Annual Financial Report Engenco Limited ACN 120 432 144 30 June 2014 CONTENTS Corporate Governance Statement ................................................................................ 1 Directors’ Report ......................................................................................................... 7 Directors’ Declaration .................................................................................................23 Auditor’s Independence Declaration............................................................................24 Independent Auditor’s Report .....................................................................................25 Consolidated Statement of Profit or Loss and Other Comprehensive Income ...............27 Consolidated Statement of Financial Position ..............................................................28 Consolidated Statement of Changes in Equity ..............................................................29 Consolidated Statement of Cash Flows ........................................................................30 Notes to the Consolidated Financial Statements ..........................................................31 Note 1 – Summary of Significant Accounting Policies ..............................................31 Note 2 – Revenue and Other Income .....................................................................43 Note 3 – Expenses ................................................................................................43 Note 4 – Income Tax Expense ................................................................................44 Note 5 – Parent Entity Disclosures .........................................................................45 Note 6 – Auditor’s Remuneration ..........................................................................46 Note 7 – Dividends ................................................................................................46 Note 8 – Earnings Per Share ..................................................................................47 Note 9 – Cash and Cash Equivalents .......................................................................47 Note 10 – Trade and Other Receivables .................................................................48 Note 11 – Inventories ............................................................................................49 Note 12 – Financial Assets .....................................................................................50 Note 13 – Equity-Accounted Investee ....................................................................50 Note 14 – Controlled Entities .................................................................................51 Note 15 – Property, Plant and Equipment ..............................................................52 Note 16 – Intangible Assets ...................................................................................54 Note 17 – Other Assets .........................................................................................55 Note 18 – Trade and Other Payables ......................................................................56 Note 19 – Financial Liabilities .................................................................................56 Note 20 – Tax Assets and Liabilities .......................................................................58 Note 21 – Provisions .............................................................................................59 Note 22 – Issued Capital ........................................................................................60 Note 23 – Capital and Leasing Commitments..........................................................61 Note 24 – Operating Segments ..............................................................................62 Note 25 – Cash Flow Information ...........................................................................69 Note 26 – Share Based Payments...........................................................................69 Note 27 – Net Tangible Assets ...............................................................................70 Note 28 – Events Subsequent to Reporting Date ....................................................70 Note 29 – Related Party Transactions ....................................................................70 Note 30 – Financial Risk Management ....................................................................72 Note 31 – Reserves ...............................................................................................76 Note 32 – Contingent Liabilities .............................................................................76 Shareholder Information ............................................................................................77 Corporate Directory ....................................................................................................79 Corporate Governance Statement Corporate Governance Statement Engenco Limited and Its Controlled Entities Engenco Limited (“the Company” or “Engenco”) and the Board are committed to achieving compliance with all the best practice recommendations released by the Australian Securities Exchange (ASX) Corporate Governance Council. This statement outlines the main corporate governance practices in place throughout the financial year, with specific references made to any departures from the best practice recommendations. Role of the Board The role of the Board is to protect and promote the interests of the Company and to represent its shareholders whilst considering the interests of other stakeholders including employees, customers, suppliers, wider communities and the environment. It does this according to the principles of good corporate governance, intending to fulfil the Company’s responsibilities as a corporate citizen. The Board operates under a Board Charter, which describes the processes used by the Board to: • appoint and review the performance of the Managing Director/CEO; • approve key strategic decisions including, but not limited to, acquisitions and divestments; • approve annual revenue, operating expenditure, and capital budgets; • approve significant changes in organisational structure; • determine and approve the remuneration of the Managing Director/CEO; • approve the remuneration of executive management, and • formally adopt any communication to regulators and shareholders as may be required by the Company constitution, statute, or other regulation. The Board may change by resolution any power reserved to itself. Executive Delegation Other than those matters reserved by the Board to itself, the Board delegates to the Managing Director/CEO all authority to achieve the Company’s objectives consistent with this Corporate Governance Statement, the Company constitution, statute or other regulation. The Managing Director/CEO prepares a one-year operational and financial plan for approval by the Board. Board Structure The skills, experience and expertise relevant to the position of each director who is in office at the date of the Annual Report and their term of office are detailed in the Directors’ Report in this Annual Report. The names of the directors of the Company in office at the date of this report, specifying which are independent, are set out in the Directors’ Report. When determining whether a non-executive director is independent, the director must not fail any of the following materiality thresholds: • less than 10% of company shares are held by the director or any other entity or individual directly or indirectly associated with the director; • no sales are made to or purchases made from any entity or individual directly or indirectly associated with the director; and • none of the director’s income or of an individual or entity directly or indirectly associated with the director is derived from a contract with any member of the economic entity other than income derived as a director of the entity. The Board reviews the independence of its directors in light of the information provided to it. Independent directors have the right to seek independent professional advice in the furtherance of their duties as directors at the Company’s expense. Written approval must be obtained from the Board prior to incurring any expense on behalf of the Company. Engenco Limited – 2014 Annual Report | Page 1 Corporate Governance Statement Engenco Limited and Its Controlled Entities The majority of the Board are not independent directors. This is a departure from ASX Corporate Governance Recommendation 2.1. The Chairman is not an independent director and this is a departure from ASX Corporate Governance Recommendation 2.2. This is due to the ownership structure of the listed company. Meetings of the Board The Board meets on a regular pre-determined basis or more frequently as required. On the invitation of the Board, members of senior management attend to discuss issues of importance and to keep the directors informed. In addition to the formal meetings the Board regularly meets to consider important issues affecting the Group. The number of meetings held and attended by each of the directors for the financial year ended 30 June 2014 is set out in the Directors’ Report. Board Membership Appointment Board members are nominated by the Board and their appointment is confirmed by a vote of shareholders. The policy of the Board is to have a minimum of one non-executive director who is free of material relationships with the Company and who would be reasonably considered by shareholders to be independent. The expectation of directors is that they are of unquestioned integrity and honesty, will understand and behave to the highest standards of corporate governance and are prepared to question, challenge, and criticise matters of importance. Directors will be appointed according to the contribution they can make in meeting strategic skill requirements of the Company. Remuneration of directors will be transparent and reported in its entirety to shareholders. Directors are expected to continue to develop their skills through ongoing education and training. Retirement and Re-election The constitution of the Company requires one third of the directors to retire from office at each annual general meeting. Directors who have been appointed by the Board are required to retire from office at the next following annual general meeting and are not taken into account in determining the number of directors to retire at that annual general meeting. Directors cannot hold office for a period in excess of three years or beyond the third annual general meeting following their appointment, whichever is longer, without submitting themselves for re-election. Retiring directors are eligible for re-election by shareholders. Board Access to Information and Independent Advice All directors have unrestricted access to employees of the Group and, subject to the law, access to all company records and information held by group employees and external advisors. Each director may obtain independent professional advice to assist the director in the proper exercise of powers and discharge of duties as a director or as a member of a Board Committee. In such cases, the Chairman and Company Secretary must be advised and a copy of the advice made available to all directors. Conflicts of Interest Directors are required to notify the Board of any real or perceived conflicts of interest that may occur from time to time. The Board has adopted the use of formal standing notices in which they disclose any material personal interests they have and the relationship with the affairs of the Group. Directors are required to provide an updated notice if they acquire any new material personal interests or if there is any change to the nature and extent of their previously disclosed interest. Performance Evaluation To date a formal assessment of Board performance has not taken place. Engenco Limited – 2014 Annual Report | Page 2 Corporate Governance Statement Reward and Remuneration Engenco Limited and Its Controlled Entities Reward and remuneration of directors and executives will be objectively linked to achieving the Group’s objectives and consistent with the financial performance of the Group. There will be transparency to shareholders regarding reward and remuneration of board members and senior executive management. There are currently no schemes for retirement benefits other than statutory superannuation. Committees Currently, the Board has appointed an Audit Committee to assist it in exercising its responsibilities. Due to the size and stage of development of the Group, the Board has not formed a Nomination or Remuneration Committee. This is a departure from ASX Corporate Governance Recommendations 2.4 and Principle 8. The Audit Committee monitors internal control policies and procedures designed to safeguard company assets and to maintain the integrity of financial reporting. The specific responsibilities set out in its charter include: • • • • • in conjunction with the internal and external auditors, assure the integrity of financial statements; recommend to the Board the appointment of and review the performance of the external auditor; determine the remuneration of the external auditor; oversee the integrity of the internal and external audit process; and ensure there is a process to identify the likelihood and impact of financial risk and that this process is actively managed. Audit Committee The Audit Committee is chaired by a non-executive director of the Company and membership of the Audit Committee must include at least two directors (other than the Managing Director/CEO and the Chief Financial Officer) and the Company Secretary. The members of the Audit Committee during the year were: • D Hector (Independent Non-Executive Director) – Chair of Audit Committee • R Dunning (Interim Managing Director) • V De Santis (Non-Executive Director) • A Bagley (Committee Secretary) • J Tan (Committee Secretary) On 15 July 2014 Ross Dunning was appointed as Interim Managing Director of the Company and on 31 July 2014 was replaced on the Audit Committee by Vincent De Santis (Non–Executive Director). Josephine Tan was appointed Committee Secretary on 22 August 2013, and resigned as Committee Secretary on 23 May 2014. The external auditors are invited to attend meetings as required and the Managing Director/CEO and Chief Financial Officer may be invited, but will be excused from discussions if the committee so determines. Details of the number of meetings held and attended by the members of the Audit Committee can be found in the Directors’ Report. The Board has established a Terms of Reference to guide the activities of the Audit Committee. The current composition of the Audit Committee does not meet ASX Corporate Governance Recommendation 4.2 however the Board believes that this is the most effective structure for the Audit Committee given the structure of the Board itself. The Audit Committee Charter is published on the Company’s website. Engenco Limited – 2014 Annual Report | Page 3 Corporate Governance Statement Financial Reporting Engenco Limited and Its Controlled Entities Consistent with ASX Corporate Governance Recommendation 7.3, and in accordance with section 295A of the Corporations Act 2001, the Group’s financial report preparation and approval process for the year ended 30 June 2014 required both the Managing Director/CEO and Chief Financial Officer to provide a written statement to the Board that, in their opinion: • • the Group’s financial statements and notes for the financial year present a true and fair view of the Group’s financial condition and operating results, and are in accordance with applicable accounting standards; and the Group’s financial records for the financial year have been properly maintained in accordance with section 286 of the Corporations Act 2001. Audit Governance and Independence External Auditor KPMG is the Group’s current external auditor. The performance of the external auditor is reviewed annually by the Audit Committee. KPMG was appointed as the external auditor at the Company’s annual general meeting in 2012. It is the Group’s policy that, where practical, no non-audit services are provided by the external auditor to ensure independence is maintained. However, during the current financial year, KPMG were appointed to perform tax review services. It is KPMG’s policy and a Corporations Act 2001 requirement to rotate audit engagement partners on listed companies at least every five years. Independence Declaration The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 amendments to the Corporations Act 2001 require external auditors to make an annual independence declaration, addressed to the Board, declaring that the auditors have maintained their independence in accordance with the Corporations Act 2001 and the rules of the professional accounting bodies. KPMG has provided such a declaration to the Audit Committee for the financial year ended 30 June 2014. Attendance of External Auditors at Annual General Meetings In accordance with the Corporations Act 2001, the Company requires that KPMG attend the Company’s annual general meeting and is available to answer questions about the conduct of the audit and the preparation and content of the audit report. Shareholders are asked to submit written questions to the Company Secretary at least 7 days prior to the annual general meeting. Risk Identification and Management The Group is in the process of implementing policies regarding risk identification and management which are consistent with Principle 7 of the ASX Corporate Governance Principles and Recommendations. Engenco has various risk management procedures and registers in place to enable the identification, assessment and mitigation of risks that arise through its activities. Code of Conduct The Company recognises the need for directors and employees to observe the highest standards of behaviour and business ethics when engaging in corporate activity. The Board is developing a Code of Conduct which sets out the principles and standards with which all officers and employees are expected to comply in the performance of their respective functions in respect of responsibilities to shareholders, customers, clients, consumers and the community. The Code of Conduct, completed in draft form, has not been formally approved as at the reporting date. This is a departure from ASX Corporate Governance Recommendation 3.1. Engenco Limited – 2014 Annual Report | Page 4 Corporate Governance Statement Securities Trading Policy Engenco Limited and Its Controlled Entities The Company has a Securities Trading Policy to minimise the risk of insider trading in the Company’s securities consistent with good corporate governance principles. The policy prohibits all employees, officers and directors of the Company from trading in the Company’s securities if they are in possession of inside information. Short term or speculative dealing in the Company’s securities by employees, officers and directors is also not permitted. Employees, officers and directors must not trade in the Company’s securities during closed periods. Trading is generally permitted at other times provided there is no contravention of the insider trading laws. The policy also restricts hedging and margin loan activities for employees, officers and directors. The Company’s Securities Trading Policy is published on the Company’s website. Continuous Disclosure The Company understands and respects that timely disclosure of price sensitive information is central to the efficient operation of the Australian Securities Exchange’s securities market. The Company Secretary has responsibility for overseeing and co- ordinating the disclosure. Any disclosures are discussed with the Board and appropriate action is taken. The Company’s Continuous Disclosure Policy is published on the Company’s website. Communications with Shareholders The Board is committed to completely discharge its obligation to represent the interests of shareholders. The Board will ensure that information is regularly communicated to shareholders, in particular, paying regard to the continuous disclosure requirements of the ASX. The Board welcomes shareholder participation at the Company’s annual general meeting. Shareholders are entitled to vote on significant matters impacting on the business, which include the election and remuneration of directors, changes to the constitution and receipt of the annual and interim financial statements. Shareholders are encouraged to attend and participate in the annual general meeting, to lodge questions to be responded to by the Board, and are able to appoint proxies. Engenco Limited – 2014 Annual Report | Page 5 Corporate Governance Statement Diversity Policy Engenco Limited and Its Controlled Entities The Group has developed a Diversity Policy, which has the following objectives: To recognise and embrace our multicultural diversity and grow our workforce to reflect the diversity of the communities in which we operate; To recognise that those in the community that have disabilities have an equal right to suitable employment and rewarding career advancement opportunities; and To create programs to ensure that gender representation at all levels of the Group (including senior management) accurately represents our society. Engenco’s commitment to diversity is substantially influenced by our Diversity Committee and representatives come from all levels of the Group. The Diversity Committee is sponsored by the Managing Director/CEO of the Company and makes recommendations on diversity related initiatives, monitors and evaluates their implementation and ensures that diversity related programs are progressing successfully. The Group’s annual compliance report for the period 1 April 2013 to 31 March 2014 is below. Engenco has received confirmation from the Workplace Gender Equality Agency that the Group is compliant with the Workplace Gender Equality Act 2012. Board Senior Executive Senior Management Line Managers Professional/Technical Administration Staff Shop Floor Staff TOTAL excl. Board TOTAL incl. Board Full-Time Part-Time Casual Total Employees Female - 2 - 6 11 32 - 51 51 Male 4 10 8 39 212 15 28 312 316 % Female - 17% - 13% 5% 68% - 14% 14% Female - - - - - 5 - 5 5 Male - - - 1 2 - - 3 3 % Female - - - - - 100% - 63% 63% Female - - - - 15 14 15 44 44 Male - - - - 190 - 142 332 332 % Female - - - - 7% 100% 10% Female - 2 - 6 26 51 15 12% 12% 100 100 Male 4 10 8 40 404 15 170 647 651 % Female - 17% - 13% 6% 77% 8% 13% 13% Engenco Limited – 2014 Annual Report | Page 6 Directors’ Report Directors’ Report Engenco Limited and Its Controlled Entities The directors present their report, together with the consolidated financial statements of the Group, being Engenco Limited (“the Company”) and its controlled entities for the financial year ended 30 June 2014 and the auditor’s report thereon. Directors The directors of the Company at any time during or since the end of the financial year are: Dale Elphinstone Non-Executive Director (Chairman) FAICD Appointed: Age: 19 July 2010 63 Directorships held in other listed entities in the past three years: Non-Executive Director, National Hire Group Limited, 2008 – December 2011 Summary of equity holdings at 30 June 2014: 202,249,018 ordinary shares Dale is the Executive Chairman of the Elphinstone Group which he founded in 1975. Dale has considerable experience in the engineering, manufacturing and heavy machinery industries and among other things is one of the longest serving Caterpillar dealers’ principal in Australia, having acquired the Caterpillar dealership in Victoria and Tasmania in 1987. Dale is the Co-Chair of the Joint Commonwealth and Tasmanian Economic Council and is a director of the Tasmanian Health Organisation North- West. He was a director of Caterpillar subsidiary, Caterpillar Underground Mining Pty Ltd until December 2008 and of the formerly publicly listed Queensland Gas Company Limited from October 2002 to November 2008. Dale was also a director of ASX listed National Hire Group Limited until December 2011. Vincent De Santis Non-Executive Director 1 B.Com LLB (Hons) Appointed: Age: 19 July 2010 44 Special Responsibilities Member of Audit Committee Directorships held in other listed entities in the past three years: Alternate Director, National Hire Group Limited, 2008 – December 2011 Summary of equity holdings at 30 June 2014: 300,003 ordinary shares 1 On 31 July 2013, Vince was appointed as a member of the Audit Committee. Vince is the Managing Director of the Elphinstone Group which he joined in 2000 as the Group’s Legal Counsel and Finance & Investment Manager. He is a director of various Elphinstone Group companies. He was Dale Elphinstone’s alternate on the board of Queensland Gas Company Limited and of National Hire Group Limited. Immediately prior to joining the Elphinstone Group, Vince was a Senior Associate in the Energy Resources & Projects work group of national law firm Corrs Chambers Westgarth in Melbourne. Engenco Limited – 2014 Annual Report | Page 7 Engenco Limited and Its Controlled Entities Directors’ Report Donald Hector Independent Non-Executive Director BE (Chem), PhD, FAICD, FIEAust, FIChemE Appointed: Age: 2 November 2006 64 Special Responsibilities: Chairman of Audit Committee Directorships held in other listed entities in the past three years: None Summary of equity holdings at 30 June 2014: 113,163 ordinary shares Don has 17 years’ experience in senior executive management and CEO positions with industrial companies. He was Managing Director of Dow Corning Australia Pty Ltd, the Australian subsidiary of Dow Corning Corporation and was Managing Director of Asia Pacific Specialty Chemicals Ltd, an ASX-listed chemical company. During the year, Don was a non-executive chairman of SEMF Pty Ltd, a multidisciplinary engineering consulting firm and was a Council member of one of Sydney’s leading independent schools. Don served as Non-Executive Chairman of Engenco Limited until 19 July 2010. Ross Dunning AC Interim Managing Director 1 BE (Hons), B.Com, FCILT, FAIM, FIE Aust, FIRSE, MAICD Appointed: Age: 8 November 2010 72 Special Responsibilities: Member of Audit Committee 2 Directorships held in other listed entities in the past three years: None Summary of equity holdings at 30 June 2014: 104,000 ordinary shares 1 Ross held the position of Non-Executive Director at the beginning of the financial year and was appointed as Interim Managing Director on 15 July 2013. 2 On 31 July 2013, Ross ceased to be a member of the Audit Committee following his appointment as Interim Managing Director of the Company. Ross has extensive exposure to the rail industry having served as the Commissioner for Railways in Queensland, President of the Australian Railways Association and Managing Director of Evans Deakin Industries Limited (the predecessor to the ASX listed company, Downer EDI Limited). Ross has been awarded the Companion of the Order of Australia and has held non-executive positions with a number of ASX listed companies including Toll Holdings Limited and Downer EDI Limited, Government owned corporations in Queensland and New South Wales and on unlisted public companies. Ross currently serves as a director of Queensland Energy Resources Limited, as chairman of SunWater Limited and is a member of The Council of St John’s College within the University of Queensland. Engenco Limited – 2014 Annual Report | Page 8 Directors’ Report Company Secretary Kevin Pallas BCom, MAICD Appointed: Age: 13 September 2013 52 Engenco Limited and Its Controlled Entities Kevin possesses senior management and leadership experience through a 23 year career in engineering, mining supplies, metals and manufacturing industries. Holding a Bachelor of Commerce degree, Kevin specialised in the areas of financial and cost accounting systems design and development, and operational and commercial management for a number of multinationals in South Africa, New Zealand, Singapore and Australia prior to joining the Group in 2007. Josephine Tan B.Mus, LLB (Hons) Appointed: Resigned: Age: 22 August 2013 23 May 2014 49 Josephine was appointed Chief Legal Officer and joint Company Secretary of Engenco Limited whilst Anna Bagley was on maternity leave. Josephine has over 10 years’ of legal experience in a broad range of matters. Prior to joining Engenco Limited she was General Counsel and a member of Senior Management at VicForests. Josephine also spent 8 years at the international law firm Baker & McKenzie. As a Senior Associate there, her work included advising various ASX listed entities in relation to corporate transactions and compliance matters. Josephine holds a Bachelor of Laws (Hons) from the University of Melbourne. Anna Bagley BSc, LLB (Hons), GCInfTech, LLM Admitted to practice as a solicitor of the Supreme Court of Victoria and the High Court of Australia Registered Australian Trade Mark Attorney Appointed: Resigned: Age: 9 November 2011 4 July 2014 35 With more than 10 years’ experience in legal roles, Anna holds a Bachelor of Science, a Bachelor of Laws (Hons) and a Graduate Certificate in Information Technology from the University of Queensland. She also holds a Masters of Laws from the University of Melbourne. Anna is a qualified and practising solicitor and Australian trade mark attorney. She has worked at national and international laws firms including the Melbourne offices of Corrs Chambers Westgarth and Baker & McKenzie. Most recently, Anna was a member of the legal team at the ASX listed company, Spotless Group Limited. Anna is also a member of the executive and is the Company Secretary for the incorporated associate, Australian Corporate Lawyers Association. Bridget Thom BSc (Hons), LLB Admitted to practice as a solicitor of the Supreme Court of Victoria Appointed: Age: 20 August 2014 42 Bridget has over 13 years’ legal experience. Prior to commencing with Engenco, Bridget has held a number of in-house legal roles and commenced her legal career at the Melbourne law firm Mallesons Stephen Jacques. Engenco Limited – 2014 Annual Report | Page 9 Directors’ Report Engenco Limited and Its Controlled Entities Changes in Directors and Executives Subsequent to Year End Anna Bagley resigned as joint Company Secretary on 4 July 2014. Bridget Thom was appointed as joint Company Secretary on 20 August 2014. Meetings of Directors During the financial year, 12 meetings of directors (including committees of directors) were held. Attendances by each director during the year were as follows: Directors’ Meetings Audit Committee Meetings Number eligible to attend 12 12 12 12 Number attended 12 12 12 12 Number eligible to attend - 3 3 - Number attended - 3 3 - Dale Elphinstone Vincent De Santis Donald Hector Ross Dunning Principal Activities The Group delivers a diverse range of engineering services and products through two business streams: Power & Propulsion and Rail & Road. Engenco businesses specialise in: Maintenance, repair and overhaul of heavy duty engines, powertrain and propulsion systems; Maintenance, repair and overhaul of locomotives; Manufacture and maintenance of wagons, carriages and associated rail equipment; Manufacture and supply of road transport and storage tankers for dry bulk products; and Project management, training and workforce provisioning services; Leasing of locomotives, wagons and other rail equipment. The Group services a diverse client base across the defence, resources, marine, power generation, rail, heavy industrial and infrastructure sectors. The Group employs nearly 500 people operating from more than twenty locations in five countries. Strategy The key sectors of the business are in Rail & Road products with an emphasis on service and labour deployment; Power & Propulsion with renewed emphasis in the gastrain and compression area; and an expanding training organisation aimed at assessment, training and qualifying Australians for new and present positions in rail and heavy industry. In the Rail business, the directors have decided only to pursue contracts in the fabrication or infrastructure maintenance sectors where satisfactory margins are available and the contracts are free from onerous risk conditions, particularly relating to inappropriate and unacceptable liabilities. The use of our nationwide maintenance facilities, in all mainland States, is expected to grow. Opportunities to joint-venture in overhaul and service work for wheels, axles and bearings on the east coast represent a strategic direction for this element of the business. Further restructure of the overall business which took place at 30 June 2014 will enable a greater focus on customer service and, in Drivetrain Power and Propulsion (Drivetrain), a significant reduction in middle management costs is expected to generate efficiencies throughout the business. Development of the new HS 6800 turbocharger in the USA is nearing completion and field trials of the equipment are planned for early in FY15. State and Federal governments in Australia are promoting training of all workers in the rail industry and in heavy industry generally. Qualified employees are more able to transition between employers if they can demonstrate they have undergone appropriate skills training evidenced by the issuing of a certificate from a Registered Training Organisation (RTO). Engenco’s RTO business, Centre for Excellence in Rail Training (CERT), provides this training in every mainland State in Australia and this business is well-positioned to grow substantially in FY15. Engenco Limited – 2014 Annual Report | Page 10 Directors’ Report Engenco Limited and Its Controlled Entities The new financial year is the last in the five-year plan to restore the business to profitability. This has been difficult to achieve in the timeframe set mainly due to the downturn in the resources industry which began in early 2012. There were serious flow-on effects in the business sectors in which the Company largely operates. However, the disciplined approach that was taken to constrain and reduce costs, and the restructuring of the business to focus on medium- to long-term profitable operational areas, is expected to achieve a profit in FY15. Operating and Financial Review Overview of the Group Drivetrain Power and Propulsion (Drivetrain) Drivetrain’s services span the complete engineering product lifecycle: design, application engineering, troubleshooting, supply and service, and through-life support programmes for heavy mobile powertrain systems, large-frame turbochargers, heavy diesel and gas power generation and gas compression equipment. Drivetrain is organised around the following business streams: Mobile Powertrain Turbocharger, Power and Compression Services include: Maintenance, repair, and overhaul Design, installation and commissioning Genuine component and spare parts distribution Field service Technical and engineering services in remote locations Drivetrain has facilities and service centres in 12 locations in the ANZ region, Asia, Sweden and USA. Gemco Rail Gemco Rail has been a well-known supplier of quality products and services to the rail sector for many years. Building on this solid reputation and experience the business specialises in providing fleet management services to national rail operators and in the manufacture, refurbishment and overhaul of rail equipment. Gemco Rail provides wagon and locomotive scheduled and ad- hoc maintenance services and manufactures custom designed and engineered new and refurbished wagons, bogie component parts and associated rail equipment. Gemco Rail also supplies a broad range of rail track maintenance equipment and parts. Services include: Manufacture and maintenance of freight wagons, other rollingstock and rail equipment Locomotive and wagon maintenance, repair and overhaul Fleet asset management Custom maintenance, modification, retrofit and upgrades Bogie, wagon and wheel refurbishment Field service crews Train inspections RailBAM acoustic analysis The flagship facility in Forrestfield WA is complemented by a country-wide footprint including workshops on main lines in Victoria, South Australia and New South Wales. Total Momentum Total Momentum offers a range of workforce provisioning services from providing skilled individuals to fully-supervised and equipped crews to carry out rail track construction, maintenance and upgrades. The business specialises in all types of rail welding including the welding of heavy gauge crane rail at height and the operation of flash butt welding plant. Total Momentum can plan, implement and manage safe working solutions for rail clients, from hand signallers and lookouts to highly experienced Principal Protection Officers. Operating out of branches in Forrestfield, Norwood, Thornton, Coonabarabran and Williamstown – Total Momentum's strategic presence is well placed to service the rail and resource sectors. Engenco Limited – 2014 Annual Report | Page 11 Directors’ Report Engenco Limited and Its Controlled Entities Centre for Excellence in Rail Training (CERT) CERT is an RTO that provides responsive, flexible and innovative training, assessment and recertification services to the Australian rail industry. CERT delivers nationally accredited and industry based training programs on a regular basis, and provides customised courses to suit individual business needs. The business has training centres in Perth, Sydney, Newcastle, Ipswich and Melbourne with the flexibility to train on-site anywhere in the country. Greentrains Greentrains provides a range of locomotives and wagons for lease to the Australian rail industry, with the added benefit of a packaged maintenance solution provided by Gemco Rail. Convair Engineering (Convair) Convair designs and manufactures tankers for the transport of dry bulk products by road and rail. The business also repairs, maintains and supplies spare parts for all makes of dry bulk tankers and offers distribution, service and repair of compressors and ancillary equipment used in the support of dry bulk materials handling. Convair is an agent for Feldbinder Spezialfahrzeugwerke Gmbh of Germany, supplementing the range of products with aluminium dry bulk tankers and stainless steel liquid tankers. With its plant based in Melbourne, Convair services customers throughout Australia and New Zealand. Operating Results The Group reported a net loss after tax including non-controlling interests of $11,503,000 for the year ended 30 June 2014. This included significant items amounting to a net loss of $5,075,000. The consolidated result for the year is summarised as follows: Revenue EBITDA 2 EBIT 1 Profit / (loss) after tax for the period Underlying trading loss 3 Net operating cash flow Net assets Net debt 2014 $000 140,273 1,692 (8,836) (11,503) (6,428) 5,733 77,427 18,651 2013 $000 176,088 (67,008) (79,642) (91,515) (11,896) 6,235 89,029 18,867 1 EBIT is earnings before finance costs and income tax expense. 2 EBITDA is EBIT before depreciation and amortisation. 3 Underlying trading loss is net loss after tax excluding significant items. Refer to Page 13 for a reconciliation of profit / (loss) for the period to underlying trading loss. Note - EBIT, EBITDA and underlying trading loss are non-IFRS financial measures, which have not been subject to review or audit by the Group’s external auditors. These measures are presented to assist understanding of the underlying performance of the Group. The continued decline in the resources industry activity, accentuated by lower iron ore and coal prices, has continued to impact the overall revenue of the Group. The Road & Rail sectors were particularly affected as traditional customers reduced operating expenditure and almost eliminated any capital expenditure. The businesses most affected were: Gemco Rail; Drivetrain Power and Propulsion, especially in OEM parts supply and maintenance, repair and overhaul; and Convair. The operational efficiencies and rationalisations introduced in early FY14 have resulted in a significant improvement in the trading result at the EBITDA level. Further restructuring announced in June 2014 is expected to enhance trading results as revenue is expected to grow in FY15. Drivetrain Power and Propulsion received a large order from Santos Ltd for stand-alone gas compression units during the year. In conjunction with Sage of Calgary, Canada, three units have now been successfully delivered. At the end of FY14, there were positive signs that a recovery in the Drivetrain business is occurring, with good prospects for off-highway powertrain as well as gas compression products and services being identified. Total Momentum and CERT received significant contracts from the Roy Hill project in Western Australia. This work will continue through FY15. Engenco Limited – 2014 Annual Report | Page 12 Directors’ Report Engenco Limited and Its Controlled Entities The wheel, bogie, and rail bearing overhaul work at Forrestfield for Gemco Rail has produced good results in the second half of FY14 and is well placed for additional work in the future. Consolidation of facilities in Western Australia onto one site at Forrestfield is now completed, with significant efficiency effects expected in FY15. The Greentrains business continues to be affected by the current oversupply of standard gauge locomotives in the Australian market and a general softening in the leasing market due to the decline in new construction activity. Market indicators suggest a slow improvement in all sectors. The CERT and Drivetrain businesses, including Gastrain, are likely to see more significant improvement. The directors are pleased to see the improvement in the trading result and anticipate this improvement to result in a positive trading result in FY15. The following table shows a reconciliation of the underlying trading loss: Profit / (loss) after tax for the period Significant Items: Impairment of goodwill and other intangible assets Impairment of property, plant and equipment Impairment of inventory Impairment of accounts receivable Legal settlements and associated costs Onerous contract provision Staff termination costs Derecognition of deferred tax assets Make-good provision Other significant items Underlying trading loss 1 1 Underlying trading loss is net loss after tax excluding significant items. Investments for Future Performance 2014 $000 (11,503) - - 1,792 465 - 276 2,666 - 443 (567) 2013 $000 (91,515) 43,275 20,350 1,529 861 2,004 1,705 1,551 8,344 - - (6,428) (11,896) On 31 October 2013 Engenco Investments Pty Ltd (a subsidiary of Engenco Limited) entered into a joint venture arrangement and invested in a newly incorporated entity, DataHawk Pty Ltd. The Group’s investment was $100, 50% of the equity. A further $542,075 was provided during the period as a long-term loan, fully repayable no later than 30 June 2017. DataHawk provides advanced process integration products using global positioning systems, optical measurement, imaging and 3D scanning technologies, with customised software and wireless communications through the complete railway lifecycle – from the feasibility phase, through design and construction, to the subsequent operation, maintenance and safety of a railway. The Group’s share of profit / (loss) in its equity-accounted investment for the period was ($222,500). During the year ended 30 June 2014 no dividends were received from the investment in DataHawk Pty Ltd. DataHawk Pty Ltd is not a publicly-listed entity and does not have a published price quotation. Review of Principal Businesses Drivetrain Power and Propulsion continued to trade at lower revenues as a result of the general economic downturn and in particular the resource industry activity reduction. In June 2014, the business was simplified and several senior positions were eliminated. Activity in the gas industry is showing promising signs of increasing. Gemco Rail was affected by low demand for fabrication services and the flow-on effects from the resources industry downturn. In the second half of the financial year the wheel, bogie and bearing shops performed well and by the end of FY14 the Dynon facility was also emerging as a profitable centre. In the Total Momentum business, a decision was taken in June 2014 not to tender for infrastructure projects containing requirements for inappropriate and unacceptable liability risk. Labour hire services in Western Australia continues to grow and work in other States is also expanding. Activity in Queensland is expected to grow with Total Momentum having been accepted by Queensland Rail on its track infrastructure panel. Engenco Limited – 2014 Annual Report | Page 13 Directors’ Report Engenco Limited and Its Controlled Entities CERT performed well during FY14, with significant expansion occurring in Western Australia in May and June 2014. This business is profitable and is expected to grow in FY15. Convair’s dry bulk tanker business performed below expectation due to flow on effects from the downturn in construction activity and a cyclical downturn in customer purchasing. A significant restructuring of Engenco’s businesses occurred in June 2014, resulting in 55 redundancies. This restructuring has streamlined the reporting and accountability of functions in the entire Group as well as consolidating the accounting function into the corporate office. Significant Changes in State of Affairs No significant changes in the state of affairs have occurred. Likely Developments The Drivetrain Power and Propulsion business is now comprised of four business units reporting to the Managing Director. The Mobile Powertrain (MPT) stream has branch offices in every mainland State and supplies parts and services for heavy off-road and mining vehicles, including some defence equipment. This business has suffered as a result of low iron ore and coal prices and low investment by the industry generally. A recovery in the sector is expected and early signs are encouraging. The strengthening support from major Drivetrain suppliers and agency principals continues to be an important factor for growth. The Turbocharger, Power and Compression (TPC) stream operates from most of the branch offices and services the power and gas industries. The successful completion of three gas compressor units for Santos Ltd utilising Sage technology from Canada, bodes well for future orders in the expanding gas industry. The Drivetrain operation in Sweden operates profitably. The Hedemora engine is no longer manufactured and over time the servicing side of this business will decline, being replaced by growth and expansion of the turbocharger business. Marketing of the current range of turbochargers in northern Europe, Asia and South Africa is on foot. Early indications are very positive. The Drivetrain USA business is focused on the production and sale of the HS 6800 turbocharger. Sales of current range turbochargers in North and South America have increased over recent months. The new HS 6800 turbocharger, now in final test, is expected to generate additional sales. The Rail business is now comprised of three activities. The Executive General Manager of the Rail business reports to the Managing Director. The Gemco Rail business contains the wheel, bogie and bearing overhaul business stream which is expected to expand (perhaps in a joint venture arrangement) into the eastern States. Work has been increasing slowly during Q4 of FY14. The repair and fabrication business in Western Australia is expected to be flat during FY15. The locomotive overhaul and repair business in Parkes and Dynon is also improving. Total Momentum’s business is improving particularly in the rail labour hire area with good growth in all mainland States. In Queensland, an office has been established to service that market. The Greentrains business is experiencing the impact of an industry oversupply of locomotives, a shortage of construction contracts and a general softening of the leasing market. Growth is expected to be limited to more flexible rental arrangements and to custom rollingstock requirements. Convair’s business is expected to show an upturn this financial year with a good order book in hand. CERT is experiencing a significant upturn in business enquiry and contract award as government funding is being provided for employees and potential employees in the rail and heavy industry to become certificated for various sectors of work in those industries. There are good opportunities now available and growth is expected in this area. There is much uncertainty in the marketplace, particularly in the resources area. During the year, a large customer utilising Engenco’s skeletal container freight wagons entered administration, affecting the leasing and wagon servicing business in Gemco Rail. This uncertainty remains in the resources area and until such time as resources production and improved pricing shows some sign of permanency, results will be difficult to predict. The HS 6800 turbocharger project, which has been a significant investment for the Group, has yet to be proven and time-tested on operating locomotives in the USA. While this is expected to take place early in FY15, the financial outcome over the future financial years contains some uncertainty and is dependent on the market penetration of the product. Engenco Limited – 2014 Annual Report | Page 14 Directors’ Report Engenco Limited and Its Controlled Entities Directors expect the restructuring and right-sizing of the business that has occurred, with a renewed focus of a supportive management team, will meet the challenges that still remain. The directors and management are confident of a much improved outcome in FY15. Dividends The directors have decided not to declare a final dividend. Events Subsequent to Reporting Date The Group has agreed an extension of the CBA debt facilities for a further 12 months to 31 October 2015, subject to certain conditions and the execution of the revised facility documentation. Waivers for breaches of the debt to EBITDA ratio and the loan to valuation ratio covenants relating to the debt facility with Elph Pty Ltd were obtained on 20 August 2014. On 25 August 2014 the debt facility with Elph Pty Ltd was extended and the Gearing Ratio covenant was removed from the facility agreement. The security was also extended to include a fixed charge over certain assets of Gemco Rail Pty Ltd. Other than the above, there has not arisen, in the interval between the end of the financial year and the date of this report, any item, transaction or event which would have a material effect on the financial statements of the Group at 30 June 2014. Environmental Regulation Group operations are subject to significant environmental regulation under Commonwealth, State and international law, including noise, air emissions and the use, handling, haulage and disposal of dangerous goods and wastes. The Group follows practices that minimise adverse environmental impacts and complies with environmental requirements. The Board is not aware of any significant breaches during the periods covered by this report nor does it consider the Group is subject to any material environmental liabilities. National Greenhouse and Energy Reporting Guidelines The Group’s environmental obligations are regulated under both Federal and State law. The Company is not subject to the conditions imposed by the registration and reporting requirements of the National Greenhouse and Energy Reporting Act 2007. Indemnifying Officers The Company has indemnified and paid premiums to insure each of the Company’s directors and executives against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in their capacity, other than conduct involving a wilful breach of duty in relation to the Company. Auditor’s Independence Declaration The lead auditor’s independence declaration is set out on page 24 and forms part of the Directors’ Report for the financial year ended 30 June 2014. Rounding of Amounts The Group is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the consolidated financial statements and Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. Engenco Limited – 2014 Annual Report | Page 15 Directors’ Report Remuneration Report - Audited Remuneration Policy Engenco Limited and Its Controlled Entities This report details the nature and amount of remuneration for each director of the Company and other key executives of the Group who have a strategic commercial impact upon the Group’s activities. The Remuneration Policy of the Group is intended to align director and executive objectives with shareholder and business objectives by providing a fixed remuneration component and offering specific incentives based on key performance areas affecting the Group’s financial results. The Board of Engenco believes the approach to remunerating to be appropriate and effective in its ability to attract and retain the best executives and directors to run and manage the Group. The Board’s policy for determining the nature and amount of remuneration for board members and senior executives of the Group is as follows: • All executive directors and key executives receive a salary package comprised of a base salary, superannuation and post-employment benefits. • The Board reviews executive packages annually by reference to the Group’s performance, executive performance and comparable market information. • The performance of executives is measured against criteria agreed annually with each executive and is based predominantly on the forecast growth of the Group’s profits, which are aligned with shareholder value. The developing remuneration policy will be designed to attract the highest calibre of executives and reward them for performance that results in long-term growth in shareholder wealth. • The directors and key executives receive a superannuation guarantee contribution required by the government (which was 9.25% during the year) and do not receive any other retirement benefits. Some individuals, however, have chosen to sacrifice part of their salary to increase superannuation contributions. • All remuneration paid to directors and executives is valued at cost to the Group and expensed. • The Board policy is to remunerate non-executive directors at market rates for time, commitment and responsibilities. The Board determines payments to non-executive directors and reviews their remuneration annually, based on market practice, duties and accountability. The maximum aggregate amount of fees that can be paid to non-executive directors is subject to approval by shareholders at the annual general meeting. • To align directors’ interests with shareholder interests, the directors are encouraged to hold shares in the Company. Performance Conditions Linked to Remuneration The remuneration level for key management personnel is based on a number of factors, including skills and qualifications, achievements of performance metrics and demonstrated management capability. The contracts for service between the Group and key management personnel are on a continuing basis. Engenco Limited – 2014 Annual Report | Page 16 Directors’ Report Engenco Limited and Its Controlled Entities Remuneration Report - Audited (cont’d) Relationship between Remuneration Policy and Company Performances There are short-term incentives available to certain key management personnel which are linked to achieving the Group’s budgeted NPAT performance. There were no payments of short-term incentives in the current financial year with regard to NPAT performance (2013: $NIL). Current remuneration policies are under review by the Board. The following table shows the gross revenue, profits and dividends for the last 5 years for Engenco Limited, as well as the share prices at the end of the respective financial years. Revenue NPAT attributable to members Dividends paid EBIT Operating income growth Share price at year end Change in share price Capital employed 1 Return on capital employed 2 2010 $ 224,331,000 (113,712,000) - (99,900,000) (1,061%) $0.15* ($0.05) 92,005,000 (109%) 2011 $ 207,352,000 4,905,000 - 17,700,000 118% $0.09* ($0.06) 209,816,000 8% 2012 $ 199,197,000 (35,683,000) - (27,055,000) (253%) $0.50* $0.41 156,653,000 (17%) 2013 $ 176,088,000 (87,731,000) - (79,642,000) (194%) $0.14 ($0.36) 93,306,000 (85%) 2014 $ 140,273,000 (11,257,000) - (8,836,000) 89% $0.12 ($0.02) 80,348,000 (11%) During November 2012 there was a share consolidation whereby every ten (10) fully paid ordinary shares on issue were consolidated into one (1) fully paid ordinary share. Each fraction of a share was rounded up. 1 Capital employed is total asset less current liabilities 2 Return on capital employed is EBIT over capital employed Engenco Limited – 2014 Annual Report | Page 17 Directors’ Report Remuneration Report - Audited (cont’d) Remuneration Details for Year Ended 30 June 2014 Engenco Limited and Its Controlled Entities The Board determines the proportion of fixed and variable compensation for key management personnel - refer to table below: Short-Term Post- Employment Other Long- Term Salary and Fees $ Non-Monetary Benefits $ STI Cash Bonus $ Sub-Total $ Super- annuation Benefit $ Long Service Leave $ Termination Benefits $ Proportion of Remuneration Performance Related Total $ DIRECTORS NON-EXECUTIVE DIRECTORS D Elphinstone Chairman V De Santis D Hector SUB – TOTAL NON-EXECUTIVE DIRECTORS’ REMUNERATION EXECUTIVE DIRECTORS R Dunning 1 Interim Managing Director TOTAL DIRECTORS’ REMUNERATION EXECUTIVES K Pallas 3 Chief Financial Officer / Company Secretary G Thorn: appointed 8 Oct 2012 Executive General Manager – Rail J Pas General Manager – DTUS G Northeast General Manager – DTSE 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 174,000 174,000 85,500 80,000 92,000 92,000 351,500 346,000 446,592 86,000 798,092 432,000 311,129 280,019 306,740 223,913 179,356 183,593 161,892 182,194 - - - - - - - - - - - - - - 15,071 12,384 13,368 13,782 - - - - - - - - - - - - - - - - - - - - - - 174,000 174,000 85,500 80,000 92,000 92,000 351,500 346,000 446,592 86,000 798,092 432,000 311,129 280,019 321,811 236,297 192,724 197,375 161,892 182,194 - - - - 8,510 8,280 8,510 8,280 17,771 7,740 26,281 16,020 28,779 25,063 30,092 21,267 2,758 2,844 38,152 42,276 - - - - - - - - - - - - 26,686 5,925 - - - - - - - - - - - - - - - - - - - - - - - - - - 174,000 174,000 85,500 80,000 100,510 100,280 360,010 354,280 464,363 93,740 824,373 448,020 366,594 311,007 351,903 257,564 195,482 200,219 200,044 224,470 - - - - - - - - - - - - - - - - - - - - Engenco Limited – 2014 Annual Report | Page 18 Directors’ Report Remuneration Report - Audited (cont’d) Remuneration Details for Year Ended 30 June 2014 (cont’d) Engenco Limited and Its Controlled Entities Short-Term Post- Employment Other Long- Term Salary and Fees $ Non-Monetary Benefits $ STI Cash Bonus $ Sub-Total $ Super- annuation Benefit $ Long Service Leave $ Termination Benefits $ D Bentley General Manager – TPC/Gastrain P Gale General Manager – Drivetrain MPT P Swann General Manager – Convair M Haigh General Manager - CERT R Edwards General Manager – Momentum/Greentrains FORMER D Quinn: resigned 12 July 2013 Chief Executive Officer P Coombe: resigned 1 March 2013 3 Chief Financial Officer A Bagley: resigned 4 July 2014 Company Secretary J Tan 4 Company Secretary G Parrett: resigned 26 August 2013 CEO – Drivetrain F Gili 5 Executive General Manager - Drivetrain TOTAL EXECUTIVE OFFICERS’ REMUNERATION TOTAL DIRECTORS’ AND EXECUTIVE OFFICERS’ REMUNERATION 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 250,166 245,283 171,590 155,205 200,108 186,644 154,294 143,060 200,524 200,510 27,046 443,757 - 184,518 93,630 186,279 144,205 - 63,427 364,070 254,571 143,101 2,518,678 3,122,146 3,316,770 3,554,146 10,934 20,109 - - 51,959 70,605 9,962 9,962 8,187 - - - - - - - - - 15,596 39,915 - - 125,077 166,757 125,077 166,757 - - - - - - - - - - - 50,000 2 - - - - - - - - - - - 50,000 - 50,000 261,100 265,392 171,590 155,205 252,067 257,249 164,256 153,022 208,711 200,510 27,046 493,757 - 184,518 93,630 186,279 144,205 - 79,023 403,985 254,571 143,101 2,643,755 3,338,903 3,441,847 3,770,903 23,588 24,140 17,674 15,689 33,038 20,641 27,661 25,736 18,548 18,046 1,893 22,960 - 20,025 8,661 16,765 19,016 - 19,412 15,775 25,075 14,386 294,347 285,613 320,628 301,633 4,826 5,642 5,949 5,381 3,931 8,528 5,912 3,355 9,195 4,523 - - - - - - - - 931 8,947 - - 57,430 42,301 57,430 42,301 - - - - - - - - - - 150,000 - - 80,000 50,215 6 - - - 397,070 - 80,092 6 - 677,377 80,000 677,377 80,000 Proportion of Remuneration Performance Related - - - - - - - - - - - 9.7% - - - - - - - - - - - 1.3% - 1.2% Total $ 289,514 295,174 195,213 176,275 289,036 286,418 197,829 182,113 236,454 223,079 178,939 516,717 - 284,543 152,506 203,044 163,221 - 496,436 428,707 359,738 157,487 3,672,909 3,746,817 4,497,282 4,194,837 Engenco Limited – 2014 Annual Report | Page 19 Directors’ Report Remuneration Report - Audited (cont’d) Engenco Limited and Its Controlled Entities 1 2 3 4 5 6 R Dunning was appointed as Interim Managing Director (previously Non-Executive Director) on 15 July 2013. The STI cash bonus related to a guaranteed sum and did not relate to meeting performance targets. P Coombe resigned as Chief Financial Officer on 1 March 2013. K Pallas was appointed as Chief Financial Officer (previously Chief Operating Officer), effective on this date. J Tan was appointed Chief Legal Officer and joint Company Secretary on 22 August 2013, and resigned 23 May 2014. F Gili was previously employed by the Company in a non-executive role and resigned on 1 February 2013. He was re-employed by the Company on 26 August 2013 to the position Executive General Manager – Drivetrain. This position was made redundant effective 30 June 2014. A Bagley and F Gili termination payments were accrued as at 30 June 2014, but not physically paid until the next financial year. Additional key management personnel have been disclosed in the current year in accordance with the management structure effective at 30 June 2014. Loans to Key Management Personnel and Their Related Parties Details regarding loans outstanding during the reporting period to key management personnel and their related parties, are as follows: Balance at Beginning of Year $ 1,400 700 Interest Charged $ Interest Not Charged $ Provision for Impairment $ Loan Repayment $ Balance at End of Year $ Highest Balance During Period - - 40 19 (1,400) - - (700) - - 1,400 700 G Parrett K Pallas The amount shown for interest not charged in the above table represents the difference between the amount paid and payable for the year and the amount of interest that would have been charged on an arm’s length basis. The balance outstanding as at 30 June 2014 is NIL (2013: $2,100). Engenco Limited – 2014 Annual Report | Page 20 Directors’ Report Remuneration Report - Audited (cont’d) Service Agreements Engenco Limited and Its Controlled Entities The employment conditions of key management personnel are formalised in contracts of employment. The employment contract does not stipulate a term of employment period but does stipulate a notice period for resignation and periods of remuneration and conditions under termination. Termination payments are not payable on resignation or dismissal for serious misconduct. In the instance of serious misconduct the Company can terminate employment at any time. Terms of Agreement Termination Benefit D Elphinstone V De Santis D Hector R Dunning K Pallas G Thorn J Pas G Northeast P Gale D Bentley P Swann M Haigh R Edwards D Quinn A Bagley J Tan G Parrett F Gili Ongoing director agreement Ongoing director agreement Ongoing director agreement Permanent employment contract Permanent employment contract Permanent employment contract Permanent employment contract Permanent employment contract Permanent employment contract Permanent employment contract No formal employment contract Permanent employment contract Permanent employment contract Permanent employment contract Permanent employment contract Maximum term employment contract Permanent employment contract Permanent employment contract N/A - Non-Executive Director N/A - Non-Executive Director N/A - Non-Executive Director 1 months’ pay 8 weeks’ pay 8 weeks’ pay 1 months’ pay 3 months’ pay 3 months’ pay 12 months’ pay 5 weeks’ pay 1 months’ pay 5 weeks’ pay 3 months’ pay 8 weeks’ pay 5 weeks’ pay 12 months’ pay 3 months’ pay Fees to Dale Elphinstone and Vincent De Santis are paid via agreements with Elphinstone Pty Ltd which is a related party of the Company. Fees to Donald Hector are paid via an agreement with Grassick SSG Pty Ltd which is a related party of the Company. Options and Rights Granted In the 2013 and 2014 financial years no executive directors, non-executive directors or key management personnel have any options or rights. Other Transactions with Key Management Personnel A number of key management persons or their relates parties hold positions in other entities that result in them having control or joint control over the financial or operating policies of those entities. A number of these entities transacted with the Group during the year. The terms and conditions of the transactions with key management personnel and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel related entities on an arm’s length basis. From time to time, directors of the Group, or their related entities, may purchase goods from the Group. These purchases are on the same terms and conditions as those entered into by other Group employees or customers and are trivial or domestic in nature. Engenco Limited – 2014 Annual Report | Page 21 Directors’ Report Remuneration Report - Audited (cont’d) Movements in Shares Engenco Limited and Its Controlled Entities The movement during the reporting period in the number of ordinary shares in Engenco Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: 2014 D Elphinstone V De Santis D Hector R Dunning K Pallas G Thorn J Pas G Northeast P Gale D Bentley P Swann M Haigh R Edwards D Quinn A Bagley J Tan G Parrett F Gili Balance 1 July 2013 202,249,018 300,003 113,163 104,000 5,000 - - 18,983 - - 25,275 - - - - - 20,166 1,429 Received as compensation Net change other* Balance 30 June 2014 - - - - - - - - - - - - - -- - - - - - - - - 10,000 - - - - - - - - - - - - - 202,249,018 300,003 113,163 104,000 15,000 - - 18,983 - - 25,275 - - - - - 20,166 1,429 *Other changes represent shares that were purchased or sold during the year This report of the directors is signed in accordance with a resolution of the Board of Directors. Dale Elphinstone Chairman Dated 25 August 2014 Engenco Limited – 2014 Annual Report | Page 22 Engenco Limited and Its Controlled Entities Directors’ Declaration 1. a. In the opinion of the directors of Engenco Ltd (the Company): the financial statements and notes that are set out on pages 27 to 76, and the Remuneration report on pages 16 to 22 in the Directors’ report, 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 2014 and of its performance for the financial year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; and 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. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 30 June 2014. 3. The directors draw attention to Note 1 to the financial statements, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the directors: Dale Elphinstone Chairman Dated 25 August 2014 Engenco Limited – 2014 Annual Report | Page 23 Auditor’s Independence Declaration Engenco Limited and Its Controlled Entities Engenco Limited – 2014 Annual Report | Page 24 Independent Auditor’s Report Engenco Limited and Its Controlled Entities Engenco Limited – 2014 Annual Report | Page 25 Engenco Limited and Its Controlled Entities Engenco Limited – 2014 Annual Report | Page 26 Consolidated Financial Statements Engenco Limited and Its Controlled Entities Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2014 Revenue Other income Changes in inventories of finished goods and work in progress Raw materials and consumables used Employee benefits expense Depreciation and amortisation expense Impairment of goodwill and intangible assets Impairment of property, plant and equipment Impairment of inventory Impairment of accounts receivable Finance costs Subcontract freight Repairs and maintenance Insurances Rent and outgoings Vehicle expenses Fuel Foreign exchange movements Other expenses Share of profit / (loss) of equity-accounted investee, net of tax PROFIT / (LOSS) BEFORE INCOME TAX Income tax expense PROFIT / (LOSS) FOR THE PERIOD Profit / (loss) attributable to: Owners of the Company Non-controlling interest OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of overseas subsidiaries Other comprehensive income for the period, net of tax TOTAL COMPREHENSIVE INCOME FOR THE PERIOD Total comprehensive income attributable to: Owners of the Company Non-controlling interest EARNINGS PER SHARE From continuing operations: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Consolidated Group 2014 $000 Consolidated Group 2013* $000 Note 2 2 3 3 13 4 140,273 3,657 (4,811) (51,162) (58,958) (10,528) - - (1,792) (465) (2,171) (1,675) (1,257) (1,897) (9,140) (727) (270) 213 (10,074) (223) (11,007) (496) (11,503) (11,257) (246) (11,503) 176,088 1,936 (5,531) (75,806) (65,508) (12,634) (43,275) (20,350) (1,529) (861) (4,352) (1,911) (1,729) (1,770) (9,517) (715) (327) (96) (16,107) - (83,994) (7,521) (91,515) (87,731) (3,784) (91,515) (99) (99) 1,833 1,833 (11,602) (89,682) (11,356) (246) (11,602) (85,898) (3,784) (89,682) Cents Cents 8 8 (3.62) (3.62) (40.06) (40.06) *2013 comparative figures have been reclassified. Full details are disclosed in Note 1(v). The notes on pages 31 to 76 are an integral part of the consolidated financial statements. Engenco Limited – 2014 Annual Report | Page 27 Consolidated Financial Statements Engenco Limited and Its Controlled Entities Consolidated Statement of Financial Position as at 30 June 2014 Consolidated Group 2014 $000 Consolidated Group 2013 $000 Note CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Current tax receivables Other current assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Trade and other receivables Financial assets Equity-accounted investee Property, plant and equipment Deferred tax assets Intangible assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Financial liabilities Current tax liabilities Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Financial liabilities Provisions Deferred tax liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS Issued capital Reserves Retained earnings / (accumulated losses) TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Non-controlling interest TOTAL EQUITY The notes on pages 31 to 76 are an integral part of the consolidated financial statements. 9 10 11 20 17 10 12 13 15 20 16 18 19 20 21 19 21 20 22 4,370 29,947 34,368 14 1,231 69,930 - 34 359 57,407 185 1,979 59,964 5,028 30,174 39,179 336 1,358 76,075 2 20 - 61,404 192 3,536 65,154 129,894 141,229 16,618 22,819 409 9,700 49,546 202 1,518 1,201 2,921 52,467 77,427 302,260 492 (224,301) 78,451 (1,024) 77,427 15,864 23,468 - 8,591 47,923 427 2,106 1,744 4,277 52,200 89,029 302,260 591 (213,044) 89,807 (778) 89,029 Engenco Limited – 2014 Annual Report | Page 28 Consolidated Financial Statements Engenco Limited and Its Controlled Entities Consolidated Statement of Changes in Equity for the year ended 30 June 2014 Consolidated Group Issued Capital Ordinary Shares $000 Retained Earnings / (Accumulat ed Losses) $000 Foreign Currency Translation Reserve $000 Option Reserves $000 Sub-Total $000 Non- controlling Interest $000 Total Equity $000 BALANCE AT 1 JULY 2012 275,342 (125,505) (1,242) 192 148,787 3,006 151,793 Total comprehensive income for the period TOTAL COMPREHENSIVE INCOME Shares issued during the year Transaction costs Share options expired during the year TOTAL CONTRIBUTIONS AND DISTRIBUTIONS - - (87,731) (87,731) 1,833 1,833 28,000 (1,082) - 26,918 - - 192 192 - - - - BALANCE AT 30 JUNE 2013 302,260 (213,044) 591 BALANCE AT 1 JULY 2013 302,260 (213,044) Total comprehensive income for the period TOTAL COMPREHENSIVE INCOME - - (11,257) (11,257) BALANCE AT 30 JUNE 2014 302,260 (224,301) 591 (99) (99) 492 The notes on pages 31 to 76 are an integral part of the consolidated financial statements. - - - - (192) 28,000 (1,082) - (192) 26,918 (85,898) (3,784) (89,682) (85,898) (3,784) (89,682) - - - - 28,000 (1,082) - 26,918 - - - - - 89,807 (778) 89,029 89,807 (11,356) (11,356) (778) (246) (246) 89,029 (11,602) (11,602) 78,451 (1,024) 77,427 Engenco Limited – 2014 Annual Report | Page 29 Consolidated Financial Statements Consolidated Statement of Cash Flows for the year ended 30 June 2014 Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 Note CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest received Finance costs Income tax received / (paid) NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES 25(b) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of non-current assets Purchase of non-current assets Investment in equity-accounted investee NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares Payment of transaction costs related to issue of shares Proceeds from borrowings Repayment of borrowings NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES Net increase / (decrease) in cash and cash equivalents Cash (net of bank overdrafts) at beginning of financial year CASH (NET OF BANK OVERDRAFTS) AT END OF FINANCIAL YEAR 25(a) The notes on pages 31 to 76 are an integral part of the consolidated financial statements. 158,303 (150,209) 111 (2,171) (301) 5,733 380 (5,355) (542) (5,517) - - - (1,640) (1,640) (1,424) 4,191 2,767 213,335 (201,175) 103 (4,352) (1,676) 6,235 517 (5,769) - (5,252) 28,000 (1,082) 3,933 (25,462) 5,389 6,372 (2,181) 4,191 Engenco Limited – 2014 Annual Report | Page 30 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Notes to the Consolidated Financial Statements for the year ended 30 June 2014 Note 1 – Summary of Significant Accounting Policies Except for the changes explained here within, the Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements. Reporting Entity Engenco Limited (the ‘Company’) is domiciled in Australia. The Company’s registered office is at Level 22, 535 Bourke Street, Melbourne, VIC 3000. These consolidated financial statements comprise the Company and its controlled entities (collectively ‘the Group’ and individually ‘Controlled Entities’). The Group is a for-profit entity and is involved in the delivery of a diverse range of engineering services and products. Basis of Preparation Statement of Compliance The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB). The consolidated financial statements were authorised for issue by the Board of Directors on 25 August 2014. Basis of Measurement The financial report has been prepared on an accruals basis and is based on historical costs except for financial instruments at fair value through profit or loss, which are measured at fair value. Going Concern The full year financial report has been prepared on the going concern basis, which contemplates the continuity of normal business activity, and the realisation of assets and the settlement of liabilities in the ordinary course of business without the necessity to curtail or dispose of a material part of the operations. At the date of issuing this report, the Group has available debt facilities (bank overdraft facility and bank guarantees) with the Commonwealth Bank of Australia (CBA) which are due to expire on 31 October 2014, and the Group has agreed an extension of the CBA facilities for a further 12 months to 31 October 2015, subject to certain conditions and the execution of the revised facility documentation. As at 30 June 2014, Engenco Limited was within its loan covenants with CBA. Greentrains Limited (an 81% owned subsidiary of Engenco Limited) has a debt facility with a related party, Elph Pty Ltd (Elph). Elph Pty Ltd and its related entity Elph Investments Pty Ltd, together hold 65.05% of the issued shares in Engenco Limited. The Elph facility is secured by the assets owned by Greentrains Limited and rail wagon assets owned by Gemco Rail Pty Ltd. The facility is currently non-recourse to the Group’s other assets. At the date of issuing this report, the Elph debt facility is due to expire on 30 September 2015. The Elph debt facility has requirements for quarterly fixed principal repayments. As at 30 June 2014, Greentrains Limited did not comply with March 2014 and June 2014 quarterly principal repayment requirements. The Elph debt facility is also subject to termination events linked to compliance with debt covenants. As at 30 June 2014, Greentrains Limited was in breach of two of the covenants relating to the Elph debt facility. All non-compliances were formally waived by Elph on 20 August 2014. Based on current management forecasts for Greentrains Limited, further covenant breach waivers may be required to be sought from Elph. These conditions give rise to a material uncertainty that may cast doubt on the ability of Greentrains Limited and the Group to continue to operate as a going concern. The Group’s ability to continue as a going concern will also be dependent upon its ability to achieve forecast cash flows from operations. Engenco Limited – 2014 Annual Report | Page 31 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) Going Concern (cont’d) After making enquiries, and considering the uncertainties described above, the directors are satisfied that the Group will have sufficient cash and undrawn facilities to continue to operate and pay its debts as and when they fall due for at least the 12 month period from the date of signing this financial report. For these reasons, the directors have determined that it is appropriate for the Group to continue to adopt the going concern basis in preparing the financial report and no adjustments have been made to the carrying value and classification of assets and the amount and classification of liabilities that may be required if the Group does not continue as a going concern. Significant Accounting Policies (a) Basis of Consolidation Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment (see Note 1(h)). Any gain on a bargain purchase is recognised in the Statement of Profit or Loss and Other Comprehensive Income (OCI) immediately. Transaction costs are expenses as incurred, except if related to the issue of debt or equity securities (see Note 1(g)). The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in the profit or loss. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in the profit or loss. If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards), then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based measure of the replacement awards compared with the market-based measure of the acquiree’s awards and the extent to which the replacement awards relate to pre-combination service. Non-controlling interests Non-controlling interests (NCI) are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions within the Statement of Financial Position and Statement of Changes in Equity. Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has the right 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. Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in the profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Engenco Limited – 2014 Annual Report | Page 32 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (a) Basis of Consolidation (cont’d) Interests in equity-accounted investees The Group’s interests in equity-accounted investees comprises of interest in a joint venture. A joint venture is an arrangement on which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. Interest in the joint venture is accounted for using the equity method. It is recognised initially at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group’s share of the profit or loss and OCI of equity-accounted investees, until the date on which joint control ceases. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Discontinued operation A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: represents a separate major line of business or geographical area of operations; is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to re-sale. Classification as a discontinued operation occurs at the earlier of disposal or when operation meets the criteria to be classified as held-for-sale. When an operation is classified as a discontinued operation, the comparative Statement of Profit or Loss and OCI is re-presented as if the operation had been discontinued from the start of the comparative year. (b) Income Tax The income tax expense/benefit for the year comprises current income tax expense/benefit and deferred tax expense/benefit. Current income tax expense charged to the profit or loss is the tax payable on taxable income calculated using applicable income tax rates enacted, or substantially enacted, as at the end of the reporting period. Current tax liabilities/assets are therefore measured at the amounts expected to be paid to/recovered from the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses. Current and deferred income tax expense/benefit is charged or credited directly to equity instead of the profit or loss when the tax relates to items that are credited or charged directly to equity. Deferred tax assets and liabilities are ascertained based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the tax rates enacted or substantively enacted at the end of the reporting period. Their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Engenco Limited – 2014 Annual Report | Page 33 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (b) Income Tax (cont’d) Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where a legally enforceable right of set-off exists, the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Tax Consolidation Engenco Limited and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under tax consolidation legislation. Each entity in the group recognises its own current and deferred tax assets and liabilities. Such taxes are measured using the ‘stand-alone taxpayer’ approach to allocation. Current tax liabilities/assets and deferred tax assets arising from unused tax losses and tax credits in the subsidiaries are immediately transferred to the head entity. The group notified the Australian Tax Office that it had formed an income tax consolidated group to apply from 31 October 2007. The tax consolidated group has entered into a tax funding arrangement whereby each company in the Group contributes to the income tax payable by the group in proportion to their contribution to the group’s taxable income. Differences between the amounts of net tax assets and liabilities derecognised and the net amounts recognised pursuant to the funding arrangement are recognised as either a contribution by, or distribution to the head entity. (c) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of finished goods includes direct materials, direct labour and an appropriate portion of variable and fixed overheads included in bringing them to their existing location and condition. Costs are assigned on the basis of weighted average costs. The cost of raw materials includes all costs to transport the goods to a location ready for use including any duties and charges on items purchased overseas. (d) Construction Contracts and Work in Progress Construction work in progress is valued at cost, plus profit recognised to date less progress billings and any provision for anticipated future losses. Cost includes both variable and fixed costs relating to specific contracts, and those that are attributable to the contract activity in general and that can be allocated on a reasonable basis. Construction profits are recognised on the stage of completion basis and measured using the proportion of costs incurred to date as compared to expected actual costs. Where losses are anticipated they are provided for in full. Construction revenue has been recognised on the basis of the terms of the contract adjusted for any variations or claims allowable under the contract. Work in progress is valued at cost. Cost includes both variable and fixed costs relating to specific projects, and those that are attributable to the project activity in general and that can be allocated on a reasonable basis. (e) Property, Plant and Equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. If significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Any gain or loss on disposal of an item of property, plant and equipment is recognised in profit or loss. Engenco Limited – 2014 Annual Report | Page 34 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (e) Property, Plant and Equipment (cont’d) Subsequent Expenditure Subsequent expenditure is capitalised only when it is probable that the future economic benefits associated with the expenditure will flow to the Group. Depreciation Depreciation is calculated to write off the cost of property, plant and equipment less their estimated residual values using the straight-line basis over their estimated useful lives, and is generally recognised in profit or loss. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The depreciation rates used for each class of depreciable assets are: Class of Fixed Asset Depreciation Rate Leasehold improvements Plant and equipment Leased plant and equipment Buildings 20% - 67% 2.5% - 67% 30% - 67% 2.50% Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (f) Leases Determining whether an arrangement contains a lease At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. At inception or on reassessment of an arrangement that contains a lease, the Group separates payments and other consideration required by the arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset; subsequently, the liability is reduced as payments are made and an imputed finance cost on the liability is recognised using the Group’s incremental borrowing rate. Leased assets Assets held by the Group under leases that transfer to the Group substantially all the risks and rewards of ownership are classified as finance leases. The leased asset is measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to that asset. Assets held under other leases are classified as operating leases and are not recognised in the Group’s Statement of Financial Position. Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Engenco Limited – 2014 Annual Report | Page 35 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (g) Financial Instruments Initial recognition and measurement Financial assets and liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the Company commits itself to either the purchase or sale of the asset (i.e. trade date accounting is adopted). Financial instruments are initially measured at fair value plus transactions costs, except where the instrument is classified ‘at fair value through profit or loss’, in which case transaction costs are expensed to profit or loss immediately. Classification and subsequent measurement Financial instruments are subsequently measured at their fair value, amortised cost using the effective interest rate method, or cost. Fair value represents the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties. When quoted prices are available in an active market they are used to determine fair value. In other circumstances, valuation techniques are adopted. Amortised cost is calculated as: (1) (2) the amount at which the financial asset or financial liability is measured at initial recognition; less principal repayments; (3) plus or minus the cumulative amortisation of the difference, if any, between the amount initially recognised and the maturity amount calculated using the effective interest method; and (4) less any reduction for impairment. The effective interest method is used to allocate interest income or interest expense over the relevant period and is equivalent to the rate that exactly discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) through the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying value with a consequential recognition of an income or expense in the profit or loss. Financial assets at fair value through profit and loss Financial assets are classified at fair value through profit or loss when they are held for trading for the purpose of short term profit taking, derivatives not held for hedging purposes, or when they are designated as such to avoid an accounting mismatch. Realised and unrealised gains and losses arising from changes in fair value are included in profit or loss in the period in which they arise. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are measured initially at fair value plus directly attributable transaction costs and subsequently at amortised cost. Loans and receivables are included in current assets, except for those which are not expected to mature within 12 months after the end of the reporting period. All other loans and receivables are classified as non-current assets. Financial liabilities Non-derivative financial liabilities (excluding financial guarantees) are measured initially at fair value plus directly attributable transaction costs and subsequently measured at amortised cost. Fair value Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models. Engenco Limited – 2014 Annual Report | Page 36 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (g) Financial Instruments (cont’d) Impairment At each reporting date, the Group assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available-for-sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether impairment has arisen. Impairment losses are recognised in the Statement of Profit or Loss and OCI. Financial guarantees Where material, financial guarantees issued, which require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due, are recognised as a financial liability at fair value on initial recognition. The guarantee is subsequently measured at the higher of the best estimate of the obligation and the amount initially recognised less, when appropriate, cumulative amortisation in accordance with AASB 118: Revenue. Where the entity gives guarantees in exchange for a fee, revenue is recognised under AASB 118. The fair value of financial guarantee contracts has been assessed using a probability weighted discounted cash flow approach. The probability has been based on: the likelihood of the guaranteed party defaulting in a year period; the proportion of the exposure that is not expected to be recovered due to the guaranteed party defaulting; and the maximum loss exposed if the guaranteed party were to default. (h) Impairment of Assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (i) Intangibles Goodwill Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. Customer related intangibles Customer related intangibles are stated at cost less accumulated amortisation and, where applicable, any accumulated impairment losses. Customer related intangibles are amortised over a period of 3 to 10 years. Engenco Limited – 2014 Annual Report | Page 37 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (i) Intangibles (cont’d) Patents and trademarks Patents and trademarks are recognised at cost of acquisition. Patents and trademarks have a finite life and are carried at cost less any accumulated amortisation and, where applicable, any accumulated impairment losses. Patents and trademarks are amortised over their useful life. The current patents and trademarks are amortised over a period of up to 13 years. Other identifiable intangibles Computer software and other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. Computer software and other identifiable intangibles are amortised over a period of 5 to 8 years. Research and development Expenditure during the research phase of a project is recognised as an expense when incurred. Development costs are capitalised only when technical feasibility studies identify that the project will deliver future economic benefits and these benefits can be measured reliably. Development costs have a finite life and are amortised on a systematic basis matched to the future economic benefits over the useful life of the project. (j) Foreign Currency Transactions and Balances Functional and presentation currency The functional currency of each of the Group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency. Transaction and balances Transactions in foreign currencies are translated to the respective functional currencies of Group companies at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate when the fair value was determined. Foreign currency differences are generally recognised in profit or loss. Non-monetary items that are measured based on historical cost in a foreign currency are not translated. However, foreign currency differences arising from the translation of the following items are recognised in OCI: available-for-sale equity investments (except on impairment in which case foreign currency differences that have been recognised in OCI are reclassified to profit or loss); a financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective; and qualifying cash flow hedges to the extent that the hedges are effective. Foreign operations The financial results and position of foreign operations whose functional currency is different from the Group’s presentation currency are translated as follows: assets and liabilities are translated at exchange rates prevailing at that reporting date; income and expenses are translated at average exchange rates for the period; and retained earnings are translated at the exchange rates prevailing at the date of the transaction. Exchange differences arising on translation of foreign operations are transferred directly to the Group’s foreign currency translation reserve in the Statement of Changes in Equity. These differences are recognised in the Statement of Profit or Loss and OCI in the period in which the operation is disposed. Engenco Limited – 2014 Annual Report | Page 38 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (k) Employee Benefits Short-term employee benefits Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid 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. Defined contribution plans Obligations for contributions to defined contribution plans are expensed as the related service is provided. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. 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. Remeasurements are recognised in profit or loss in the period in which they arise. Termination benefits Termination benefits are expensed at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises costs for a restructuring. If benefits are not expected to be settled wholly within 12 months of the end of the reporting period, then they are discounted. (l) Provisions 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. The unwinding of the discount is recognised as finance cost. Warranties A provision for warranties is recognised when the underlying products or services are sold, based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. Restructuring 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 losses are not provided for. Onerous contracts A provision for onerous contracts is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. (m) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts, where the Group does not have the legal right and the intention to settle on a net basis, are shown within short-term borrowings in current liabilities on the Statement of Financial Position. (n) Revenue and Other Income Revenue is measured at fair value of the consideration received or receivable after taking into account any trade discounts and volume rebates allowed. Revenue from the sale of goods is recognised at the point of delivery or as contractually negotiated as this corresponds to the transfer of significant risks and rewards of ownership of the goods and the cessation of all involvement in those goods. Engenco Limited – 2014 Annual Report | Page 39 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (n) Revenue and Other Income (cont’d) Revenue recognition relating to the provision of services is determined with reference to the stage of completion of the transaction at reporting date and where the outcome of the contract can be estimated reliably. Stage of completion is determined with reference to the services performed to date as a percentage of total anticipated services to be performed. Where the outcome cannot be estimated reliably, revenue is recognised only to the extent that related expenditure is recoverable. Rental income from leased plant and equipment is recognised as revenue on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. Revenue relating to construction activities is detailed in Note 1(d). Interest revenue is recognised as it accrues using the effective interest rate method. All revenue is stated net of the amount of goods and services tax (GST). (o) Trade and Other Payables Trade and other payables represent the liability outstanding at the end of the reporting period for goods and services received by the Group during the reporting period which remains unpaid. The balance is recognised as a current liability if expected to be settled within 12 months. (p) Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets that necessarily take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in the Statement of Profit or Loss and OCI in the period in which they are incurred. (q) Goods and Services Tax (GST) Revenues, expenses and non-financial assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the Statement of Financial Position are shown inclusive of GST. Cash flows are presented in the Statement of Cash Flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. (r) Comparative Figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. Refer to Note 1(v). When the Group applies an accounting policy retrospectively, makes a retrospective restatement or reclassifies items in its financial statements, a Statement of Financial Position as at the beginning of the earliest comparative period will be disclosed. (s) Rounding of Amounts The Group has applied the relief available to it under ASIC Class Order 98/100 and accordingly, amounts in the financial statements and Directors’ Report have been rounded off to the nearest thousand dollars (unless otherwise indicated). (t) Critical Accounting Estimates and Judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Engenco Limited – 2014 Annual Report | Page 40 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (t) Critical Accounting Estimates and Judgments (cont’d) Goodwill and intangibles Significant judgments are made with respect to identifying and valuing intangible assets on acquisitions of new businesses. The Group assesses impairment of intangibles at each reporting date by evaluating conditions specific to the Group that may lead to impairment of assets. Where an impairment trigger exists, the recoverable amount of the asset is determined. Recoverable amount is determined based on the higher of value-in-use or fair value less cost of sale. Impairment is recognised when the carrying amount exceeds the recoverable amount. Income tax Balances disclosed in the financial statements and the notes thereto, related to taxation, are based on the best estimates of directors. These estimates take into account both the financial performance and position of the Company as they pertain to current income taxation legislation, and the directors’ understanding thereof. No adjustment has been made for pending or future taxation legislation. The current income tax position represents the directors’ best estimate, pending an assessment by taxable authorities in relevant jurisdictions. Further details can be found in Note 4 – Income Tax Expense and Note 20 – Tax Assets and Liabilities. Impairment The Group assesses impairment at the end of each reporting period by evaluating conditions and events specific to the Group that may be indicative of impairment triggers. Recoverable amounts of relevant assets are reassessed using the higher of value- in-use and fair value less cost to sell calculations. Trade receivables are reviewed and impaired where significant uncertainty is identified as to the recoverability of amounts due, and where the amounts to which the uncertainty relates can be quantified. The recoverable amount of certain locomotives and wagons (part of ‘property, plant and equipment’) is determined using an external valuation report which utilises multiple valuation techniques with a primary focus on depreciated replacement cost approach. Impairment is recognised when the carrying amount exceeds the recoverable amount. Net realisable value – inventory and WIP Inventory and WIP value is determined using the net realisable value, where the cost is in excess of this value. (u) New Accounting Standards and Interpretations New accounting standards adopted The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the “AASB”) that are relevant to its operations and effective for the current reporting period. New and revised Standards and Interpretations effective for the current reporting period that are relevant to the Group include: AASB 10 Consolidated Financial Statements, AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards AASB 11 Joint Arrangements, AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards AASB 12 Disclosures of Interests in Other Entities, AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards AASB 127 Separate Financial Statements (2011), AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards AASB 128 Investments in Associates and Joint Ventures (2011), AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards AASB 13 Fair Value Measurement and related AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 AASB 119 Employee Benefits (2011), AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 (2011) AASB 1053 Application of Tiers of Australian Accounting Standards Engenco Limited – 2014 Annual Report | Page 41 Notes to the Consolidated Financial Statements Engenco Limited and Its Controlled Entities Note 1 – Summary of Significant Accounting Policies (cont’d) (u) New Accounting Standards and Interpretations (cont’d) AASB 2011-4 Amendments to Australian Accounting Standards to remove Key Management Personnel Disclosure Requirements AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle AASB 2012-9 Amendment to AASB 1048 arising from the Withdrawal of Australian Interpretation 1039 AASB 2012-10 Amendments to Australian Accounting Standards – Transition Guidance and Other Amendments. The adoption of these standards resulted in expanded disclosures in the financial statements but did not have material financial impact on the current reporting period or the prior comparative reporting period. New accounting standards not yet adopted A number of new standards, amendments to standards and interpretations were available for early adoption but have not been applied by the Group in these financial statements. The Group does not believe these new accounting standards, amendments and interpretations will have a significant impact on the Group and does not plan to early adopt these standards. (v) Prior Year Reclassifications During the current year, the Group has made reclassifications in the Statement of Profit or Loss and Other Comprehensive Income to more accurately reflect the nature of the expenses for: Rental income from “Rent and outgoings” to “Other income”; and Direct labour cost from “Raw materials and consumables used” and “Other expenses” to “Employee benefits”. Accordingly, the comparatives have been reclassified as follows: Consolidated Statement of Profit or Loss and Other Comprehensive Income Other income Rent and outgoings Employees benefits expense Raw materials and consumables used Other expenses 2013 Annual Report $000 2013 Reclassified $000 1,247 (8,828) (51,263) (89,729) (16,429) 1,936 (9,517) (65,508) (75,806) (16,107) Change $000 689 (689) (14,245) 13,923 322 Engenco Limited – 2014 Annual Report | Page 42 Notes to the Consolidated Financial Statements Note 2 – Revenue and Other Income SALES REVENUE Sales of goods and services Lease rental income TOTAL SALES REVENUE OTHER REVENUE Interest received - external TOTAL OTHER REVENUE TOTAL REVENUE OTHER INCOME Gain on disposal of property, plant and equipment Rental income Other gains TOTAL OTHER INCOME Note 3 – Expenses FINANCE COSTS Interest – external Interest – related parties Other finance costs TOTAL FINANCE COSTS EMPLOYEE BENEFITS EXPENSE Wages and salaries Annual leave expense Long service leave expense Termination costs Defined contribution plan TOTAL EMPLOYEE BENEFITS EXPENSE RENTAL EXPENSE ON OPERATING LEASES Minimum lease payments TOTAL RENTAL EXPENSE ON OPERATING LEASES Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 133,854 6,308 140,162 111 111 166,899 9,086 175,985 103 103 140,273 176,088 70 1,102 2,485 3,657 108 688 1,140 1,936 Consolidated Group 2014 $000 Consolidated Group 2013 $000 171 1,519 481 2,171 48,595 3,296 456 2,666 3,945 58,958 7,292 7,292 1,684 2,099 569 4,352 55,431 3,764 357 1,551 4,405 65,508 7,477 7,477 Engenco Limited – 2014 Annual Report | Page 43 Notes to the Consolidated Financial Statements Note 4 – Income Tax Expense (a) The components of tax expense comprise: Current income tax expense/(benefit) - Current income tax expense/(benefit) - Adjustment for prior years Deferred income tax expense/(benefit) - Derecognition of deferred tax assets - Origination and reversal of temporary differences Income tax expense reported in the Statement of Profit or Loss and OCI (b) A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the Group's applicable income tax rate is as follows: Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 1,032 - - (536) 496 (345) (286) 8,344 (192) 7,521 Accounting profit (loss) before tax At the Company’s statutory domestic income tax rate of 30% (2013: 30%) (11,007) (3,302) (83,994) (25,198) Add / (Less) tax effect of: - Non-deductible depreciation and amortisation - Impairment of goodwill and other intangibles - Foreign tax rate adjustment - Losses for which no deferred tax asset is recognised - Derecognition of deferred tax assets - Adjustment for prior years - Movements in unrecognised temporary differences Income tax expense - - (143) 4,772 - - (831) 496 6,105 12,983 (176) 6,752 8,344 (286) (1,003) 7,521 Engenco Limited – 2014 Annual Report | Page 44 Notes to the Consolidated Financial Statements Note 5 – Parent Entity Disclosures Engenco Limited and Its Controlled Entities As at, and throughout the financial year ended 30 June 2014, the parent entity of the Group was Engenco Limited. The ultimate controlling party of the Company at reporting date was Elph Investments Pty Ltd, incorporated in Australia. (a) Financial Position ASSETS Current assets Non-current assets TOTAL ASSETS LIABILITIES Current liabilities Non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Accumulated losses TOTAL EQUITY (b) Financial Performance COMPREHENSIVE INCOME (Loss) / Profit for the year Other comprehensive income TOTAL COMPREHENSIVE INCOME / (LOSS) (c) Guarantees 2014 $000 521 93,804 94,325 15,303 1,595 16,898 77,427 2013 $000 213 99,483 99,696 8,778 1,889 10,667 89,029 302,260 (224,833) 77,427 302,260 (213,231) 89,029 (11,602) - (11,602) (89,682) - (89,682) The parent entity acts as guarantor for bank debt facilities. Details of these facilities can be found in Note 19(c) – Financial Liabilities. (d) Contingent Liabilities At 30 June 2014, the parent entity has no significant contingent liabilities (2013: Nil). (e) Contractual Commitments At 30 June 2014, the parent entity had not entered into any contractual commitments for the acquisition of property, plant and equipment and other intangible assets (2013: Nil). Engenco Limited – 2014 Annual Report | Page 45 Notes to the Consolidated Financial Statements Note 6 – Auditor’s Remuneration Audit and review services Auditors of the Company - KPMG Australia – audit and review of financial statements - KPMG Overseas – audit and review of financial statements Other auditors - audit and review of financial statements TOTAL AUDIT AND REVIEW SERVICES Other Services Auditors of the Company - KPMG Australia – other assurance services - KPMG Australia – tax services - KPMG Overseas – tax services TOTAL OTHER SERVICES Note 7 – Dividends The directors have decided not to declare a final dividend. Engenco Limited and Its Controlled Entities Consolidated Group 2014 $ Consolidated Group 2013 $ 430,000 66,866 4,551 501,417 - 25,000 10,609 35,609 290,000 77,000 44,000 411,000 75,000 - 20,000 95,000 Consolidated Group 2014 $000 Consolidated Group 2013 $000 (a) DECLARED AND PAID Final fully franked ordinary dividend of nil (2013: nil) cents per share franked at the tax rate of 30% (2013: 30%) - - (b) FRANKING CREDIT BALANCE The amount of franking credits available for subsequent financial years are: Franking account balance as at the end of the financial year at 30% (2013: 30%) 11,253 11,253 Engenco Limited – 2014 Annual Report | Page 46 Notes to the Consolidated Financial Statements Note 8 – Earnings Per Share (a) RECONCILIATION OF EARNINGS TO PROFIT OR LOSS Profit / (Loss) for the period Attributable to non-controlling interest Earnings used to calculate basic EPS Earnings used in the calculation of dilutive EPS (b) RECONCILIATION OF EARNINGS TO PROFIT OR LOSS FROM CONTINUING OPERATIONS Profit / (Loss) from continuing operations Attributable to non-controlling interest in respect of continuing operations Earnings used to calculate basic EPS from continuing operations Earnings used in the calculation of dilutive EPS from continuing operations (c) WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES OUTSTANDING DURING THE YEAR USED IN CALCULATING BASIC EPS Weighted average number of dilutive options outstanding Weighted average number of ordinary shares outstanding during the year used in calculating dilutive EPS Note 9 – Cash and Cash Equivalents CASH AT BANK AND IN HAND Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 (11,503) 246 (11,257) (11,257) (11,503) 246 (11,257) (11,257) (91,515) 3,784 (87,731) (87,731) (91,515) 3,784 (87,731) (87,731) No. ‘000 No. ‘000 310,891 - 310,891 219,019 - 219,019 Consolidated Group 2014 $000 Consolidated Group 2013 $000 4,370 4,370 5,028 5,028 As at the reporting date, where the Group has the legally enforceable right of set-off and the intention to settle on a net basis within the CBA facility, the Group has set-off bank overdrafts of $17,431,378 (2013: $17,469,204) against cash and cash equivalents of $16,089,793 (2013: $19,975,541) resulting in a net overdraft position of $1,341,585 (2013: net cash position of $2,506,337). Engenco Limited – 2014 Annual Report | Page 47 Notes to the Consolidated Financial Statements Note 10 – Trade and Other Receivables CURRENT Trade receivables Provision for impairment of receivables Total trade receivables Accrued income Sundry receivables Total other receivables Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 27,902 (279) 27,623 1,478 846 2,324 30,446 (1,143) 29,303 701 170 871 TOTAL CURRENT TRADE AND OTHER RECEIVABLES 29,947 30,174 NON-CURRENT Amounts receivable from: - Key management personnel and employees TOTAL NON-CURRENT TRADE AND OTHER RECEIVABLES (a) Provision for impairment of receivables - - 2 2 Current trade and other receivables are non-interest bearing and generally on 30 to 60 day terms. Trade and other receivables are assessed for recoverability based on the underlying terms of the contract. A provision for impairment is recognised when there is objective evidence that an individual trade or term receivable is impaired. These amounts have been included in impairment of accounts receivable and other expenses in the Statement of Profit or Loss and OCI. Movement in the provision for impairment of receivables is as follows: 2014 Current trade receivables 2013 Current trade receivables Opening Balance 1 Jul 2013 $000 (1,143) (1,143) Opening Balance 1 Jul 2012 $000 (4,587) (4,587) Consolidated Group Charge for the Year $000 (715) (715) Charge for the Year $000 (1,627) (1,627) Amounts Written Off $000 1,579 1,579 Amounts Written Off $000 5,071 5,071 Closing Balance 30 Jun 2014 $000 (279) (279) Closing Balance 30 Jun 2013 $000 (1,143) (1,143) The following table details the Group's trade and other receivables exposed to credit risk with ageing analysis and impairment provided thereon. Amounts are considered as 'past due' when the debt has not been settled, within the terms and conditions agreed between the Group and the customer or counter party to the transaction. Receivables that are past due are assessed for impairment by ascertaining solvency of the debtors and are provided for where there are specific circumstances indicating that the debt may not be fully repaid to the Group. Engenco Limited – 2014 Annual Report | Page 48 Notes to the Consolidated Financial Statements Note 10 – Trade and Other Receivables (cont’d) Engenco Limited and Its Controlled Entities The balances of receivables that remain within initial trade terms (as detailed in the table) are considered to be of high credit quality. Consolidated Group Gross Amount Past Due and Impaired $000 $000 < 30 days $000 Past due but not impaired 31 – 60 days $000 61 – 90 days $000 > 90 days $000 Within initial trade terms $000 27,902 2,324 30,226 30,446 871 31,317 279 - 279 1,143 - 1,143 7,047 - 7,047 6,357 - 6,357 2,199 - 2,199 2,397 - 2,397 2,031 - 2,031 2,136 - 2,136 3,578 - 3,578 1,849 - 1,849 12,768 2,324 15,092 16,564 871 17,435 2014 Trade receivables Other receivables Total 2013 Trade receivables Other receivables Total In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reportable date. The concentration of credit risk is limited to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. Note 11 – Inventories CURRENT At cost: - Work in progress - Finished goods At net realisable value: - Work in progress - Finished goods TOTAL INVENTORY Consolidated Group 2014 $000 Consolidated Group 2013 $000 4,024 22,786 26,810 - 7,558 7,558 34,368 5,136 29,057 34,193 - 4,986 4,986 39,179 The Group has completed a comprehensive review of the carrying value of inventory. As a result of the review, inventory has been impaired by $1,792,000 (2013: $1,529,000). Engenco Limited – 2014 Annual Report | Page 49 Notes to the Consolidated Financial Statements Note 12 – Financial Assets NON CURRENT Shares in listed companies Loans receivable - other TOTAL FINANCIAL ASSETS Note 13 – Equity-Accounted Investee NON CURRENT Interest in joint venture TOTAL EQUITY-ACCOUNTED INVESTEE Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 27 7 34 13 7 20 Consolidated Group 2014 $000 Consolidated Group 2013 $000 359 359 - - On 31 October 2013 Engenco Investments Pty Ltd (a subsidiary of Engenco Limited) entered into a joint venture arrangement and invested in a newly incorporated entity, DataHawk Pty Ltd. The Group’s investment was $100, 50% of the equity. A further $542,075 was provided during the period as a long-term loan, fully repayable no later than 30 June 2017. The Group’s share of profit / (loss) in its equity-accounted investment for the period was ($222,500). During the year ended 30 June 2014 no dividends were received from the investment in DataHawk Pty Ltd. DataHawk Pty Ltd is not a publicly-listed entity and does not have a published price quotation. Engenco Limited – 2014 Annual Report | Page 50 Notes to the Consolidated Financial Statements Note 14 – Controlled Entities Note: Subsidiaries are indented beneath their parent entity Engenco Limited Convair Engineering Pty Ltd Engenco Logistics Pty Ltd Asset Kinetics Pty Ltd Engenco Investments Pty Ltd Australian Rail Mining Services Pty Ltd Centre for Excellence in Rail Training Pty Ltd EGN Rail Pty Ltd EGN Rail (NSW) Pty Ltd Midland Railway Company Pty Ltd Momentum Rail (Vic) Pty Ltd Momentum Rail (WA) Pty Ltd Sydney Railway Company Pty Ltd Greentrains Limited 1 Greentrains Leasing Pty Ltd Drivetrain Power and Propulsion Pty Ltd Drivetrain Australia Pty Ltd DTPP Energy Pty Ltd Drivetrain Philippines Inc Drivetrain Singapore Pte Ltd Drivetrain Limited Drivetrain USA Inc o Hyradix Inc Hedemora Investments AB o Drivetrain Sweden AB Gemco Rail Pty Ltd Railway Bearings Refurbishment Services Pty Ltd New RTS Pty Ltd Hedemora Pty Ltd Industrial Powertrain Pty Ltd PC Diesel Pty Ltd Total Momentum Pty Ltd Engenco Limited and Its Controlled Entities Country of Incorporation Date of Control Percentage Owned 2014 Percentage Owned 2013 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Philippines Singapore New Zealand USA USA Sweden Sweden Australia Australia Australia Australia Australia Australia Australia 1 Jul 06 1 Jul 06 1 Jul 06 18 Apr 07 30 Apr 07 30 Apr 07 30 Apr 07 30 Apr 07 30 Apr 07 30 Apr 07 30 Apr 07 30 Apr 07 17 Jul 09 18 Jun 08 1 Jul 06 1 Jul 06 25 May 10 1 Jul 07 1 Jul 07 1 Jul 07 31 Dec 08 31 Dec 08 1 Jul 06 1 Jul 06 1 Jul 07 1 Jul 07 3 Dec 08 1 Jul 06 1 Jul 07 1 Jul 06 30 Apr 07 100 100 100 100 100 100 100 100 100 100 100 100 81 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 81 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1 Total Engenco Group ownership of Greentrains Ltd is 81% (split between Engenco Investments Pty Ltd, 61%, and Engenco Ltd, 20%). Engenco Limited – 2014 Annual Report | Page 51 Notes to the Consolidated Financial Statements Note 15 – Property, Plant and Equipment LAND AND BUILDINGS Freehold land: - At cost Total Land Buildings: - At cost - Less accumulated depreciation Total Buildings TOTAL LAND AND BUILDINGS PLANT AND EQUIPMENT Plant and equipment: - At cost - Accumulated depreciation Total Plant and Equipment Leasehold improvements: - At cost - Accumulated depreciation Total Leasehold Improvements Leased plant and equipment: - Capitalised leased assets - Accumulated depreciation Total Leased Plant and Equipment TOTAL PLANT AND EQUIPMENT TOTAL PROPERTY, PLANT AND EQUIPMENT Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 53 53 812 (520) 292 345 101,274 (46,738) 54,536 3,385 (1,414) 1,971 1,269 (714) 555 57,062 57,407 53 53 768 (498) 270 323 96,330 (38,601) 57,729 3,377 (1,071) 2,306 1,334 (288) 1,046 61,081 61,404 Property, Plant and Equipment of $42,514,000 (2013: $43,129,000) was pledged as security as part of the Group’s total financing arrangements as at the reporting date. Additional Property, Plant and Equipment of $11,791,000 was pledged as security as part of the Group’s total financing arrangements as at the date of signing of this report. Engenco Limited – 2014 Annual Report | Page 52 Notes to the Consolidated Financial Statements Note 15 – Property, Plant and Equipment (cont’d) (a) Movements in Carrying Amounts Engenco Limited and Its Controlled Entities Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year. Consolidated Group Freehold Land $000 Buildings $000 Leasehold Improvements $000 Plant and Equipment $000 Leased Plant and Equipment $000 BALANCE AT 1 JULY 2012 Additions Disposals (Impairment) / reversal of impairment Depreciation expense Disposals of assets on sale of subsidiary BALANCE AT 30 JUNE 2013 Additions Disposals (Impairment) / reversal of impairment Depreciation expense Disposals of assets on sale of subsidiary BALANCE AT 30 JUNE 2014 53 - - - - - 53 - - - - - 53 284 6 - - (20) - 270 44 - - (22) - 292 1,378 1,291 (55) - (308) - 2,306 30 (22) - (343) - 1,971 83,889 3,625 (259) (20,350) (9,176) - 57,729 5,897 (954) - (8,136) - 54,536 Total $000 86,856 5,291 (582) (20,350) (9,811) - 61,404 5,987 (1,057) - (8,927) - 1,252 369 (268) - (307) - 1,046 16 (81) - (426) - 555 57,407 In the previous financial period, the Group completed a comprehensive review of the carrying value of property, plant and equipment. As a result of the review property, plant and equipment was impaired by $20,350,000. No impairments were made at 30 June 2014. Engenco Limited – 2014 Annual Report | Page 53 Notes to the Consolidated Financial Statements Note 16 – Intangible Assets GOODWILL Cost: Opening balance Impairment for the year Closing balance CUSTOMER RELATED INTANGIBLES Cost: Opening balance Additions Closing balance Accumulated amortisation: Opening balance Amortisation for the year Impairment for the year Closing balance Net book value PATENTS AND TRADEMARKS Cost: Opening balance Additions Closing balance Accumulated amortisation: Opening balance Amortisation for the year Impairment for the year Closing balance Net book value Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 - - - 32,459 (32,459) - 14,494 - 14,494 (14,494) - - (14,494) - 1,227 - 1,227 (1,227) - - (1,227) - 14,494 - 14,494 (7,477) (666) (6,351) (14,494) - 1,227 - 1,227 (553) (47) (627) (1,227) - Engenco Limited – 2014 Annual Report | Page 54 Notes to the Consolidated Financial Statements Note 16 – Intangible Assets (cont’d) OTHER IDENTIFIABLE INTANGIBLES Cost: Opening balance Additions Closing balance Accumulated amortisation: Opening balance Amortisation for the year Impairment for the year Closing balance Net book value TOTAL INTANGIBLE ASSETS At cost Accumulated amortisation and impairment Net book value Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 12,915 44 12,959 (9,379) (1,601) - (10,980) 1,979 28,680 (26,701) 1,979 12,372 543 12,915 (3,431) (2,110) (3,838) (9,379) 3,536 61,095 (57,559) 3,536 Intangible assets, other than goodwill, have finite useful lives. The current amortisation charges for intangible assets are included under depreciation and amortisation expense in the Statement of Profit or Loss and OCI. Goodwill has an indefinite useful life. In the previous financial period, there existed key impairment indicators. These included the Group valuation reported in an Independent Expert’s Report dated 16 January 2013, the business performance of the Group and the ASX market capitalisation. Based on these factors the total intangible value (excluding software) of $43,275,000 on the Consolidated Statement of Financial Position was impaired. Note 17 – Other Assets CURRENT Other current assets Prepayments TOTAL CURRENT OTHER ASSETS Consolidated Group 2014 $000 Consolidated Group 2013 $000 20 1,211 1,231 268 1,090 1,358 Engenco Limited – 2014 Annual Report | Page 55 Notes to the Consolidated Financial Statements Note 18 – Trade and Other Payables CURRENT Unsecured liabilities: Trade payables Sundry payables and accrued expenses Deferred income TOTAL TRADE AND OTHER PAYABLES Note 19 – Financial Liabilities CURRENT Secured liabilities: Bank overdrafts Lease liability Other loans Loans from related parties Bank loans TOTAL CURRENT FINANCIAL LIABILITIES NON-CURRENT Secured liabilities: Lease liability TOTAL NON-CURRENT FINANCIAL LIABILITIES (a) Total current and non-current secured liabilities: Bank overdraft Bank loans Other loans Loans from related parties Lease liability Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 12,848 1,780 1,990 16,618 12,679 3,185 - 15,864 Consolidated Group 2014 $000 Consolidated Group 2013 $000 1,603 216 - 21,000 - 22,819 202 202 837 239 177 22,000 215 23,468 427 427 Consolidated Group 2014 $000 1,603 - - 21,000 418 Consolidated Group 2013 $000 837 215 177 22,000 666 23,021 23,895 Note 25(a) 29(b) Note 23(a) Engenco Limited – 2014 Annual Report | Page 56 Notes to the Consolidated Financial Statements Note 19 – Financial Liabilities (cont’d) (b) Collateral provided Bank Debt Engenco Limited and Its Controlled Entities The bank debt is secured by first registered fixed and floating charges over assets owned by Engenco Limited and other Australian Group members excluding Greentrains Limited and its subsidiary. Key financial covenants agreed between Engenco Limited and its primary lender (CBA) are: i. Asset Cover Ratio, (the ratio of tangible assets less employee liabilities to the accommodation limit) of at least 4.0 times at 31 March 2014 and 30 June 2014; ii. Debt Service Cover Ratio, (the ratio of EBITDA adjusted for working capital movement in the period, less capital expenditure financed from operational cash-flow to interest expense) to be at least 2.00 for the 3 months to March 2014 and at least 2.00 for the 6 months to June 2014). Related Party Debt * The debt with Elph Pty Ltd is secured by first registered fixed and floating charges over assets owned by Greentrains Limited. Key financial covenants agreed between Greentrains Limited and its related party (Elph Pty Ltd) are: i. ii. Interest Coverage Ratio, (the ratio of EBITDA to gross interest expense) to be greater than 2.0 times; Loan to Valuation Ratio, (the ratio of the total outstanding loan to the total of the locomotive asset value) to be less than 0.5 times; and iii. Gearing Ratio, (the ratio of Total Debt to EBITDA) to be no more than 5.0 times. * On 25 August 2014 the debt facility with Elph Pty Ltd was extended and the Gearing Ratio covenant was removed from the facility agreement. The security was also extended to include a fixed charge over certain assets of Gemco Rail Pty Ltd. Defaults and Breaches As at 30 June 2014, Greentrains Limited was in breach of the debt to EBITDA ratio and the loan to valuation ratio covenants relating to the debt facility with Elph Pty Ltd. A waiver was obtained from Elph Pty Ltd on 20 August 2014. Lease Liabilities Lease liabilities are secured by underlying leased assets. (c) Debt facilities and credit standby arrangements A summary of the Group’s loan facilities are provided in the table below: Facility Available 2014 $000 Facility Used 2014 $000 Maturity Dates 2014 Facility Available 2013 $000 - Working Capital Multi Option Facility * 13,000 5,465 Oct-14 12,500 - Swedish Loan Facility (EUR and SEK) - Swedish Overdraft Facility (SEK) - 1,960 - 182 - Greentrains Loan Facility 30,000 21,000 - Other Loans - Leases - 418 - 418 Various 215 1,960 - Dec-14 Sep-14 - Facility Used 2013 $000 3,000 215 737 Maturity Dates 2013 Interest Basis Jul-13 Floating Mar-14 Floating n/a Floating 30,000 22,000 Jul-13 Floating 177 666 177 666 Jun-13 Various n/a Fixed Comprises net bank overdrafts, off balance sheet bank guarantees of $4,000,000, business cards and other trade products. 45,378 27,065 45,518 26,795 Engenco Limited – 2014 Annual Report | Page 57 Notes to the Consolidated Financial Statements Note 20 – Tax Assets and Liabilities CURRENT Income tax receivable Income tax payable TOTAL Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 14 (409) (395) 336 - 336 The tax receivable and payable relate to the Group companies outside the Australian Tax Consolidated Group. Consolidated Group Opening Balance $000 Balance Acquired $000 Charged to Income $000 Charged directly to Equity $000 Changes in Tax rate $000 Exchange Differences $000 Closing Balance $000 NON-CURRENT Deferred tax liability: Other Balance at 30 June 2013 Other Balance at 30 June 2014 Deferred tax assets: Provisions Transaction costs on equity issue Losses Other Balance at 30 June 2013 Provisions Transaction costs on equity issue Losses Other Balance at 30 June 2014 1,744 1,744 1,744 1,744 3,634 1,492 9,043 (5,825) 8,344 34 - 89 69 192 - - - - - - - - - - - - - - - - (543) (543) (3,600) (1,492) (8,954) 5,894 (8,152) 155 - (89) (73) (7) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,744 1,744 1,201 1,201 34 - 89 69 192 189 - - (4) 185 The Company has estimated carry forward operating tax losses of $79,498,980 at June 2014 (2013: $63,593,728) which are not recognised. The ability to utilise the operating tax losses will be subject to satisfying relevant eligibility criteria for the recoupment of carry forward tax losses. Engenco Limited – 2014 Annual Report | Page 58 Notes to the Consolidated Financial Statements Note 21 – Provisions Engenco Limited and Its Controlled Entities Long Service Leave Employee Benefits $000 Annual Leave Employee Benefits $000 1,870 456 (316) 2,010 1,337 673 2,010 2,943 3,296 (3,483) 2,756 2,756 - 2,756 Consolidated Group Legal $000 2,047 - (1,547) 500 500 - 500 Onerous Contract $000 Restruc- turing $000 1,705 280 (438) 1,547 702 845 1,547 200 2,666 (1,458) 1,408 1,408 - 1,408 Other $000 1,932 2,022 (957) 2,997 2,997 - 2,997 Total $000 10,697 8,720 (8,199) 11,218 9,700 1,518 11,218 OPENING BALANCE AT 1 JULY 2013 Additional provisions Amounts used BALANCE AT 30 JUNE 2014 Current Non-current (a) Significant provisions Provision for long-term employee benefits A provision has been recognised for employee entitlements relating to long service leave. In calculating the present value of future cash flows in respect of long service leave, the probability of long service leave being taken is based on historical data. Legal There are a number of ongoing legal proceedings involving the Group at the reporting date. Provisions have been taken up for some of these exposures based on the Board’s determination. Onerous contracts The Group has identified loss making contracts which are non-cancellable. The obligation for expected future losses has been provided for as at the reporting date. Restructuring The Group announced streamlining of the operational structure on 30 June 2014, which resulted in a number of redundancies across the Group. The associated costs of these redundancies has been provided for as at the reporting date. Other Provisions Other provisions relate to various categories including provisions for make-good costs and warranty costs. Engenco Limited – 2014 Annual Report | Page 59 Notes to the Consolidated Financial Statements Note 22 – Issued Capital 310,891,432 (2013: 310,891,432) fully paid ordinary shares with no par value (a) Ordinary shares At beginning of reporting period Shares issued during the year 29 January 2013 At reporting date Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 302,260 302,260 Consolidated Group 2013 $000 302,260 302,260 2014 No. 2013 No. 310,891,432 124,224,766 186,666,666 310,891,432 310,891,432 On 12 December 2012 a renounceable 3 for 2 entitlement offer at 15c per share was announced. On 29 January 2013, 186,666,666 fully paid ordinary shares were issued pursuant to the pro-rata entitlement offer. Ordinary shares are eligible to participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares on issue. At shareholders’ meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. Engenco Limited – 2014 Annual Report | Page 60 Notes to the Consolidated Financial Statements Note 23 – Capital and Leasing Commitments LEASES AS LESSEE (a) Finance Lease Commitments not later than 12 months between 12 months and 5 years Payable - minimum lease payments: - - Minimum lease payments Future finance charges Present value of minimum lease payments 19 (b) Operating Lease Commitments Non-cancellable operating leases contracted for but not capitalised in the financial statements Payable - minimum lease payments - - - not later than 12 months between 12 months and 5 years greater than 5 years Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013* $000 Note 228 212 440 (22) 418 6,438 11,176 2,631 20,245 254 446 700 (34) 666 6,313 13,642 3,268 23,223 * The 2013 comparatives operating lease commitments have been restated to include property leases excluded from the prior year’s financial report. The Group’s finance lease commitments relate primarily to capitalised software licence fees. The leases typically run for a period of 3 years. The Group also leases a number of sites under operating leases which include land and buildings for the purpose of operating its business. The leases typically run for a period of between 3 and 10 years, sometimes with an option to renew the leases after that date. None of the leases include contingent rentals. During the year-ended 30 June 2014, $7,292,000 was recognised as an expense in the Statement of Profit or Loss and OCI in respect of operating leases (2013: $7,477,000). (c) Contractual Commitments At 30 June 2014, the Group had not entered into any contractual commitments for the acquisition of property, plant and equipment and other intangible assets (2013: Nil). LEASES AS LESSOR (d) Operating Lease Receivables Receivable - minimum lease payments - not later than 12 months - between 12 months and 5 years Consolidated Group 2014 $000 Consolidated Group 2013 $000 8,269 2,419 10,688 12,838 13,719 26,557 The Group leases out its fleet of rolling stock to customers. At the end of the reporting period, the future minimum lease payments under non-cancellable leases are receivable as shown above. Engenco Limited – 2014 Annual Report | Page 61 Notes to the Consolidated Financial Statements Note 24 – Operating Segments Segment Information Identification of Reportable Segments Engenco Limited and Its Controlled Entities The Group has identified its operating segments based on the internal reports that are reviewed and used by the CEO/Managing Director (chief operating decision maker) in assessing performance and determining the allocation of resources. The Group is managed primarily on the basis of service offerings since the diversification of the Group’s operations inherently have notably different risk profiles and performance assessment criteria. Operating segments are therefore determined on the same basis. Types of Products and Services by Segment The chief operating decision maker considers the business from a Business Line perspective and have identified six (6) reportable segments as follows: (a) Drivetrain Power and Propulsion Drivetrain Power and Propulsion is a provider of technical sales and services to the mining, oil & gas, rail, transport, defence, marine, construction, materials handling, automotive, agriculture, and power generation industries. A broad product and service offering includes engine and powertrain maintenance, repair and overhaul, new components and parts, fluid connector products, power generation design and construction, technical support, professional engineering and training services. (b) Centre for Excellence in Rail Training (CERT) CERT provides specialist rail training including the provision of competency based training; issuing of certificates of competency; rail incident investigation training; security (transit guard) training; first aid training; company inductions and course design and management of apprenticeship and trainee schemes to major infrastructure and rail clients throughout Australia. (c) Convair Engineering (Convair) Convair is a manufacturer of bulk pneumatic road tankers and mobile silos for the carriage and storage of construction materials, grains, and other dry bulk materials. Additional services include maintenance, repair and overhaul and provisioning of ancillary equipment and spare parts sales. (d) Total Momentum Total Momentum is a provider of personnel and project management services to freight rail and mining rail infrastructure managers. Services include professional recruitment, training and workforce solutions, including managing and provisioning track construction and maintenance projects. (e) Gemco Rail Gemco Rail specialises in the remanufacture and repair of locomotives, wagons, bearings and other rail products for rail operators and maintainers. Gemco provides wheel-set, bogie and in-field wagon maintenance and manufactures new and refurbished wagons, bogie component parts, customised remote controlled ballast car discharge gates, and a range of rail maintenance equipment and spares. (f) Greentrains Greentrains leases rolling stock to freight rail operators throughout Australia. (g) All Other This includes the parent entity and consolidation / elimination adjustments. Engenco Limited – 2014 Annual Report | Page 62 Notes to the Consolidated Financial Statements Note 24 - Operating Segments (cont’d) Basis of Reporting by Operating Segments (a) Basis of reporting Engenco Limited and Its Controlled Entities Unless stated otherwise, all amounts reported to the CEO/Managing Director as the chief operating decision maker with respect to operating segments are determined in accordance with accounting policies that are consistent to those adopted in the annual financial statements of the Group. (b) Inter-segment transactions An internal transfer price is set for all inter-segment sales. This price is set based on what would be realised in the event the sale was made to an external party at arm’s length. All such transactions are eliminated on consolidation of the Group’s financial statements. (c) Segment assets Unless indicated otherwise in the segment assets note, deferred tax assets have not been allocated to operating segments. (d) Segment liabilities Liabilities are allocated to segments where there is nexus between the incurrence of the liability and the operations of the segment. Unless indicated otherwise in the segment liabilities note, deferred tax liabilities have not been allocated to operating segments. (e) Unallocated items The following items of expenses, assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment: Deferred tax assets and liabilities. The presentation of the operating segments for the current and prior periods has been modified to be consistent with internal management reporting changes (significant items disclosed at segment level). This disclosure of significant items to chief operating decision makers is performed to understand the underlying trading performance. Engenco Limited – 2014 Annual Report | Page 63 Notes to the Consolidated Financial Statements Note 24 - Operating Segments (cont’d) (i) Segment Performance Year ended 30 June 2014 Engenco Limited and Its Controlled Entities Primary Reporting Business Segments REVENUE External sales Inter-segment sales Interest revenue TOTAL SEGMENT REVENUE Reconciliation of segment revenue to Group revenue Inter-segment elimination TOTAL GROUP REVENUE SEGMENT EBITDA excluding significant items Reconciliation of segment EBITDA excluding significant items to Group net profit / (loss) before tax: Depreciation and amortisation Financial Costs Significant Items: Staff termination costs Impairment of inventory Onerous contract provisions Impairment of accounts receivable Make-good provision NET PROFIT BEFORE TAX FROM CONTINUING OPERATIONS Drivetrain Power & Propulsion CERT Convair Momentum Gemco Rail Greentrains All Other Total Consol. Group $000 $000 $000 $000 $000 $000 $000 $000 52,090 6,345 13,592 19,625 42,141 6,308 288 10 91 - - 33 1,086 3,311 - - - 4 61 1 64 140,162 4,777 111 52,388 6,436 13,625 20,711 45,452 6,312 126 145,050 (4,777) (4,777) 140,273 3,981 1,104 1,775 1,241 3,252 3,686 (7,705) 7,334 (1,008) (88) (80) (17) (157) (16) (357) (3,285) (3,460) (2,181) (10,528) (1) (10) (1,519) (520) (2,171) (1,155) (1,792) (276) (465) - (5) (44) (248) (1,059) - - - - - - - - - - - - - - - (443) - - - - - (155) (2,666) - - - - (1,792) (276) (465) (443) (803) 1,002 1,558 635 (1,545) (1,293) (10,561) (11,007) Engenco Limited – 2014 Annual Report | Page 64 Notes to the Consolidated Financial Statements Note 24 – Operating Segments (cont’d) Year ended 30 June 2013 Engenco Limited and Its Controlled Entities Primary Reporting Business Segments REVENUE External sales Inter-segment sales Interest revenue TOTAL SEGMENT REVENUE Reconciliation of segment revenue to Group revenue Inter-segment elimination TOTAL GROUP REVENUE SEGMENT EBITDA excluding significant items Reconciliation of segment EBITDA excluding significant items to Group net profit / (loss) before tax: Depreciation and amortisation Finance Costs Significant Items: Impairment of property, plant and equipment Impairment of intangibles Impairment of inventory Impairment of accounts receivable Staff termination costs Onerous contract provisions NET PROFIT BEFORE TAX FROM CONTINUING OPERATIONS Drivetrain Power & Propulsion CERT Convair Momentum Gemco Rail Total Green- trains All Other Consol. Group $000 $000 $000 $000 $000 $000 $000 $000 71,564 5,886 16,722 22,864 49,748 9,086 115 175,985 391 8 79 - - 21 2,060 4,316 - - - 17 - 57 6,846 103 71,963 5,965 16,743 24,924 54,064 9,103 172 182,934 (6,846) (6,846) 176,088 6,179 771 2,238 1,854 (5,373) 5,814 (9,220) 2,263 (1,671) (556) (66) (13) (135) (19) (455) (3,669) (3,623) (3,015) (12,634) (25) (290) (1,819) (1,630) (4,352) (361) (21,039) (824) - (941) - - - - - (7) - - - - (2,779) (17,210) - (20,350) (3,181) - - (19,055) (43,275) (140) (18) (297) - - - - - (28) (477) - (1,705) (250) (352) - - - (1,529) (509) (861) (98) (1,551) - (1,705) (19,213) 685 1,944 (1,853) (14,590) (17,440) (33,527) (83,994) Engenco Limited – 2014 Annual Report | Page 65 Notes to the Consolidated Financial Statements Note 24 - Operating Segments (cont’d) Engenco Limited and Its Controlled Entities (ii) Segment Assets As at 30 June 2014 Primary Reporting Business Segments ASSETS Segment assets (excl. capital expenditure, investments and intangibles) Capital expenditure Investments Intangibles Reconciliation of segment assets to Group assets Segment eliminations Cash reclassification to liabilities Unallocated Items: Deferred tax assets TOTAL ASSETS As at 30 June 2013 Primary Reporting Business Segments ASSETS Segment assets (excl. capital expenditure, investments and intangibles) Capital expenditure Investments Intangibles Reconciliation of segment assets to Group assets Segment eliminations Unallocated Items: Deferred tax assets TOTAL ASSETS Drivetrain Power & Propulsion CERT Convair Momentum Gemco Rail Total Green- trains All Other Consol. Group $000 $000 $000 $000 $000 $000 $000 $000 54,397 4,840 12,356 8,543 29,100 30,887 (11,256) 128,867 220 7 - 97 - - 349 - - 19 - - 1,514 3,714 - - - - 74 386 1,979 5,987 393 1,979 (8,859) 1,342 185 54,624 4,937 12,705 8,562 30,614 34,601 (8,817) 129,894 Drivetrain Power & Propulsion CERT Convair Momentum Gemco Rail Total Green- trains All Other Consol. Group $000 $000 $000 $000 $000 $000 $000 $000 54,708 3,930 10,771 7,329 30,875 33,822 (4,983) 136,452 1,002 7 - 83 - - 418 615 2,426 - - - - - - - - 747 13 5,291 20 3,536 3,536 55,717 4,013 11,189 7,944 33,301 33,822 (687) 141,229 (4,262) 192 Engenco Limited – 2014 Annual Report | Page 66 Notes to the Consolidated Financial Statements Note 24 - Operating Segments (cont’d) (iii) Segment Liabilities Engenco Limited and Its Controlled Entities As at 30 June 2014 Primary Reporting Business Segments LIABILITIES Segment liabilities Reconciliation of segment liabilities to Group liabilities Segment eliminations Cash reclassification to liabilities Unallocated Items: Deferred tax liabilities TOTAL LIABILITIES As at 30 June 2013 Primary Reporting Business Segments LIABILITIES Segment liabilities Reconciliation of segment liabilities to Group liabilities Segment eliminations Unallocated Items: Deferred tax liabilities TOTAL LIABILITIES Drivetrain Power & Propulsion CERT Convair Momentum Gemco Rail Total Green- trains All Other Consol. Group $000 $000 $000 $000 $000 $000 $000 $000 76,280 1,188 3,096 6,570 90,644 29,793 (148,788) 58,783 (8,859) 1,342 1,201 76,280 1,188 3,096 6,570 90,644 29,793 (148,788) 52,467 Drivetrain Power & Propulsion CERT Convair Momentum Gemco Rail Total Green- trains All Other Consol. Group $000 $000 $000 $000 $000 $000 $000 $000 75,439 1,266 3,138 6,588 91,785 27,719 (151,217) 54,718 75,439 1,266 3,138 6,588 91,785 27,719 (151,217) 52,200 (4,262) 1,744 Engenco Limited – 2014 Annual Report | Page 67 Notes to the Consolidated Financial Statements Note 24 - Operating Segments (cont’d) (iv) Revenue by geographical region Revenue attributable to external customers is disclosed below, based on the location of the external customer: Australasia United States of America Europe TOTAL REVENUE (v) Assets by geographical region The location of segment assets is disclosed below by geographical location of the assets: Australasia United States of America Europe TOTAL ASSETS (vi) Major customers Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $’000 125,893 950 13,430 140,273 160,813 666 14,609 176,088 Consolidated Group 2014 $000 Consolidated Group 2013 $000 97,017 2,108 30,769 129,894 119,954 1,909 19,366 141,229 The Group has a large and diverse customer base. No individual customer has contributed in excess of 10% to overall Group revenue. Engenco Limited – 2014 Annual Report | Page 68 Notes to the Consolidated Financial Statements Note 25 – Cash Flow Information (a) Reconciliation of cash at end of financial year Cash and cash equivalents Bank overdrafts CASH (NET OF BANK OVERDRAFTS) AT END OF FINANCIAL YEAR Engenco Limited and Its Controlled Entities Consolidated Group 2014 $000 Consolidated Group 2013 $000 4,370 (1,603) 2,767 5,028 (837) 4,191 Note 9 19 (b) Reconciliation of cash flow from operating activities with profit / loss after income tax PROFIT (LOSS) AFTER INCOME TAX Adjustments for non-cash items: - Depreciation - Other Intangibles amortisation - Impairment of goodwill and other intangibles - Impairment of property, plant and equipment - Impairment of inventory - Impairment of accounts receivable - Net finance costs - Income tax expense / (benefit) - Gain on sale of property, plant and equipment Changes in: - (Increase)/decrease in trade and other receivables - (Increase)/decrease in prepayments - (Increase)/decrease in inventories - Increase/(decrease) in trade payables and accruals - Increase/(decrease) in provisions Cash provided by / (used in) operating activities - Net interest paid - Income taxes paid CASH FLOW PROVIDED BY / (USED IN) OPERATIONS Consolidated Group 2014 $000 Consolidated Group 2013 $000 (11,503) (91,515) 8,927 1,601 - - 1,792 465 2,060 496 (70) 3,768 347 (297) 2,661 1,536 79 8,094 (2,060) (301) 5,733 9,811 2,823 43,275 20,350 1,529 861 4,249 7,521 (108) (1,204) 16,726 510 4,002 (12,223) 4,349 12,160 (4,249) (1,676) 6,235 Note 26 – Share Based Payments All share options had expired at 30 June 2013 and no share options were granted during the year ended 30 June 2014. Outstanding at the beginning of the year Expired during the year Outstanding at year-end Exercisable at year-end 2014 Number of Options Weighted Average Exercise Price $ - - - - - - - - 2013 Number of Options 100,000 (100,000) - - Weighted Average Exercise Price $ 40.00 40.00 - - Engenco Limited – 2014 Annual Report | Page 69 Notes to the Consolidated Financial Statements Note 27 – Net Tangible Assets Net tangible assets per ordinary share: (2014: 310,891,432 shares, 2013: 310,891,432 shares ) Engenco Limited and Its Controlled Entities 2014 Cents 24.9 2013 Cents 28.2 Note 28 – Events Subsequent to Reporting Date The Group has agreed an extension of the CBA debt facilities for a further 12 months to 31 October 2015, subject to certain conditions and the execution of the revised facility documentation. Waivers for breaches of the debt to EBITDA ratio and the loan to valuation ratio covenants relating to the debt facility with Elph Pty Ltd were obtained on 20 August 2014. On 25 August 2014 the debt facility with Elph Pty Ltd was extended and the Gearing Ratio covenant was removed from the facility agreement. The security was also extended to include a fixed charge over certain assets of Gemco Rail Pty Ltd. Other than the above, there has not arisen, in the interval between the end of the financial year and the date of this report, any item, transaction or event which would have a material effect on the financial statements of the Group at 30 June 2014. Note 29 – Related Party Transactions (a) Transactions with key management personnel (i) Loans to key management personnel Balance at Beginning of Year $ 2,100 512,500 Interest Charged $ Interest Not Charged $ Provision for Impairment $ Loan Repayment $ Balance at End of Year $ Number of Individuals - - 59 (1,400) 30,750 (508,686) (700) (1,714) - 2,100 - 2 2014 2013 The amounts shown for interest not charged in the table above represents the difference between the amount paid and payable for the year and the amount of interest that would have been charged on an arm’s length basis. The balance outstanding as at 30 June 2014 of $NIL (2013: $2,100) is included in ‘Trade and other receivables’ (see Note 10). (ii) Key management personnel compensation The totals of remuneration paid to key management personnel during the year (including termination benefits) are as follows: Short-term employee benefits Post-employment benefits Termination benefits Other long-term benefits TOTAL 2014 $ 3,441,847 320,628 677,377 57,430 4,497,282 2013 $ 3,770,903 301,633 80,000 42,301 4,194,837 Compensation of the Group’s key management personnel includes salaries, superannuation and post-employment benefits. (iii) Key management personnel transactions A number of key management personnel, or their related parties, hold positions in other companies that result in them having control or significant influence over these companies. A number of these companies transacted with the Group during the year. The terms and conditions of these transactions were no more favourable than those available, or which might reasonably be expected to be available, in similar transactions with non-key management personnel related companies on an arm’s length basis. Engenco Limited – 2014 Annual Report | Page 70 Notes to the Consolidated Financial Statements Note 29 – Related Party Transactions (cont’d) Engenco Limited and Its Controlled Entities The aggregate value of transactions and outstanding balances related to key management personnel and entities over which they have control or significant influence were as follows: Related Party Elph Pty Ltd1 Elphinstone Pty Ltd2 William Adams Pty Ltd3 United Equipment Pty Ltd4 Max Hire Pty Ltd5 Grassick SSG Pty Ltd6 Director V De Santis/D Elphinstone V De Santis/D Elphinstone V De Santis/D Elphinstone V De Santis/D Elphinstone V De Santis/D Elphinstone D Hector Cost for the year ended 30 June Payable as at 30 June 2014 $ 1,518,752 774,191 59,388 96,284 3,737 135,210 2013 $ 2,051,991 556,192 336,947 60,840 7,499 100,280 2014 $ - - 6,677 14,901 - 9,670 2013 $ 368,051 25,835 11,940 6,020 - - 1 Interest was owed to Elph Pty Ltd in 2013 by Gemco Rail Pty Ltd. Vincent De Santis is a director of Elphinstone Pty Ltd. Dale Elphinstone is also Chairman of this entity. 2 Director fees and travel expense reimbursements were paid to Elphinstone Pty Ltd for the services of Dale Elphinstone (Chairman) and Vincent De Santis (Non-Executive Director). Fees were also paid to Elphinstone for the services of consultants to Gemco Rail Pty Ltd. Vincent De Santis is a director of Elphinstone Pty Ltd. Dale Elphinstone is also Chairman of this entity. 3 Goods were purchased from Williams Adams Pty Ltd during the year. Dale Elphinstone is the Chairman and Vincent De Santis is a director of this entity. 4 Goods were purchased from United Equipment Pty Ltd during the year. Dale Elphinstone is a director of this entity. 5 Goods were purchased from Max Hire Pty Ltd during the year. Dale Elphinstone is the Chairman and Vincent De Santis is a director of this entity. 6 Director fees were paid to Grassick SSG Pty Ltd for the services of Don Hector. Don Hector is the Principal of this entity. (b) Other related party transactions The Group has the following balances outstanding at the reporting date in relation to transactions with related parties: Related Party Transaction Current receivables (parent entity): Receivables from subsidiaries The Group has the following loans to/from related parties as at 30 June: Related Party Transaction Loans to/from subsidiaries (parent entity): Loans to subsidiaries Loans from subsidiaries Loans to/from other related parties: Loans from Elph Pty Ltd 2014 $000 2013 $000 106 177 2014 $000 33,058 (1,431) 2013 $000 95,107 (1,431) (21,000) (22,000) The intercompany loans extended from Engenco Limited to its wholly owned subsidiaries are extended on the following terms: Term: Rate: Revolving Facility repayable when subsidiary is in a position to do so or as otherwise decided by the Company. Fixed rate reviewable quarterly. At the reporting date, the related party loan from Elph Pty Ltd to Greentrains Limited was on arms’ length terms for up to $30 million maturing not earlier than 30 September 2014. Engenco Limited – 2014 Annual Report | Page 71 Notes to the Consolidated Financial Statements Note 30 – Financial Risk Management Engenco Limited and Its Controlled Entities The Group’s financial instruments consist mainly of investments, accounts receivable and payable, loans from external and related parties and leases. FINANCIAL ASSETS Cash and cash equivalents Other assets Trade and other receivables FINANCIAL LIABILITIES Financial liabilities at amortised cost: - Trade and other payables - Borrowings i. Treasury Risk Management Consolidated Group 2014 $000 Consolidated Group 2013 $000 4,370 34 29,947 34,351 16,618 23,021 39,639 5,028 20 30,176 35,224 15,864 23,895 39,759 Note 9 12 10 18 19 Management, consisting of senior executives of the Group, discusses and monitors financial risk exposure and evaluates treasury management strategies in the context of current economic conditions and forecasts. Management’s overall risk management strategy seeks to assist the Group in meeting its financial targets, whilst minimising potential adverse effects on financial performance. Management operates under the supervision of members of the Board of Directors. Risk management transactions are approved by senior management personnel. ii. Financial Risk Exposures and Management The main risks the group is exposed to through its financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk. a. Interest Rate Risk Exposure to interest rate risk arises on financial liabilities recognised at reporting date whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instruments. Currently the Group’s operations are financed using a mixture of fixed and floating debt. The Group is not currently entered into any interest rate swaps to fix its floating rate debt. The variable interest rate borrowings exposes the Group to interest rate risk which will impact future cash flows and interest charges and is indicated by the following floating interest rate financial liabilities: FLOATING RATE INSTRUMENTS Bank Overdrafts Swedish Loan Facility Swedish Overdraft Facility Greentrains Loan Facility Total Consolidated Group 2014 $000 Consolidated Group 2013 $000 1,603 - - 21,000 22,603 100 215 737 22,000 23,052 Note 19(c) 19(c) 19(c) Engenco Limited – 2014 Annual Report | Page 72 Notes to the Consolidated Financial Statements Note 30 – Financial Risk Management (cont’d) b. Liquidity Risk Engenco Limited and Its Controlled Entities Liquidity risk arises from the possibility that the Group might encounter difficulty in settling its debts or otherwise meeting its obligations related to financial liabilities. The Group manages this risk through the following mechanisms: preparing forecast cash flow analysis in relation to its operational, investing and financing activities; monitoring undrawn credit facilities; managing credit risk related to financial assets; and monitoring the maturity profile of financial liabilities. obtaining funding from a variety of sources; The tables below reflect an undiscounted contractual maturity analysis for financial liabilities. Cash flows realised from financial assets reflect management's expectations as to the timing of realisation. Actual timing may therefore differ from that disclosed. The timing of cash flows presented in the table to settle financial liabilities reflects the earliest contractual settlement dates and does not reflect management's expectations that banking facilities will be rolled forward. Financial Liability Maturity Analysis Consolidated Group Within 1 Year 2014 $000 2013 $000 1 to 5 Years 2014 $000 2013 $000 Over 5 Years 2014 $000 2013 $000 Total 2014 $000 2013 $000 FINANCIAL LIABILITIES DUE FOR PAYMENT Bank overdrafts and loans Trade and other payables (excluding estimated annual leave) Finance lease liabilities 22,603 23,229 16,618 15,864 216 239 Total Expected Outflows 39,437 39,332 c. Foreign Exchange Risk - - 202 202 - - 427 427 - - - - - - - - 22,603 23,229 16,618 15,864 418 666 39,639 39,759 Exposure to foreign exchange risk may result in the fair value or future cash flows of a financial instrument fluctuating due to movement in foreign exchange rates of currencies in which the Group holds financial instruments which are other than the AUD functional currency of the Group. The majority of financial liabilities and assets of the Group are denominated in the functional currency of the operational location. These are primarily Australian Dollars and Swedish Krona. d. Credit Risk Exposure to credit risk relating to financial assets arises from potential non-performance by counter parties of contract obligations that could lead to a financial loss to the Group. Credit risk is managed through the maintenance of procedures (such procedures include monitoring of exposures, payment cycles and monitoring of the financial stability of significant customers and counter parties) ensuring to the extent possible, that customers and counter parties to transactions are of sound credit worthiness. Such monitoring is used in assessing receivables for impairment. Credit terms differ between each key business but are generally 30 to 60 days. Where the Group is unable to ascertain a satisfactory credit risk profile in relation to a customer or counter party, then risk may be further managed through title retention clauses over goods or obtaining security by way of personal or commercial guarantees over assets of sufficient value which can be claimed against in the event of any default. Engenco Limited – 2014 Annual Report | Page 73 Notes to the Consolidated Financial Statements Note 30 – Financial Risk Management (cont’d) Credit Risk Exposures Engenco Limited and Its Controlled Entities The maximum exposure to credit risk by class of recognised financial assets at balance date, excluding the value of any collateral or security held, is equivalent to the carrying value and classification of those financial assets (net of any provisions) as presented in the Consolidated Statement of Financial Position. On a geographical basis the Group has significant credit risk exposures in Australia given the substantial operations in this region. Details with respect of the credit risk of Trade and Other Receivables can be found in Note 10. Trade and other receivables that are neither past due or impaired are considered to be of high credit quality. Aggregates of such amounts are detailed in Note 10. Balances held with banks are with AA rated financial institutions, details of these holdings can be found in Note 9 – Cash and Cash Equivalents. iii. Net Fair Values Fair Value Estimation The fair values of financial assets and financial liabilities are presented in the following table and can be compared to their carrying values as presented in the Statement of Financial Position. Fair values are those amounts at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair values derived may be based on information that is estimated or subject to judgment, where changes in assumptions may have a material impact on the amounts estimated. Estimates, judgments and the associated assumptions have been detailed below. Where possible, valuation information used to calculate fair value is extracted from the market, with more reliable information available from markets that are actively traded. In this regard, fair values for listed securities are obtained from quoted market bid prices. FINANCIAL ASSETS Cash and cash equivalents Trade and other receivables Other assets FINANCIAL LIABILITIES Trade and other payables Lease liability Loans and borrowings 2014 Net Carrying Value $000 Consolidated Group 2014 Net Fair Value $000 2013 Net Carrying Value $000 4,370 29,947 34 34,351 16,618 418 22,603 39,639 4,370 29,947 34 34,351 16,618 418 22,603 39,639 5,028 30,176 20 35,224 15,864 666 23,229 39,759 2013 Net Fair Value $000 5,028 30,176 20 35,224 15,864 666 23,229 39,759 The fair values disclosed in the above table have been determined based on the following methodologies: Cash and cash equivalents, trade and other receivables and trade and other payables are short-term instruments in nature whose carrying value is equivalent to fair value. Loans and receivables have carrying values equivalent to fair value. The majority of these facilities have floating rates and those that are fixed are expected to be held to maturity and as such when discounted bear little resemblance to the carrying value. For other assets, closing quoted bid prices at reporting date are used where appropriate. Engenco Limited – 2014 Annual Report | Page 74 Notes to the Consolidated Financial Statements Note 30 – Financial Risk Management (cont’d) iv. Sensitivity Analysis a. Interest Rate Risk and Foreign Currency Risk Engenco Limited and Its Controlled Entities The following table illustrates sensitivities to the Group's exposures to changes in interest rates and foreign currency exchange rates. The table indicates the impact on how profit and equity values reported at balance date would have been affected by changes in the relevant risk variable that management considers to be reasonably possible. These sensitivities assume that the movement in a particular variable is independent of other variables. b. Interest Rate Sensitivity Analysis At 30 June 2014, the effect on earnings and equity as a result of changes in the interest rate, with all other variables remaining constant would be as follows: CHANGE IN EARNINGS - Increase in interest rates by 100 basis points - Decrease in interest rates by 100 basis points CHANGE IN EQUITY - Increase in interest rates by 100 basis points - Decrease in interest rates by 100 basis points c. Foreign Currency Risk Sensitivity Analysis Consolidated Group 2014 $000 Consolidated Group 2013 $000 (181) 181 (181) 181 (363) 363 (363) 363 At 30 June 2014, the effect on earnings and equity as a result of changes in the value of the Australian Dollar to the Swedish Krona, with all other variables remaining constant is as follows: CHANGE IN EARNINGS - Improvement in AUD to SEK by 5% - Decline in AUD to SEK by 5% CHANGE IN EQUITY - Improvement in AUD to SEK by 5% - Decline in AUD to SEK by 5% 2014 $000 (90) 90 (866) 866 2013 $000 (193) 193 (1,198) 1,198 The Group does not currently hedge against foreign exchange movements in net assets of its Swedish subsidiaries. Engenco Limited – 2014 Annual Report | Page 75 Notes to the Consolidated Financial Statements Note 30 – Financial Risk Management (cont’d) v. Capital Management Engenco Limited and Its Controlled Entities Management monitors the capital of the Consolidated Group in an effort to maintain an appropriate debt to equity ratio, provide the shareholders with adequate returns and ensure that the Consolidated Group can fund its operations and continue as a going concern. The Consolidated Group’s debt and capital includes ordinary shares and financial liabilities. The gearing ratios as at 30 June 2014 and 2013 are as follows: Total Borrowings Net Debt Total Equity TOTAL EQUITY AND NET DEBT GEARING RATIO 2014 $000 23,021 18,651 77,427 96,078 24% 2013 $000 23,895 18,867 89,029 107,896 21% The gearing ratio has increased in the year largely as a result of losses in the current financial period. Note 31 – Reserves (a) Foreign currency translation reserve The foreign currency translation reserve records exchange differences arising on translation of overseas subsidiaries. (b) Option reserve The option reserve records items recognised as expenses on valuation of employee share options. Note 32 – Contingent Liabilities Gemco Rail Pty Ltd (a subsidiary of Engenco Limited) has a contingent liability relating to a property lease whereby, if the lease is not surrendered, there may be a contractual obligation to incur capital expenditure on leasehold improvements estimated to be $1,300,000. There are a number of legal claims and exposures which arise from the ordinary course of business. There is significant uncertainty as to whether a future liability will arise in respect to these items. The amount of the liability, if any, which may arise cannot be reliably measured at the reporting date. The Group has arranged for its bankers to guarantee its performance to third parties. The maximum amount of these guarantees at 30 June 2014 is $3,795,907 (2013: $3,376,100). Engenco Limited – 2014 Annual Report | Page 76 Engenco Limited and Its Controlled Entities Shareholder Information Additional Information for Listed Companies at 8 August 2014 The following information is provided in accordance with the ASX Listing Rules. 1. Shareholding (a) Distribution of shareholders Category (size of holding) 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over No. of shareholders 545 373 159 353 98 1,528 % 0.07% 0.32% 0.39% 3.94% 95.29% 100.00% No. Ordinary Shares 211,274 983,986 1,217,144 12,236,966 296,242,062 310,891,432 (b) The number of shareholdings held in less than marketable parcels (less than $500 in value) is 839. (c) 20 largest shareholders – ordinary shares Position Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Elph Investments Pty Ltd Elph Pty Ltd UBS Nominees Pty Limited RAC & JD Brice Superannuation Pty Ltd HSBC Custody Nominees (Australia) Limited Mr Clarence John Kelly, & Mrs Robyn Suzanne Kelly Mr Neville Leslie Esler, & Mrs Cheryl Anne Esler Marford Group Pty Ltd UBS Wealth Management Australia Nominess Pty Ltd Mr Dennis Graham Austin, & Mrs Marilyn Alice Austin Mr Hugh William Maguire, & Mrs Susan Anna Maguire Mr Hugh William Maguire T B I C Pty Ltd Mr Bruce Ballantine Teele, & Mrs Helen Patricia Teele Neko Super Pty Ltd Shymea Pty Ltd Mrs Margaret Jane Lindemann, & Mr Luke Charles Lindemann CFF Pty Ltd Simzam Nominees Pty Ltd Mr Benjamin Pinwill, & Mrs Carly Esler Number of Ordinary Fully Paid Shares Held 108,981,588 93,267,430 % Held of Issued Ordinary Capital 35.05% 30.00% 23,723,362 19,554,102 14,716,402 3,655,000 2,396,925 2,243,680 1,644,334 1,502,540 1,300,000 1,201,000 1,000,000 980,996 910,000 900,000 800,000 758,619 551,390 501,703 7.63% 6.29% 4.73% 1.18% 0.77% 0.72% 0.53% 0.48% 0.42% 0.39% 0.32% 0.32% 0.29% 0.29% 0.26% 0.24% 0.18% 0.16% (d) Shareholders holding in excess of 10% of issued capital were listed in the holding company’s register as follows: 280,589,071 90.25% Shareholder Elph Investments Pty Ltd Elph Pty Ltd No. Ordinary Shares 108,981,588 93,267,430 % 35.05% 30.00% Engenco Limited – 2014 Annual Report | Page 77 Shareholder Information (cont’d) (e) Voting Rights Each ordinary share is entitled to one vote when a poll is called, otherwise each member present at a meeting or by proxy has one vote on a show of hands. Engenco Limited and Its Controlled Entities 2. The name of the Company Secretaries are: Kevin Pallas Bridget Thom 3. The address of the principal registered office in Australia is: Level 22, 535 Bourke Street, Melbourne, VIC 3000 4. Registers of securities are held at the following addresses: 770 Canning Highway, Applecross, WA 6153 5. Securities Exchange Listing Quotation has been granted for all the ordinary shares of the company on all Member Exchanges of the ASX Limited. 6. Unquoted Securities N/A. 7. Other Disclosures There were no restricted securities at this date. Engenco Limited – 2014 Annual Report | Page 78 Corporate Directory Corporate Office Engenco Limited Level 22 535 Bourke Street Melbourne VIC 3000 T: +61 (0)3 8620 8900 F: +61 (0)3 8620 8999 investor.relations@engenco.com.au www.engenco.com.au Registered Office Engenco Limited Level 22 535 Bourke Street Melbourne VIC 3000 T: +61 (0)3 8620 8900 F: +61 (0)3 8620 8999 Directors Dale Elphinstone FAICD Non-Executive Chairman Vincent De Santis BCom LLB (Hons) Non-Executive Director Donald Hector BE(Chem), PhD, FAICD, FIEAust, FIChemE Non-Executive Director Ross Dunning AC BE(Hons), BCom, FCILT, FAIM, FIEAust, FIRSE, MAICD Interim Managing Director Company Secretary Kevin Pallas BCom, MAICD Chief Financial Officer / Company Secretary Bridget Thom BSc (Hons), LLB Company Secretary Engenco Limited and Its Controlled Entities Auditors KPMG 147 Collins Street Melbourne VIC 3000 T: +61 (0)3 9288 5555 F: +61 (0)3 9288 6666 Share Registry Security Transfer Registrars Pty Ltd 770 Canning Highway Applecross WA 6153 T: +61 (0)8 9315 2333 F: +61 (0)8 9315 2233 Engenco Limited – 2014 Annual Report | Page 79