$'000$'000Share capital368,551,024 (2019: 323,212,432) ordinary shares, fully paid 1,100,329 1,007,086 Acquisition reserve(75,887) (75,887) 1,024,442 931,199 ConsolidatedDetailsDateSharesIssue price ($)$'0001 July 2019323,212,432 1,007,086 21 February 202031,413,195 2.07 65,025 28 February 20204,830,918 1.90 9,179 31 March 20209,094,479 2.24 20,372 (1,332) 30 June 2020368,551,024 1,100,329 6,940,854 BalanceIssue of shares for rights issue (1)Issue of shares for acquisition of Pit n Portal Issue of shares under employee share schemeLess: share issue costs, net of deferred taxBalanceLess: treasury sharesIssued capital361,610,171 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 85 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 13 Capital and reserves (continued) Treasury shares (1) The treasury shares comprise of shares purchased on market to satisfy the vesting of shares and rights under the employee share plans. Rights that are forfeited under the Company’s employee share plans due to employees not meeting the service vesting requirement will remain in the reserve. As at 30 June 2020 the Company held 6,940,854 treasury shares (2019: 16,847,903), 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 underlying hedged debt and 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(k)(v)). Dividends (1) No dividends were paid or declared during the year (2019: $Nil) or prior to the release of this report. Franking account The above available amounts are based on the balance of the dividend franking account at year end adjusted for: (a) franking credits that will arise from the payment of current tax liabilities and recovery of current tax receivables; (b) franking debits that will arise from the payment of dividends recognised as a liability at the year end; (c) franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the year end; (d) franking credits that the entity may be prevented from distributing in subsequent years; and (e) franking credits acquired through business combinations. 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 (2019: $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 $85,394,000 (2019: $77,222,000) franking credits. ________________________ (1) Refer to Consolidated Statement of Changes in Equity. 20202019 $'000 $'000 Dividend franking account30% franking credits available to shareholders of Emeco Holdings Limited for subsequent financial years85,394 77,222 The Company Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 86 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 14 Disposal groups and non-current assets held for sale During the year $18,195,000 (FY19: $24,380,000) of non-current assets were transferred from property, plant and equipment into non-current assets held for sale. Assets previously classified and classified during the period as held for sale were further impaired by $8,912,000 to their fair value less cost to sell based on market prices of similar equipment. As at 30 June 2020, the non-current assets held for sale comprised assets of $3,192,000 (2019: $2,906,000). Level 2 fair value hierarchy has been used in determining the fair value with reference to an independent valuation utilising observable market valuations. The Group is actively marketing these assets and they are expected to be disposed of within 12 months. Liabilities directly associated with assets classified as held for sale relate to assets designated as held for sale that have outstanding lease repayments remaining. All remaining payments are due within six months. 20202019$'000$'000Assets classified as held for saleProperty, plant and equipment - continuing operations3,192 2,832 Property, plant and equipment - discontinuing operations- 74 Net assets classified as held for sale3,192 2,906 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 87 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 15 Segment reporting The Group has four (2019: three) reportable segments, as described below, three of which are the Group’s strategic business units and one of which (Chile) is discontinued. 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: Rental Provides a wide range of earthmoving equipment solutions to customers in Australia. Additional technology platforms have been developed to enable customers to improve earthmoving efficiencies of their rental machines. Workshops Provides maintenance and component rebuild services to customers in Australia. Pit N Portal Provides a range of mining services solutions and associated services to customers in Australia. Chile (discontinued) Provided a range of earthmoving equipment and maintenance services to customers in Chile. This segment was discontinued in June 2017. In June 2017 the board resolved to exit the Chilean business after a strategic review of the operations. The business has been wound down and will not materially contribute to the future earnings of the Group. The loss from discontinued operations of $3,000 (2019: profit of $287,000) is attributable entirely to the owners of the Company. Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before interest and income tax as included in the internal management reports that are reviewed by the Group’s managing director and board of directors. Segment earnings before interest, income tax, depreciation and amortisation is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm’s length basis. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 88 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 15 Segment reporting (continued) Information about reportable segments DiscontinuedRentalWorkshopsPit n PortalChileTotal$'000$'000$'000$'000$'000Period ended 30 June 2020Revenue from rental income387,959 --1,171 389,130 Revenue from the sale of machines and parts4,049 -80 -4,129 Revenue from mining services--39,672 -39,672 Revenue from maintenance services33,114 163,804 --196,918 Intersegment revenue-(83,789)(4,460)-(88,249)Revenue from external customers425,122 80,015 35,292 1,171 541,600 Other income3,242 210 28 -3,480 Segment earnings before interest, tax, depn and amortisation264,915 7,911 9,260 74 282,160 Impairment of tangible assets(13,633)-(118)(77)(13,828)Depreciation and amortisation(107,295)(2,438)(3,770)-(113,503)Segment result (EBIT)143,987 5,473 5,372 (3)154,830 Corporate overheads(49,498)EBIT105,332 Finance income/(expense) (net)(50,514)Foreign exchange movements366 Net profit before tax55,184 Tax benefit/(expense)10,945 Net profit after tax66,129 Total assets for reportable segments676,347 44,010 100,190 140 820,686 Unallocated assets267,905 Total Group assets1,088,591 Net capital expenditure100,600 1,613 6,710 -108,922 Total liabilities for reportable segments77,365 32,374 21,672 43 131,454 Unallocated liabilities599,893 Total Group liabilities731,346 DiscontinuedRentalWorkshopsChileTotal$'000$'000$'000$'000Period ended 30 June 2019Revenue from rental income363,258 -4,527 367,785 Revenue from the sale of machines and parts1,680 --1,680 Revenue from maintenance services36,760 114,678 -151,438 Intersegment revenue-(51,890)-(51,890)Revenue from external customers401,698 62,788 4,527 469,013 Other income6,047 90 -6,137 Segment earnings before interest, tax, depreciation and amortisation232,824 4,665 274 237,762 Impairment of tangible assets(6,684)--(6,684)Depreciation and amortisation(87,823)(75)-(87,898)Segment result (EBIT)138,317 4,590 274 143,180 Corporate overheads(44,292)EBIT98,888 Finance income/(expense) (net)(53,656)Foreign exchange movements(11,271)Net profit before tax33,961 Tax benefit/(expense)-Net profit after tax33,961 Total assets for reportable segments658,260 26,922 73 685,255 Unallocated assets83,415 Total Group assets768,670 Net capital expenditure155,964 1,188 -157,152 Total liabilities for reportable segments46,977 17,827 -64,803 Unallocated liabilities505,788 Total Group liabilities570,591 AustralianAustralian Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 89 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 16 Cash and cash equivalents 17 Trade and other receivables The Group’s exposure to credit risks, currency risks and impairment losses associated with trade and other receivables are disclosed in note 6. 20202019$'000$'000Cash at bank198,169 36,189 Consolidated20202019$'000$'000CurrentTrade receivables93,516 82,009 Less: Expected credit losses(536) (516) 92,980 81,493 VAT/GST receivable1,798 2,050 Accrued revenue15,019 102 Other receivables3,991 3,614 113,788 87,259 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 90 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 18 Derivatives 19 Inventories (1) During the year ended 30 June 2020 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 $4,915,000 (2019: $43,000). (2) $1.9m of trading stock was acquired from Pit N Portal in March 2020. 20202019$'000$'000Non-current assetsCross currency interest rate swaps38,918 18,496 38,918 18,496 Current liabilitiesCross currency interest rate swaps(10,884) (11,465) (10,884) (11,465) Consolidated20202019$'000$'000Work in progress - at cost (1)3,106 4,090 Consumables, equipment & spare parts - at cost9,075 457 Total at cost12,181 4,547 Equipment and parts - at NRV (2)2,586 1,798 Total inventory14,767 6,345 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 91 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 20 Intangible assets Contract intangible and goodwill On the acquisition of Pit N Portal, a provisional customer intangible has been recognised. This represents the fair value of the residual value of the purchase price of the company over the fair value of the identifiable assets and liabilities acquired. Management has 12 months from date of acquisition to assess the value of identifiable intangible assets of an acquired entity. Once the customer intangible has been assessed, it will be amortised over the determined life of the intangible. The contract intangible arising in the current period is recognised in the Pit N Portal operating segment. Refer to note 36. Goodwill was recognised on the acquisition of Matilda Equipment Holdings Pty Ltd (Matilda) in FY19 and represents the residual value of the purchase price of the company over the fair value of the identifiable assets and liabilities acquired. On acquisition of Matilda an intangible asset was identified for $802,000, being the value of existing customer contracts. The goodwill is recognised in the Australian Rental operating segment. Refer to note 36. Software Software has been acquired and developed internally by the business for asset management, monitoring and planning purposes. Software is amortised over 0 to 4 years. Amortisation and impairment of intangible assets The amortisation charge and impairment of intangible assets are recognised in the following line item in the income statement: 20202019$'000$'000Goodwilll8,005 8,005 8,005 8,005 Contract intangible1,115 802 Less: Accumulated amortisation(802) (725) 313 77 Software - at cost7,240 5,334 Less: Accumulated amortisation(5,306) (4,340) 1,934 994 Total intangible assets10,252 9,076 Consolidated20202019$'000$'000Amortisation expense974 1,930 Total expense for the year for continuing operations974 1,930 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 92 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 21 Property, plant and equipment Land & buildingsLeasehold improvementsPlant & equipmentLeased plant & equipmentOffice equipmentMotor vehiclesSundry plantTotalAt-cost at 30 June 20201,907 5,290 1,113,216 21,567 3,584 7,654 10,703 1,163,922 Accumulated depreciation and impairments at 30 June 2020(1,161) (4,479) (508,718) (4,139) (3,047) (5,494) (7,715) (534,752) 746 811 604,498 17,428 537 2,160 2,988 629,169 At-cost at 30 June 20191,585 4,785 981,487 26,733 3,064 7,181 10,481 1,035,316 Accumulated depreciation and impairments at 30 June 2019(1,040) (4,288) (430,212) (3,767) (2,914) (6,202) (7,225) (455,648) 545 497 551,275 22,966 150 979 3,255 579,668 Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below:Land & buildingsLeasehold improvementsPlant & equipmentLeased plant & equipmentOffice equipmentMotor vehiclesSundry plantTotalCarrying amount at the beginning of the year545 497 551,275 22,966 150 979 3,255 579,667 Additions322 505 133,905 2,566 520 142 1,257 139,217 Additions from acquisition (Pit N Portal)- - 52,846 - - 1,541 - 54,387 Depreciation(121) (191) (102,100) (3,163) (133) (502) (795) (107,004) Disposals- - - - - - - - Transfer asset class- - 5,355 (4,690) - - (665) - Impairment- - - - - - - - Movement from/(to) assets held for sale- - (17,878) (251) - - (62) (18,192) Movement major equipment components- - (4,203) - - - - (4,203) Major equipment components acquired (Pit N Portal)- - 6,345 - - - - 6,345 Movement capital WIP- - (21,049) - - - - (21,049) Carrying amount at the end of the year746 811 604,498 17,428 537 2,160 2,989 629,169 Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below:Land & buildingsLeasehold improvementsPlant & equipmentLeased plant & equipmentOffice equipmentMotor vehiclesSundry plantTotalCarrying amount at the beginning of the year680 546 399,494 3,669 348 1,577 1,638 407,952 Additions46 125 147,961 21,638 12 32 1,858 171,672 Additions from acquisition (Matilda)- - 78,450 - - - 419 78,869 Depreciation(153) (174) (83,731) (2,039) (210) (387) (715) (87,409) Disposals(28) - - - - (243) - (271) Transfer asset class- - - - - - - - Impairment- - - - - - - - Movement from/(to) assets held for sale- - (24,133) (302) - - 55 (24,380) Movement major equipment components- - 7,275 - - - - 7,275 Major equipment components acquired (Matilda)- - 556 - - - - 556 Movement capital WIP- - 25,403 - - - - 25,403 Carrying amount at the end of the year545 497 551,275 22,966 150 979 3,255 579,668 $'000Consolidated2019$'000Consolidated$'000Consolidated2020 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 93 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 21 Property, plant and equipment (continued) Depreciation The Group manages depreciation at an individual componentisation of asset level. Depreciation is calculated based on a standard machine hour usage basis. Security The Group’s assets are subject to a fixed and floating charge under the terms of the new notes issued. Refer note 24 for further details. Impairment tests for cash generating units The Group conducts impairment testing annually at 30 June each year and when impairment indicators exist. At 30 June 2020, it was determined that COVID-19 represented an indicator of impairment and therefore detailed impairment testing was undertaken for both the Australian rental CGU and the Pit N Portal CGU and testing carried out for the Workshops CGU. Refer to note 2(d) “Estimates and judgments” for detailed consideration of this matter. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 94 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 22 Right of use assets The group right of use assets relate to property, motor vehicles and heavy earth moving equipment. The average lease term is 4.97 years. The corresponding lease liability analysis is presented in note 24. 23 Trade and other payables The Group’s exposure to currency and liquidity risk associated with trade and other payables is disclosed in note 6. As at 30 June 2020Buildings$'000Motor vehicle$'000Equipment$'000TotalInitial application as at 1 July 201934,519 2,737 - 37,256 Additions3,571 454 20,080 24,104 Termination of lease(48) - - (48) Remeasurements(10,187) (325) 341 (10,171) Total cost27,855 2,866 20,421 51,142 Accumulated depreciationAccumulated depreciation(4,881) (766) (1,362) (7,010) Total Accumulated Depreciation(4,881) (766) (1,362) (7,010) Net carrying amount22,974 2,100 19,059 44,132 Consolidated$'000Consolidated2020$'000Amounts recognised in profit and lossDepreciation expense on right-of-use assets7,010 Interest expense on lease liabilities1,524 Expense relating to short term leases156 Expense relating to leases of low value assets- 8,689 20202019$'000$'000CurrentTrade payablesTrade payables46,751 28,795 Interest accrual7,987 7,356 Other payables and accruals34,499 47,563 89,237 83,714 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 95 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 23 Trade and other payables (continued) The Company has also entered into a deed of cross guarantee with certain subsidiaries as described in note 38. 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 38. 24 Interest bearing liabilities (1) Carried at amortised cost with movements in fair value of the underlying hedge item recorded in the profit and loss statement. 20202019$'000$'000CurrentAmortised costLease liabilities25,986 4,023 Loan Note Agreement97,000 - 122,986 4,023 Non-currentAmortised costUSD notes - secured469,373 459,334 Debt raising costs (1)(8,917) (13,309) Lease liabilities36,573 17,886 497,030 463,911 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 96 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 24 Interest bearing liabilities (continued) On 8 January 2020, the Group increased its Revolving Credit Facility (RCF) to $100,000,000 (30 June 2019: $65,000,000), with its existing lenders. This facility matures in September 2021 with a two year option to extend, which has two sub facilities consisting of a Loan Note Agreement Facility (LNA) of A$97,000,000 (30 June 2019 $62,000,000) and a Bank Guarantee Facility of A$3,000,000. The bank guarantee facility attracts a fee of up to 1.57% on the unutilised portion of the facility, and a fee of 3.5% on the outstanding balance of guarantees on issue. The nominal interest rate on the LNA is equal to the aggregate of the bank bill swap rate (BBSY) plus a margin of between 3.25% and 3.5% dependant on the portion of the facility utilised (3.25% if less than 25% drawn and 3.5% if greater than 25% drawn). The facilities require the Group to maintain a collateral coverage ratio greater than 3.0x and a fixed charge coverage ratio greater than 1.5x. The collateral coverage ratio is based on an independent valuation of the rental fleet in ratio to the drawn LNA. At 30 June 2020 the Group had drawn all $97,000,000 of the LNA and had utilised A$1,654,900 of the bank guarantee facility. The LNA was drawn due to global bank liquidity concerns at the start of COVID-19, and at 30 June 2020 is held in an “at call” deposit account with a leading Australian bank. The Group has issued secured fixed interest notes to the value of US$322,131,000 which matures on 31 March 2022. The nominal fixed interest rate is 9.25%. Under the terms of the note agreement, the noteholders hold a joint fixed and floating charge with the revolving credit facility bank over the assets and undertakings of the Group. The notes are measured at amortised cost. On 5 December 2019, several covenants under the Notes facility were amended as follows: the net capex restriction was amended to be equal to 135% of annual depreciation limit for the 12months to 30 June 2020 and each subsequent 12-month period (previously the notes had alimitation on capital expenditure to the amount of A$100,000,000, net of proceeds from disposals forthe 12-month period commencing 31 March 2017 and for each subsequent 12-month period);permitted the Incurrence of Indebtedness provided that the Net Leverage Ratio would be less than2.0 to 1.0;permitted growth Capital Expenditure if it is immediately deleveraging or if the Net Leverage Ratio isbelow 1.0 to 1.0.The US Notes are fully hedged to AUD until maturity and the Group has designated derivatives (cross currency interest rate swaps) as hedge instruments against this underlying debt. Working capital facilities The Group has a credit card facility with a limit of A$150,000. The facility is secured via a cash cover account. USDAUDUSDAUD$'000$'000$'000$'000USD notes322,131469,373322,131459,334Hedged (asset/liability)-(28,034)-(7,031)Net exposure322,131441,339322,131452,303FY20FY19Secured notes issue Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 97 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 24 Interest bearing liabilities (continued) Lease liabilities At 30 June 2020, the Group held lease facilities totalling A$62,559,000 (2019: A$21,909,000) which have various maturities up to July 2024. Lease terms are negotiated on an individual basis and obtains a wide range of different terms and conditions. The lease agreements do not impose any covenants. Lease liabilities of the Group are payable as follows: The Group leases plant and equipment. The Group’s lease liabilities are secured by the leased assets of $35,365,000 (2019: $22,966,000). In the event of default, the leased assets revert to the lessor. The weighted average incremental borrowing rate applied to the lease liabilities at the date of initial application was 4.96%. The approximated lease liabilities disclosed in the June 19 annual report (A$36,713,000) varies from the initial application as at 1 July 2019 (A$37,256,000) by A$543,000. This variance is due to inclusion of additional motor vehicles. There has been no impact on lease payments as a result of COVID-19, either through deferral or reduction in lease payments. Reconciliation of liabilities arising from financing activities Liabilities arising from financing activities are those for which cash flows were or will be classified in the Group’s consolidated statement of cash flows. The following table details cash and non-cash movements in the Group’s liabilities arising from financing activities: PresentFuturevalue ofOpeningClosingminimumminimumleaseRemeasure-Additions/leaseleaseleaseliabilitiesmentsInterestRepayments(terminations)liabilitiespaymentsInterestpayments202020202020202020202020201920192019Consolidated$'000$'000$'000$'000$'000$'000$'000$'000$'000LeaseCurrent4,023-1,173(2,019)2693,4465,196(1,173)4,023Non-current17,886--(3,223)-14,66320,505(2,619)17,88621,909-1,173(5,242)26918,10925,701(3,792)21,909Lease on application of AASB 16 LeasesCurrent6,507(1,857)1,524(3,744)20,11022,539---Non-current30,749(8,313)-(4,549)4,02421,911---37,256(10,170)1,524(8,293)24,13544,450---Total Lease LiabilityCurrent10,530(1,857)2,697(5,763)20,38025,9865,196(1,173)4,023Non-current48,635(8,313)-(7,772)4,02436,57420,505(2,619)17,88659,165(10,170)2,697(13,535)24,40462,56025,701(3,792)21,9091 JulyFinancingFinancialNew debtUnrealised30 June2019cash flowsexpense*acquired**FX2020$'000$'000$'000$'000$'000$'000USD notes459,334---10,039469,373Lease liabilities21,909(19,869)1,48859,031-62,559Loan Note Agreement---97,000-97,000Debt raising costs(12,350)-4,115--(8,235)Debt raising costs (144A Notes)(959)-432--(528)Debt raising costs (loan note agreement)-(154)---(154)Other financing-(2,708)2,708---467,933(22,730)8,742156,03110,039620,016*inclusive of amortisation expense**New debt acquired for lease liabilities relates to adoption of AASB 16 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 98 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 24 Interest bearing liabilities (continued) Reconciliation of liabilities arising from financing activities (continued) 25 Financing arrangements The Group has the ability to access the following lines of credit: (1) The facility of US$322,131,000/A$469,373,000 was fully drawn at 30 June 2020. (2) On 8 January 2020, it was announced that the Revolving Credit Facility was increased from $65,000,000 to $100,000,000. The Revolving Credit Facility consists of the Loan Note Agreement of A$97,000,000 and bank guarantee of $3,000,000. The Loan Note Agreement was fully drawn at 30 June 2020, with funds held in an “at call” deposit account with a leading Australian bank. 1 JulyFinancingFinancialNew debtUnrealised30 June2018cash flowsexpense*acquiredFX2019$'000$'000$'000$'000$'000$'000USD notes481,569(47,516)--25,281459,334Lease liabilities1,155(3,048)-23,802-21,909Debt raising costs(16,519)-4,169--(12,350)Debt raising costs (144A Notes)-(1,297)338--(959)Debt raising costs (loan note agreement)(707)- 707---Other financing1,857(1,857)----467,355(53,718)5,21423,80225,281467,933*inclusive of amortisation expense2020Available facilityFacility utilised at reporting dateFacility not utilisted at reporting dateUSD notes (1)469,373 469,373 - Loan Note Agreement (2)97,000 97,000 - Bank guarantee facility (2)3,000 1,655 1,345 Lease liabilities62,559 62,559 - 631,932 630,587 1,345 2019Available facilityFacility utilised at reporting dateFacility not utilisted at reporting dateUSD notes (1)459,334 459,334 - Loan Note Agreement (2)62,000 - 62,000 Bank guarantee facility (2)3,000 1,744 1,256 Lease liabilities21,909 21,909 - Working capital150 150 - 546,393 483,137 63,256 Consolidated$'000Consolidated$'000 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 99 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 26 Provisions Defined contribution superannuation funds The Group makes contributions to defined contribution superannuation funds. The expense recognised for the year was $7,862,000 (2019: $6,625,000). 20202019$'000$'000CurrentEmployee benefits:- annual leave8,476 4,987 - long service leave2,096 1,991 Provision for restructuring57 94 10,629 7,072 Non-currentEmployee benefits - long service leave581 406 581 406 ConsolidatedEmployee benefitsProvision for restructuringTotalBalance at 1 July 20197,384 94 7,478 Provisions acquired from Pit n Portal3,082 - 3,082 Arising during the year5,782 73 5,855 Utilised(5,095) (110) (5,205) Balance at 30 June 202011,153 57 11,210 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 100 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 27 Share based payments During the year the Company issued Rights to key management personnel and senior employees of the Group under its employee incentive plans (refer note 3(k)(v)). On 27 November 2018 the Company effected a 10:1 share consolidation. The number of shares have been converted to reflect both pre and post share consolidation. Vested plans Unvested plans Grant date/employees entitledNumber of instruments Vesting ConditionsContractual life of rights/performance share rightsRights/performance share rights 201718,178,057 3 years service3 yearsRights/performance share rights 20181,595,586 2 years service2 yearsRights/performance share rights 20191,500,000 1 year service1 year21,273,643 Grant date/employees entitledNumber of instruments Vesting ConditionsContractual life of rights/performance share rightsEHIPRights/performance share rights 201846,996 2 years service2 yearsMIPRights/performance share rights 20191,608,913 3 years service3 yearsRights/performance share rights 20191,415,168 4 years service4 yearsRights/performance share rights 20191,885,691 5 years service5 yearsLTIPRights/performance share rights 2020900,901 1 year service1 yearRights/performance share rights 2020120,445 2 years service2 yearsRights/performance share rights 2020400,204 3 years service3 years6,378,317 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 101 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 27 Share based payments (continued) The movement of Rights on issue during the year were as follows: The fair value of Rights granted during the year are measured using a volume weighted average price of $1.83 (FY19: $2.06). Please refer to note 3(k)). The following applies to Rights: - there is no entitlement to dividends or shadow dividends on unvested rights; and - in the event of absolute change in control (i.e. the acquisition by a third party and its associates >50% of Emeco shares), rights awarded will vest upon change in control. Employee expenses (1) 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. in AUD20202019Performance shares/rights14,288,750 14,674,531 Total expense recognised as employee costs (1)14,288,750 14,674,531 ConsolidatedNumber of rights/Number of rights/performanceperformanceshare rightsshare rights20202019Outstanding at 1 July26,347,281 204,133,030 Granted during the period1,422,064 82,875,083 Exercised during the period(21,273,643) (22,352,459) Share consolidation- (238,190,089) Forfeited during the period(117,385) (118,284) Outstanding at 30 June6,378,316 26,347,281 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 102 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 28 Commitments (a) Operating lease commitments Of the $18,340,000 in prior year commitments, $16,701,000 was recognised as lease liabilities under AASB 16 at 30 June 2020. Refer to Note 24 for further information. From 1 July 2019, the group has recognised right-of-use assets for these leases, except for short-term and low-value leases. See Note 22 for further information. Operating lease expenditure for FY20 and FY19 is disclosed in Note 24. (b) Capital commitments The Group has $Nil commitments for purchases of fixed assets (2019: $Nil). 29 Contingent liabilities Guarantees The Group has provided bank guarantees in the amount of $1,654,900 (2019: $1,744,000) in relation to obligations under operating leases and rental premises. 20202019$'000$'000Future non-cancellable operating leases not providedfor in the finanical statements and payable:Less than one year156 6,426 Between one and five years250 11,164 More than five years- 750 406 18,340 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 103 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 30 Notes to the statement of cash flows (i) Reconciliation of cash For the purposes of the statements of cash flow, cash includes cash on hand and at bank and short term deposits at call, net of outstanding bank overdrafts. Cash as at the end of the financial year as shown in the statements of cash flows is reconciled to the related items in the statements of financial position as follows: (ii) Reconciliation of net profit to net cash provided by operating activities 20202019Note$'000$'000Cash assets16198,169 36,189 Consolidated20202019Note$'000$'000Net profit from continuing operations66,132 33,674 Add/(less) items classified as investing/financingactivities: Net profit on sale of non-current assets7(945) (492) Acquisition and corporate development costs83,509 (262) Dividends received7- 141 Add/(less) non-cash items: Amortisation20974 1,930 Depreciation8114,014 87,409 Amortisation of borrowing costs using effective interest rate84,594 3,977 Write off previous deferred borrowing costs8- 642 Foreign exchange (gain)/loss8(366) 11,271 Impairment losses on tangible assets813,750 6,684 Impairment of investments8461 - Bad debts81,009 49 Provision for doubtful debts/(reversal)8(57) (236) Other non-cash items and reclassifications(259) (907) Equity settled share based payments814,289 14,675 (Increase)/decrease in deferred tax asset(9,343) (870) Income tax benefit10(10,945) - Net cash flow from operating activities of discontinued operations(29) 114 Net cash from operating activities before change in assets/(liabilities) adjusted for assets and (liabilities) acquired196,787 157,799 Change in operating assets and liabilities, net of effects from purchase of controlled entity: (Increase)/decrease in trade and other receivables(4,447) 9,958 (Increase) in inventories(8,422) (708) (Decrease)/increase in payables(3,175) 2,139 Increase in provisions1,230 276 Net cash from operating activities181,973 169,464 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 104 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 31 Controlled entities (a) Particulars in relation to controlled entities Country Ownership interest of incorporation 2020 % 2019 % Parent entity Emeco Holdings Limited Controlled entities Pacific Custodians Pty Ltd as trustee for Emeco Employee Share Ownership Plan Trust Australia 100 100 Emeco Pty Limited Australia 100 100 Emeco International Pty Limited Australia 100 100 EHL Corporate Pty Ltd Australia 100 100 Emeco Parts Pty Ltd Australia 100 100 Emeco Finance Pty Ltd Australia 100 100 Andy’s Earthmovers (Asia Pacific) Pty Ltd Australia 100 100 Orionstone Holdings Pty Ltd Australia 100 100 Orionstone Pty Ltd Australia 100 100 Ironstone Group Pty Ltd Australia 100 100 Orion (WA) Pty Ltd Australia 100 100 RPO Australia Pty Ltd Australia 100 100 Force Equipment Pty Ltd Australia 100 100 Matilda Equipment Holdings Pty Ltd Australia 100 100 Matilda Equipment Pty Ltd Australia 100 100 Pit N Portal Mining Services Pty Ltd Australia 100 - Pit N Portal Equipment Hire Pty Ltd Australia 100 - Emeco Equipment (USA) LLC United States 100 100 Emeco (UK) Limited United Kingdom 100 100 Emeco International Europe BV Netherlands 100 100 Emeco Europe BV Netherlands 100 100 Emeco BV Netherlands 100 100 PT Prima Traktor IndoNusa Indonesia 100 100 Emeco Holdings South America SpA Chile 100 100 Enduro SpA Chile 100 100 (b) Acquisition of entities in the current year The following entities was acquired in the current year: Pit N Portal Mining Services Pty Ltd Pit N Portal Equipment Hire Pty Ltd Refer to note 36 for details on the acquisition of this entity. (c) Acquisition of entities in the prior year The following entities were acquired in the prior year: Matilda Equipment Holdings Pty Ltd Matilda Equipment Pty Ltd Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 105 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 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 Peter Richards Chair Peter Frank Keith Skinner Darren Yeates Executive directors Ian Testrow Managing Director & Chief Executive Officer Other executives Position Thao Pham Chief Strategy Officer Neil Siford Chief Financial Officer (commenced role on 18 March 2020) Justine Lea Chief Financial Officer (ceased role on 18 March 2020) Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 106 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 32 Key management personnel disclosure (continued) Key management personnel compensation The key management personnel compensation is as follows: 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 22 to 36. 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 Rights over equity instruments granted as compensation under employee hybrid incentive plan (EHIP) The Company has the hybrid incentive plan that includes both short term, cash incentive and long term, equity settled incentive elements, award of which is determined by reference to the Company’s performance. This is based on both financial and non-financial measures and will vest at the end of the applicable vesting period, subject to the employee remaining employed by the Company. Rights over equity instruments granted as compensation under management incentive plan (MIP) The Company has a management incentive plan in which rights to shares have been granted to certain employees of the Company. Rights awarded under the MIP will vest at the end of the applicable vesting period, subject to the employee remaining employed by the Company. Rights that do not vest will lapse. Rights over equity instruments granted as compensation under long term incentive plan (LTI) (long term incentive plan) The Company had a retention incentive plan that rewards executives for their contribution to achievement of certain KPIs over a three-year period. KPIs are reviewed annually, but achievement is assessed over a three-year period with one-third of the maximum entitlement being tested each year. Assessing achievement annually also ensures that executives are rewarded for their performance in each year over the three-year period. By assessing outcomes in this manner, consistent high performance over each year within the three-year performance period is required in order to achieve maximum award. Awards under the LTI plan are made in the form of Rights. Other key management personnel transactions Key management persons, or their related parties, hold positions in other entities that may result in them having control or significant influence over the financial or operating policies of those entities. There were no transactions between the Group and these related entities during the period (FY19 $Nil). In AUD20202019Short term employee benefits3,597,890 3,543,163 Other long term benefits33,741 92,385 Post-employment benefits112,405 129,857 Equity compensation benefits9,924,397 11,312,286 13,668,433 15,077,691 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 107 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 33 Other related party transactions Subsidiaries Loans are made between wholly owned subsidiaries of the Group for corporate purposes. 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. Ultimate parent entity Emeco Holdings Limited is the ultimate parent entity of the Group. 34 Subsequent events No significant events have occurred subsequent to the year ended 30 June 2020. 35 Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 June 2020 was based on the profit attributable to ordinary shareholders of $66,129,000 (2019: $33,961,000) and a weighted average number of ordinary shares outstanding less any treasury shares for the year ended 30 June 2020 of 327,161 (2019: 301,523). Profit attributed to ordinary shareholders ContinuingDiscontinuedContinuingDiscontinuedoperationsoperationsTotaloperationsoperationsTotal$'000$'000$'000$'000$'000$'000Profit for the year66,132 (3) 66,129 33,674 287 33,961 Consolidated2020201920202019'000'000Issued ordinary shares at 1 July308,635 3,043,778 Effect of shares issued during the period13,801 - Effect of vested employee share plans4,725 15,012 Effect of share consolidation- (2,757,267) Weighted average number of ordinary shares at 30 June327,161 301,523 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 108 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 35 Earnings per share (continued) Weighted average number of ordinary shares Diluted earnings per share The calculation of diluted earnings per share at 30 June 2020 was based on the profit/(loss) attributable to ordinary shareholders of $66,129,000 (2019: $33,961,000) and a weighted average number of ordinary shares outstanding less any treasury shares during the financial year ended 30 June 2020 of 333,539 (2019: 323,370). Profit attributed to ordinary shareholders (diluted) Weighted average number of ordinary shares (diluted) 20202019ContinuingDiscontinuedContinuingDiscontinuedoperationsoperationsTotaloperationsoperationsTotal$'000$'000$'000$'000$'000$'000Profit attributed to ordinary shareholders (basic)66,132 (3) 66,129 33,674 287 33,961 Consolidated20202019'000'000Issued ordinary shares at 1 July308,635 3,043,778 Effect of shares issued during the period13,801 - Effect of vested employee share plans4,725 15,012 Effect of share consolidation- (2,757,267) Effect of unvested employee share plans6,378 21,847 Weighted average number of ordinary shares (diluted) at 30 June333,539 323,370 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 109 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 36 Business combination Pit N Portal Mining Services Pty Ltd and Pit N Portal Equipment Hire Pty Ltd On 28 February 2020, Emeco Holdings Limited acquired 100% of the shares in Pit N Portal Mining Services Pty Ltd and Pit N Portal Equipment Hire Pty Ltd (Pit N Portal) for total consideration of $70,802,995 settled by an upfront cash payment of $62,000,000 and Emeco shares issued to the sellers of $9,178,744, less an additional cash payment of $375,749 in relation to a working capital adjustment settled in June 2020. The values identified in relation to the acquisition are provisional as at reporting date 30 June 2020. Details of the acquisition are as follows: Impact of acquisitions on the results of the Group Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 110 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 36 Business combination (continued) Pit N Portal Mining Services Pty Ltd and Pit N Portal Equipment Hire Pty Ltd (continued) Pit N Portal has been treated as a reportable segment of the Group with effect from the date of acquisition. The revenue and earnings contributed to the Group in the period from 28 February 2020 are set out in Note 15. Matilda Equipment Pty Ltd On 2 July 2018, Emeco Holdings Limited acquired 100% of the shares in Matilda Equipment Holdings Pty Ltd (Matilda) and its subsidiary Matilda Equipment Pty Ltd for total consideration of $94,327,000 settled by an upfront cash payment of $93,312,000 and an additional cash payment of $1,015,000 in relation to a working capital adjustment paid in October 2018. The values identified in relation to the acquisition are final as at reporting date 30 June 2019. Details of the acquisition are as follows: Final2019$'000Cash assets549 Trade and other receivables6,849 Inventories742 Prepayments219 Plant and equipment78,869 Goodwill/intangibles8,807 Tax asset/(liability)(165) Trade and other payables(1,384) Provisions(159) Net assets /(liabilities) acquired94,327 Acquisition date fair value of consideration transferred94,327 Representing:Cash93,312 Cash consideration paid in respect of working capital adjustment1,015 Total94,327 Acquisition costs expensed to profit or loss2,160 Cash used to acquire the business, net of cash aquired:Acquisition date fair value of consideration transferred94,327 Less: cash and cash equivalents(549) Net Cash paid93,778 Matilda EquipmentPty Ltd Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 111 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 36 Business combination (continued) Matilda Equipment Pty Ltd (continued) Impact of acquisitions on the results of the Group The Matilda Group has fully integrated the acquisition of the business from the acquisition date and is therefore unable to accurately quantify the additional revenue and earnings contributed to the Group by the acquired business. 37 Parent entity disclosure As at and throughout the financial year ending 30 June 2020 the parent entity (the ‘Company’) of the Group was Emeco Holdings Limited. (1) This includes the impairment of intercompany investments and loans within the same tax consolidated group and jurisdiction. This is eliminated on group consolidation. 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 38. 20202019$'000$'000Result of the parent entityProfit/(loss) for the period (1)18,598 (325,455) Other comprehensive income- - Total comprehensive income/(loss) for the period18,598 (325,455) Financial position of parent entity at year endCurrent assets73 20 Non-current assets260,041 154,334 Total assets260,114 154,354 Current liabilities- - Non-current liabilities- - Total liabilities- - Total equity of the parent entity comprising of:Share capital1,024,442 931,199 Share based payment reserve27,387 42,882 Reserve for own shares(39,589) (49,001) Retained losses(752,127) (770,725) Total equity260,114 154,355 Company Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 112 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 38 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 Andy’s Earthmovers (Asia Pacific) Pty Ltd Orionstone Holdings Pty Ltd Orionstone Pty Ltd Force Equipment Pty Ltd Matilda Equipment Pty Ltd Matilda Equipment Holdings Pty Ltd Pit N Portal Mining Services Pty Ltd Pit N Portal Equipment Hire Pty Ltd Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 113 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 38 Deed of cross guarantee (continued) 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 2020 is set out as follows: Statement of profit or loss and other comprehensive income and retained earnings 20202019$'000$'000Revenue540,428 464,516 Cost of sales(313,301) (272,549) Gross profit227,127 191,967 Operating expense(105,887) (92,199) Other income2,647 6,038 Finance income2,307 961 Finance costs(52,821) (55,120) Unrealised FX367 (11,140) Impairment of assets(13,750) (6,684) Impairment of investments- (199,447) Profit/(loss) before tax59,990 (165,624) Tax benefit10,945 - Net profit/(loss) after tax70,935 (165,624) Other comprehensive income5,877 (3,640) Total comprehensive income for the period5,877 (3,640) Retained losses at beginning of year(734,982) (565,718) Retained losses at end of year(658,169) (734,982) Attributable to:Equity holders of the Company(658,169) (734,982) Profit/(loss) for the period70,935 (165,624) Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 114 Notes to the Consolidated Financial Statements For the year ended 30 June 2020 38 Deed of cross guarantee (continued) Statement of financial position 20202019$'000$'000Current assetsCash and cash equivalents198,033 35,869 Trade and other receivables111,674 85,119 Prepayments3,279 4,719 Inventories14,768 6,345 Assets held for sale3,192 2,832 Total current assets330,946 134,884 Non-current assetsTrade and other receivables19,298 18,799 Derivatives38,918 18,496 Intangible assets10,252 9,076 Investments367 799 Property, plant and equipment629,170 579,668 Right of use Asset44,132 - Deferred tax assets32,555 23,212 Total non-current assets774,692 650,050 Total assets1,105,638 784,934 Current liabilitiesTrade and other payables89,218 83,608 Derivatives10,884 11,465 Interest bearing liabilities122,986 4,023 Provisions10,573 6,978 Total current liabilities233,661 106,074 Non-current liabilitiesInterest bearing liabilities499,059 465,901 Provisions581 406 Total non-current liabilities499,640 466,307 Total liabilities733,301 572,381 Net assets372,338 212,553 EquityIssued capital1,024,442 931,199 Share based payment reserve27,387 42,882 Reserves(21,322)(26,546)Retained losses(658,169)(734,982)Total equity attributable to equity holders of the parent372,338 212,553 Consolidated Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 115 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 38 to 114, and remuneration report in the directors’ report, set out on pages 22 to 36 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. There are reasonable grounds to believe that the Company and the group entities identified in note 38 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. 3. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 30 June 2020. 4. The directors draw attention to note 2(a) to the consolidated financial statements, which includes a statement of compliance with international financial reporting standards. Dated at Perth, 26th day of July 2020 Signed in accordance with a resolution of the directors: Ian Testrow Managing Director Deloitte Touche Tohmatsu ABN 74 490 121 060 Tower 2, Brookfield Place 123 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au Independent Auditor’s Report to the members of Emeco Holdings Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Emeco Holdings Limited (the “Company”) and its subsidiaries (the “Group”), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Asia Pacific Limited and the Deloitte Network. Key Audit Matter How the scope of our audit responded to the Key Audit Matter Recognition of available Australian tax losses as a deferred tax asset The Group has recognised $32.6 million of net deferred tax assets as at 30 June 2020 which includes the recognition of all the available tax losses in Australia as disclosed in note 12. The relevant accounting standard permits a deferred tax asset to be recognised for unused tax losses only to the extent that it is probable that taxable profit will be available against which the unused tax losses can be utilised. Significant judgement is required to assess the probability that future taxable profits will be available against which unused tax losses can be utilised. Our procedures included, but were not limited to:• Understanding the process that management undertakesto develop the model to estimate future taxable profits including the impact of COVID-19 and challenging the reasonableness of the assumptions;• Comparing the profit forecast for FY21 to the Board approved FY21 budget;• Assessing historical forecasting accuracy by comparing actual performance to budgets;• Testing on a sample basis management’s model for future profit for mathematical accuracy;• In conjunction with our tax specialists:o evaluating whether the unused Australian taxlosses are available to the Group and whether the profit forecasts had been appropriately adjusted for the differences between accounting profits and taxable profits; ando testing managements tax effect accounting calculations and assessing the amount of reversingtemporary differences.We also assessed the appropriateness of the disclosures innote 12 to the financial statements. Provisional acquisition accounting On 28 February 2020, the Group acquired Pit N Portal Mining Services Pty Ltd and Pit N Portal Equipment Hire Pty Ltd (“Pit N Portal”) as disclosed in note 36. The acquisition has been provisionally accounted for in the 30 June 2020 financial report. Accounting for this business acquisition is complex, requiring management to exercise judgement to determine the fair value of acquired assets and liabilities, including separately identifiable intangible assets. Our procedures included, but were not limited to:• Reviewing the Share Sale Agreement and the ExecutiveServices Agreement associated with the acquisition;• Obtaining management's workings for the provisionalacquisition accounting and performing the following: o Testing them for mathematical accuracy;o Assessing compliance with AASB 3 BusinessCombinations including the recognition of intangible assets;o Testing the determination of the purchase price including determination of any contingent or deferred consideration;o Evaluating management’s determination of the fair value of plant & equipment acquired;o Testing the assessment of the customer intangible asset which is provisionally recognised;o Challenging management’s assessment of the fair value of the remaining assets acquired andliabilities assumed; and• In conjunction with our tax specialists, assessing the taximpact of Pit N Portal joining the tax consolidation group.We also assessed the appropriateness of the disclosures in note 36 to the financial statements. Other Information The directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors 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 gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 22 to 36 of the Directors’ Report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Emeco Holdings Limited, for the year ended 30 June 2020, complies with section 300A of the Corporations Act 2001. Responsibilities 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 Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU Leanne Karamfiles Partner Chartered Accountants Perth, 26 July 2020 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 120 Shareholder Information Financial calendar The annual general meeting of Emeco Holdings Limited will be held on Thursday, 12 November 2020. Event Date* Annual general meeting 12 November 2020 Half year 31 December 2020 Half year profit announcement February 2021 Year end 30 June 2021 *Timing of events is subject to change and board discretion. Shareholder statistics Substantial shareholders Details regarding substantial holders of the Company’s ordinary shares as at 16 July 2020, as disclosed in the substantial holding notices given to the Company, are as follows: Name Shares % Issued capital Black Diamond Capital Management LLC Black Diamond CLO 2012-1 Ltd Black Diamond Credit Strategies Master Fund Ltd Black Diamond CLO 2006-1 (Cayman) Ltd BDCM Opportunity Fund IV LP BDCM Opportunity Fund III LP 661,286,351 [A] 23.47 Perennial Value Management Limited 18,478,210 [B] 5.01 [A] Share numbers are on a pre-share consolidation basis as the relevant substantial holding notice was lodged with the Company prior to the 10 to 1 share consolidation being effected. [B] Share numbers are on a post-share consolidation basis as the relevant substantial holding notice was lodged with the Company after the 10 to 1 share consolidation being effected. Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 121 Shareholder information Distribution of shareholders As at 16 July 2020, there were 7,355 holders of the Company’s ordinary shares. The distribution as at 16 July 2020 was as follows: Range Investors Securities % Issued capital 100,001 and Over 108 323,122,409 87.67 10,001 to 100,000 1,102 31,794,111 8.63 5,001 to 10,000 831 6,493,832 1.76 1,001 to 5,000 2,181 5,851,661 1.59 1 to 1,000 3,133 1,289,011 0.35 Total 7,355 368,551,024 100.00 The number of security investors holding less than a marketable parcel of 556 securities (90 cents on 16 July 2020) is 2,196 and they hold 508,984 securities. 20 largest shareholders The names of the 20 largest holders of the Company’s ordinary shares as at 16 July 2020 are: Rank Name Equity securities % Issued capital 1 J P MORGAN NOMINEES AUSTRALIA PTY LIMITED 123,432,996 33.49 2 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 60,613,161 16.45 3 CITICORP NOMINEES PTY LIMITED 37,238,922 10.10 4 NATIONAL NOMINEES LIMITED 21,101,282 5.73 5 PACIFIC CUSTODIANS PTY LIMITED 20,728,866 5.62 6 ZERO NOMINEES PTY LTD 11,125,000 3.02 7 BNP PARIBAS NOMS PTY LTD 7,634,400 2.07 8 BNP PARIBAS NOMINEES PTY LTD 6,277,954 1.70 9 PACIFIC CUSTODIANS PTY LIMITED 3,802,492 1.03 10 IAN MICHAEL BARNARD 2,415,459 0.66 10 STEVEN EDWIN VERSTEEGEN 2,415,459 0.66 11 BNP PARIBAS NOMINEES PTY LTD 1,620,145 0.44 12 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 1,313,377 0.36 13 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 1,252,744 0.34 14 G HARVEY NOMINEES PTY LIMITED 1,149,100 0.31 15 ELPHINSTONE HOLDINGS PTY LTD 981,845 0.27 16 MR PETER DAVID WILKINSON & MRS JENNIFER LOUISE WILKINSON 956,509 0.26 17 UBS NOMINEES PTY LTD 879,910 0.24 18 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 713,753 0.19 19 DENNIS BUSINESS ASSETS PTY LTD 666,042 0.18 20 KEONG LIM PTY LIMITED 614,704 0.17 EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 122 Emeco Holdings Limited and its Controlled Entities Shareholder information Voting rights of ordinary shares Voting rights of shareholders are governed by the Company’s constitution. The constitution provides that on a show of hands every member present in person or by proxy has one vote and on a poll every member present in person or by proxy has one vote for each fully paid ordinary share held by the member. Closing share price ($) Unquoted equity securities As at 16 July 2020, there are 1,938,190 unvested performance rights on issue to 16 participants pursuant to the Company’s employee incentive plans. Securities subject to voluntary escrow As at 16 July 2020, there are 4,830,918 ordinary shares that are subject to voluntary escrow. These shares were issued as part consideration for the acquisition of Pit N Portal in February 2020 and the voluntary escrow period will end on 28 February 2021. $- $0.50 $1.00 $1.50 $2.00 $2.50 $3.00Jul-19Aug-19Oct-19Dec-19Feb-20Apr-20Jun-20 Emeco Holdings Limited and its Controlled Entities EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 123 Company Directory DIRECTORS Peter Richards Ian Testrow Peter Frank Keith Skinner Darren Yeates SECRETARY Penelope Young REGISTERED OFFICE Level 3, 71 Walters Drive Osborne Park WA 6017 Phone: +61 8 9420 0222 Fax: +61 8 9420 0205 SHARE REGISTRY Link Market Services Limited Level 12 QV1 Building, 250 St Georges Terrace Perth WA 6000 Phone: 1800 689 300 www.linkmarketservices.com.au AUDITORS Deloitte Touche Tohmatsu Brookfield Place, Tower 2 123 St Georges Terrace Perth WA 6000 SECURITIES EXCHANGE LISTING Emeco Holdings Ltd ordinary shares are listed on the Australian Securities Exchange Ltd. ASX code: EHL THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY EMECO HOLDINGS LIMITED ANNUAL REPORT 2020 124 ALLOWED 6mm SPINE
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