Emeco Holdings Limited
Annual Report 2022

Plain-text annual report

 Emeco Holdings Limited and its Controlled Entities ABN 89 112 188 815 Annual Financial Report 30 June 2022 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 1 Contents Chairman’s Report ........................................................................................................ 3 Managing Director’s Report ......................................................................................... 5 Operating and Financial Review .................................................................................. 7 Segment Business Overview ..................................................................................... 12 Financial Report .......................................................................................................... 14 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 2 Chairman’s Report Dear Shareholders, I am pleased to present the Emeco Holdings Limited Annual Report for the 2022 financial year (FY22). People, safety and sustainability Throughout a challenging year with ongoing impacts of COVID, a tight labour market, increasing inflationary pressures, hard borders and extreme weather events, particularly on the east coast, I am proud of the Emeco team and the way the Company performed in FY22. The entire Emeco team is to be commended on their unrelenting focus on serving our customers and operating safely despite significant disruption throughout the year. Your Company prides itself on its commitment to supporting its people and this year we added over 25% to our workforce which now stands at ~1,400. Our ability to attract and retain our people is a major pillar to the ongoing growth and success of our business. Hence, we continued to embed Project Align throughout Emeco to engage and empower our people in our shared vision and values. I am also pleased to report that during the year we increased our female participation in our workforce by 11%, increased the number of apprenticeships by 37% and conducted over 70 leadership training and development courses. We made strong progress in our community engagement program which provides valuable connection between our people and their community, including charities and local interest groups. In this regard we partnered with Kuuwa to support Indigenous communities and businesses. Emeco’s strong safety performance continued in FY22 with our total recordable injury frequency rate reducing to 1.9 from 2.1, last year. Our lost time injury frequency rate remained at zero for the sixth consecutive year. Ongoing work on our Health, Safety, Environment Training Strategic Plan was implemented during the year, further strengthening our capability and commitment to industry leading practices. During FY22, the Company developed its inaugural ESG Strategy. Significant work was undertaken on benchmarking and stakeholder engagement to identify material themes that are critical to Emeco’s right to operate within our sector and in our communities. Following this important work, metrics, targets and actions are being finalised across the 8 key themes and these will be implemented across our business in FY23. Updates on the progress of our ESG Strategy will be captured in our ongoing sustainability reporting. More information can be obtained on our website. A Solid Operating and Financial Performance Notwithstanding the challenges faced above, the Company delivered a solid operating and financial performance during FY22 and is well placed to build upon this platform into FY23. Pleasingly, earnings growth was achieved across each of our operating segments, with the Group delivering 5% growth in Operating EBITDA to $250 million and 22% growth to Operating NPAT to $69 million over FY21. These results reflect strong execution against our strategy of creating a more sustainable and resilient business. Our Rental business had success in deploying fleet across the country, Pit N Portal continued to grow its business, and activity at our Force Workshops was up strongly. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 3 Capital Management Emeco’s strong cash generation supports continued investment in maintaining and replacing our assets and disciplined growth capital expenditure, while maintaining the Board’s capital management policy. This year, the Board allocated $24.1 million (35% of FY22 Operating NPAT) towards capital management, comprising a 1.25 cent interim and 1.25 cent final fully franked dividend and $10.8 million of on market share buy backs. In addition, the company also repurchased an additional $7.6 million of shares during 2H22 within the parameters of our 10/12 buy back program announced in February. This brings the total amount allocated to capital management in respect of the FY22 year to $31.7 million. Thank you The Board remains enthusiastic about the future of our business and I thank them for their unwavering support. To our shareholders, I say thank you for your continued support of Emeco and thanks also to our management team for their continuing efforts in building shareholder value. Lastly, I would like to express thanks from the Board to our dedicated employees for their outstanding contribution throughout the year. Peter Richards Chairman EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 4 Managing Director’s Report Dear Shareholders, I am proud of the Emeco team in FY22 as we delivered solid growth across all operating segments despite Covid disruptions, labour shortages, inflationary pressures and extreme weather events on the east coast. We are guided by our strategic goal of making Emeco a sustainable and resilient business that generates long term value for our shareholders. We continue to deliver against our pillars of being the lowest cost, highest quality provider of mining equipment, we continued to widen our customer value proposition, and continued to build a balanced and diversified portfolio of customers and projects throughout Australia with a broad commodity mix. Our balance sheet remains strong and the significant cash we generated supported continued investment in sustaining and replacing our assets, some modest growth expenditure and our ongoing capital management initiatives. People, safety and sustainability Emeco continued to grow its workforce over the year to 1,400 people. We target a zero-harm workplace and safety will always be the number one priority in our business. Our lost time injury frequency rate has remained at zero for over six consecutive years and our total recordable injury frequency rate also decreased to 1.9 from 2.1 over FY22. We continue to invest in our people and strive to make Emeco an employer of choice in our markets. The addition of over 25% more people to our business to support our growth during the year is a significant achievement. Our continued commitment to and investment in culture, training and diversity was demonstrated during the year as we embedded Project Align further across our expanding workforce. Project Align is the centrepiece of our employee engagement, development and retention strategy. Our community engagement program continued to build through the year with support provided to a wide range of charities and community organisations. In FY22, Emeco commenced development of its inaugural ESG Strategy. As part of this, benchmarking and stakeholder engagement was undertaken to determine the current state of ESG performance at Emeco and to identify common ESG themes across the sector. A materiality assessment was then undertaken to identify eight ESG themes that are considered material to Emeco. Actions, metrics and targets associated with identified actions are being finalised for each material theme. Update on the progress of the strategic action plan will form part of our ongoing ESG reporting. Solid operating and financial performance Emeco’s operating and financial performance was solid in the context of a positive market for our equipment and services, but challenging environment in which to operate. We delivered 5% growth in Operating EBITDA to $250 million and 22% growth in Operating NPAT to $69 million over FY21. We delivered growth across all operating segments – Rental, Pit N Portal, and Force – and our return on capital of 16% remains comfortably above our cost of capital. Our Rental business has returned to growth as assets were put to work throughout Australia during the year across a wide range of projects further diversifying our commodity mix. Pleasingly we increased the proportion of fully maintained projects which is in line with our strategy of widening the value proposition for our customers and increasing project tenure. Continuing operator shortages due to the tight labour market and extreme weather events on the east coast during the year dampened utilisation. Margins were well managed through tight cost control and rate increases across our projects. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 5 Pit N Portal had a strong year of revenue growth as we secured rental and services work in underground and open cut projects. We have invested significantly to support growth since acquisition in FY20 and the business has delivered solid earnings results in line with expectations except for an underperforming project which has further delayed planned earnings and margin improvements previously anticipated in 2H22. This contract is currently being renegotiated and Pit N Portal earnings, margins and returns will improve once this underperforming contract has been addressed and the project moves into production phase in 1H23. Force continues its strong performance as it grew both external or retail customer work as well as supported increasing internal rebuild and maintenance activity. Force is crucial to our strategy of being the lowest cost and highest quality equipment provider and has a significant mitigating impact in the current inflationary environment. Capital Management The Board announced a payout of 35% of Operating NPAT for the FY22 year. This $24.1 million package comprised a 1.25 cent interim and 1.25 cent fully franked final dividend and $10.8 million of on market share buy backs. In addition, the Board also allocated $7.6 million during 2H22 to repurchase additional shares on market bringing the total capital management program in respect of the FY22 year to $31.7 million. We remain committed to prudent capital management and disciplined capital allocation decision making across our sustaining, replacement and growth investment initiatives. The strength of our balance sheet and our continuing strong cash generation allows us to return funds to our shareholders whilst providing flexibility to sustain and grow our company. Outlook for FY23 The Company expects continued earnings growth in FY23 across all operating segments. Our Rental business is well positioned with our assets now placed into projects that provide upside to operating utilisation as conditions normalise and our customers can work our equipment harder. We expect margins to remain broadly in line with FY22 through increased utilisation from the existing asset base, continued cost control, contractual mechanisms that help mitigate inflation and rate increases in new contracts and extensions. Pit N Portal will deliver growth weighted towards 2H23 with improved margins, earnings and returns as the business continues on its growth trajectory and the underperforming contract is addressed and the project moves into production phase. Activity levels will grow in our Force business as we leverage the cost and quality advantage of bringing more component rebuilds work in house. Retail work will also grow, and margins will be closely managed with a focus on continuous improvement initiatives. Whilst the challenges of tight labour markets and inflation are likely to remain through FY23, the underlying momentum in each operating segment is positive for our equipment rental and services. I am confident that we can deliver sustainable growth and deliver increasing shareholder returns in FY23. Thank you I would like to pay tribute to the entire Emeco team for your continued hard work in what was a challenging year. I also would like to thank our Board for their ongoing stewardship and governance. Finally, I would like to thank our shareholders and investors for their continued support. Ian Testrow Managing Director & Chief Executive Officer EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 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. The Group also supplies operator, technical and engineering solutions and services to the mining industry. 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. The balance of capital expenditure is assets (growth and replacement), including midlife equipment cores and the cost to rebuild these cores. Table 1: Group financial results A$ millions Revenue EBITDA2 EBIT2 NPAT ROC%2 EBIT margin2 EBITDA margin2 Operating results1,2,3 2021 2022 620.5 754.4 237.7 250.2 119.1 120.7 56.8 68.9 16.8% 16.2% 19.2% 16.0% 38.3% 33.2% Statutory results 2022 754.4 245.7 115.1 65.0 14.9% 15.3% 32.6% 2021 620.5 226.9 107.2 20.7 14.1% 17.3% 36.6% Note: 1. Significant items have been excluded from the reported 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. Non IFRS measures. 3. EBITDA: Earnings before interest, tax, depreciation and amortisation. Excludes tangible asset impairment, net finance costs and net foreign exchange gain; EBIT: Earnings before interest and tax. Excludes net finance costs and net foreign exchange gain; NPAT: Net profit after tax; ROC: Return on capital (EBIT / Average capital employed). EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 7 Table 2: FY22 Statutory to operating results reconciliation A$ millions Statutory result Tangible asset impairment Long-term incentive expense Restructuring expense Covid-related expense Tax effect of adjustments Operating result EBITDA 245.7 - 2.0 0.8 1.7 - 250.2 EBIT 115.1 1.1 2.0 0.8 1.7 - 120.7 NPAT 65.0 1.1 2.0 0.8 1.7 (1.7) 68.9 Reconciliation of differences between operating and reported results: 1. FY22 operating results are non IFRS measures and exclude the following: Tangible asset impairments: Net impairments totalling $1.1 million were recognised across the business on assets held for sale and subsequently disposed during the period (June 2021: $1.1 million). Long-term incentive program: During FY22, Emeco recognised $2.0 million (June 2021: $6.0 million) of non-cash expenses relating to the employee incentive plan. Restructuring expense: One-off costs of $0.8 million internal restructuring (June 2021: nil). COVID related expense: Expense of $1.7 million (June 2021: nil) incurred in relation to rapid antigen test kits, cleaning and COVID leave as a result of the global pandemic. Tax effect of adjustments: notional tax on above adjustments at 30%. 2. Refer to the 2021 Annual Report for a reconciliation of differences between FY21 operating and reported results. CONTINUED STRONG RETURNS Operating EBITDA increased to $250.2 million (up $12.5 million or 5% on FY21) as a result of revenue growth and tight cost control across all areas of the business. Group revenue from continuing operations increased to $754.4 million in FY22 (FY21: $620.5 million). Rental revenue increased to $429.1 million (FY21: $402.6 million) as a result of new contracts secured, increased rates and higher utilisation, despite covid absenteeism, labour shortages and extreme weather events affecting the Group and our clients’ workforce. Pit N Portal achieved significant revenue growth of 76% during the year, resulting in revenue of $248.7 million (FY21: $140.6 million). The growth was underpinned by new and expanded projects. External revenue from Workshops increased from $77.3 million in FY21 to $90.6 million in FY22. Operating EBITDA margins decreased to 33.2% (FY21: 38.3%) primarily as a result of lower Pit N Portal margins. In FY22, Pit N Portal provided a greater proportion of mining services which is typically at lower margins. Despite these challenges, Group EBITDA was up 5%, from $237.7 million to $250.2 million. Return on capital (ROC) remained high at 16.2% (FY21: 16.8%) above our cost of capital. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 8 Table 3: Operating cost summary (operating results) Note: Operating results are non IFRS and have been adjusted as per reconciliation in Table 2. A$ millions Revenue Operating expenses Repairs and maintenance External mining and maintenance services Employee expenses1 Cartage and fuel Net other expenses2 Operating EBITDA Depreciation and amortisation expense Operating EBIT 2022 754.4 (123.5) (175.5) (140.4) (17.4) (47.3) 250.2 (129.4) 120.7 2021 620.5 (108.1) (120.6) (92.4) (15.7) (45.9) 237.7 (118.6) 119.1 Note: 1. Employee expenses for operating EBITDA excludes employee share plan expenses of $2.0 million 2. Net other expenses for operating EBITDA excludes restructuring expenses of $0.8 million as well as covid related costs of $1.7 million. Repairs and maintenance expense increased to $123.5 million (FY21: $108.1 million) driven by growth in the business and inflation. External mining and maintenance services increased as a result of the increase in fully maintained project sites in the Rental segment, workshop maintenance and the significant growth in the Pit N Portal business. The increase in Employee expenses is as a result of the increase in average number of employees. Group total headcount increased from approximately 1,100 to approximately 1,390 over FY22. A large portion of this growth was in Pit N Portal, increasing from an average of 336 to an average of 588 in FY22 to service new projects. Cartage and fuel increased to $17.4 million (FY21: $15.7 million) in line with revenue growth across all segments, fuel cost increases and higher utilisation levels. Net other expenses increased to $47.3 million (FY21: $45.9 million) primarily as a result of the growth across all segments, particularly from Pit N Portal. Depreciation and amortisation expense increased to $129.4 million in FY22 (FY21: $118.6 million) driven by the growth in asset utilisation and the impact of the growing asset base and inflation over time. REINVESTMENT IN RENTAL FLEET AND EXPANSION OF PNP The written down value (WDV) of the equipment fleet including capital WIP and inventory increased by $45.9 million to $711.2 million in FY22 primarily due to inflationary impact on stay in business capital expenditure (eg. parts and labour to rebuild components), the capital inventory increase to mitigate against supply chain risks, the commencement of the asset replacement program and growth capital expenditure. Table 4: Equipment fleet A$ millions Equipment fleet Non-current assets held for sale Equipment fleet 2022 2021 707.1 4.1 711.2 662.5 2.8 665.3 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 2022 9 CONTINUED STRONG FREE CASH FLOW Table 5: Free cash flow summary A$ millions Operating EBITDA Net movement in working capital Net sustaining capital expenditure2 Acquisition of component inventory Finance costs Net free cash flow (pre-growth capex) Growth capex Borex acquisition Net free cash flow 2022 250.2 (9.8) (149.7) (4.1) (19.3) 67.3 (16.7) (2.2) 48.4 2021 237.7 6.4 (115.9) (2.3) (38.5) 87.4 (40.1) - 47.3 Note: 1. Free cash flow excludes any non-recurring items (FY22: restructuring expense $0.8 million, covid related expense $1.7 million) (FY21: Refinancing and adviser fees $2.0 million, finance and hedging costs $15.5 million) 2. Capital expenditure includes assets acquired under leasing arrangements. Strong net free cash flow in FY22 was supported by growing Operating EBITDA, up from $237.7 million in FY21 to $250.2 million in FY22. The working capital outflow was largely driven by the significant growth of Pit N Portal. Working capital in the current economic climate is well maintained resulting from a continued strong focus on working capital controls within the business. No increase in debtor write-offs or allowances has occurred in the year. Net sustaining capital expenditure increased from $115.9 million in FY21 to $149.7 million in FY22. Sustaining capital increased in line with a larger fleet and strong utilisation, inflation and continuation of the asset replacement program which includes a rolling annual replacement of ~5% of the fleet. Growth capex included $11.6 million to support Pit N Portal growth and an opportunistic purchase of $5.6 million worth of midlife equipment cores. Finance costs were lower in FY22 due to the refinancing and repayment of the USD notes in July 2021. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 10 CONTINUED LEVERAGE IN LINE WITH TARGET Table 6: Net debt and gearing summary A$ millions Interest bearing liabilities (current and non-current)1 Secured Notes- AUD Secured Notes – USD4 Lease liabilities and other financing5 Total debt1 Cash Net debt1 Leverage ratio2 Interest cover ratio3 2022 2021 250.0 - 55.6 305.6 (60.2) 245.5 0.98x 11.6 - 246.8 48.8 295.6 (74.7) 220.9 0.93x 7.0 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 26. 2. Leverage ratio - Net debt / Operating EBITDA. 3. 4. US$180.0 million converted at the effective hedge rate of 0.7293 and excluding liabilities in relation to the premium payable on Interest cover ratio - Operating EBITDA / Net Interest expense. early repayment or maturity (US$8.3m / A$11.1m) as disclosed in note 26 of the financial report. In July 2021, the Group refinanced the outstanding US$180.1 million notes with the issuance of A$250.0 million notes. The notes mature in July 2026 and have a semi-annual coupon of 6.25% p.a. This refinancing event marked a significant turning point in the Group with a significant reduction in the annual interest expense. Refer to note 26 in the accompanying financial statements for additional information on Emeco’s financing facilities. Total outstanding debt increased to $305.6 million, up 3% from $295.6 million in the prior year. Lease liabilities increased by $6.3 million, mainly on recognition of a right of use asset and lease liability securing the Group’s new corporate head office lease. Emeco’s cash balance was $60.2 million at 30 June 2022, following capital management activities during the year. The Group paid dividends to the company’s shareholders totalling $13.5 million in FY22, and embarked on an on-market share buy back. During the year, 17 million shares were purchased at an average price of $0.90 totalling $15.6 million. Emeco’s leverage ratio is steady at 0.98x at 30 June 2022 compared to 0.93x at 30 June 2021. On 16 August 2022, the board resolved to pay a final dividend for the year ended 30 June 2022 of 1.25 cents per share. The dividend will be fully franked and will be paid on 30 September 2022. The board also resolved to undertake an on market buy back of $6.4 million. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 11 Segment Business Overview Main markets The Company’s business operations comprised of three segments: Rental, Pit N Portal and Workshops. Rental The Rental segment achieved revenue growth of 7% during the year, with new projects secured, increased utilisation and higher rates, resulting in revenue of $429.1 million. Rental Operating EBITDA increased from $228.6 million to $240.2 million, Operating EBITDA margins were steady at 56% compared to 57% in the prior period. External factors including covid, tight labour markets, extreme weather and inflationary pressures have impacted the segment, however margin impact has been well controlled as a result of tight cost controls. Gross utilisation averaged 92% in FY22 (FY21: 87%) as a result of assets being deployed into projects. Operating utilisation is a measure of how many hours we are invoicing. Group operating utilisation1 increased over FY22 averaging 60%, up from 59% in FY21. There remains upside in operating utilisation as operating conditions normalise. Management is focussed on increasing the operating utilisation of machines currently on rent and continues to pursue opportunities to dispose of underutilised non-core fleet to generate greater returns as part of the Groups fleet strategy. Workshops Total Workshops activity (as measured by retail and internal revenue pre-intercompany eliminations) increased from $155.7 million in FY21 to $173.7 million in FY22, as a result of securing component rebuild works with external retail customers and high demand in Rental. Retail demand continues to be strong with growing customer demand for our expertise. The Operating EBITDA contribution from the external customers increased to $9.0 million (FY21: $8.1 million). Operating EBITDA margin for the period is in line with the prior period at 10%. Pit N Portal This segment was established with the acquisition of Pit N Portal in early CY20, and provides underground equipment rental, together with a range of mining services solutions and associated services to customers in Australia. Pit N Portal’s strong revenue growth continued in FY22, with revenue increasing from $140.6 million in FY21 to $248.7 million in FY22. The growth was underpinned by new projects secured and the expansion of current projects. Pit N Portal operating EBITDA increased from $30.2 million to $32.7 million. The EBITDA margin deteriorated from 21% to 13% as a result of a number of new projects being in the start-up phase, delays in customer mining activity, cost inflation pressures and the impact of labour shortages and covid absenteeism impacting both the PnP and customer workforce. Management is focused on Pit N Portal’s earnings and margin recovery in FY23, particularly as a major contract is renegotiated and the project enters production phase in 1H23. 1 Operating utilisation defined as average operating hours per asset as a percentage of 400 hours per month EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 12 Table 7: Five-year financial summary REVENUE Total revenue from continuing operations 20224 20214 20204 2019 2018 $'000 754,368 620,528 540,429 464,486 380,992 PROFIT Operating EBITDA2 Operating EBIT2 Operating NPAT2 Reported profit/(loss) for the year Basic EPS3 BALANCE SHEET Total assets Total liabilities Shareholders’ equity Total debt CASH FLOWS Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Net cash movement Free cash flow before repayment/(drawdown) of net debt1 DIVIDENDS Number of ordinary shares at year end3 Total dividends declared in respect to financial year Ordinary dividends per share declared Special dividends per share declared KEY RATIO'S Average fleet utilisation Average fleet operating utilisation Operating EBIT ROC2 Leverage ratio2 $'000 $'000 $'000 $'000 cents $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 250,173 237,687 254,366 213,966 153,004 120,732 119,110 139,410 125,352 68,867 64,953 12.1 56,791 20,695 4.0 61,037 66,129 19.8 63,126 33,961 11.2 83,193 20,068 11,376 0.4 1,025,413 965,544 1,088,591 768,669 716,052 458,192 434,138 731,346 570,591 562,570 567,221 531,406 357,245 198,078 153,482 305,613 299,304 628,932 481,243 484,581 221,148 205,616 181,973 169,464 125,533 (169,874) (149,558) (169,852) (251,024) (127,087) (65,687) (179,472) 149,825 (53,718) 156,730 (14,413) (123,414) 161,946 (135,278) 155,174 49,674 54,859 75,308 (130,373) 162,856 '000 526,666 544,055 368,551 323,212 3,178,859 $'000 cents cents % % % x 13,341 6,801 2.50 0.0 91.8 60.2 16.2 0.98 1.25 0.0 86.7 59.4 16.8 0.93 0 0.0 0.0 90.5 64.4 21.0 1.58 0 0.0 0.0 90.1 63.9 21.0 2.00 0 0.0 0.0 89.6 57.4 19.6 2.62 Financial information as reported in the corresponding financial year and includes operations now discontinued. 1. 2. Operating results and therefore these are non IFRS measures. Please refer to previous annual reports for reconciliation between Includes capex funded via finance lease facilities (excluded from reported cash flow). Reported and Operating Results. 3. Weighted average number of shares restated at 30 June 2021 due to FY21 bonus rights issue. 30 June 2019 includes the impact of a 10:1 share consolidation that occurred on 27 November 2018. 4. FY22, FY21 and FY20 are reported as post AASB 16 Leases. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 13 Financial Report Directors’ Report ................................................................................................................ 15 Directors ..................................................................................................................... 15 Company secretary .................................................................................................... 17 Directors’ meetings .................................................................................................... 18 Corporate governance statement ............................................................................. 18 Principal activities ...................................................................................................... 18 Operating and financial review ................................................................................. 19 Dividends .................................................................................................................... 19 Significant changes in state of affairs ...................................................................... 19 Events subsequent to report date............................................................................. 19 Likely developments .................................................................................................. 19 Directors’ interest ...................................................................................................... 20 Indemnification and insurance of officers and auditors ......................................... 20 Non-audit services ..................................................................................................... 21 Lead auditor’s independence declaration ................................................................ 21 Rounding off ............................................................................................................... 21 Remuneration report (audited) .................................................................................. 22 Deloitte Touche Tohmatsu independence declaration ............................................ 39 Financial Statements ..............................................................................................................40 Consolidated Statement of Profit or Loss and Other Comprehensive Income ...... 40 Consolidated Statement of Financial Position ......................................................... 42 Consolidated Statement of Changes in Equity ........................................................ 43 Consolidated Statement of Cash Flows ................................................................... 44 Notes to the Consolidated Financial Statements ..................................................... 45 Directors’ Declaration.......................................................................................................... 110 Independent Auditor’s Report ............................................................................................. 111 Shareholder Information ...................................................................................................... 116 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 14 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 The board of directors (Board) of Emeco Holdings Limited (Emeco or Company) present its 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 2022 (FY22). Directors The directors of the Company during FY22 were: PETER RICHARDS BCom Appointment: Independent Non-Executive Director since June 2010. Chairman since January 2016. Board committee membership: • Chairman of the Remuneration and Nomination Committee (Chairman since 12 November 2020, previously a member). 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). Peter was a non-executive director of Elmore Limited (previously IndiOre Limited and NSL Consolidated Limited) from 2009 to 2021 and was Chairman from 2014 to 2017 and 2018 to 2021. Current appointments: • • Chairman of Graincorp Limited since March 2020 (Non-Executive Director since 2015). Non-Executive Chairman of Spenda Limited (previously Cirralto Limited) since December 2017. IAN TESTROW BEng (Civil), MBA Appointment: Managing Director since 20 August 2015. Skills and experience: Ian joined Emeco in 2005 and was appointed Chief Executive Officer and Managing Director in August 2015. Prior to this Ian was Emeco’s Chief Operating Officer, having previously been responsible for Emeco’s Eastern Region Rental business (2005 to 2009) and the North and South American operations (2009 to 2014). Prior to Emeco Ian worked for Wesfarmers, BHP Billiton, Thiess and Dyno Nobel. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 15 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 PETER FRANK BSEE, MBA Appointment: Non-Executive Director since April 2017. Skills and experience: As of 31 December 2021, Peter retired as Senior Managing Director at Black Diamond Capital Management however continues in an advisory capacity. 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 a Director of North Sydney Local Health District (2017 to 2021) and the Chair of the Finance, Risk and Performance Committee. Keith was also 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 16 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 PETER KANE BEng (Mining) Appointment: Independent Non-Executive Director since December 2020. Board committee membership: • • Member of the Remuneration and Nomination Committee since December 2020. Member of the Audit and Risk Management Committee since December 2020. Skills and experience: Peter is a Mining Engineer with over 33 years’ experience in the mining industry throughout Australia, New Zealand and Mongolia. Peter is currently the Chief Operating Officer of the QCoal Group where he is responsible for site operations. Prior to QCoal, Peter held roles as the Chief Executive Officer at Cockatoo Coal, Group Managing Director at Guildford Coal, Chief Executive Officer at Aston Resources, and Chief Executive Officer at Boardwalk Resources, Executive General Manager Projects with Whitehaven Coal and Chief Operating Officer with Macarthur Coal. Peter also performed the role of Joint Venture Chair for multiple operations with numerous joint venture partners. Peter’s earlier career included 10 years for Leighton in various roles including General Manager of the Australian mining contractor business and 10 years with BHP, primarily in their iron ore and, later, coal divisions. Peter was a Board member of Australian Coal Research Limited from 2017 to 2021. Peter is a member of the Australasian Institute of Mining & Metallurgy and a graduate of the Australian Institute of Company Directors. Current appointments: • • Chief Operating Officer at QCoal Group (since 2016). Independent Non Executive Director of Multicom Resources (since 2022). Company secretary The company secretary of the Company during FY22 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 was 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 ANNUAL REPORT 2022 17 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Directors’ meetings The number of board and committee meetings held and attended by each director in FY22 is outlined in the following table below: Table 8: Board and committee meetings held and director attendance Director Board meetings Peter Richards Ian Testrow Peter Frank Keith Skinner Peter Kane A 6 6 6 6 6 B 6 6 6 6 6 Audit & risk management committee meetings A 4 * * 4 0 4 4 B 4 4 4 4 4 Remuneration & nomination committee meetings A 3 B 3 * * 3 0 3 3 3 3 3 3 A B * Number of meetings attended. Number of meetings held during the time the director held office during the year. Not a member of this committee. Corporate governance statement The Company’s corporate governance statement is located on the Company’s website at https://www.emecogroup.com/investors-overview/corporate-governance. Principal activities The principal activity of the Group during FY22 was the provision of open cut and underground mining equipment rental and also providing complementary equipment and mining services, including maintenance, asset and component rebuilds, fleet optimisation technology, and technical and engineering services. As set out in this report, the nature of the Group’s operations and principal activities have been consistent throughout the financial year. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 18 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Operating and financial review A review of Group operations, and the results of those operations for FY22, is set out in the operating and financial review section at pages 7 to 13 and in the accompanying financial statements. Dividends On 16 August 2022, the board resolved to pay a final dividend for the financial year ended 30 June 2022 of 1.25 cents per share, representing a total cash payment of $6.583 million. The dividend will be fully franked and will be paid on 30 September 2022. Type FY22 final 1H22 FY21 Payment date 30 September 2022 6 April 2022 30 September 2021 Period ends 30 June 2022 31 December 2021 30 June 2021 Cents per share Value $ million Fully franked 1.25 6.583 ✓ 1.25 6.758 ✓ 1.25 6.786 ✓ 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 On 16 August 2022, the board resolved to pay a final dividend for the year ended 30 June 2022 of 1.25 cents per share, representing a total cash payment of $6.583 million. The dividend will be fully franked and will be paid on 30 September 2022. On 16 August 2022, the Company announced its intention to undertake an on-market share buy back of up to $6,399,000. Other than the above, there have been no other significant events subsequent to the year ended 30 June 2022. 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 7 to 13. 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 19 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Directors’ interest The relevant interests of each director in securities 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 Peter Richards Ian Testrow Peter Frank Keith Skinner Peter Kane Ordinary shares [A] Rights 11,044 12,144,869 - 22,300 10,288 - 2,711,260 [B] - - - [A] This comprises ordinary shares in which the Director has a relevant interest. [B] This comprises unvested rights issued under the Company’s incentive plans. Indemnification and insurance of officers and auditors The Company has entered into a deed of access, indemnity and insurance with each of its current and former directors, the chief financial officer and the company secretary. Under the terms of the deed, the Company indemnifies the officer or former officer, to the extent permitted by law, for liabilities incurred as an officer of the Company. The deed provides that the Company must advance the officer reasonable costs incurred by the officer in defending certain proceedings or appearing before an inquiry or hearing of a government agency. Since the end of the previous financial year, the Company has paid premiums in respect of contracts insuring current and former officers of the Emeco Group, including executives, against liabilities incurred by such an officer to the extent permitted by the Corporations Act 2001. The contracts of insurance prohibit disclosure of the nature of the liability cover and the amount of the premium. The Group has not indemnified its auditor, Deloitte Touche Tohmatsu. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 20 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 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 certain assurance services. 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 10 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 39 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 ANNUAL REPORT 2022 21 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Remuneration report (audited) Contents This Remuneration Report for the year ended 30 June 2022 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. 2. 3. 4. 5. Introduction Remuneration governance Executive remuneration arrangements 3.1. Remuneration principles and strategy 3.2. Approach to setting remuneration and details of incentive plans Relationship between executive remuneration and company performance Executive remuneration outcomes for FY22 6. Executive contracts 7. 8. 9. Non-executive director remuneration Additional disclosures relating to share-based payments 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 FY22: Non-executive directors Peter Richards Chair, Independent Non-Executive Director Peter Frank Keith Skinner Peter Kane Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Executive directors Ian Testrow Managing Director & Chief Executive Officer EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 22 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 The following persons were also employed as executives of the Company during FY22: Other executives Position Thao Pham Chief Financial Officer (commenced role on 4 February 2022), previously Interim Chief Financial Officer (29 September 2021 to 3 February 2022) and Chief Strategy Officer (ceased role 28 September 2021) Neil Siford Chief Financial Officer (ceased role on 29 September 2021) 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 non-executive directors. 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 FY22 were Mr Peter Richards (Chair), Mr Keith Skinner and Mr Peter Kane. 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. Where required, 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 period, no remuneration recommendations (as defined by the Act) were provided to the Company. 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 ANNUAL REPORT 2022 23 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Executive remuneration arrangements 3. 3.1 Remuneration principles and strategy Emeco’s executive remuneration strategy is designed to attract, motivate and retain talented 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. Business objective Build a sustainable and resilient business through scale, customer and commodity diversification and creating value through providing the lowest cost, highest quality earthmoving equipment solutions and related services that add value to our customers’ projects and embed Emeco in its customers’ operations Remuneration strategy linkages to business objective Remunerate fairly and appropriately Align executive interests with those of shareholders Attract, retain and develop proven performers Provide market-competitive remuneration and rewards to executives in order to secure the long-term benefits of their time, experience and loyalty and ensure alignment with industry trends. Provide a significant proportion of 'at risk' remuneration to ensure that executive reward is directly linked to the creation of shareholder value. Provide total remuneration which is sufficient to attract and retain proven and experienced executives who are capable of: 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. • fulfilling their respective roles with the Group; • achieving the Group’s strategic objectives; and • maximising Group earnings and returns to shareholders. Vehicle Purpose Link to performance To provide competitive fixed remuneration to attract, retain and motivate executives 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. Remuneration component Fixed Remuneration Variable short term incentive plan (STI) Comprises base salary, employer superannuation contributions and other non- cash benefits. 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)), operating earnings before interest, tax, depreciation and amortisation (Operating EBITDA) and executive-specific operational or financial targets and focus areas are the key performance measures in FY22 which determine if any short-term component is payable. Targets are discussed in section 5. Vesting of awards is dependent on company performance inherent within which is 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 after the three-year performance period, so drives executives to maximise shareholder return. 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 progressive achievement of Company KPIs over the three-year performance period. Awards of Rights dependent on achievement of the LTI KPI. Performance Rights may convert into shares after vesting at the end of the three-year performance period (subject to any earlier vesting as set out below) directly aligning executive interests with shareholder value over the three-year period. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 24 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 3.2 Approach to setting remuneration and details of incentive plans In FY22, 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 award) 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. Managing Director Executives Fixed 33% Short term 27% Long term 40% Fixed 50% Short term 30% Long term 20% How much variable remuneration can executives earn? The below table sets out the maximum incentive opportunity for each executive under the FY22 STI and FY22 LTI plans, expressed as a percentage of total fixed remuneration (TFR). Table 10: Components of variable remuneration Executive [A] Position Ian Testrow Managing Director & Chief Executive Officer Maximum STI % of TFR Maximum LTI % of TFR Maximum Total % of TFR 80% 120% 200% Thao Pham Chief Financial Officer 60% 40% 100% [A] Mr Neil Siford ceased in his role on 29 September 2021 and was not offered STIs or LTIs for FY22. How is variable remuneration delivered? The STI is assessed over a single year and the LTI is assessed progressively over three years. The chart below sets out the time periods for assessing and awarding remuneration under the FY22 STI and FY22 LTI plans: EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 25 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 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 position, 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 (and any recommendations the Remuneration and Nomination Committee). Variable remuneration - FY22 Short term incentive plan (FY22 STI) What is the purpose of the plan? What are the KPIs and how do they align with business performance? When is performance measured? How are awards determined? How is it paid? What happens if an executive leaves? The FY22 STI plan is a cash incentive that rewards executives for their contribution to achievement of certain KPIs in the financial year. The KPIs for the FY22 STI plan are based on a balance of financial and non-financial measures which provide the platform for the long-term performance, growth and sustainability of the Company, assessed at either a Company or individual level. See section 5 for more information on the FY22 KPIs. Achievement against the STI KPIs is assessed in conjunction with finalisation of the Company’s full year results. Awards are determined by the Board, on recommendation of the Remuneration and Nomination Committee, after consideration of performance against the applicable KPIs. FY22 STI awards are paid in cash. The STI award is only paid to executives employed by the Group after performance is assessed against the STI KPIs. Variable remuneration - FY22 Long term incentive plan (FY22 LTI) What is the purpose of the plan? The FY22 LTI plan is an equity incentive that rewards executives for their contribution to achievement of certain KPIs over a three-year period. One-third of a participant’s maximum entitlement is tested each year against the KPI set for that year. The Board believes that assessing KPIs each year throughout the performance period is appropriate given the cyclic nature of the mining sector. Assessing achievement annually ensures that executives are rewarded for their performance in each year over the three-year period. Awards under the FY22 LTI plan are made in the form of Rights. What are the KPIs and how do they align with business performance? The KPI for year 1 of the FY22 LTI was earnings per share growth, which is designed to further align management with shareholder value and to recognise the evolving focus on seeing the strong foundation developed for the Company being reflected in its financial outcomes. The Board determined that an EPS KPI would apply for each year of the LTI plans in FY22. See section 5 for more information on the FY22 KPI. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 26 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 When is performance measured? How are awards determined? How is it paid? What happens if an executive leaves? Achievement against the LTI KPI is measured by the Board, with the assistance of the Remuneration and Nomination Committee, at the time of the Company’s full year results. The FY22 LTI plan spans a three-year performance period. Performance is assessed annually by the Board across the three-year period in conjunction with approval of the full year results (see “How is variable remuneration delivered” on page 25). Awards are determined by the Board, on recommendation of the Remuneration and Nomination Committee, after consideration of performance against the applicable KPI. FY22 LTI awards are paid by issuing rights (Rights) to fully paid ordinary Emeco shares (Shares). Rights issued under the FY22 LTI plan are scheduled to vest after announcement of Emeco’s annual results in 2024. Under the FY22 LTI Plan 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 (see “What happens if an executive leaves?” below). The maximum possible award of Rights under the FY22 LTI plan was calculated by reference volume-weighted average price of Emeco shares for the 20 business days following the release of Emeco’s FY21 results, being $1.15. Rights will be issued at no cost to the executive. The ultimate value of the FY22 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. Under the FY22 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 FY22 LTI plan will lapse. If the executive leaves the Emeco Group for any other reason, Rights that have been tested and issued under the FY22 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 FY22 LTI plan; and • awards in respect of any component of the FY22 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 ANNUAL REPORT 2022 27 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 4. Relationship between executive remuneration and company performance Emeco’s remuneration objectives align the interests of Emeco’s executives with the interests of the Company and its shareholders. This is achieved through ensuring that a significant proportion of an executive’s remuneration is “at risk” and tied to the satisfaction of KPIs which relate to the Company’s performance and execution of the Company’s strategic aims. Details of those KPIs, and the Company’s performance in respect of those measures, are set out in section 5. In FY22, the KPIs for variable components of executive remuneration were directed at driving and rewarding leadership performance and behaviours consistent with the Company’s strategy, performance and long-term value creation. The STI KPIs (detailed in section 5) focussed on safety, earnings and executive-specific personal targets based on their roles. The FY22 LTI KPI was earnings per share growth which is designed to further increase alignment between management and shareholders by recognising the importance in seeing the Company’s performance being reflected in its financial outcomes. Good performance against the STI KPIs in FY22 is reflected in the partial awards of STIs to executives. Further, although there was strong EPS growth over FY22 (see table 7), the board elected to exercise its discretion to make a partial award against the FY22 LTI KPI to take into the impact of Covid and FY22 earnings coming in at the bottom of the guidance range. The Board also recognises that 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 focus on building a resilient and sustainable customer-focussed solutions business that can achieve a return on capital above its cost of capital on an ongoing basis has resulted in continued strong financial performance. This was achieved despite facing significant challenges in the FY22 year, including covid, significant tightening of the labour market, extreme weather and inflationary pressures. Further, the Company is committed to its capital management policy as part of creating value for shareholders. In FY22, the Company executed on its capital management policy of allocating 25-40% of operating net profit after tax to capital management initiatives. Throughout the course of FY22, capital was returned to shareholders through both a dividend and buy back program. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 28 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 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: Operating EBITDA ($m) [1] Operating EBIT ($m) [1] Operating NPAT ($m) [1] Net leverage Return on capital [1] Total dividends determined ($m) [5] Total shares bought back ($m) [6] FY22[3] FY21[3] FY20[3] FY19 FY18 250.2 237.7 254.4 214.0 153.0 120.7 119.1 139.4 125.4 67.3 56.8 61.0[4] 63.1 83.2 20.1 0.98x 0.93x 1.58x 2.00x 2.60x 16% 13.3 18.4 17% 21% 21% 20% 6.8 3.8 - - - - - - Closing share price as at 30 June [2] $0.65 $1.05 $0.99 $2.10 $0.38 TRIFR 1.9 2.1 2.9 4.6 1.2 [3] [4] [5] [1] Non IFRS measures. Refer to Table 2 of the Operating and Financial Review for further detail regarding operating adjustments. A 10 to 1 share consolidation was approved by the Company’s shareholders at the 2018 AGM and effected on 27 November [2] 2018. The share price for FY18 is pre-consolidation. FY22, FY21 and FY20 are reported post AASB 16 Leases. FY20 Operating NPAT tax effected for comparative purposes. FY21 figure includes dividends determined in respect of the FY21 year and paid in FY22. FY22 figure includes dividends determined and paid in respect of 1H22 and determined but not yet paid in respect of the full FY22 year. FY21 figure includes share buy back determined in respect of the FY21 year and paid in FY22. FY22 figure includes shares bought back in respect of 1H22, an additional $7.6 million on-market buy back in 2H22, and a share buy back determined but not yet paid in respect of the full FY22 year. [6] 5. Executive remuneration outcomes for FY22 5.1 Fixed remuneration outcomes There was a minor change to fixed remuneration for existing key management personnel in FY22 to reflect the increase in the superannuation guarantee rate from 1 July 2021 however there were no changes as part of an annual review. Ms Pham received a fixed remuneration increase on expanding and commencing her role as Chief Financial Officer. 5.2 Variable remuneration outcomes In FY22 the executives had both common and individual KPIs in order to align the performance of each participant with the overall success of the Company. Set out below is information regarding satisfaction of the applicable KPIs for the FY22 STI and FY22 LTI plans. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 29 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 5.2.1 FY22 STI plan Table 11 below sets out the KPIs under the FY22 STI plan and the respective weightings. In the Board’s view, these KPIs align the reward of executives with the interests of shareholders. The FY22 STI plan provided for pro-rata entitlements where achievement was between the thresholds and targets. Table 11: FY22 STI KPI weightings, payment schedule and achievement KPI Safety Weight Payment schedule Rationale Achievement 20% 0% if the Group TRIFR[1] as at 30 June 2022 is equal to Group TRIFR as at 30 June 2021. 20% if the Group TRIFR[1] as at 30 June 2022 is lower than the Group TRIFR as at 30 June 2021. Pro-rata payments between these levels. 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 target and threshold Operating EBITDA 60% 0% if actual FY22 Group Operating EBITDA ≤ 85% of budget FY22 Operating EBITDA. Reflects the Company's financial performance and ability to pay STI awards. Between target and threshold 100% if actual FY22 Group Operating EBITDA ≥ 105% of budget FY22 Operating EBITDA. Pro-rata payments between these levels. Personal KPIs 20% Satisfaction of key initiatives set by the Board for each executive. Reflects key focus areas for each executive. Between threshold and target [1] TRIFR = Number of recordable injuries x 1,000,000 hours Total hours worked EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 30 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 5.2.2 FY22 LTI plan The FY22 LTI KPI has been set for each financial year during the three-year performance period. The KPI is 100% based on earnings per share (EPS), reflecting the importance of company performance in financial outcomes at this stage in the Company’s evolution. The same EPS KPI applied for year 2 of the FY21 LTI and year 3 of the FY20 LTI. Building on the achievements of recent years, including last year’s refinancing, management continued to work hard throughout FY22 to evolve the Company’s business model and expand its service offering, rebalancing the commodity mix and increasing contract tenure. The Group experienced strong EPS growth despite covid, significant tightening of the labour market, extreme weather and inflationary pressures faced by the industry and the Company. However, in light of Covid and FY22 earnings coming in at the bottom of the guidance range and, with an eye on ensuring appropriate linkage between shareholder value and executive remuneration, the Board partially awarded against the EPS KPI. 5.2.3 Incentive outcomes The following table outlines the proportion of maximum incentive opportunity that was earned (i.e awarded following testing) or forfeited (i.e not awarded following testing) in relation to the FY22 STI plan. Table 12: FY22 STI Executive [A] Ian Testrow Thao Pham Maximum STI (% of TFR) 80% 60% STI awarded (% of Maximum STI available) 56.6% STI forfeited (% of Maximum STI available) 43.4% 57.6% 42.4% [A] Mr Neil Siford ceased in his role on 29 September 2021 and was not offered STIs for FY22. As noted above, in light of the cyclic nature of the Group’s business, the FY22 LTI Plan is assessed progressively over a three-year period with one-third of the maximum incentive being tested each year. Accordingly, a maximum of one-third of each executive’s FY22 award was available to be earned after FY22, with 1/3 deferred to after FY23 and 1/3 deferred to after FY24. 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 FY23 or FY24) in relation to the FY22 LTI Plan. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 31 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Table 13: FY22 LTI outcomes Executive [A] Maximum LTI (% of TFR) LTI tested and earned in FY22 (% of Maximum LTI available over 3 year period) LTI tested and forfeited in FY22 (% of Maximum LTI available over 3 year period) LTI to be tested across FY23 & FY24 (% of Maximum LTI available over 3 year period) Ian Testrow Thao Pham 120% 40% 18% 18% 15% 15% 67% 67% [A] Mr Neil Siford ceased in his role on 29 September 2021 and was not offered LTIs for FY22. The table below sets out the cumulative outcomes to date in respect of the FY22 LTI (after testing of the year 1 KPI), the FY21 LTI (after testing of the year 1 and 2 KPIs) and the FY20 LTI (after testing of the year 1, 2 and 3 KPIs). Any deferred components will be tested against their applicable KPIs in subsequent years. Cumulative LTI Outcomes FY22 LTI 18% 15% 67% FY21 LTI 50% 17% 33% FY20 LTI 78% 22% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Earned Forfeited Deferred [1] Expressed as a percentage of maximum LTI available over 3 year period. [2] As detailed above, the year 3 KPI for the FY20 LTI plan and the year 2 KPI for the FY21 LTI plan is the same as the KPI for the FY22 LTI plan and the outcomes are therefore the same. Outcomes for the years 1 and 2 for the FY20 LTI plan and the year 1 FY21 LTI plan are detailed in the FY20 and FY21 annual reports. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 32 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Statutory Executive KMP remuneration The following table sets out total remuneration for executive KMP in FY22 and FY21, calculated in accordance with statutory accounting requirements. Table 14 – Statutory executive KMP remuneration KMP Short term employee benefits Post-employment benefits payments Share based & y r a l a S ] 1 [ s e e F m r e t t r o h S s u n o b ] 2 [ s t n e m y a p Executive director Ian Testrow FY22 1,045,140 460,326 FY21 1,017,933 623,399 Other executives Thao Pham FY22 622,759 198,720 FY21 468,156 240,661 Neil Siford [5] FY22 113,239 - FY21 395,938 183,602 TOTAL KMP remuneration FY22 1,781,138 659,046 FY21 1,882,027 1,047,662 y r a t e n o m - n o N - - - - - - - - n o i t a u n n a r e p u S m r e t g n o l r e h t O ] 3 [ s t i f e n e b 27,692 19,026 25,000 22,167 27,692 25,622 25,000 9,963 7,460 1,925 25,000 7,590 62,844 46,573 75,000 39,720 n o i t a n m r e T i s t i f e n e b m r e t g n o L y t i u q e ] 4 [ s e v i t n e c n i y r o t u t a t s l a t o T n o i t a r e n u m e r n o i t a r e n u m e r e c n a m r o f r e p d e t a l e r f o % - - - - - - - - 1,922,686 3,474,871 69% 3,659,157 5,347,656 80% 526,143 1,400,936 52% 586,377 1,330,157 62% - 122,624 0% 52,636 664,766 36% 2,448,829 4,998,431 4,298,170 7,342,579 62% 73% [1] These figures include annual leave accrual adjustments. [2] The FY22 figure includes cash awards under the FY22 STI as approved by the Board after review of performance against applicable key performance indicators (see table 11). [3] Long service leave accruals are revalued where an employee’s remuneration increases. Figure also includes certain on-costs which may be re-calculated from time to time. [4] The FY22 figure includes Rights granted (for accounting purposes) by the Company in FY19, FY20 and FY21 however no Rights under the FY22 LTI plan were issued in FY22. [5] Mr Siford ceased in his role on 29 September 2021. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 33 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 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) Other executives notice period (by company or executive) 12 months’ notice No notice 6 months’ notice No notice Nil 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 non-executive directors 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 non-executive directors 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 non-executive directors’ pool at the 2022 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 FY22, 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 non-executive directors fee policy for FY22 (inclusive of superannuation): Board fees Chairman Directors Committee fees Committee Chair Committee Member FY22 $166,149 $105,000 FY22 $13,999 $10,500 Non-executive directors do not receive retirement benefits, nor do they participate in any incentive programs. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 34 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 The remuneration of non-executive directors for the year ended 30 June 2022 and 30 June 2021 is detailed in table 15 below. Table 15 – Statutory non-executive director remuneration Non-executive director Short-term employee benefits Post-employment benefits Long-term benefits Peter Richards Peter Frank Keith Skinner Peter Kane [1] TOTAL FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 Salary and fees 163,772 153,642 Superannuation benefits 16,378 14,596 Long term equity incentives - - 105,000 91,324 108,182 103,501 105,000 56,024 481,954 443,503 10,500 8,676 10,818 9,833 10,500 5,322 48,196 42,133 - - - - - - - - Total 180,150 168,238 115,500 100,000 119,000 113,333 115,500 61,346 530,150 485,635 [1] Mr Kane commenced on 7 December 2020. 8. Additional disclosures relating to share-based payments Grants and vesting of equity settled awards made to executives in connection with the Company’s long term incentive plans in FY19, FY20, FY21 and FY22 are set out in the following table. All grants are rights (or an entitlement to receive rights) to receive one fully paid ordinary Emeco share. The vesting of rights is subject to satisfaction of vesting conditions. Once vested, a participant has a period within which to exercise the right (at zero cost) and receive shares. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 35 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Table 16 – Summary of executive KMP allocated, vested or lapsed equity Executive Grant date [1] Number granted [2] % vested in FY22 % forfeited in FY22 Vesting date [3] [4] Fair value per share/right at grant date [5] Ian Testrow [A] 2019 MIP (Year 2) 15/11/2018 1,000,000 100% (Year 3) 15/11/2018 1,000,000 (Year 4) 15/11/2018 1,000,000 2020 LTI (Year 1) 12/11/2020 157,836 2020 LTI (Year 2) 18/11/2021 176,404 2021 LTI (Year 1) 18/11/2021 377,020 Thao Pham 2019 MIP 26/07/2018 553,557 2020 LTI (Year 1) 14/11/2019 (Year 2) 14/11/2019 (Year 3) 14/11/2019 2021 LTI (Year 1) 26/07/2021 (Year 2) 26/07/2021 (Year 3) 26/07/2021 2022 LTI (Year 1) 12/08/2021 (Year 2) 12/08/2021 (Year 3) 12/08/2021 Neil Siford [C] 2020 LTI (Year 1) 18/03/2020 (Year 2) 18/03/2020 (Year 3) 18/03/2020 2021 LTI (Year 1) 26/07/2021 (Year 2) 26/07/2021 (Year 3) 26/07/2021 29,918 [B] 29,917 [B] 29,917 [B] 63,941 [B] 63,940 [B] 63,940 [B] 100,000 [B] 100,000 [B] 100,000 [B] 7,458 [B] 7,458 [B] 7,458 [B] 55,556 [B] 55,556 [B] 55,555 [B] - - - - - - - - - - - - - - - 85% 95% - 95% - - - - - - - - - 15% 5% 45% 5% 45% - Aug-2021 Aug-2022 Aug-2023 Aug-2022 Aug-2022 Aug-2023 30/06/2023 Aug-2022 Aug-2022 Aug-2022 Aug-2023 Aug-2023 Aug-2023 45% Aug-2024 - - 15% 5% 100% 5% 100% 100% Aug-2024 Aug-2024 Aug-2022 Aug-2022 Aug-2022 Aug-2023 Aug-2023 Aug-2023 $3.30 $3.30 $3.30 $0.94 $1.07 $1.06 $3.60 $1.91 $1.91 $1.91 $0.93 $0.93 $0.93 $1.04 $1.01 $0.99 $0.82 $0.82 $0.82 $0.93 $0.93 $0.93 [A] Mr Ian Testrow’s grant of awards under the: (i) FY19 MIP were approved by shareholders on 15 November 2018; (ii) FY20 LTI (Year 1) was approved by shareholders on 12 November 2020; (iii) FY20 LTI (Year 2) and FY21 LTI (Year 1) was approved by shareholders on 18 November 2021 and (iv) Mr Testrow may, subject to shareholder approval, also be granted up to 396,863 Rights in respect of Year 3 of the FY21 LTI and up to 353,607 Rights in respect of each of Year 2 and Year 3 of the FY22 LTI. [B] This figure represents maximum entitlement under the FY20, FY21 and FY22 LTI plans 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. Refer to table 17 for more information regarding Rights held by the KMPs. [C] Mr Siford ceased in his role on 29 September 2021 and, in accordance with their terms, some rights vested and others were forfeited. [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, FY21 and FY22 incentive plans, differs from the date Rights may be issued over the course of the life of the plan. [2] All figures are post-consolidation (where applicable). EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 36 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 [3] 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 3.2, ‘What happens if an executive leaves?’ in respect of the FY22 LTI plan). A participant has a period of time in which to exercise any vested rights into shares. 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 FY22 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. [4] Where exact vesting dates are not noted, the vesting date will follow release of the Company’s full year results. [5] The fair value of awards granted was determined using the 30-day volume weighted average price on the grant date (under the MIP in FY19 (figure shown post-consolidation)), the 30-day volume weighted average price on 31 July 2019 (for the FY20 LTI), the 20- day volume-weighted average price following release of the Company’s FY20 full year results (for the FY21 LTI). The fair value of awards granted under the FY22 LTI were determined using the black scholes valuation method. For all securities, the fair value is allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed in the KMP remuneration table (table 14) is the portion of the fair value of the securities recognised in the Consolidated Statement of Profit or Loss and Other Comprehensive Income for the relevant period. The fair value of all securities is not related to or indicative of the benefit (if any) that an executive may ultimately realise if the equity instruments vest. Table 17: KMP Rights Details of Rights held by KMP, including their personally related entities, for FY22 are as follows: KMP Rights [1] Executive Director Ian Testrow Rights / performance shares Rights / performance rights Other executives Thao Pham Neil Siford [4] Rights / performance rights Rights / performance rights Holding at 1 July 2021 Rights issued in FY22 [2] Rights vested in FY22 Holding at 30 June 2022 Potential future Rights [3] 3,000,000 - 1,000,000 2,000,000 - 157,836 553,424 578,988 89,166 - - 711,260 1,104,077 668,154 263,940 6,340 59,864 66,204 - - [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 vesting conditions. [2] Rights issued to executives in FY22 under the FY20 and FY21 incentive plans. [3] Maximum remaining possible entitlement to Rights under the FY21 and FY22 LTI plans across the three-year performance period. [4] Mr Siford ceased his role on 29 September 2021. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 37 Emeco Holdings Limited and its Controlled Entities Directors’ Report For the year ended 30 June 2022 Table 18: KMP Shareholding Details of Shares held by KMP, including their personally related entities, for FY22 are as follows: Holding at 1 July 2021 Shares received as a result of rights vesting in FY22 Shares otherwise issued in FY22 Net changes other Holding at 30 June 2022 Non-executive directors Peter Richards Peter Frank Peter Kane Keith Skinner Executives 11,044 - 10,288 22,300 - - - - Ian Testrow [A] 11,722,107 1,000,000 Thao Pham 2,569,851 - - - - - - - - - - - 11,044 - 10,288 22,300 (577,238) 12,144,869 - 2,569,851 [A] As announced to the market on 20 August 2021, Mr Testrow disposed of 577,238 shares in the Company in order to fund tax liabilities resulting from the vesting of shares under the Company’s long term incentive plans. 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, 16th day of August 2022 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 38 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, 133 Hasler Road Osborne Park WA 6017 16 August 2022 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 2022, 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 David Newman Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. 39 Emeco Holdings Limited and its Controlled Entities Financial Statements Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2022 Note 2022 $'000 2021 $'000 Continuing operations Revenue Other income Repairs and maintenance Employee expenses External mining and maintenance services Cartage and fuel Depreciation and amortisation expense Impairment of tangible assets Other expense Finance income Finance costs Net foreign exchange (loss)/gain Profit before tax expense Tax expense Profit from continuing operations Other comprehensive (loss)/income Items that are or may be reclassified to profit and loss: Foreign currency translation differences (net of tax) Changes in fair value of cash flow hedges (net of tax) Total other comprehensive (loss)/income for the year 7 8 9 9 9 9 9 9 9 11 754,368 680 (123,508) (142,405) (175,527) (17,414) (129,441) (1,125) (50,488) 164 (24,185) (436) 90,683 (25,730) 64,953 620,528 1,084 (108,146) (98,424) (120,622) (15,723) (118,576) (1,146) (51,772) 362 (88,275) 10,302 29,592 (8,897) 20,695 (446) - (446) 21,267 (19,624) 1,643 Total comprehensive income for the year 64,507 22,338 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 45 to 109. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 40 Emeco Holdings Limited and its Controlled Entities Consolidated Statement of Profit or Loss and Other Comprehensive Income (continued) For the year ended 30 June 2022 Profit attributable to: Owners of the Company Profit for the year Total comprehensive profit attributable to: Owners of the Company Total comprehensive profit for the year Earnings per share: Basic earnings per share Diluted earnings per share 2022 $'000 2021 $'000 64,953 64,953 20,695 20,695 64,507 64,507 22,338 22,338 Note 37 37 2022 Cents 2021 cents 12.13 11.94 4.02 3.96 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 45 to 109. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 41 Emeco Holdings Limited and its Controlled Entities Consolidated Statement of Financial Position as at 30 June 2022 Current assets Cash and cash equivalents Trade and other receivables Inventories and work in progress Other current assets Assets held for sale Total current assets Non-current assets Intangible assets Property, plant and equipment Right of use asset Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Derivative financial instruments Interest bearing liabilities Provisions Total current liabilities Non-current liabilities Interest bearing liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained losses Total equity attributable to equity holders of the Company Note 2022 $'000 2021 $'000 18 19 21 17 15 22 23 24 13 25 20 26 28 26 28 13 14 60,158 146,848 25,311 19,043 4,094 255,454 10,971 718,094 40,894 - 769,959 74,725 124,695 19,202 7,227 2,794 228,643 10,329 669,233 32,850 24,489 736,901 1,025,413 965,544 139,778 - 14,969 14,546 169,293 286,095 682 2,122 288,899 110,012 12,389 13,399 11,872 147,672 285,811 655 - 286,466 458,192 434,138 567,221 531,406 1,155,856 7,585 (596,220) 567,221 1,171,457 7,632 (647,683) 531,406 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 45 to 109. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 42 Emeco Holdings Limited and its Controlled Entities Consolidated Statement of Changes in Equity For the year ended 30 June 2022 Share based Foreign currency Share capital $'000 payment Hedging translation Treasury Accumulated Total reserve reserve reserve $'000 $'000 $'000 shares $'000 losses $'000 equity $'000 Balance at 1 July 2020 1,024,442 27,387 (1,233) 14,615 (39,589) (668,378) 357,244 Total comprehensive income for the period Profit for the period Other comprehensive income Foreign currency translation differences Change in fair value of cash flow hedge / recycling of hedge reserve on cessation of hedge accounting, net of tax Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners - - - - - 20,695 20,695 - - 20,857 410 - - 21,267 - - (19,624) - - - (19,624) - - 1,233 410 - 20,695 22,338 Shares issued during the period, net of issue costs 147,015 - - - - - 147,015 Shares vested during the period Shares purchased by the trust Share-based payment transactions Total contributions by and distributions to owners - (2,495) - - - - - - 2,495 (1,200) - - - (1,200) - 147,015 6,009 - - - - 6,009 3,514 - - 1,295 - 151,824 Balance at 30 June 2021 1,171,457 30,901 - 15,025 (38,294) (647,683) 531,406 Share based Foreign currency Share capital $'000 payment Hedging translation Treasury Accumulated reserve reserve reserve shares $'000 $'000 $'000 $'000 losses $'000 Total equity $'000 Balance at 1 July 2021 1,171,457 30,901 - 15,025 (38,294) (647,688) 531,406 Total comprehensive income for the period Profit for the period Other comprehensive income - - - - - 64,953 64,593 Foreign currency translation differences - - Total comprehensive income/(loss) for the period - - - - (446) - - (446) - 64,953 (446) 64,507 Transactions with owners, recorded directly in equity Contributions by and distributions to owners On market share buy back (15,601) - Dividends paid - - Shares vested during the period - (4,425) Shares purchased by the trust - - Share-based payment transactions - 1,999 Total contributions by and distributions to owners (15,601) Balance at 30 June 2022 1,155,856 (2,426) 28,475 - - - - - - - - - - - - (15,601) (13,485) (13,485) - 4,425 - - - (1,600) - (1,600) - - - 1,999 - 2,825 (13,485) 14,579 (35,469) (596,220) (28,687) 567,221 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 45 to 109. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 43 Emeco Holdings Limited and its Controlled Entities Consolidated Statement of Cash Flows For the year ended 30 June 2022 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Finance income received Finance costs paid Note 2022 $'000 2021 $'000 732,378 (491,934) 240,444 164 (19,460) 613,109 (368,964) 244,145 362 (38,890) Net cash generated by operating activities 32 221,148 205,616 Cash flows from investing activities Proceeds on disposal of non-current assets Payment for property, plant and equipment Payment for intangible assets Proceeds on sale of investments Payment for acquired entities Net cash used in investing activities Cash flows from financing activities Net proceeds from issue of shares Dividends paid to company’s shareholders Payments for shares bought back Proceeds from borrowings Purchase of own shares Repayment of borrowings Premium paid on US notes repurchased Payment for debt financing costs Payments for hedge derivatives closed Repayment of lease liabilities Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the period Effects of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the financial period 2,791 (170,417) - - (2,248) 4,268 (153,554) (600) 328 - (169,874) (149,558) - (13,485) (15,601) 280,000 (1,600) (276,828) (11,191) (5,566) (5,314) (16,102) (65,687) (14,413) 74,725 (154) 60,158 146,100 - - 2,465 (1,200) (291,883) (9,013) (5,793) (3,200) (16,948) (179,472) (123,414) 198,169 (31) 74,724 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements set out on pages 45 to 109. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 44 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 1 Reporting entity Emeco Holdings Limited (the ‘Company’) is domiciled in Australia. The address of the Company’s registered office is Level 3, 133 Hasler Road, Osborne Park WA 6017. The consolidated financial statements of the Company as at and for the year ended 30 June 2022 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 2021. The consolidated financial statements were authorised for issue by the board of directors on 16 August 2022. (b) Comparative financial information The presentation of certain items in the consolidated statement of profit or loss and other comprehensive income has been amended during the period to simplify the presentation and aide understanding. Where applicable, comparative amounts have been reclassified to ensure comparability. On the face of the consolidated statement of profit or loss and other comprehensive income, the Group has reclassified certain “external mining and maintenance services” costs previously classified as “repairs and maintenance”, to more accurately reflect the nature of expenses incurred. There was no impact on total expenses as a result of this reclassification. (c) 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 • The methods used to measure fair values are discussed further in note 5. financial instruments at fair value through profit or are measured at fair value. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 45 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 2 Basis of preparation (continued) (d) 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. Certain columns and rows may not add due to the use of rounded numbers. (e) 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. Estimates and underlying assumptions are reviewed on an ongoing basis and for FY22 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: 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. Annual impairment testing was conducted at 30 June 2022, with no impairment identified. An impairment assessment was performed for the Group's key cash generating units (CGUs), being Rental, Workshops and Pit N Portal. The Group has prepared value-in-use models for the purpose of impairment testing as at 30 June 2022, 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 and key assumptions 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 2022. 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 46 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 2 Basis of preparation (continued) (e) Use of estimates and judgements (continued) Impairment of assets (continued) In performing its detailed impairment assessment, 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; the likelihood of any continued disruption to the operations of the Group’s customers, as a result of labour shortages, covid absence; and the impact of decarbonisation and ESG related impacts on operations. • • • The post-tax discount rate used in the calculations is 8.7% (2021: 7.2%). 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. The five year cash flow estimates used in assessments for all CGU’s were based on Board approved budgets for the year ending 30 June 2023. A compound annual growth rate (CAGR) of 2.8% was used over the remaining four years of the forecast. The terminal value growth rate represents the long term forecast consumer price index (CPI) of 2.0% (2021: 2.0%) for all CGUs. The recoverable amounts of all of the Group's CGUs continued to exceed their carrying amounts at 30 June 2022, with no reasonably possible changes to key assumptions giving rise to an impairment. 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 15. (f) 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 47 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 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 2021, except for the adoption of new standards effective as of 1 July 2021. 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. (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) (i) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. (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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 48 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (c) AASB 16 Leases (continued) 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. • • • • 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 49 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (c) AASB 16 Leases (continued) 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. (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. (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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 50 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (d) Financial instruments (continued) (ii) Measurement (continued) 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. (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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 51 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (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. • 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 52 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (e) Property, plant and equipment (continued) (iii) Depreciation (continued) 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 Intangible assets (f) (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 • Customer contracts 0 – 4 years 0 – 3 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 53 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (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. (h) Work in progress Progressive 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. Impairment (i) (i) Non-derivative financial assets The expected credit loss model under AASB 9 is used to measure the fair value of financial assets not classified as at fair value through profit or loss. To assist in this process, the Group segregates trade 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 receivables The Group has classified its receivables into three main segments of Rental, Workshops and Pit N Portal in line with the main segments and work undertaken. The debtors in each segment is then further classified as follows: • Rental – blue chip customers, insured customers, uninsured customers and cash sale customers. • Workshop – blue chip customers, insured customers, uninsured customers, cash sales and small retail customers. • Pit N Portal – blue chip customers, insured customers, uninsured customers, cash sales and small retail customers. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 54 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) Impairment (continued) (i) (i) Non-derivative financial assets (continued) These categories are defined as: • Blue chip customers – those that are typically defined as having a market capitalisation of greater than $750m. The classification of Blue Chip is determined under the credit risk of the Groups Insurance Policy. Insured customers – those that are trading within terms with their trade receivable exposure under the insured limit. • • Underinsured customers - those that have not been granted sufficient credit limits by the insurer to 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. Bad debt policy An allowance for 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 55 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (i) Non-derivative financial assets (continued) (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. (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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 56 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (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. (v) Share based payment transactions Under the Emeco long term incentive plans (LTI) and the legacy 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 LTI plans, 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 the share price at grant date. The grant date in respect of the LTI Plans, 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 LTI plans are 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 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 57 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (k) Employee benefits (continued) (v) Share based payment transactions (continued) 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 may vest on an accelerated basis. Rights granted under the MIP 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. (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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 58 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (n) Revenue (continued) (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 recognised over time on the basis of the work completed and billed to the customer as the customer receives the benefit. Customer contracts are generally based on schedule of rates or a cost plus basis. Certain contracts with customers include a variable element which is subject to the group meeting either certain cost targets or material movement KPIs. Variable consideration is recognised when it is highly probable that a significant reversal of revenue will not occur in a subsequent period. (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. 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 is 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 59 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (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; • • • withholding tax; • premium paid on repurchase of debt; • • amortisation of borrowing costs capitalised using the effective interest method. the net gain or loss on financial assets at fair value through profit or loss; the foreign currency gain or loss on financial assets and liabilities; the net gain or loss on hedging instruments that are recognised in profit or loss; and 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. 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 60 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 3 Significant accounting policies (continued) (q) Income tax (continued) 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. (iv) Tax consolidation Amounts payable or receivable under the tax-funding arrangement between the company and the entities in the tax consolidated group are determined using a ‘separate taxpayer within group’ approach to determine the tax contribution amounts payable or receivable by each member of the tax-consolidated group. This approach results in the tax effect of transactions being recognised in the legal entity where that transaction occurred and does not tax effect transactions that have no tax consequences to the group. The same basis is used for tax allocation within the tax-consolidated group. (r) 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. 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 2020-8 Amendments to Australian Accounting Standards – Interest rate benchmark reform – Phase 2 This amendment enables the Group to reflect the effects of transitioning from interbank offered rates (IBOR) to alternative benchmark interest rates (also referred to as ‘risk free rates’ or RFRs) without giving rise to accounting impacts that would not provide useful information to users of financial statements. The amendments are relevant for the following types of hedging relationships: • Fair value hedges where LIBOR-linked derivatives are designated as a fair value hedge of fixed rate debt in respect of the GBP LIBOR risk component. • Cash flow hedges where IBOR-linked derivatives are designated as a cash flow hedge of IBOR-linked bank borrowings. • Bills or exchange and lease liabilities which reference LIBORs and are subject to the interest rate benchmark reform. None of the new accounting standards and interpretations above had an impact on the comprehensive income for the Group or the Statement of Financial Position. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 61 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 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) 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. (d) Share based payment transactions The fair value of the Rights awarded under the LTI plan and MIP 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. (e) 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. (f) 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 62 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 6 Financial instruments Overview The Group has exposure to the following risks from their use of financial instruments: • • • market risk. credit risk; liquidity risk; and 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: Carried at fair value through profit or loss using level one valuation technique (based on share prices quoted on the relevant stock exchanges) Investments in equity securities Derivatives designated under hedge accounting using level two valuation technique Derivative financial instruments (note 20) (a) The carrying value of each of these items approximates fair value. Carried at amortised cost Cash and bank balances (note 20) (a) Trade and other receivables (note 19) (a) Interest bearing liabilities (note 26) Trade and other payables (note 25) (a) 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 63 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 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 Consolidated Carrying amount 2022 $'000 110,055 36,983 60,158 207,196 2021 $'000 96,454 28,446 74,725 199,625 Note 19 19 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 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 (2021: $750,000,000). The Group held insurance for the entire financial year ended 30 June 2022. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 64 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 6 Financial instruments (continued) Credit risk (continued) The aging of the Group’s trade receivables at the reporting date was: Not past due Past due 0-30 days Past due 31-60 days Past due 61 days Consolidated Consolidated Gross 2022 $'000 Impairment 2022 $'000 Gross 2021 $'000 Impairment 2021 $'000 89,160 17,235 3,412 248 110,055 - - - (189) (189) 89,446 5,234 1,722 52 96,454 - - (153) (52) (205) 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: Blue chip (including subsidiaries) Insured Underinsured Uninsured Consolidated Carrying amount 2022 $'000 2021 $'000 34,513 36,781 6,966 31,795 110,055 33,064 37,812 3,569 22,009 96,454 The Group considers blue chip and insured customers as 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 65 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 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 rental customer 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 has calculated an expected credit loss of $189,000 based on historical loss trends and economic factors (2021: $205,000). No specific customers have been identified as doubtful, and provided for by the Group (2021: $Nil). The movement in the credit loss allowance in respect of trade receivables during the year was as follows: Opening loss allowance as at 1 July Net remeasurement of loss allowance Write-offs Loss allowance as at 30 June Consolidated Impairment 2022 $'000 Impairment 2021 $'000 205 (16) - 189 536 (331) - 205 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. An allowance 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 $60,158,000 at 30 June 2022 (2021: $74,725,000), 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 2022 the Group held $Nil of bank guarantees (2021: $Nil) and $Nil of prepayments (2021: $Nil). EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 66 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 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 31. At 30 June 2022, $3,121,000 guarantees were outstanding (2021: $1,646,000). 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. Notes The Group has issued secured fixed interest notes to the value of A$250,000.000 which mature on 1 July 2026. The nominal fixed interest rate is 6.25%. Refer to note 26 for further details. Revolving Credit Facility The Group has a Revolving Credit Facility (RCF) facility of $100,000,000, which matures in September 2023, which has two sub facilities consisting of a Loan Note Agreement Facility (LNA) of A$96,800,000 (30 June 2021: $97,000,000) and a Bank Guarantee Facility of A$3,200,000 (30 June 2021: $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 2.0x and a fixed charge coverage ratio greater than 1.5x. At 30 June 2022, the Group had drawn $Nil of the LNA and had utilised A$3,121,000 of the bank guarantee facility. 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$54,648,000 (2021: A$48,300,000) which have various maturities up to June 2033. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 67 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 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. Consolidated 30 June 2022 Non-derivative financial liabilities Secured notes issue Lease liabilities Trade and other payables Consolidated 30 June 2021 Non-derivative financial liabilities Secured notes issue Lease liabilities Trade and other payables Derivative financial asset/(liability) Net cross currency interest rate swaps used for hedging liability Contract- Carrying ual cash flows amount 6 mths or less 6-12 mths 1-2 years 2-5 years More than 5 years $'000 $'000 $'000 $'000 $'000 $'000 $'000 250,000 54,648 125,607 430,255 320,314 60,413 125,607 506,334 7,813 8,157 125,607 141,577 7,813 7,316 - 15,625 18,041 - 289,063 18,632 - 15,129 33,666 307,695 - 8,268 - 8,268 Contract- Carrying ual cash flows amount 6 mths or less 6-12 mths 1-2 years 2-5 years More than 5 years $'000 $'000 $'000 $'000 $'000 $'000 $'000 250,508 48,300 105,990 404,798 330,202 53,709 105,990 489,901 11,416 7,498 105,990 124,904 11,416 7,463 - 22,832 12,263 - 284,539 21,964 - 18,879 35,095 306,503 - 4,521 - 4,521 12,389 12,389 12,389 12,389 12,389 12,389 - - - - - - - - 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 68 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 6 Financial instruments (continued) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Group enters into derivatives, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Group’s hedging policy. Generally, the Group seeks to apply hedge accounting in order to manage volatility in profit or loss. Currency risk The functional currency of the Group is the Australian dollar (AUD). Following the settlement of the USD notes and replacement with AUD notes, the Group is no longer exposed to any material currency risk. Refer to note 26 for further details of this transaction. The Group is holding no cash flow hedges. The derivatives were closed out on repayment of the hedged liability (the US Notes). Hedge accounting has been discontinued as at 30 June 2021. Refer to note 26 for further details. Exposure to currency risk The Group’s exposure to foreign currency risk at balance date was as follows, based on notional amounts: Cash Secured notes issued Gross balance sheet exposure Cross currency interest rate swap to hedge the secured notes issued Net exposure The following significant exchange rates applied during the year: USD 2022 $'000 USD 2021 $'000 11 (180,007) (179,996) 180,007 180,007 11 6 - 6 - - 6 US Dollars Average rate Reporting date spot rate 2022 0.7258 2021 0.7468 2022 2021 0.6889 0.7518 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 69 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 6 Financial instruments (continued) Market risk (continued) Sensitivity analysis A weakening of the Australian dollar, as indicated below, against the US dollar, would not materially affect the measurement of financial instruments denominated in US dollars. Emeco no longer has material exposure to the US dollar following the settlement of the USD notes as at year ended 30 June 2021. 30 June 2022 USD (10 percent movement) 30 June 2021 USD (10 percent movement) Consolidated Strengthening Weakening Equity $’000 Profit or loss $’000 Equity $’000 Profit or loss $’000 - (1) - 1 (3,642) (1) 4,451 2 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: Variable rate instruments: Cash at bank Fixed rate instruments: Effective interest rate swaps to hedge interest rate risk Interest bearing liabilities (USD notes) Interest bearing liabilities (AUD notes) Interest bearing finance leases Consolidated Note 2022 $'000 2021 $'000 18 20 26 26 26 60,158 60,158 74,725 74,725 - - (250,000) (54,648) (304,648) (12,389) (250,508) - (48,300) (311,197) Cash flow hedges At 30 June 2022, the Group had no cross currency interest rate swaps (hedging instruments). Hedge accounting ceased at 30 June 2021 due to repayment of the secured notes and closure of cross- currency interest rate swaps subsequent to 30 June 2021, and all movements in the hedge reserve have been recycled through the Statement of Profit or Loss and Other Comprehensive Income. Refer to note 26 for further information. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 70 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 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 Statement of Financial Position, are as follows: Assets carried at amortised cost Receivables Cash and cash equivalents Note 19 18 Liabilities carried at fair value Cross currency interest rate swaps 20 2022 2021 Carrying amount $’000 Fair value $’000 Carrying amount $’000 Fair value $’000 146,849 60,158 207,007 146,849 60,158 207,007 124,695 74,725 199,420 124,695 74,725 199,420 - - - - (12,389) (12,389) (12,389) (12,389) Liabilities carried at amortised cost Secured notes issue (1) Lease liabilities Loan note agreement Trade and other payables 26 26 26 25 (250,000) (250,000) (250,508) (250,508) (54,648) (60,413) (48,300) (53,709) 158 (139,778) (444,268) 158 94 94 (139,778) (110,012) (110,012) (450,033) (408,726) (414,135) (1) Carried at amortised cost with movements in fair value of the underlying hedged item is recorded in the statement of other comprehensive income. Any movements in the fair value of unhedged items are recognised 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 71 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 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 15.0% (2021: 14.1%). The Group’s return on invested capital at the end of the reporting period was as follows: EBIT (continuing and discontinued operations) Average invested capital (1) Consolidated 2022 $'000 115,140 773,680 2021 $'000 107,203 761,707 EBIT return on capital at 30 June 15.0% 14.1% (1) Average invested capital is average net assets add net debt, less intangibles. 7 Revenue The Group disaggregates revenue from its contracts with customers through three strategic business units, being rental, workshops and Pit N Portal. This appropriately depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Group’s fleet is commodity agnostic i.e. the fleet can be used across a range of different commodities without significant modification, and decision making relating to the sale of goods and services is driven by the economic factors affecting each business unit. For further information regarding revenue earned by business unit, refer to note 16. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 72 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 8 Other income Net profit on sale of non current assets (1) Sundry income (2) Consolidated 2022 $'000 2021 $'000 60 620 680 318 766 1,084 (1) Included in net profit on the sale of non-current assets is the sale of rental equipment, including those non-current assets classified as held for sale. The gross proceeds from the sale of this equipment in 2022 was $2,791,000 (2021: $4,268,000). (2) Included in sundry income are fees charged on overdue accounts and bad debts recovered. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 73 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 9 Profit before income tax expense for continuing operations Consolidated Note 2022 $'000 2021 $'000 Profit before income tax expense has been arrived at after charging/(crediting) the following items: Impairment of tangible assets: - - Inventory property, plant and equipment 21 Employee expenses: - - salaries, wages and superannuation employee share plan expenses doubtful debts/(reversal) insurance property and office expenses telecommunications and IT restructuring and redundancies corporate, accounting and legal Other expenses: - motor vehicles - safety, staff training and amenities - travel and subsistence expense - workshop consumables, tooling and labour - - - - - - - COVID-19 expenses - - - - - corporate development expenses impairment of investments net loss on AASB 16 lease modification hired in equipment and services other expenses Depreciation of: buildings - plant and equipment – owned - plant and equipment – leased - - office equipment - motor vehicles - - leasehold improvements sundry plant Depreciation of right of use asset Total depreciation Amortisation of intangible assets: - - contract intangible software Total depreciation and amortisation EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 23 24 22 89 1,036 1,125 140,406 1,999 142,405 2,928 5,756 8,356 3,942 (2) 5,146 9,068 3,448 781 3,976 1,686 - - - 1,293 4,110 50,488 66 111,314 2,078 553 1,446 140 1,304 116,901 10,969 127,870 661 910 1,571 129,441 382 764 1,146 92,415 6,009 98,424 2,850 3,946 4,336 8,636 (170) 3,492 7,129 3,302 - 3,464 - 2,013 10 2,737 5,708 4,319 51,772 169 103,128 2,510 288 949 200 963 108,207 9,230 117,437 246 892 1,138 118,576 74 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 9 Profit before income tax expense for continuing operations (continued) interest expense Finance costs: - - write-off previous facility costs(1) - - - - amortisation of debt establishment costs using effective interest rate premium paid on buy back of issue debit(1) hedge loss(1) net loss on modification of US Notes' contractual terms under AASB 9 other facility costs - Net finance costs Finance income: - Net finance income interest income Foreign exchange (gain)/loss: Net realised foreign exchange (gain)/loss Net unrealised foreign exchange (gain)/loss Net foreign exchange (gain)/loss Consolidated 2022 $'000 2021 $'000 21,600 - 1,113 - - - 1,472 24,185 33,768 5,633 3,621 20,374 20,339 3,348 1,192 88,275 (164) (164) (362) (362) 192 244 436 (4,018) (6,284) (10,302) (1) Refer to note 26 for further details on the long-term debt refinancing transactions associated with these finance costs. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 75 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 10 Auditor’s remuneration Audit services Auditors of the Company Deloitte Touche Tohmatsu Australia: - audit and review of financial reports Overseas Deloitte Firms: - other assurance services Other assurance and agreed upon procedures Auditors of the Company Deloitte Touche Tohmatsu Australia: - other assurance services Other services Auditors of the Company Deloitte Touche Tohmatsu Australia: - taxation services Overseas Deloitte Firms: taxation services - Consolidated 2022 $ 2021 $ 517,292 698,112 16,029 533,321 36,086 734,198 51,410 51,410 240,013 240,013 12,945 45,768 9,610 22,555 35,291 81,059 607,286 1,055,270 The Company has engaged with Deloitte for the provision of audit and tax services as well as other specific assurance. No other advisory or consulting services were provided by Deloitte during the year. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 76 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 11 Taxes a. Recognition in the income statement Consolidated Note 2022 $’000 2021 $’000 Deferred tax benefit Origination and reversal of temporary differences and tax losses in the current year Tax expense 13 25,730 25,730 8,897 8,897 b. Current and deferred tax expense/(benefit) recognised directly in equity Share issue costs Foreign exchange Cashflow hedges Consolidated 2022 $’000 2021 $’000 - 410 - 410 (915) (445) 529 (831) 13 c. Numerical reconciliation between tax expense and pre-tax net profit Prima facie tax expense calculated at 30% on net profit Increase/(decrease) in income tax expense due to: Derecognition of foreign tax losses Other non-deductible expenses Over provided in prior years Tax expense Consolidated 2022 $’000 2021 $’000 26,994 8,877 50 67 (1,381) 25,730 50 30 (60) 8,897 12 Current tax assets and liabilities The current tax asset for the Group of $Nil (2021: $Nil) represents income taxes recoverable in respect of prior periods and that arise from payment of taxes in excess of the amount due to the relevant tax authority. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 77 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 13 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated Property, plant and equipment Intangibles Receivables Derivative contracts Right of use contracts Other financial assets Inventories Payables Interest bearing loans and borrowings Unearned revenue Business costs Provisions Borrowing costs Employee share costs Tax losses carried forward Tax assets/(liabilities) Set off of tax Assets Liabilities Net 2022 $'000 - - - - 13,022 - - 1,050 - - 847 4,582 4,739 - 91,101 115,341 (117,463) 2021 $'000 - - - 3,717 12,807 - - 1,470 1,732 - 1,534 3,646 6 - 94,398 119,310 (94,822) 2022 $'000 (114,502) (471) (289) - - (168) (1,574) - - (24) - - - (435) - (117,463) 117,463 2021 $'000 (92,626) (4) (575) - - (116) (230) - - (25) - - - (1,246) - (94,822) 94,822 2022 $'000 (114,502) (471) (289) - 13,022 (168) (1,574) 1,050 - (24) 847 4,582 4,739 (435) 91,101 (2,122) - 2021 $'000 (92,626) (4) (575) 3,717 12,807 (116) (230) 1,470 1,732 (25) 1,534 3,646 6 (1,246) 94,398 24,488 - Net tax (liabilities)/assets (2,122) 24,488 - - (2,122) 24,488 Movement in deferred tax balances Balance 1 July 21 $'000 Balances acquired $'000 Consolidated Recognised in profit or loss $'000 Recognised directly in equity $'000 Recognised in other comprehensive income $'000 (92,626) (6,309) (15,566) Property, plant and equipment Intangibles assets Receivables Derivative - hedge receivable Right of use contracts Other financial assets Inventories Payables Interest bearing loans and borrowings Unearned revenue Business costs Provisions Borrowing costs Employee share costs Tax losses carried forward (4) (575) 3,717 12,807 (116) (230) 1,470 1,732 (25) 1,534 3,646 6 (1,245) 94,398 24,488 (466) - - 286 (1,004) (5,449) 6,309 - - - 1,004 - - - - - - (6,095) (52) (1,344) (10) - - (687) 936 4,733 811 (3,297) - - - - - - - (410) - - - - - - - (466) (25,734) (410) - - - - - - - - - - - - - - - - Balance 30 Jun 22 $'000 (114,501) (470) (289) (2,736) 13,021 (168) (1,574) 1,050 2,736 (25) 847 4,582 4,739 (435) 91,101 (2,122) 78 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 13 Deferred tax assets and liabilities (continued) Movement in deferred tax balances Property, plant and equipment Intangibles assets Receivables Derivative - hedge receivable Right of use contracts Other financial assets Inventories Payables Interest bearing loans and borrowings Unearned revenue Business costs Provisions Borrowing costs Employee share costs Tax losses carried forward Balance 1 July 20 $'000 (62,567) (4) (491) (8,410) 33 (31) (105) 1,257 14,387 (25) 1,176 3,354 31 (2,688) 86,638 32,555 Recognised in profit or loss $'000 (30,059) - (84) 12,656 12,774 (85) (125) (232) (12,655) - (557) 292 (25) 1,443 7,760 (8,897) Unrecognised deferred tax assets Consolidated Recognised directly in equity $'000 Recognised in other comprehensive income $'000 - - - (529) - - - 445 - - 915 - - - - 831 - - - - - - - - - - - - - - - - Balance 30 Jun 21 $'000 (92,626) (4) (575) 3,717 12,807 (116) (230) 1,470 1,732 (25) 1,534 3,646 6 (1,245) 94,398 24,488 The following deferred tax assets have not been brought to account as assets: Tax losses Consolidated 2022 $’000 2021 $’000 82,390 82,340 Unutilised tax losses are in Chile, Indonesia, the United Kingdom, United States and Europe and are not expected to be utilised by the Group. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 79 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 14 Capital and reserves Share capital 526,666,035 (2021: 544,055,134) ordinary shares, fully paid Acquisition reserve Consolidated 2022 $’000 2021 $’000 1,231,743 (75,887) 1,155,856 1,247,344 (75,887) 1,171,457 Terms and conditions Ordinary shares The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at shareholders' meetings. Shares have no par value. In the event of winding up of the Company, the ordinary shareholder ranks after all other creditors are fully entitled to any proceeds of liquidation. Movements in ordinary share capital Details Balance On market share buy back (1) On market share buy back (1) On market share buy back (1) On market share buy back (1) Balance Less: treasury shares Issued capital Date 1 July 2021 Shares 544,055,134 Issue price ($) $'000 1,247,344 17 September 2021 14 March 2022 3 June 2022 20 June 2022 (3,386,232) (4,722,867) (8,826,700) (453,300) 30 June 2022 526,666,035 4,561,797 522,104,238 1.12 0.88 0.82 0.77 (3,798) (4,178) (7,276) (349) 1,231,743 (1) During the period, Emeco announced a capital management package which included an on-market share buy back. During the year ended 30 June 2022, 17,389,099 shares were purchased at an average share price of $0.90 totaling $15,601,000. No share buy backs were undertaken in the year ended 30 June 2021. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 80 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 14 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 2022 the Company held 4,561,797 treasury shares (2021: 4,232,129), 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) On 15 February 2022, a fully franked interim dividend of 1.25 cents per share totalling $6,758,000 was declared and paid on 6 April 2022. For the six months ended 30 June 2021, the board resolved to pay a final dividend of 1.25 cents per share totalling $6,801,000, which was fully franked and paid on 30 September 2021. On 16 August 2022, the board resolved to pay a final dividend for the year ended 30 June 2022 of 1.25 cents per share and a total cash payment of $6,583,000. The dividend will be fully franked and will be paid on 30 September 2022. _________________ (1) Refer to Consolidated Statement of Changes in Equity. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 81 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 14 Capital and reserves (continued) Franking account Dividend franking account 30% franking credits available to shareholders of Emeco Holdings Limited for subsequent financial years The Company 2022 $’000 2021 $’000 79,584 85,394 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; franking debits that will arise from the payment of dividends recognised as a liability at the year end; franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the year end; franking credits that the entity may be prevented from distributing in subsequent years; and franking credits acquired through business combinations. (b) (c) (d) (e) 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 $2,821,000 (2021: $2,914,000). 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 $79,584,000 (2021: $85,394,000) franking credits. 15 Disposal groups and non-current assets held for sale During the year $5,576,000 (FY21: $5,645,000) of non-current assets were transferred from property, plant and equipment into non-current assets held for sale. Assets previously classified during the period as held for sale were further impaired by $1,036,000 to their fair value less cost to sell based on market prices of similar equipment. As at 30 June 2022, the non-current assets held for sale comprised assets of $4,094,000 (2021: $2,794,000). 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. Assets classified as held for sale Property, plant and equipment – continuing operations Net assets classified as held for sale 2022 $’000 2021 $’000 4,094 4,094 2,794 2,794 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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 82 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 16 Segment reporting The Group has three (2021: three) reportable segments, as described below, which are the Group’s strategic business units. The strategic business units offer different products and services, and are managed separately because they require different operational strategies for each geographic region. For each of the strategic business units, the managing director and board of directors review internal management reports on a monthly basis. The following summary describes the operations in each of the Group’s reportable segments: Rental Workshops Pit N Portal 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. Provides maintenance and component rebuild services to customers in Australia. Provides a range of mining services solutions and associated services to customers in Australia. 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 ANNUAL REPORT 2022 83 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 16 Segment reporting (continued) Information about reportable segments M Rental $'000 Continuing Workshops $'000 Pit n Portal $'000 Total $'000 Period ended 30 June 2022 Segment revenue Intersegment revenue Revenue from external customers Other income Segment earnings before interest, tax, depn & amortisation Impairment of tangible assets Depreciation and amortisation Segment result (EBIT) Corporate overheads 429,099 (13,978) 415,121 590 240,236 (1,125) (108,063) 131,048 173,654 (83,063) 90,591 28 9,041 - (3,468) 5,573 248,656 - 248,656 62 32,700 - (15,701) 16,999 EBIT Finance income/(expense) (net) Foreign exchange movements Net profit before tax Tax expense Net profit after tax Total assets for reportable segments Unallocated assets Total Group assets Net capital expenditure Total liabilities for reportable segments Unallocated liabilities Total Group liabilities 734,074 39,729 196,371 139,255 79,354 1,649 38,496 26,723 52,849 851,409 (97,041) 754,368 680 281,977 (1,125) (127,232) 153,620 (38,400) 115,140 (24,021) (436) 90,683 (25,730) 64,953 970,174 55,239 1,025,413 167,626 170,699 287,493 458,192 Rental $'000 Continuing Workshops $'000 Pit n Portal $'000 Total $'000 Period ended 30 June 2021 Segment revenue Intersegment revenue Revenue from external customers Other income Segment earnings before interest, tax, depn & amortisation Impairment of tangible assets Depreciation and amortisation Segment result (EBIT) Corporate overheads 402,250 - 402,250 766 228,544 (1,134) (101,503) 125,907 154,344 (77,073) 77,271 (9) 8,079 (12) (2,939) 5,128 141,008 - 141,008 312 30,250 - (12,548) 17,702 EBIT Finance income/(expense) (net) Foreign exchange movements Net profit before tax Tax expense Net profit after tax Total assets for reportable segments Unallocated assets Total Group assets Net capital expenditure Total liabilities for reportable segments Unallocated liabilities Total Group liabilities 690,965 33,501 153,669 113,636 70,062 2,028 31,096 33,622 36,536 697,601 (77,073) 620,528 1,069 266,872 (1,146) (116,990) 148,736 (41,533) 107,203 (87,913) 10,302 29,592 (8,897) 20,695 878,135 87,409 965,544 149,286 137,694 296,444 434,138 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 84 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 17 Other current assets Prepayments Contract assets 18 Cash and cash equivalents Cash at bank 19 Trade and other receivables Current Trade receivables Less: Expected credit losses VAT/GST receivable Accrued revenue Other receivables Consolidated 2022 $’000 2021 $’000 3,550 15,493 19,043 4,521 2,706 7,227 Consolidated 2022 $’000 2021 $’000 60,158 74,725 Consolidated 2022 $’000 2021 $’000 110,055 (189) 109,866 3,900 25,667 7,415 146,848 96,454 (205) 96,249 4,452 14,334 9,660 124,695 The Group’s exposure to credit risks, currency risks and impairment losses associated with trade and other receivables are disclosed in note 6. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 85 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 20 Derivatives Current liabilities Cross currency interest rate swaps Consolidated 2022 $’000 2021 $’000 - - (12,389) (12,389) The cross currency interest rate swaps were classified as current at 30 June 2021 due to the issuance of A$250,000,000 in the Medium Term Notes market (AUD Notes) subsequent to 30 June 2021. 21 Inventories Work in progress – at cost (1) Consumables, equipment & spare parts – at cost Total at cost Equipment and parts – at NRV Total inventory Consolidated 2022 $’000 2021 $’000 9,523 12,805 22,328 2,983 25,311 5,215 10,019 15,234 3,968 19,202 (1) During the year ended 30 June 2022 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 $89,000 (2021: $382,000). EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 86 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 22 Intangible assets Goodwill Contract intangible Less: Accumulated amortisation Software – at cost Less: Accumulated amortisation Consolidated 2022 $’000 2021 $’000 8,005 8,005 3,737 (1,710) 2,027 8,049 (7,710) 939 8,005 8,005 1,715 (1,048) 667 7,857 (6,199) 1,658 Total intangible assets 10,971 10,329 Contract intangible and goodwill On the acquisition of Pit N Portal on 28 February 2020, a customer intangible was recognised. This represented 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. The customer intangible is being amortised over the determined life of the intangible. The increase in contract intangible from the prior period is due to contract intangibles acquired relating to Borex Pty Ltd. 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. 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: Amortisation expense Total expense for the year for continuing operations Consolidated 2022 $’000 2021 $’000 1,571 1,571 1,138 1,138 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 87 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 23 Property, plant and equipment Land & buildings Leasehold improvements Plant & equipment Consolidated $’000 Leased plant & equipment Office equipment Motor vehicles Sundry plant Total At-cost at 30 June 2022 2,727 5,730 1,376,388 23,429 5,260 14,283 14,585 1,442,402 Accumulated depreciation and impairment at 30 June 2022 (1,398) 1,329 (4,819) 911 (688,561) 687,827 (8,728) 14,701 (3,888) 1,372 (6,863) 7,420 (10,051) 4,534 (724,308) 718,094 At-cost at 30 June 2021 2,191 5,611 1,244,795 21,836 4,448 9,783 11,961 1,300,625 Accumulated depreciation and impairments at 30 June 2021 Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Carrying amount at the beginning of the year Additions Depreciation Movement from/(to) assets held for sale Movement in major equipment components Movement capital WIP Carrying amount at the end of the year Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Carrying amount at the beginning of the year Additions Depreciation Transfer asset class Movement from/(to) assets held for sale Movement in major equipment components Movement capital WIP Carrying amount at the end of the year (1,332) 859 (4,679) 932 (600,708) 644,088 (6,650) 15,186 (3,335) 1,113 (5,941) 3,841 (8,747) 3,214 (631,392) 669,233 Land & buildings Leasehold improvements Plant & equipment Consolidated 2022 $’000 Leased plant & equipment Office equipment Motor vehicles Sundry plant Total 859 536 (66) - - - 932 119 (140) 644,088 141,960 (111,314) 15,186 1,593 (2,078) 1,113 822 (553) 3,841 5,051 (1,446) 3,214 2,624 (1,304) 669,233 152,705 (116,901) - - - (5,537) 2,866 15,764 - - - (10) (26) - - - - - - - (5,573) 2,866 15,764 1,329 911 687,827 14,701 1,372 7,420 4,534 718,094 Land & buildings Leasehold improvements Plant & equipment Consolidated 2021 $’000 Leased plant & equipment Office equipment Motor vehicles Sundry plant Total 746 283 (169) - - - - 811 321 (200) - - - - 604,498 153,685 (103,128) 77 (5,541) (664) (4,839) 17,428 269 (2,510) - - - - 537 864 (288) - - - - 2,160 2,731 (949) - 2,989 1,268 (963) (77) 629,169 159,420 (108,207) - (101) (4) (5,645) - - - - (664) (4,839) 859 932 644,088 15,186 1,113 3,841 3,214 669,233 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 88 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 23 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 notes issued. Refer note 26 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 2022, a 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, with no impairment being identified. Refer to note 2(e) “Estimates and judgments” for detailed consideration of this matter. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 89 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 24 Right of use assets As at 30 June 2022 Opening balance 1 July 2021 Additions Termination of lease Remeasurements Total cost Accumulated depreciation Accumulated depreciation Total accumulated depreciation Consolidated $’000 Buildings Motor vehicle Equipment Total 27,280 9,004 (194) (51) 6,273 4,393 (302) - 13,657 5,479 - - 47,210 18,876 (496) (51) 36,039 10,364 19,136 65,539 (14,799) (14,799) (3,945) (3,945) (5,901) (5,901) (24,645) (24,645) Net carrying amount 21,240 6,419 13,235 40,894 As at 30 June 2021 Opening balance 1 July 2020 Additions Termination of lease Remeasurements Total cost Accumulated depreciation Accumulated depreciation Total accumulated depreciation Consolidated $’000 Buildings Motor vehicle Equipment Total 27,855 - (347) (228) 27,280 2,866 2,198 (105) 1,314 6,273 20,421 11,587 (17,037) (1,315) 13,657 51,142 13,785 (17,489) (228) 47,210 (9,971) (9,971) (2,071) (2,071) (2,318) (2,318) (14,360) (14,360) Net carrying amount 17,309 4,202 11,339 32,850 The Group’s right of use assets relate to property, motor vehicles and heavy earth moving equipment. The average lease term is 4.65 years (2021: 4.53 years). The corresponding lease liability analysis is presented in note 26. Amount recognised in profit and loss Depreciation expense on right-of-use assets Interest expense in lease liabilities Expense relating to short term leases Expense relating to leases of low value assets EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 Consolidated 2022 $’000 2021 $’000 10,969 2,374 2,420 132 15,895 9,230 2,684 2,725 156 14,795 90 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 25 Trade and other payables Current Trade payables Trade payables Interest accrual Deferred revenue Other payables and accruals Consolidated 2022 $’000 2021 $’000 75,357 7,471 6,700 50,250 139,778 55,211 4,022 - 50,779 110,012 The Group’s exposure to currency and liquidity risk associated with trade and other payables is disclosed in note 6. The Company has also entered into a deed of cross guarantee with certain subsidiaries as described in note 39. 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 39. 26 Interest bearing liabilities Current Amortised cost Lease liabilities Other financing Non-current Amortised cost USD notes – secured AUD notes – secured Debt raising costs (1) Lease liabilities Consolidated 2022 $’000 2021 $’000 14,005 965 14,970 12,902 497 13,399 - 250,000 (4,548) 40,643 286,095 250,508 - (94) 35,397 285,811 (1) Carried at amortised cost. The increase from prior year is due to debt financing costs of $5,100,000 paid in July 2021 in relation to AUD Notes issued, less amortisation recorded in the Statement of Profit or Loss and Other Comprehensive Income for the period. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 91 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 26 Interest bearing liabilities (continued) Revolving Credit Facility The Group has a Revolving Credit Facility (RCF) of $100,000,000 which matures in September 2023 and has two sub facilities consisting of a Loan Note Agreement Facility (LNA) of A$96,800,000 (30 June 2021: $97,000,000) and a Bank Guarantee Facility of A$3,200,000 (30 June 2021: $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 2.0x 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 2022 the LNA was undrawn (30 June 2021: Nil). Secured notes issue On 2 July 2021, the Company successfully completed the issuance of A$250,000,000 notes in the A$ MTN market (AUD Notes). The notes have a fixed coupon of 6.25%, payable semi-annually, and have a maturity date of 10 July 2026. The funds received from this debt raising were used to repay the outstanding US$180,007,000 March 2024 notes, call premium and to close out all hedging associated with these notes on 2 July 2021. AUD$269,450,000 was paid to derivative counterparties on 16 July 2021 with the hedge counterparty payment of US$197,750,000 made to noteholders on 2 August 2021 to repurchase and cancel the notes and associated premium and final coupon. The 16 July 2021 payment of AUD$269,450,000 included the principal amount at the hedged rate of $246,828,000, accrued interest of $6,084,000, a premium for early repayment of the Note of $11,223,000 and a mark- to-market payment on hedge close-out of $5,314,000. The AUD Notes have fewer restrictions on the Group than the 2024 USD notes, however include restrictions on issuing additional debt if leverage (net debt divided by operating EBITDA) is greater than 1.75x and shareholder distributions if leverage is greater than 2.0x. The notes cannot be called before 10 July 2022 and a call premium of 3.125% is payable if redeemed prior to 10 July 2024 and 1.5625% is payable on the notes if the notes are redeemed prior to 10 July 2025. No call premium is payable after this date. There are no restrictions on capital expenditure in the AUD notes. The effective interest rate of these notes is 6.76%, which is inclusive of the capitalised borrowing costs and annual coupon. Hedge accounting was discontinued at 30 June 2021 due to the repurchase of the US Notes and close out of associated derivatives. Refer to note 20 for further information. Working capital facilities The Group has a credit card facility with a limit of A$150,000 (30 June 2021: A$150,000). The facility is secured via a cash cover account. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 92 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 26 Interest bearing liabilities (continued) Lease liabilities At 30 June 2022, the Group held lease facilities totalling A$54,648,000 (2021: A$48,300,000) which have various maturities up to June 2033. 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: Opening balance as at 1 July New leases Interest expense Principal repayments Remeasurements Termination of lease Balance at 30 June Current Non-current Consolidated 2022 $’000 2021 $’000 48,300 21,028 2,374 (17,201) 147 - 54,648 14,005 40,643 54,648 62,560 13,785 2,684 (17,359) (803) (12,567) 48,300 12,902 35,398 48,300 The Group’s lease liabilities are secured by the leased assets of $40,893,000 (2021: $50,278,000). In the event of default, the leased assets revert to the lessor. There has been no impact on lease payments as a result of COVID-19, either through deferral or reduction in lease payments. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 93 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 26 Interest bearing liabilities (continued) 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: USD notes AUD notes Lease liabilities Debt raising costs Other financing 1 July 2021 $'000 250,508 - 48,300 (94) 497 299,211 Financing cash flows $'000 (258,019) - (17,201) (5,566) (3,436) (284,222) Financial expense* $'000 Net debt acquired/(retired) $'000 Realised FX $'000 Hedging transactions $'000 30 June 2022 $'000 - - 2,374 1,112 45 3,531 - 250,000 21,175 - 3,859 275,034 118 - - - - 118 7,393 - - - - 7,393 - 250,000 54,648 (4,548) 965 301,065 * inclusive of amortisation expense USD notes Lease liabilities Loan note agreement Debt raising costs (144A notes) Debt raising costs (loan note agreement) Other financing 1 July 2020 $'000 469,373 62,560 97,000 (8,235) (682) - 620,016 Financing cash flows $'000 (194,883) (17,359) (97,000) - - Financial expense* $'000 Net debt acquired/(retired) $'000 11,361 2,684 - 8,235 587 - 415 - - - (2,003) (311,245) 35 22,903 * inclusive of amortisation expense 2,465 2,880 Realised FX $'000 (4,003) - - - - - (4,003) Unrealised FX $'000 (31,340) - - - - - (31,340) 30 June 2021 $'000 250,508 48,300 - - (94) 497 299,211 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 94 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 27 Financing arrangements The Group has the ability to access the following lines of credit: 2022 AUD notes (1) Loan note agreement (2) Bank guarantee facility (2) Lease liabilities 2021 USD notes Loan note agreement Bank guarantee facility Lease liabilities Consolidated $’000 Facility utilised at reporting date Facility not utilised at reporting date 250,000 - 3,121 54,648 307,769 - 96,800 79 - 96,879 Consolidated $’000 Facility utilised at reporting date Facility not utilised at reporting date 250,508 - 1,646 48,300 300,454 - 97,000 1,354 - 98,354 Available facility 250,000 96,800 3,200 54,648 404,648 Available facility 250,508 97,000 3,000 48,300 398,808 (1) The facility of A$250,000,000 was fully drawn at 30 June 2022. Refer to note 26 for further details. (2) The Revolving Credit Facility has a limit of $100,000,000. The Revolving Credit Facility consists of the Loan Note Agreement of A$96,800,000 and bank guarantee of $3,200,000. The Loan Note Agreement was undrawn at 30 June 2022. $3,121,000 of bank guarantees were issued at 30 June 2022. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 95 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 28 Provisions Current Employee benefits: annual leave - long service leave - Non-current Employee benefits – long service leave Balance at 1 July Arising during the year Utilised Balance at 30 June Consolidated 2022 $’000 2021 $’000 12,900 1,647 14,547 680 680 9,839 2,033 11,872 655 655 Consolidated 2022 $’000 2021 $’000 12,527 15,000 (12,300) 15,227 11,210 10,158 (8,841) 12,527 Defined contribution superannuation funds The Group makes contributions to defined contribution superannuation funds. The expense recognised for the year was $18,128,000 (2021: $12,492,000). EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 96 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 29 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 Grant date/employee entitled MIP Rights/performance share rights 2019 Rights/performance share rights 2019 LTIP Rights/performance share rights 2020 Rights/performance share rights 2021 Unvested plans Grant date/employee entitled MIP Rights/performance share rights 2019 Rights/performance share rights 2019 LTIP Rights/performance share rights 2020 LTIP Rights/performance share rights 2021 LTIP Rights/performance share rights 2022 Number of instruments Vesting conditions Contractual life of rights/ performance share rights 1,000,000 3 years service 249,102 4 years service 83,274 2 years service 96,866 1 years service 1,429,242 3 years 4 years 2 years 1 years Number of instruments Vesting conditions Contractual life of rights/ performance share rights 1,000,000 4 years service 1,553,556 5 years service 4 years 5 years 777,917 3 years service 3 years 2,040,691 3 years service 3 years 3,232,619 3 years service 8,604,783 3 years EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 97 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 29 Share based payments (continued) The movement of Rights on issue during the year were as follows: Outstanding at 1 July Granted during the period Exercised during the period Forfeited during the period Outstanding at 30 June Number of rights/ performance share rights 2022 8,623,741 3,466,013 (1,429,242) (2,055,730) 8,604,782 Number of rights/ performance share rights 2021 6,378,316 3,104,813 (767,358) (92,030) 8,623,741 The fair value of Rights granted during the year are measured using the Black Scholes model resulting in a fair value of $0.94 (FY21: $1.02). Please refer to note 3(k)(v)). 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 in AUD Performance shares/rights Total expense recognised as employee costs (1) Consolidated 2022 1,999,257 1,999,257 2021 6,009,476 6,009,476 (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. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 98 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 30 Commitments (a) Short term and low value leases Future non-cancellable short-term and low value leases not provided for in the financial statements and payable: Less than one year Between one and five years More than five years Consolidated 2022 $’000 2021 $’000 3,363 198 - 3,561 1,720 108 - 1,828 Short-term and low value lease expenditure for FY22 and FY21 is disclosed in Note 26. (b) Capital commitments The Group has nil commitments for purchases of fixed assets (2021: $2,000,000). 31 Contingent liabilities Guarantees The Group has provided bank guarantees in the amount of $3,121,000 (2021: $1,646,000) in relation to obligations under operating leases and rental premises. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 99 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 32 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: Cash and cash equivalents Consolidated 2022 $’000 2021 $’000 60,158 74,725 Note 18 (ii) Reconciliation of net profit to net cash provided by operating activities Net profit from continuing operations Add/(less) items classified as investing/financing activities: Net profit on sale of non-current assets Payment for debt financing costs Premium paid on buy back of issued debt Add/(less) non-cash items: Depreciation and amortisation Amortisation of borrowing costs using effective interest rate Foreign exchange loss/(gain) Hedge loss Net loss on AASB 16 lease modification Impairment losses on tangible assets Impairment of investments Provision for doubtful debts reversal Equity settled share based payments Income tax expense/(benefit) Note Consolidated 2022 $’000 2021 $’000 64,953 20,695 8 8 9 9 9 9 9 9 9 9 9 9 11 (60) - - (318) 5,793 9,013 129,441 118,576 1,113 436 - - 1,125 - (2) 1,999 25,730 3,621 (10,302) 20,339 2,737 1,146 10 (170) 6,009 8,897 Net cash from operating activities before change in assets/(liabilities) adjusted for assets and (liabilities) acquired 224,735 186,045 Change in operating assets and liabilities, net of effects from purchase of controlled entity: Increase in trade and other receivables Increase in inventories Increase/(decrease) in payables Increase in provisions Net cash from operating activities (33,408) (10,426) (6,110) 33,229 2,700 (4,434) 33,114 1,316 221,148 205,616 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 100 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 33 Controlled entities (a) Particulars in relation to controlled entities Country of incorporation Ownership interest 2022 % 2021 % Parent entity Emeco Holdings Limited Controlled entities Pacific Custodians Pty Ltd as trustee for Emeco Employee Share Ownership Plan Trust Emeco Pty Limited Emeco International Pty Limited EHL Corporate Pty Ltd Emeco Parts Pty Ltd Emeco Finance Pty Ltd Andy’s Earthmovers (Asia Pacific) Pty Ltd Orionstone Holdings Pty Ltd Orionstone Pty Ltd Ironstone Group Pty Ltd Orion (WA) Pty Ltd RPO Australia Pty Ltd Force Equipment Pty Ltd Matilda Equipment Holdings Pty Ltd Matilda Equipment Pty Ltd Pit N Portal Mining Services Pty Ltd Pit N Portal Equipment Hire Pty Ltd Emeco Equipment (USA) LLC Emeco (UK) Limited Emeco International Europe BV Emeco Europe BV Emeco BV PT Prima Traktor IndoNusa Emeco Holdings South America SpA Enduro SpA Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia United States United Kingdom Netherlands Netherlands Netherlands Indonesia Chile Chile 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 (b) Acquisition of entities There were no entities acquired in the current or prior year. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 101 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 34 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 Peter Kane Executive directors Ian Testrow Managing Director & Chief Executive Officer Other executives Position Thao Pham Neil Siford Chief Strategy Officer & Chief Financial Officer (appointed permanent Chief Financial Officer 4 February 2022) Chief Financial Officer (resigned 29 September 2021) EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 102 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 34 Key management personnel disclosure (continued) Key management personnel compensation The key management personnel compensation is as follows: in AUD Short term employee benefits Other long term benefits Post-employment benefits Equity compensation benefits Consolidated 2022 2,922,138 46,573 111,040 2,448,829 5,528,581 2021 3,373,191 39,720 117,133 4,298,170 7,828,214 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 38. 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 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 (FY21 $Nil). EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 103 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 35 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. 36 Subsequent events On 16 August 2022, the board resolved to pay a final dividend for the year ended 30 June 2022 of 1.25 cents per share and a total cash payment of $6,583,000. The dividend will be fully franked and will be paid on 30 September 2022. On 16 August 2022, the Company announced its intention to undertake an on-market share buy back of up to $6,399,000. The Company reserves the right to vary, suspend or terminate the buy back at any time. Other than the above, there have been no significant events subsequent to the year ended 30 June 2022. 37 Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 June 2022 was based on the profit attributable to ordinary shareholders of $64,953,000 (2021: $20,695,000) and a weighted average number of ordinary shares outstanding less any treasury shares for the year ended 30 June 2022 of 535,493,000 (2021: 514,526,000). Profit attributed to ordinary shareholders Profit for the year Weighted average number of ordinary shares (ordinary) Issued ordinary shares at 1 July Effect of shares issued during the period Effect of vested employee share plans Effect of on market share buy back during the period Weighted average number of ordinary shares at 30 June EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 Consolidated 2022 $‘000 2021 $‘000 64,953 20,695 Consolidated 2022 ‘000 539,823 - 955 (5,285) 535,493 2021 ‘000 371,353 142,298 874 - 514,526 104 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 37 Earnings per share (continued) Weighted average number of ordinary shares Diluted earnings per share The calculation of diluted earnings per share at 30 June 2022 was based on the profit attributable to ordinary shareholders of $64,953,000 (2021: $20,695,000) and a weighted average number of ordinary shares outstanding less any treasury shares during the financial year ended 30 June 2022 of 544,098,000 (2021: 523,150,000). Profit attributed to ordinary shareholders (diluted) Profit for the year Weighted average number of ordinary shares (diluted) Issued ordinary shares at 1 July Effect of shares issued during the period Effect of vested employee share plans Effect of unvested employee share plans Effect of on market share buy back during the period Weighted average number of ordinary shares (diluted) at 30 June Consolidated 2022 $‘000 2021 $‘000 64,953 20,695 Consolidated 2022 ‘000 539,823 - 955 8,605 (5,285) 544,098 2021 ‘000 371,353 142,298 874 8,624 - 523,149 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 105 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 38 Parent entity disclosure As at and throughout the financial year ending 30 June 2022 the parent entity (the ‘Company’) of the Group was Emeco Holdings Limited. Results of the parent entity Profit for the period (1) Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Share based payment reserve Profit reserve Reserve of own shares Retained losses Total equity Company 2022 $‘000 2021 $‘000 325 - 325 30,133 - 30,133 275 413,433 413,708 73 441,997 442,070 - - - - - - 1,155,856 28,476 16,891 (35,469) (752,045) 413,708 1,171,457 30,901 30,376 (38,294) (752,370) 442,071 (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 39. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 106 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 39 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 ANNUAL REPORT 2022 107 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 39 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 2022 is set out as follows: Statement of profit or loss and other comprehensive income and retained earnings Revenue Cost of sales Gross profit Operating expense Other income Finance income Finance costs Unrealised FX Impairment of assets Profit before tax Tax expense Net profit after tax Other comprehensive (loss)/income Total comprehensive (loss)/income for the period Retained losses at beginning of year Retained losses at end of year Attributed to: Equity holders of the Company Profit for the period Consolidated 2022 $‘000 754,368 (450,498) 303,872 (188,056) 620 164 (24,185) (439) (1,037) 90,938 (25,730) 65,208 2021 $‘000 620,528 (370,575) 249,953 (142,200) 764 362 (88,275) 10,301 (1,136) 29,770 (8,897) 20,872 (446) (446) 1,643 1,643 (635,655) (570,891) (658,170) (635,654) (570,891) 65,208 (635,654) 20,872 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 108 Emeco Holdings Limited and its Controlled Entities Notes to the Consolidated Financial Statements For the year ended 30 June 2022 39 Deed of cross guarantee (continued) Statement of financial position Current assets Cash and cash equivalents Trade and other receivables Prepayments Inventories Assets held for sale Total current assets Non-current assets Trade and other receivables Intangible assets Property, plant and equipment Right of use asset Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Derivatives Interest bearing liabilities Provisions Total current liabilities Non-current liabilities Interest bearing liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Share based payment reserve Reserves Retained losses Consolidated 2022 $‘000 2021 $‘000 60,158 146,848 19,043 25,312 4,094 74,725 124,695 7,227 19,202 2,794 255,454 228,643 19,506 10,971 718,094 40,894 - 789,465 17,799 10,329 669,233 32,850 24,489 754,700 1,044,919 983,343 139,778 110,012 - 14,969 14,546 169,293 12,389 13,399 11,872 147,672 286,095 285,811 680 2,122 655 - 288,897 286,466 458,190 434,138 586,729 549,205 1,155,856 1,171,457 28,476 (26,713) 30,901 (17,500) (570,891) (635,654) Total equity attributable to equity holders of the parent 586,729 549,205 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 109 Emeco Holdings Limited and its Controlled Entities Directors’ Declaration 1. In the opinion of the directors of Emeco Holdings Limited (the ‘Company’): (a) the consolidated financial statements and notes as set out on pages 40 to 109, and remuneration report in the directors’ report, set out on pages 22 to 38 are in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its performance for the financial year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. 3. 4. There are reasonable grounds to believe that the Company and the group entities identified in note 39 will be able to meet any obligation or liabilities to which they are or may become subject to by virtue of the deed of cross guarantee between the Company and those group entities pursuant to ASIC Class Order 98/1418. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 30 June 2022. 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, 16 August 2022 Signed in accordance with a resolution of the directors: Ian Testrow Managing Director EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 110 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 2022, 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 other explanatory information, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: • Giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its financial performance for the year then ended; and • 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 & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (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. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. 111 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. Key Audit Matter How the scope of our audit responded to the Key Audit Matter Revenue recognition of Pit N Portal mining services For the year ended 30 June 2022 Pit n Portal generated mining services revenue totaling $248.7 million as disclosed in note 16. Mining services revenue is recognised over time on the basis of work completed. Customer contracts are generally schedule of rates or cost plus in nature. Consideration under either contract type is allocated to performance obligations that are completed for customers. Management judgement is required in determination of contractual entitlement and assessment of the probability of customer approval of variations and acceptance of claims. Our procedures included, but were not limited to: • • • • • • • • obtaining an understanding of the contract terms and conditions to evaluate whether these were reflected in Pit N Portals method for recognition of mining services revenue; evaluating Pit N Portal’s revenue recognition policies against accounting standard requirements; identifying and testing the design and implementation of controls relevant to the recognition of revenue; substantively testing on a sample basis, progress claims for which revenue has been recognised to address accuracy, occurrence s of revenue; assessing variations and claims including review of correspondence with customers concerning the merits and status of those variations and claims; assessing the recoverability of amounts outstanding from customers, both for works completed and payment claim submitted, and for work completed but variation not yet submitted; for specific contracts, performing a review of forecasts to completion and performance post year end to identify whether any onerous contract provisions should be recognised ; and assessing contract assets to verify that they are accurate, recoverable, and are consistent with our knowledge of the related projects. We also assessed the appropriateness of the disclosures in note 3 (n)(iv), 7 and 16 to the financial statements. 112 Key Audit Matter Recoverability of non-current assets How the scope of our audit responded to the Key Audit Matter As disclosed in notes 22 and 23, the carrying value of goodwill as at 30 June 2022 is $8.0 million (June 2021: $8.0 million), and the carrying value of property, plant and equipment is $718.1 million (June 2021: $669.2 million). Management undertakes impairment testing to assess the recoverability of non-current assets including, goodwill, intangible assets and property, plant & equipment annually, or whenever a trigger is identified. We focused on the impairment assessment completed by management given that the market capitalisation of the Group fell below the net assets during the year, resulting in an indicator of impairment. The assessment of the recoverable value requires judgement in respect of assumptions and estimates in preparing a value in use model (‘VIU’). Significant judgements include but are not limited to: fleet operating utilisation; operating and capital cost assumptions; terminal growth rate; and discount rate. • • • • In conjunction with our corporate finance specialists, our procedures included, but were not limited to: • • • • • • performing an impairment risk assessment using internal and external information; assessing managements historical budgeting accuracy for each individual cash generating unit (CGU); assessing budgets and forecasts for reasonableness compared to historical actual performance; assessing the reasonableness of management’s assumptions with respect to the impact of environmental, social and governance (ESG) risk on Emeco's operations, including the ability to utilise fleet across different commodities, and also considering the average remaining life of the fleet to identify whether there is any material risk that fleet may be stranded; assessing to the extent necessary the mathematical accuracy of managements value-in- use models; assessing the risk of impairment by performing independent breakeven analysis on managements value-in-use models for a range of changes in the key assumptions based on parameters determined in conjunction with our corporate finance specialists; and • assessing whether a reasonably possible change in key assumptions would result in an impairment. We also assessed the appropriateness of the disclosures in note 3 (n)(iv), 7 and 16 to the financial statements. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2022, 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. 113 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 intentional omissions, misrepresentations, or the override of internal control. involve collusion, forgery, • 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’s audit. We remain solely responsible for our audit opinion. 114 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, actions taken to eliminate threats or safeguards applied. 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 38 of the Directors’ Report for the year ended 30 June 2022. In our opinion, the Remuneration Report of Emeco Holdings Limited, for the year ended 30 June 2022, 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 David Newman Partner Chartered Accountants Perth, 16 August 2022 115 Emeco Holdings Limited and its Controlled Entities Shareholder Information Financial calendar The annual general meeting of Emeco Holdings Limited will be held on Thursday, 17 November 2022. Event Annual general meeting Half year Half year profit announcement Year end *Timing of events is subject to change and board discretion. Date* 17 November 2022 31 December 2022 February 2023 30 June 2023 Shareholder statistics Substantial shareholders Details regarding substantial holders of the Company’s ordinary shares as at 27 July 2022, 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 Credit Strategies Master Fund Ltd BDCM Opportunity Fund IV LP BDCM Opportunity Fund III LP BDCM Strategic Capital Fund I, L.P. 182,360,220 34.58 Paradice Investment Management Pty Ltd 52,602,397 9.669 Distribution of ordinary shareholders As at 27 July 2022, there were 6,687 holders of the Company’s ordinary shares. The distribution as at 27 July 2022 was as follows: Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Investors 172 1,162 699 1,914 2,740 6,687 Securities % Ordinary shares 91.01 6.79 1.03 0.97 0.21 100 479,303,343 35,745,387 5,430,969 5,092,548 1,093,788 526,666,035 There were 2,156 security investors holding less than a marketable parcel of 715 securities ($0.70 on 27 July 2022). EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 116 Emeco Holdings Limited and its Controlled Entities Shareholder Information 20 largest shareholders The names of the 20 largest holders of the Company’s ordinary shares as at 27 July 2022 are: Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Pacific Custodians Pty Limited BNP Paribas Nominees Pty Ltd Washington H Soul Pattinson And Company Limited First Samuel Ltd HSBC Custody Nominees (Australia) Limited National Nominees Limited Pacific Custodians Pty Limited UBS Nominees Pty Ltd Sandhurst Trustees Ltd Woodross Nominees Pty Ltd Brispot Nominees Pty Ltd Warbont Nominees Pty Ltd CS Fourth Nominees Pty Limited Mr Peter David Wilkinson & Mrs Jennifer Louise Wilkinson Steven Edwin Versteegen BNP Paribas Noms Pty Ltd Zthree Pty Ltd Equity securities 161,241,812 110,660,977 60,859,838 15,754,985 13,907,614 12,548,423 10,477,670 9,806,127 7,406,698 4,561,797 4,427,386 4,335,887 4,232,647 3,894,426 3,127,818 2,597,014 2,570,000 2,415,459 1,628,707 1,600,000 Closing share price ($) % Issued capital 30.62 21.01 11.56 2.99 2.64 2.38 1.99 1.86 1.41 0.87 0.84 0.82 0.80 0.74 0.59 0.49 0.49 0.46 0.31 0.30 EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 117 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. Unquoted equity securities As at 27 July 2022, there are 1,710,834 unvested performance rights on issue to 15 participants pursuant to the Company’s employee incentive plans. The distribution as at 27 July 2022 was as follows: Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Participants Performance rights 2 10 2 1 0 15 1,379,414 312,415 15,316 3,689 0 1,710,834 % Performance rights 80.63% 18.26% 0.90% 0.22% 0.00% 100.00% On-market security purchases During FY22, Pacific Custodians Pty Limited in its capacity as trustee of the Emeco Employee Share Ownership Plans Trust purchased 1,758,910 ordinary shares on-market, at an average price per share of $0.90, to be used to satisfy upcoming entitlements of participants under the Company’s employee incentives scheme to receive ordinary fully-paid shares. On-market share buy back On 3 February 2022, the Company announced that it would conduct an on market buy back of up to 54,066,890 ordinary shares between 24 February 2022 and 23 February 2023. As at 27 July 2022, the Company had bought back 14,002,867 ordinary shares under this buy back. Debt securities A register of the noteholders of the 6.25% A$ notes, which have a maturity date of 10 July 2026, is kept at the office of EQT Australia Pty Ltd at Level 4, 7 Macquarie Place, Sydney NSW 2000. EQT Australia Pty Ltd can be contacted by telephone on 1300 133 472. Securities subject to voluntary escrow As at 27 July 2022, there were no securities subject to voluntary escrow. EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 118 Emeco Holdings Limited and its Controlled Entities Company Directory DIRECTORS Peter Richards Ian Testrow Peter Frank Keith Skinner Peter Kane SECRETARY Penelope Young REGISTERED OFFICE Level 3, 133 Hasler Road Osborne Park WA 6017 Phone: +61 8 9420 0222 +61 8 9420 0205 Fax: 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 Level 7-9 Brookfield Place, Tower 2 123 St Georges Terrace Perth WA 6000 SECURITIES EXCHANGE LISTING Emeco Holdings Limited ordinary shares are listed on the Australian Securities Exchange Ltd. ASX code: EHL EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 119 THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY EMECO HOLDINGS LIMITED ANNUAL REPORT 2022 120 

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