SERVICE STREAM LIMITED 2019 ANNUAL REPORTSERVICE STREAM LIMITED 2019 ANNUAL REPORT Annual General Meeting The Annual General Meeting of Service Stream Limited will be held at RACV City Club Level 2, 501 Bourke Street, Melbourne 23 October 2019, 10.00am Service Stream Limited ABN 46 072 369 870 Annual report for the financial year ended 30 June 2019 Service Stream Limited ABN 46 072 369 870 Consolidated financial statements for the year ended 30 June 2019 Contents Directors’ report Auditor’s independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report to the members Page 1 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 69 Page 70 These financial statements are the consolidated financial statements of the consolidated entity consisting of Service Stream Limited and its subsidiaries. The financial statements are presented in the Australian currency. Service Stream Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 4, 357 Collins Street Melbourne VIC 3000. A description of the nature of the consolidated entity's operations and its principal activities is included in the review of operations and financial performance on pages 5 to 12, which is not part of these financial statements. The financial statements were authorised for issue by the Directors on 20 August 2019. The Directors have the power to amend and reissue the financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All media releases, financial reports and other information are available on our website: www.servicestream.com.au. Directors' report Your Directors present their report on the consolidated entity (the Group) consisting of Service Stream Limited and entities it controlled at the end of, or during, the year ended 30 June 2019, and in order to comply with the provisions of the Corporations Act 2001, the Directors report as follows: Information about the Directors The names and particulars of the Directors of the Group during or since the end of the financial year are: Service Stream Limited Directors' report Brett Gallagher Chairman Term of Office: Non-Executive Director from April 2010 to April 2013 and from November 2013 to May 2014, Managing Director from April 2013 to November 2013, Executive Director from May 2014 to February 2015, Chairman since March 2015. Qualification: FAICD. Brett Gallagher has over 20 years’ experience across the utility and facilities management industries, and was Managing Director and a shareholder of AMRS (now Energy & Water) from 2003 until 2008 when that Group was acquired by Service Stream. Brett is a member of the Sustainability, Safety, Health & Environment Committee and holds directorships and interests in a number of private businesses that operate predominately in the utilities sector. Brett has no other listed company directorships and has held no other listed company directorships in the last three years. Leigh Mackender Managing Director Term of Office: Managing Director since May 2014. Qualification: MBA (VU). Leigh Mackender joined Service Stream Limited when it acquired AMRS (now Energy & Water) in February 2008, prior to which he held various management roles within the business since joining in 2005. Prior to being appointed Managing Director, Leigh was responsible for overseeing the Energy & Water division’s national operations. Leigh has over 15 years of experience working within the industrial services sector and held various roles in private and public organisations, specialising in the development and implementation of business strategy, operational and financial management, commercial negotiations and business development. Leigh is a member of the Sustainability, Safety, Health & Environment Committee. Leigh has no other listed company directorships and has held no other listed company directorships in the last three years. Greg Adcock Non-Executive Director Term of Office: Non-Executive Director since June 2016. Qualifications: MAICD, MAIPM. Greg Adcock was appointed as Non-Executive Director of Service Stream Limited on 1 June 2016. Greg brings commercial and operational expertise developed from senior executive roles at Telstra Corporation where his career spanned more than 20 years, and more recently at nbn co where he was the Chief Operating Officer responsible for the key operational and commercial elements of Australia’s largest infrastructure project. Greg brings to Service Stream a broad telecommunications and operational management background with a strong focus on commercial and project discipline. Greg’s roles at Telstra included overseeing business and capital planning, contract establishment, operational process optimisation, regulatory compliance, strategic projects and the group’s productivity initiative program. His experience includes developing and implementing construction contracting strategies as well as having been the Superintendent on major construction contracts. Greg is Chair of the Sustainability, Safety, Health & Environment Committee and is a member of the Remuneration and Nomination Committee. 1 Greg currently has no other listed company directorships and has held no other listed company directorships in the last three years, however Greg is a director of OptiComm Ltd, a non-listed public company that operates in the telecommunications sector and which is expected to list on the Australian Securities Exchange on or about 22 August 2019. Service Stream Limited Directors' report Tom Coen Non-Executive Director Term of Office: Non-Executive Director since February 2019. Tom Coen was appointed as a Non-Executive Director of Service Stream Limited on 1 February 2019. Tom was a founding member of Comdain Infrastructure and led the business as Managing Director for 20 years and then Chairman for the following 8 years. Tom has over 35 years’ experience in the Australian utility sector. He brings to Service Stream an intimate knowledge of both the water and gas sectors and provides unique insight into civil construction, procurement, program coordination, scheduling, operations management and contract management. Tom brings to the Board a demonstrated ability to form productive and collaborative partnerships evident in the numerous Joint Ventures he has successfully crafted. Tom has no other listed company directorships and has held no other listed company directorships in the last three years. Peter Dempsey Non-Executive Director Qualifications: B. Tech. (Civil Eng.) (Adel), Grad. Diploma (Bus. Admin.), SAIT, FIEAust, MAICD. Term of Office: Chairman from November 2010 to February 2015, Non-Executive Director since March 2015. Peter Dempsey was appointed as Non-Executive Director of Service Stream Limited on 1 November 2010 and held the role of Chairman until February 2015. Peter has extensive construction and development experience and has been involved in these industries for the last 40 years. In 2003, he retired from A W Baulderstone Pty Ltd after a 30 year career, the last five years as Managing Director. Baulderstone undertook some of Australia’s largest building and civil infrastructure projects with annual revenues up to $1.5 billion during his tenure. The company was also involved in projects for the resources sector, with operations in all Australian mainland states, Papua New Guinea, Indonesia and Vietnam. Peter is Chairman of the Remuneration and Nomination Committee, a member of the Audit and Risk Committee and the Sustainability, Safety, Health and Environment Committee and is the lead Independent Director. Peter is currently a Non-Executive Director of Monadelphous Limited. Peter has held no other listed company directorships in the last three years. Raelene Murphy Non-Executive Director Term of Office: Non-Executive Director since November 2015. Qualifications: BBus (FUA), FCA, GAICD. Raelene Murphy has a proven track record in financial and operational performance improvement both as an advisor and in CFO and CEO roles across a number of industry sectors in the private and public arena. Raelene's industry experience includes senior roles locally and internationally with Mars Inc., one of the largest food manufacturers globally, in planning, finance and supply chain management and as CEO of the Delta Group, a leading diversified recycling and construction industry service provider employing over 1,000 people Australia-wide. Her advisory career has been with PwC and as a partner in a national accounting firm where she led financial and operational advisory. In that capacity, she was a lead partner on the Federal Government's strategic review of the nbn. Raelene is a member of the Audit and Risk Committee and the Remuneration and Nomination Committee. Raelene is a Non-Executive Director of Bega Cheese Limited, Altium Limited, Integral Diagnostics Limited and Clean Seas Seafood Limited. During the last three years, Raelene held a listed company directorship with Tassal Group Limited (retired March 2018). 2 Service Stream Limited Directors' report Deborah Page AM Non-Executive Director Term of Office: Non-Executive Director since September 2010. Qualifications: B Ec (Syd), FCA, FAICD. Deborah Page, a Chartered Accountant, has held senior executive positions with the Commonwealth Bank, Allen, Allen & Hemsley, IBM and the Lend Lease Group and is a former KPMG partner. She brings expertise developed from finance and operational executive roles and from her professional background in external audit and corporate advisory. Since 2001 she has worked exclusively as a Non-Executive Director across a range of industries, including energy, insurance, financial services and property. Deborah is Chairman of the Audit and Risk Committee and is a member of the Remuneration and Nomination Committee. Deborah is currently a Non-Executive Director of Brickworks Limited, Pendal Group Limited and GBST Holdings Limited. Deborah has held no other listed company directorships in the last three years. Directors' shareholdings The following table sets out each Director’s relevant interest in shares and rights in shares of the Company or related body corporate as at the date of this report. Service Stream Limited Fully paid ordinary shares Performance rights Directors Number Number B Gallagher G Adcock T Coen1 P Dempsey R Murphy D Page L Mackender 3,150,986 50,000 38,444,918 1,000,000 20,000 409,268 1,050,000 - - - - - - 1,000,000 1Comdain Nominees Pty Ltd, a company in which Tom Coen has a beneficial interest, received 38,444,918 shares as part of the consideration for the Comdain Infrastructure acquisition. Remuneration of key management personnel is set out in the remuneration report of this Information about the remuneration of key management personnel Directors’ report, on pages 15 to 23. The term ‘key management personnel’ refers to those persons having authority and responsibility for planning, directing and controlling the activities of the consolidated entity, directly or indirectly, including any Director (whether executive or otherwise) of the consolidated entity. 3 Performance rights granted to Directors and senior management During and since the end of the financial year, the following performance rights were granted to Directors and to the five highest remunerated officers of the Group as part of their remuneration: Service Stream Limited Directors' report Director and senior executives Number of rights granted Number of ordinary shares under rights Service Stream Limited L Mackender R Grant J Ash P McCann K Smith 1,000,000 1,000,000 700,000 81,140 650,000 650,000 700,000 81,140 650,000 650,000 3,081,140 3,081,140 Company secretaries Vicki Letcher Vicki Letcher joined Service Stream Limited in June 2010 and was appointed Company Secretary in August 2012. Vicki holds a Bachelor of Laws and a Bachelor of Commerce and is also a fellow Chartered Accountants Australia and New Zealand and of the Governance Institute. Vicki is responsible for the corporate administration, governance and risk management of the Group, along with having the responsibility for the Internal Audit department of the Group. Vicki has broad experience across a number of industries, including manufacturing, consumer goods and professional services having previously held a range of senior finance positions with Deloitte and Foster’s Group Limited. Vicki commenced maternity leave with effect from 31 May 2019. Chris Chapman Chris Chapman was appointed General Counsel for the Service Stream Group in August 2015. Chris has significant in-house experience having held senior legal positions at large private and listed construction and infrastructure businesses. Chris was appointed Co-Company Secretary in February 2019 and holds a Bachelor of Laws and Bachelor of Arts and is a graduate of the Australian Institute of Company Directors. Nicole Goding Nicole Goding held the role of Co-Company Secretary from December 2016 until her resignation from the company on 22 February 2019. Principal activities The Service Stream Group is a provider of essential network services, including access, design, build, installation and maintenance. These services are provided across fixed-line and wireless telecommunications networks as well as to a range of water, gas and electricity network owners and operators nationally. 4 Review of operations and financial performance Financial overview Service Stream has delivered another year of growth with significant improvements recorded for the financial year ended 30 June 2019 (FY19) across key profitability measures. The year was highlighted by the acquisition of Comdain Infrastructure on 2 January 2019, and its contribution to Group earnings for the second-half of the financial year. Service Stream Limited Directors' report Key financial measures 1.000 $'000 Profitability: Revenue EBITDA1 EBITDA % EBIT EBIT % Net profit after tax 1.000 Cashflow & Capital Management: Operating Cashflow Net Cash Earnings per share (cents) Dividends declared per share (cents) 1.000 Adjusted Profitability2: EBITDA from Operations NPATA3 Adjusted EPS (cents) 1.000FY19 1.000FY18 1.000 Change 852,178 632,946 219,232 89,543 10.5% 73,317 8.6% 67,296 10.6% 57,851 9.1% 49,859 41,107 22,247 (0.1%) 15,466 (0.5%) 8,752 35% ▲ 33% ▲ ▼ 27% ▲ ▼ 21% ▲ 59,523 10,521 13.09 9.00 79,677 73,041 11.29 7.50 (20,154) (62,520) 1.80 1.50 (25%) ▼ (86%) ▼ 16% ▲ 20% ▲ 93,266 57,663 15.14 66,296 41,459 11.39 26,970 16,204 3.75 41% ▲ 39% ▲ 33% ▲ 1.000 1 Earnings before interest, tax, depreciation and amortisation. 22 Adjusted as relevant for one-off non-operational Refer to the reconciliation between IFRS and non-IFRS financial information for further details on page 9. 23 Adjusted net profit after tax. 1 All financial measures and period-on-period changes thereto, are rounded to the displayed number of decimal places. items and amortisation of customer contracts and customer relationships. Changes to the Group's reportable segments Following the acquisition of Comdain Infrastructure during the year, the Group has reviewed its operating segments, cash generating units and reportable segments. That review concluded that: • • • the Group’s existing operating segments and cash generating units remain the same (Fixed Communications, Network Construction, and Energy & Water) with the addition of Comdain Infrastructure; Fixed Communications and Network Construction have been assessed as having similar economic characteristics and being similar in terms of each of the other aggregation criteria set out in AASB 8 Operating Segments including the nature of services, the type of customers and the methods by which services are provided, such that they have been aggregated into a single Telecommunications reportable segment; and Energy & Water and Comdain Infrastructure have been assessed as having similar economic characteristics and being similar in terms of each of the other aggregation criteria set out in AASB 8 Operating Segments including the nature of services, the type of customers and the methods by which services are provided, such that they have been aggregated into a single Utilities reportable segment. Group results Group revenue improved to $852.2 million from $632.9 million with the 35% year-on-year increase attributable to growth in each of the two reporting segments of Telecommunications (+10%) and Utilities (+156%) with the acquisition of Comdain Infrastructure contributing $160.2 million (+150%) of the latter. 5 Service Stream Limited Directors' report Group earnings before interest, tax, depreciation and amortisation (EBITDA) improved to $89.5 million from $67.3 million with the 33% year-on-year increase following average annual growth in the same metric of 38% over the preceding three financial years. As with revenue, EBITDA growth was achieved by each of Telecommunications (+22%) and Utilities (+127%) with the acquisition of Comdain Infrastructure contributing $11.1 million (+106%) of the latter. Group earnings before interest and tax (EBIT) improved to $73.3 million from $57.9 million with the 27% year-on-year increase attributable to the increase in EBITDA offset by the impact of additional depreciation and amortisation charges (including the amortisation of customer contracts and customer relationships) associated with Comdain Infrastructure. Group net profit after tax (NPAT) improved to $49.9 million from $41.1 million with the 21% increase attributable to the aforementioned improvement in EBIT offset by higher net financing costs associated with an increase in the size and utilisation of the Group’s financing facilities arising from the acquisition of Comdain Infrastructure. Basic earnings per share (EPS) improved to 13.09 cents from 11.29 cents with the increase primarily attributable to the increase in NPAT despite the impact of higher average shares on issue during the period including that arising from the issue of 40.189 million shares as part consideration for the acquisition of Comdain Infrastructure. Group operating cashflow before interest and tax (OCFBIT) of $79.7 million represents a 20% decrease on FY18. The Group achieved an EBITDA to OCFBIT conversion of 89% for the period. Operating cashflow was $59.5 million after factoring in tax payments of $18.8 million (FY18: $20.6 million) and net financing payments of $1.4 million (FY18: $0.4 million receipt). A final dividend of 5.5 cents (fully-franked) has been declared in respect of FY19, taking total dividends in respect of the year to 9.0 cents (fully-franked) compared to 7.5 cents (fully-franked) in respect of FY18. Other cash outflows for the year included $82.8 million for cash consideration associated with the acquisition of Comdain Infrastructure, $9.4 million associated with capital expenditure net of proceeds from the sale of assets and $0.1 million associated with share issue costs. The Group concluded the year with Net Cash of $10.5 million (FY18: $73.0 million). Segment Results Information on the Group's reportable segment results is summarised below: 1.000 $'000 1.000 FY19 1.000 FY18 1.000 Change Telecommunications Utilities 587,815 273,417 Eliminations, interest & other revenue (9,054) Total Revenue 1.000 Telecommunications Utilities Unallocated corporate costs One-off non-operational costs Total EBITDA 1.000 852,178 75,852 23,782 (6,368) (3,723) 89,543 535,182 106,734 (8,970) 632,946 52,633 166,683 (84) 219,232 12.9% 8.7% (0.7%) (0.4%) 10.5% 62,326 10,471 11.6% 9.8% (6,501) (1.0%) 13,526 13,311 133 1,000 0.2% (4,723) 67,296 10.6% 22,247 Depreciation & amortisation Amort. of cust. contracts / relationships (8,801) (7,425) (1.0%) (0.9%) (7,513) (1,932) (1.2%) (0.3%) (1,288) (5,493) EBIT 1.000 Net financing costs Income tax expense 73,317 8.6% 57,851 9.1% 15,466 (1,202) 421 (22,256) 49,859 (17,165) 41,107 (1,623) (5,091) 8,752 Net profit after tax 1.000 All financial measures and period-on-period changes thereto, are rounded to the displayed number of decimal places. 6.5% 5.9% 1.3% (1.1%) 0.3% (0.6%) (0.1%) 0.2% (0.6%) (0.5%) (0.6%) 6 Revenue Revenue increased by $219.2 million compared to the prior corresponding period driven primarily by: Service Stream Limited Directors' report • • Telecommunications revenue was up (+$52.6 million) with a breakdown of revenue from the key business activities detailed in the table below. The increase in revenue was related to customer connections and related services being performed for nbn co under the various Activation & Assurance, Minor Projects and Design & Construction contracts, offset by a volume-related decline in fixed-line activities for other customers and in Wireless operations. 1.000 $'000 1.000FY19 1.000FY18 1.000Change nbn Activations & Assurance 276,059 218,048 nbn Minor Projects Other fixed-line customers nbn Design & Construction Wireless Total Revenue: Telecommunications 59,569 36,932 127,678 87,577 587,815 34,940 48,315 106,284 127,595 535,182 58,011 24,629 (11,383) 21,394 (40,018) 52,633 Utilities revenue was up (+$166.7 million) with a breakdown of revenue from the key business activities detailed in the table below. The increase in revenue was primarily due to the inclusion of revenue from Comdain Infrastructure following its acquisition in January 2019. Increases in revenue, albeit of more modest quantum, also arose in each of metering services, new energy and inspection services. 1.000 $'000 Metering services New energy Inspection services Comdain Infrastructure Other Total Revenue: Utilities 1.000FY19 1.000FY18 1.000Change 71,143 15,649 17,303 160,222 65,293 13,775 16,974 5,850 1,874 329 - 160,222 9,100 10,692 (1,592) 273,417 106,734 166,683 Earnings before interest, tax, depreciation and amortisation The Group’s EBITDA of $89.5 million for the year was an increase over the prior year by $22.2 million. • • • • Telecommunications achieved an EBITDA of $75.9 million for FY19 which represents an improvement of $13.5 million over the prior year. The higher EBITDA resulted from the increase in revenue detailed above coupled with a 1.3 percentage point increase in margin on the back of improved productivity and a greater proportion of revenue from nbn activities under a free issue materials commercial framework. Utilities reported an EBITDA of $23.8 million for FY19, an increase of $13.3 million over the prior year. The higher EBITDA resulted from the increase in revenue detailed above offset by a 1.1 percentage point decrease in margin arising from the inclusion of lower margin revenue from Comdain Infrastructure. Unallocated corporate costs were $6.4 million for FY19, a decrease of $0.1 million over the prior year. One-off non-operational costs were $3.7 million for FY19, including transaction and integration costs associated with the acquisition of Comdain Infrastructure. This compares to a one-off non-operational benefit in FY18 arising from the write-back to profit of the $1.0 million allowance for contingent consideration that was booked in the prior year in relation to the TechSafe acquisition. Depreciation and amortisation • • • Depreciation and amortisation charges totalling $8.8 million were recorded for the period in relation to the Group’s plant and equipment and acquired/internally-developed IT systems. This was $1.3 million higher than the charge in the prior year largely due to the depreciation and amortisation charges applicable to the acquired Comdain Infrastructure assets. A charge of $1.8 million was recorded for the period in relation to the amortisation of customer contracts acquired as part of the TechSafe acquisition in May 2017. This was $1.9 million in the prior year. A first-time charge of $5.7 million was recorded for the period in relation to the amortisation of customer contracts and customer relationships acquired as part of the Comdain Infrastructure acquisition in January 2019. 7 Service Stream Limited Directors' report Net financing costs • The Group incurred line fees, interest expense and other financing costs totalling $1.9 million for the year, offset by interest income of $0.7 million. This compared to a $0.4 million net financing benefit in the previous year. Tax • An income tax expense of $22.3 million was recorded for the period, representing an effective tax rate for the year of 30.9% which was in line with expectations and prior years. Cashflow Key movements in cashflow compared to the prior period are as follows: • Net cashflow from operations was $59.5 million compared to $79.7 million in the prior period. The $20.2 million decrease can be attributed to: ○ ○ ○ Service Stream operations generated $79.7 million in operating cashflow before interest and tax (OCFBIT) for the year compared to $99.9 million in the prior period due to the impact of an increase in net working capital, particularly that associated with the nbn design and construction contracts as they near physical completion; Cash flows associated with financing for the year were a net cash outflow of $1.4 million compared to a net cash inflow of $0.4 million in the previous year; and Tax payments totalling $18.8 million were made during the year in accordance with the Group’s tax instalment regime, compared to $20.6 million in the prior year. • Net investing cash outflows for the year increased to $92.2 million compared to $8.2 million in the previous year and comprised: ○ ○ ○ $82.8 million associated with the cash consideration paid during the year the Comdain Infrastructure acquisition, compared to $0.7 million associated with the post-completion Purchase Price Adjustment for the TechSafe acquisition in the prior year; for $9.9 million of capital expenditure investment in technology and plant & equipment compared to $7.7 million in the previous year; net of $0.5 million of proceeds from the sale of assets compared to $0.2 million in the previous year. • Net financing outflows for the year included: ○ ○ ○ ○ ○ $29.8 million paid in dividends, an increase of $8.1 million over the previous year; Nil expended to acquire shares in Service Stream Limited to satisfy the Group’s obligations under certain share-based incentive arrangements compared to $18.6 million in the prior period; Nil expended to acquire shares as part of the Group’s on-market share buy-back compared to $8.0 million in the prior period; $60.0 million of new borrowings to partly fund the cash consideration of the Comdain Acquisition compared to Nil in the prior period; and $0.4 million paid in respect of finance lease repayments consistent with the prior period. Financial position The financial position of the Group improved during the year, with Net Assets at 30 June 2019 of $307.8 million compared to $206.9 million at 30 June 2018. $70.4 million of the increase was due to the issuance of 40.189 million shares as part consideration for the acquisition of Comdain Infrastructure. At 30 June 2019, Current Assets exceeded Current Liabilities by $53.4 million (30 June 2018: $71.2 million). Net cash and financing facilities • • • • The Group ended the year with Net Cash of $10.5 million, a decrease of $62.5 million over the $73.0 million balance at the prior period end. Net Cash at 30 June 2019 comprised cash of $70.8 million less borrowings of $60.0 million and the outstanding balance under the IT Infrastructure finance lease of $0.3 million. Bank guarantee utilisation at year-end of $42.5 million was significantly higher than the prior year-end’s $19.3 million due to the bank guarantee requirements of Comdain Infrastructure. The Group’s finance facilities at 30 June 2019 comprised a Term Loan of $60.0 million (drawn: $60.0 million), cash advance lines totalling $30.0 million (drawn: Nil) and overdraft facilities totalling $40.0 million (drawn: Nil). The Group was in compliance with, and had substantial headroom on each of the financial covenants that applied during the year under the Syndicated Facilities Agreement with its bankers Australia & New Zealand Banking Group and HSBC Bank Australia Limited. 8 Service Stream Limited Directors' report Other Balance Sheet items / movements Other key balance sheet movements during the year included: • Working capital (comprising the net of trade & other receivables, inventories, accrued revenue, trade & other payables, income in advance, provisions and lease incentives) at 30 June 2019 was a net liability position of $3.8 million. The closing balance represents an increase of $0.2 million from the prior year’s closing net liability balance of $3.6 million. • • Plant and equipment at 30 June 2019 was $20.1 million compared to $3.9 million at 30 June 2018 with the bulk of the increase attributable to plant & equipment acquired as part of the Comdain Infrastructure acquisition. Intangibles at 30 June 2019 were $319.5 million compared to $148.8 million with the increase primarily attributable to customer contracts, customer relationships and goodwill arising from the Comdain Infrastructure acquisition. Reconciliations between IFRS and non-IFRS financial information 1.000 $'000 Reported EBITDA Add-back adjustments: - Write-back of deferred consideration (TechSafe) - Acquisition costs (Comdain) - Integration costs (Comdain) EBITDA1 from Operations 1.000 Statutory NPAT Add-back adjustments: - As above for EBITDA - Amort. of cust. contracts / relationships - Tax effect of above (as relevant) Adjusted NPAT (NPATA)2 1.000 1.000FY19 1.000FY18 89,543 67,296 - 2,473 1,250 (1,000) - - 93,266 66,296 49,859 41,107 3,723 7,425 (3,344) 57,663 (1,000) 1,932 (580) 41,459 Avg number of shares on issue (millions) 380.877 363.952 1.000 Statutory EPS (cents) Adjusted EPS (cents) 1.000 1 Earnings before interest, tax, depreciation and amortisation. 22 Adjusted net profit after tax. 13.09 15.14 11.29 11.39 Business activities Telecommunications Through the Group’s Fixed Communications and Network Construction businesses, Telecommunications provides a wide range of operations, maintenance, installation, design and construction services to the owners of fixed-line and wireless telecommunication networks in Australia. Principal customers include nbn co, Telstra and Vodafone Hutchison Australia (VHA). • • Telecommunications’ financial performance in FY19 improved over the prior year, delivering an EBITDA of $75.9 million and revenue of $587.8 million (12.9% margin), compared with EBITDA of $62.3 million and revenue of $535.2 million (11.6% margin) in the prior year. During the year, Fixed Communications continued to deliver services to nbn co under the Operations and Maintenance Master Agreement (OMMA) and Network MACs and Restoration Activities (NMRA) contracts to Telstra under the Asset Relocation & Commercial Works (ARCW) contract and to Telstra, nbn co and other customers under various minor works contracts. The business completed the activation of 727,000 new customers for nbn co under the OMMA contract compared to 787,000 in the previous year, and commenced activities during the year for nbn co under the new Business Deployment on Demand (BDoD) contract. 9 Service Stream Limited Directors' report • During the year, Network Construction continued its delivery of predominantly fibre-to-the-node (FTTN) construction activity to nbn co under the Multi-Technology Integrated Master Agreement (MIMA) contract, and predominantly fibre-to-the-curb (FTTC) design and construction activity to nbn co under the Design and Construction Master Agreement (DCMA) contract, and continued its delivery of site acquisition, engineering, design and construction services to wireless customers including Telstra, VHA and Nokia Solutions and Networks Australia Pty Ltd on the Optus wireless network. Utilities Through the Group’s Energy & Water and Comdain Infrastructure businesses, Utilities provides a wide range of specialist metering, new energy, inspection & compliance, operations, maintenance, design & construction services to utility network owners and operators and to other customers in Australia. • • • • Utilities’ financial performance in FY19 also saw improvement with EBITDA of $23.8 million and revenue of $273.4 million (8.7% margin) compared with EBITDA of $10.5 million and revenue of $106.7 million (9.8% margin) in the prior year. During the year Energy & Water completed 89 (FY18: 135) commercial solar PV installations with an average size of 108.1kw (FY18: 69.6kw) representing total installed capacity of 9.6 megawatts (FY18: 9.4 megawatts) as well as 437 (FY18: 569) residential solar PV installations at an average size of 5.6kw (FY18: 4.3kw) representing total installed capacity of 2.5 megawatts (FY18: 2.4 megawatts). Comdain Infrastructure, the acquisition of which was completed on 2 January 2019, contributed six months revenue ($160.2 million) and EBITDA ($11.1 million) to Utilities' financial performance for the year. During the year, Comdain Infrastructure undertook operations and maintenance work in Victoria by its Asset Management Services and Multinet Gas business units, small gas and water infrastructure projects in Victoria by its Land Development business unit, specialist activities nationally by its Electrical and Mechanical Instrumentation business unit, and gas and water-related projects nationally by its Victorian Engineering, New South Wales, Queensland and Regional business units. During the year, Comdain Infrastructure substantially completed one of its largest projects to date, being the approximately $18.0 million Nimmie-Caira wetlands restoration project which is part of the Murray Darling Basin Plan. Overall Group strategy, prospects and risks The financial performance of the Group further improved during the year, and the Group delivered on its strategic plan in line with the Board’s expectation. The Board is particularly pleased to have completed the acquisition of Comdain Infrastructure on 2 January 2019 and for the Company’s admission to the S&P ASX200 Index with effect from 24 June 2019. The Board also notes the continued consistency of service delivery under Telecommunications’ various contracts with nbn co during the year, the winning of the nbn BDoD contract during the year, the future prospects of the Wireless business in respect of 5G design and construction opportunities, and the future prospects of the Comdain Infrastructure business. The Board believes that demand for essential network services is expected to remain strong in the medium term, and that the Group remains well placed to continue to take advantage of both organic and acquisitive growth opportunities as they present. Given the Group’s strong financial position, the Board continues to review the Group’s capital management strategy to ensure it remains effective at maximising shareholder value. In this context, the Board has declared an increased final dividend of 5.5 cents per share (fully-franked) taking total dividends in respect of FY19 to 9.0 cents per share (fully-franked) in line with the Group’s progressive dividend policy approach. The achievement of the Group’s business objectives in the near term may be impacted by the following risks: Customer concentration Management and the Board are conscious of the Group’s exposure to a small number of key customers and infrastructure programs particularly within the telecommunications sector as a source of revenue and profitability, but accepts that concentration to customers such as nbn co, Telstra and VHA is a natural consequence of operating in this market in Australia. In that context, Management and the Board remain alert to factors that could disrupt or delay the flow of work from its major customers, and implement strategies to actively pursue the diversification of income streams both within and separate to those customers by developing and offering a broad range of services and geographic coverage. In January 2019, the Group acquired Comdain Infrastructure which provides a wide range of operations, maintenance, design and construction services to gas and water network owners and operators in Australia. The Board believes that this acquisition will add significant diversification to the Group’s revenue stream and will lessen the risk posed by customer concentration. The Board supports Management’s continued identification and assessment of further acquisition opportunities within strict criteria, which may further improve the diversification of the Group’s revenue streams. 10 Customer demand Many of the Group’s customer contracts, including those of Comdain Infrastructure, do not contain volume commitments and are therefore dependent on the customer’s demand requirements which can change at any time. Whilst Management and the Board take a balanced view on the level of customer demand that is expected to arise under each of these contracts when forecasting financial performance, there is a risk that the level of customer demand may change over time. Service Stream Limited Directors' report Contract management In addition, the potential variability in that customer demand presents operational challenges to the Group. In this regard, Management and the Board are conscious of the need to maximise the variability of the business’ cost-base and structures by maintaining an appropriate balance between a self-perform workforce and the use of subcontractors. Processes are therefore established and maintained to attract, mobilise and retain key resources to ensure that they are available at the right time and right place to match customers' forecasts of volume as they change over time. Given that Service Stream’s operating model is premised on the provision of infrastructure-related services to customers under periodically renewed contracts, Management and the Board are conscious of the risks that can arise through the acceptance of sub-optimal conditions in customer contracts and through the ineffective commercial administration of these contracts over their term. Management and the Board therefore remain focused on ensuring that appropriate contract management disciplines are effectively embedded in the organisation to manage contract risks and to maximise contract entitlements. In that context, a now well-established Group Commercial function is in place, reporting directly to the Managing Director. Group Commercial is responsible for the development and maintenance of a Bid Management Framework in respect of winning new business and a Commercial Health-Check Program in respect of existing business, and generally for ensuring that sound contract management disciplines are embedded across the Group. Management’s current focus is on embedding the Group’s bidding and contract management disciplines into the recently acquired Comdain Infrastructure business. Renewal of customer contracts Whilst the Group has been successful in renewing and extending the majority of all customer contracts that have recently expired, the renewal of contracts remains a risk that Management and the Board continues to actively monitor and manage. Service Stream operates in a limited number of market segments in which there are relatively few competitors. Management and the Board are therefore particularly conscious of the risks related to the loss of business to competitors either through their ability to potentially leverage more cost-effective business platforms or as a consequence of their potential adoption of loss-leading strategies to maintain or increase market share. the Group did not During FY19, in securing extensions of its wireless contracts with both Telstra and VHA. The Group was also successful in winning a number of new meter reading and meter replacement contracts in Energy & Water and the Business Deployment on Demand contract with nbn co. lose any major contracts and was successful During FY20, the Group’s OMMA and NMRA contracts with nbn co come up for renewal. The Board expects that the Group’s superior performance and consistency of service delivery will underpin extension of those contracts. Project management Management and the Board are conscious that the acquisition of Comdain Infrastructure increases the Group’s exposure to risks arising from undertaking a portion of project works which are fixed-price / lump-sum in nature. In that context, the Group has engaged an independent expert to assess the effectiveness of Comdain Infrastructure’s project management controls and systems, and is currently working with Comdain Infrastructure to implement a number of recommendations coming out of that review. Planning is progressing to transition Comdain Infrastructure onto the Group’s core business to enhance the systemisation and system and project management platform during FY20, scalability of project management controls. Retention of key personnel and sourcing of subcontractors The talents of a growing, yet relatively small number of key personnel contribute significantly to the Group’s operational effectiveness. Management and the Board have implemented strategies to retain those personnel, including participation in appropriate incentive arrangements and participation in the Group’s employee development, talent identification and succession programs. The Board notes that the Executive Share-based Incentive Plan (ESBIP) that was established in 2014 to operate for a five-year period from FY15 to FY19 and that was offered to the Managing Director and a small number of other key executives, has now concluded. In consultation with external remuneration advisers, the Board has developed and implemented revised remuneration arrangements for the Managing Director and executives to apply from FY20, and believes those arrangements will be effective in retaining and incentivising those key personnel. 11 Service Stream Limited Directors' report Access to an appropriately skilled and resourced pool of subcontractors across Australia is also critical to Service Stream’s ability to successfully secure and complete field-based work for its customers. Throughout FY19, Management continued to focus on mobilising large numbers of subcontractors to undertake an increased volume of work for clients such as nbn co. The business continues to make appropriate capital investments in IT-related platforms which assist with the engagement, deployment, daily management and retention of the business’ growing subcontractor base. Working with potential safety hazards In undertaking work and delivering programs for its customers, Service Stream’s employees and subcontractors can operate in potentially hazardous environments and perform potentially hazardous tasks. to the safety risks posed to employees and Management and the Board remain alert subcontractors, devote significant the Group’s safety framework, and have implemented a wide range of controls and proactive programs to increase awareness of significant hazards and prevent injuries to employees and subcontractors. time to monitoring the effectiveness of In that context, the Group has engaged an independent expert to assess the effectiveness of Comdain Infrastructure’s safety management systems, and is currently working with Comdain Infrastructure to implement a number of recommendations coming out of that review. During FY19, Reportable Incident Frequency Rate (TRIFR) at industry-leading levels. the Group maintained its Lost Time Injury Frequency Rate (LTIFR) and Total Digital disruption As technology continues to change and evolve at a rapid pace, it is possible that such advances may cause disruptions to certain elements of the markets in which Service Stream operates, or to services that Service Steam provides. Management and the Board spend time each year during a planning cycle to update the Group Strategic Plan which extends across a four-year horizon. This planning process includes a detailed assessment of relevant external factors, including digital disruption or technological changes, which may have a bearing on the Group’s current markets and service offerings. Information technology systems and cyber security The Group's operational agility, overall cost effectiveness and ability to convert works to cash in a timely manner are becoming increasingly reliant on a number of business-critical systems and in turn, the appropriate management of data and information and risks associated with cyber security and malicious emails. Management and the Board remain alert to ensuring that sufficient funds are made available to IT investments are maintain fit-for-purpose system applications and infrastructure, and that appropriately prioritised as part of the Group’s annual strategic planning process and are undertaken effectively. During FY19, the Group has further expanded the scope of its core ERP application, and has continued to enhance its IT infrastructure redundancy, implemented and tested disaster recovery capability, and invested in improved email scanning and firewall protections. Dividends Dividends paid or declared by the Company during and since the end of the year are set out in note 18 to the financial statements and further set out below: Per share (cents) Total amount ($'000) Franked Payment date Final 2019 Interim 2019 Final 2018 5.50 22,089 100% 3.50 14,049 100% 4.50 16,242 100% 2 October 2019 21 March 2019 27 September 2018 Significant changes in the state of affairs Except for as stated in the review of operations and financial performance, there was no significant change in the state of affairs of the Group during the financial year. Matters subsequent to the end of financial year There has not been any matter or circumstance occurring subsequent to the end of the financial year that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. 12 Environmental regulation laws and regulations, the Other than compliance with general obligations under Federal and State environmental Group's operations are not subject to any particular or significant environmental regulation under a Commonwealth, State or Territory law. Shares under performance rights Details of unissued shares under performance rights at the date of this report are: Service Stream Limited Directors' report Series Class of shares Exercise price of right FY17 LTIP Tranche FY18 LTIP Tranche FY19 LTIP Tranche Ordinary Ordinary Ordinary FY19 ESBIP Tranche Ordinary $0.00 $0.00 $0.00 $0.00 Vesting date September 2019 September 2020 September 2021 August 2019 Number of shares under rights 853,073 665,889 812,893 4,500,000 6,831,855 The holders of these rights do not have the right, by virtue of the performance right, to participate in any share issue or interest issue of the Company or of any other body corporate or registered scheme. No further performance rights have been issued since the end of the financial year. In accordance with the Employee Share Ownership Plan the shares relating to the Long Term Incentive Plan (LTIP) and Executive Share-based Incentive Plan (ESBIP) tranches will be issued to participants after release of the financial statements in the relevant financial year, to the extent that the vesting criteria has been satisfied. Directors' meetings The following table sets out the number of Directors’ meetings (including meetings of Committees of Directors) held during the financial year and the number of meetings attended by each Director (while they were a Director or Committee member). NO OF MEETINGS HELD No of meetings attended by B Gallagher G Adcock T Coen P Dempsey R Murphy D Page L Mackender Meetings of Committees Remuneration and Nomination Sustainability, Safety, Health & Environment Audit and Risk Term of Directorship 4 4* 3* 2* 4 4 4 4* 3 3* 3 2* 3 3 3 3* 3 3 3 1* 3 1* 3* 3 9 years 3 years 5 months 9 years 4 years 9 years 5 years Board meetings 192 18 19 71 19 19 17 19 * Attended as Standing Invitee. 1 T Coen was appointed on 1 February 2019 and did not participate in one Board meeting since date of appointment due to a conflict of interest. 2 The number of board meetings held during the year comprised ten regular monthly meetings, two general meetings of shareholders and seven unscheduled meetings that related to the Comdain Infrastructure acquisition or large contract tender submissions. Indemnification of officers and auditors During the financial year, the Group paid a premium in respect of a contract insuring the Directors of the Company (as named above), the Company Secretaries, and all officers of the Group and any related body corporate against a liability incurred as a Director, Secretary or officer to the extent permitted under the Corporations Act 2001. The contract of insurance prohibits the general disclosure of the terms and conditions, nature of the liability insured and the amount of the deductible or premium paid for the contract. 13 Service Stream Limited Directors' report The Group has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred as an officer or auditor. Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Non-audit services Details of any amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in note 31 to the financial statements. The Directors are satisfied that the provision of non-audit services during the year by the auditor (or by another person or firm on the auditor’s behalf) are compatible with the general standard of independence of auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services disclosed in note 31 to the financial statements do not compromise the external auditor’s independence, based on advice received from the Audit and Risk Committee, for the following reasons: • • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in the Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Auditor's independence declaration The auditor’s independence declaration is included on page 25 of the annual financial report. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial / Directors' Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the rounding-off of amounts in the Directors' report and the financial report. Amounts in the Directors' report and the financial report have been rounded-off to the nearest thousand dollars, in accordance with that Instrument. Corporate governance statement Service Stream Limited and the Board are committed to achieving and demonstrating the highest standards of corporate governance. Service Stream Limited has reviewed its corporate governance practices against the 3rd edition ASX Corporate Governance Principles and Recommendations. Service Stream is compliant with all ASX Corporate Governance Principles and Recommendations. A description of the Group’s current corporate governance practices is set out in the Group’s corporate governance statement which can be viewed at http://www.servicestream.com.au/investors/corporate-governance. The corporate governance statement is accurate and up to date as at 20 August 2019 and has been approved by the Board. Sustainability report Service Stream Limited and the Board recognise the importance of driving long-term sustainable practices which support and enhance the environment, social and economic performance for both the Company and our wider stakeholders. The Group’s current sustainability report can be viewed at http://www.servicestream.com.au/investors/corporate-governance. The sustainability report is accurate and up to date as at 20 August 2019 and has been approved by the Board. 14 Service Stream Limited Directors' report Remuneration report 1 Introduction and scope The Service Stream Limited remuneration report sets out information about the remuneration of Service Stream Limited's key management personnel (KMP) for the year ended 30 June 2019 (FY19). The term KMP refers to those persons having authority and responsibility for planning, directing and controlling the activities of the consolidated entity, directly or indirectly, including any Director (whether executive or otherwise) of the consolidated entity. The following table depicts the Directors and Senior Executives of the Group who were classified as KMP for the entire financial year unless otherwise indicated. Non-Executive Directors Brett Gallagher Greg Adcock Tom Coen (appointed on 1 February 2019) Peter Dempsey Raelene Murphy Deborah Page AM Executive Director Leigh Mackender Senior Executives Robert Grant John Ash Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Managing Director Chief Financial Officer Executive General Manager, Network Construction Peter Coen (appointed on 2 January 2019) Executive General Manager, Comdain Infrastructure Paul McCann Kevin Smith Executive General Manager, Energy & Water Executive General Manager, Fixed Communications 2 Role of the Remuneration and Nomination Committee reviewing and making The Board’s Remuneration and Nomination Committee (RNC) recommendations to the Board on the remuneration arrangements for the Non-Executive Directors, the Managing Director and the executive management team including the Senior Executives. Information on the RNC’s role and responsibilities is contained in its charter, which is available on the Group’s website at www.servicestream.com.au. is responsible for To assist in performing its duties and making recommendations to the Board, the RNC periodically seeks independent advice from external consultants on various remuneration-related matters. In such cases, the RNC follows protocols around the engagement and use of external remuneration consultants to ensure compliance with the relevant executive remuneration legislation. All remuneration recommendations are provided by the external consultant directly to the RNC. During FY19, the RNC engaged Korn Ferry to provide benchmarking data for salaried roles across the Group. Recommendations for salary adjustments arising from the benchmarking data were considered by the RNC and submitted to the Board for approval where appropriate. Korn Ferry was paid $63,000 for these services. Also during FY19, the RNC engaged PricewaterhouseCoopers (PwC) to review the Executive’s long-term incentive plan design. PwC was paid $60,180 for these services. PwC was not engaged to provide direct remuneration recommendations, but to provide insight to current executive remuneration and incentive practices, prevalent in the market. As a result of this engagement, the RNC has recommended the adoption of the STIP and LTIP to replace the ESBIP for the relevant Executives with effect from FY20. 3 Executive remuneration policy and framework Remuneration policy and principles The Board, through the RNC, reviews the remuneration packages of all KMP on an annual basis. Remuneration packages are set and reviewed with due regard to current market rates and are benchmarked, where relevant, against comparable industry salaries. The objectives of the Group's remuneration policy are to ensure that the Group: • • • Attracts, retains and motivates talented employees; Aligns employee activities to the achievement of business objectives; Creates a high performance culture that delivers shareholder value; 15 Service Stream Limited Directors' report • Maintains fair, equitable and affordable rates of pay for all employees, based on their performance and the markets in which the Group operates; • • Encourages, recognises and rewards individual, team and group performance on the basis of ability-to-pay and alignment with shareholder returns; and Operates a remuneration system that is transparent, accountable, scalable, flexible and consistent, enabling comparison with the external market. To retain and attract executives of sufficient calibre to facilitate the efficient and effective management of the Group’s operations, the Board may seek the advice of external advisers in connection with the structure of remuneration packages as the Board considers necessary. Overview of remuneration components The table below depicts the components of the executive remuneration framework that apply to the Managing Director and Senior Executives. Further details on each of the components are set out in section 5 of this remuneration report. Fixed remuneration Incentive remuneration FY19: Average 35% of total remuneration 1 FY19: Average 65% of total remuneration 1 > Fixed salary set by reference to appropriate benchmark information and individual performance > Fixed number of performance rights issued under an Executive Share-based Incentive Plan (ESBIP) Includes > non-monetary benefits superannuation and salary-sacrificed > Performance hurdle linked to annual EPS growth >Discretionary cash bonuses 2 Or 3 > Variable number of performance rights issued under a Long Term Incentive Plan (LTIP) > Performance hurdle linked to annual EPS growth and Relative Total Shareholder Return > Cash bonus paid under the Short Term Incentive Plan (STIP) 1 The percentage allocation of remuneration between Fixed and Incentive is based on a fair value for each performance right issued under the FY19 ESBIP and the FY17, FY18 and FY19 LTIPs. 2 Discretionary cash bonuses would only be approved by the Board in one-off circumstances for recognition of exceptional outcomes and effort by the relevant Executive. 3 Executives not eligible to participate in the ESBIP as detailed on page 17 may be eligible to participate in the LTIP and the STIP. 4 Linking performance to executive remuneration The above elements of the executive remuneration framework are linked to the Group’s financial performance. Changes to fixed remuneration are determined by an individual's performance and by the Group’s capacity to fund any changes. Vesting of performance rights issued under the ESBIP and LTIP is directly linked to the satisfaction of relevant Group financial measures and cash paid under the STIP is linked to the satisfaction of relevant Group financial measures as well as relevant individual measures. The RNC reviews the remuneration packages of all Directors and Senior Executives on an annual basis and makes recommendations to the Board in respect to any changes thereto. Remuneration packages are reviewed with due regard to performance, the relativity of remuneration to comparable companies and the level of remuneration required to attract and compensate Directors and Senior Executives, given the nature of their work and responsibilities. In considering the Group’s financial performance, the RNC has regard to a number of measures including the following: Key Indicators Revenue ($'000) EBITDA1 ($'000) Net profit after tax ($'000) Earnings per share (cents) Dividends per share2 (cents) Share price 30 June ($) 2015 2016 2017 2018 2019 411,270 438,940 501,810 632,946 852,178 25,389 11,720 3.03 1.50 0.30 35,818 19,983 5.20 2.50 0.79 48,352 28,370 7.78 4.50 1.32 67,296 41,107 11.29 7.50 1.51 89,543 49,859 13.09 9.00 2.81 1 Earnings before interest, tax, depreciation and amortisation. 2 Franked to 100% at 30% corporate income tax rate. 16 Service Stream Limited Directors' report The overall performance and growth prospects of the Group. level of key management personnel compensation takes into account the size, complexity, financial 5 Managing Director and Senior Executive remuneration Fixed remuneration Fixed remuneration consists of base compensation and statutory superannuation contributions. Executives may also elect to have other benefits provided out of their fixed remuneration, including additional superannuation and the provision of a motor vehicle. Incentive remuneration During the financial year ended 30 June 2019, Managing Director and Senior Executive incentive remuneration consisted of participation in either the Group’s Executive Share-Based Incentive Plan (ESBIP), Long-Term Incentive Plan (LTIP) or Short-Term Incentive Plan (STIP) as set out in the table below. Summary of incentive plan participation L Mackender R Grant J Ash P Coen1 P McCann K Smith ESBIP Yes Yes - - Yes Yes 2019 LTIP - - Yes - - - STIP ESBIP - - Yes Yes - - Yes Yes - n/a Yes Yes 2018 LTIP - - Yes n/a - - STIP Yes n/a - - 1 Peter Coen was appointed as Executive General Manager - Comdain Infrastructure with effect from 2 January 2019 following the completion of Service Stream's acquisition of Comdain Infrastructure, and participated in the FY19 STIP on a pro-rata basis from that date. ESBIP What was the ESBIP and who participated? The ESBIP was a share-based incentive plan established by the Board in 2014 to operate for a five-year period from FY15 to FY19 and offered to the Managing Director and to a small number of other key executives of the time. In establishing the ESBIP, the Board’s aims were to recognise the efforts and loyalty of those individuals during the immediately preceding period of operating challenges and financial instability, provide a retention incentive for those executives identified as being key to leading the Group's return to sustainable profitability, and link their reward with the creation of shareholder value. Participation in ESBIP was conditional on each invited executive agreeing to forego participation in the Short-Term Incentive Plan (STIP) and the Long-Term Incentive Plan (LTIP) applicable to that five-year period. The Managing Director and the Senior Executives listed in the table above were participants in the ESBIP. How did the ESBIP operate? The ESBIP operated via the allocation of performance rights that were subject to satisfaction of earnings per share (EPS) performance conditions. Upon admission to the ESBIP, each participating executive was provided with an ESBIP invitation that set out the rules and mechanics of the plan, and provided details regarding the number of rights that would be offered to that executive on an annual basis (by way of an annual offer letter) over the plan’s term. Each performance right converted into one ordinary share of Service Stream Limited upon vesting. No amounts were paid or payable by the participant on receipt of the performance rights, and the performance rights carried neither rights to dividends nor voting rights. The number of performance rights offered to the Managing Director and relevant Senior Executives under the ESBIP were endorsed by the RNC and approved by the Board and by shareholders in the case of the Managing Director. What was the performance period? ESBIP performance rights were issued in respect of a particular financial year and were subject to the satisfaction of performance hurdles over an initial one-year performance period. Any performance rights which did not vest at the end of the initial performance period would be tested again at the end of year two, and if necessary the end of year three (Aggregate Period). Any rights which did not vested at the end of the Aggregate Period would lapse. 17 Service Stream Limited Directors' report What were the performance hurdles? The performance hurdles for each ESBIP grant were based on the following: • • • The participant must have been an employee at the latter of the date on which the Group released its results for the financial year to which the ESBIP grant applied or otherwise determined that the vesting conditions have been satisfied during the Aggregate Period; and at least 10% growth in EPS for the initial performance period was achieved; or an average of at least 10% compound growth in EPS per annum for the Aggregate Period was achieved. Why was this performance condition chosen? The Board considered the EPS hurdle to be an appropriate measure on the basis that it was a relevant measure of increase in shareholder value, it was a financial outcome that was highly correlated with the effectiveness of ESBIP participants, and it was a financial metric the calculation of which was independently verified by virtue of the audit of the financial statements. How has the ESBIP performed since it was established? As depicted in the following table, performance rights issued in respect each of the FY15, FY16, FY17, FY18 and FY19 tranches of ESBIP have vested in full with annual Reported EPS growth over that period ranging from 16% to 299% relative to the 10% per annum performance hurdle. Over this five-year period, the Group’s share price has increased by approximately 1400% from a base of $0.186 per share on 30 June 2014 to a closing price of $2.810 on 30 June 2019. Over this same period, dividends per share have increased from Nil in respect of FY14 to 9.0 cents in respect of FY19, with an average dividend yield based on year-end share prices averaging 4.0% (full-franked). ESBIP Vesting & Shareholder Returns Reported earnings per share (EPS) (cents) Growth in Reported EPS Adjusted1 earnings per share (EPS) (cents) Growth in Adjusted EPS Growth in EPS - ESBIP hurdle ESBIP vesting Shareholder Returns Share price as at 30 June ($) Growth in share price Dividends per share (cents) Dividend yield based on share price as at 30 June FY15 3.03 299% 3.03 299% 10% Yes 0.30 60% 1.5 5.1% FY16 5.20 72% 5.20 72% 10% Yes 0.79 164% 2.5 3.2% FY17 7.78 50% 7.97 53% 10% Yes 1.32 68% 4.5 3.4% FY18 11.29 45% 11.39 43% 10% Yes 1.51 14% 7.5 5.0% FY19 13.09 16% 15.14 33% 10% Yes 2.81 86% 9.0 3.2% 1 Adjusted for the tax-effected impact of the amortisation of customer contracts and customer relationships arising from the TechSafe and Comdain Infrastructure acquisitions, transaction and integration costs associated with those acquisitions, and the write-back of TechSafe contingent consideration. LTIP What is the LTIP and who participates? From time to time employees in senior management roles may be invited, with approval from the Board, to participate in the LTIP. The LTIP operates within the shareholder approved Employee Share Ownership Plan (ESOP), under the administration of the Remuneration and Nomination Committee (RNC). The extent of individual participation and the associated number of performance rights offered is recommended by the Managing Director and reviewed by the RNC, which will then make recommendations to the Board for approval. How does the LTIP operate? In accordance with the provisions of the ESOP, certain employees in senior management roles may be invited to participate in the LTIP which entitles them to receive a number of performance rights. Each performance right converts into one ordinary share of Service Stream Limited on vesting. No amounts are paid or payable by the participant on receipt of the performance rights, and the performance rights carry neither rights to dividends nor voting rights. The number of performance rights granted is based on the employee’s long term incentive participation rate, which is expressed as a percentage of the participant’s total fixed remuneration (TFR), and the volume-weighted average market price of the Group’s shares over a prescribed period of time or other issue price as deemed appropriate by the Board. 18 Service Stream Limited Directors' report What is the performance period? LTIP performance rights are subject to the satisfaction of performance hurdles over a three-year performance period. Any rights which have not vested at the end of the Performance Period will lapse. What are the performance hurdles? Performance rights for each of the LTIP tranches relevant to FY19 are subject to service and performance criteria being: A B The participant must be an employee at the conclusion of the performance period; and 50% of the performance rights granted will each vest where: (i) The Group’s earnings per share (EPS) achieves annual growth of 10% or more over the performance period, commencing with growth from an agreed base EPS, subject to proportional vesting which commences at annual growth of 7.5%. (ii) The Group’s total shareholder return (TSR) over the performance period is such that it would rank at or above the 75th percentile (full achievement) or the 50th percentile (pro-rata achievement) of a relevant peer group of companies being those comprising the ASX 200 Industrials index. Performance rights will vest to the extent that the participant remains employed by the Group on the vesting date and to the extent that the Group’s performance over the relevant period satisfies the vesting conditions. Why was this performance condition chosen? The Board considered the EPS and TSR hurdles to be appropriate measures on the basis that they were relevant measures of increase in shareholder value and they were both outcomes which are highly correlated with the effectiveness of LTIP participants. In addition, EPS was a financial metric the calculation of which was independently verified by virtue of the audit of the financial statements, whilst TSR performance was independently assessed by third-party experts. STIP What is the STIP and who participates? Eligible employees invited to participate in the STIP have the opportunity to earn an annual lump sum cash-based incentive payment through the achievement of pre-determined goals established with both the Remuneration and Nomination Committee (RNC) and relevant line managers at the beginning of each financial year. How does the STIP operate? The employee’s maximum STIP entitlement is based on the employees’ short-term incentive participation rate, which is expressed as a percentage of the employee’s total fixed remuneration (TFR). What is the performance period? STIP payments are subject to the satisfaction of group and individual goals in respect of a particular financial year. What are the performance hurdles? Payment of STIP-related bonuses are subject to the achievement of at least 90% of the Group’s EBITDA target for the financial year for all participants, regardless of their personal performance. Once this criterion is satisfied, bonus payments are based equally on Group performance and achievement of individual goals as illustrated below. 50% Group Financial Performance1 50% Individual Performance Performance to Budget 90 - 100% 100% Percentage paid out KPI Quadrant-individual goals Example percentage allocation Pro-rata between 50% and 100% and at RNC discretion Financial 100% Market & Customer Safety & People Risk & Governance 50% 20% 20% 10% 1 Additionally, the Managing Director has the discretion to withhold or pro-rate the Group Financial Performance component if individual financial KPIs are not met. Individual goals are tied directly to the annual objectives of the Group, which are linked directly to the overall Group strategy categorised into the four quadrants of Financial, Market & Customer, Safety & People and Risk & Governance. The weighting applied to each of these quadrants varies depending on the role and responsibilities of each individual employee. 19 Summary of grants under ESBIP and LTIP Balance as at 1 Granted as Balance as at 30 June July 2018 Number compensation Vested Forfeited 2019 Number Number Number Number Service Stream Limited Directors' report Fair value when granted 2 $ Value of shares at vesting $ L Mackender FY18 ESBIP FY19 ESBIP1 Total R Grant FY18 ESBIP FY19 ESBIP1 Total J Ash FY16 LTIP FY17 LTIP1 FY18 LTIP FY19 LTIP Total K Smith FY18 ESBIP FY19 ESBIP1 Total P McCann FY18 ESBIP FY19 ESBIP1 Total Plan FY16 LTIP FY17 LTIP FY18 LTIP FY19 LTIP FY18 ESBIP FY19 ESBIP 1,000,000 - (1,000,000) - 1,000,000 - 1,000,000 1,000,000 (1,000,000) 700,000 - 700,000 296,989 123,411 90,299 - 510,699 650,000 - 650,000 650,000 - 650,000 - (700,000) 700,000 - 700,000 (700,000) - - - 81,140 (296,989) - - - 81,140 (296,989) - (650,000) 650,000 - 650,000 (650,000) - (650,000) 650,000 - 650,000 (650,000) - - - - - - - - - - - - - 1,326,200 1,591,900 1,000,000 1,487,100 n/a 1,000,000 - 928,340 1,114,330 700,000 1,040,970 n/a 700,000 - 123,411 90,299 81,140 294,850 - 650,000 650,000 - 650,000 650,000 72,020 76,774 98,530 89,618 518,127 n/a n/a n/a 862,030 966,615 1,034,735 n/a 862,030 966,615 1,034,735 n/a Grant dates Vesting dates 11 September 2015 11 September 2018 14 September 2016 September 2019 14 September 2017 September 2020 21 September 2018 September 2021 31 October 2017 15 August 2018 31 August 2018 20 August 2019 1 The relevant number of shares will be issued to the participants after the release of these FY19 financial statements, to the extent that the vesting criteria has been satisfied. 2 The grant date fair value of all rights on issue to KMP has been expensed as at 30 June 2019 in line with each of the tranche's performance periods. Performance outcomes The table below sets out the details of the percentage performance achieved against the applicable share plans, where the rights under the plan either vested or the assessment of the achievement of the relevant performance hurdles were assessed in the current financial year. Plan FY16 LTIP 1 FY17 LTIP 2 Grant date Vesting date Fair value of each performance right at grant date % of performance hurdles achieved % of rights vested 11 September 2015 11 September 2018 24.3 cents 100% 100% 14 September 2016 September 2019 62.2 cents To be determined To be determined FY18 ESBIP 1 31 October 2017 15 August 2018 FY19 ESBIP 3 31 August 2018 20 August 2019 132.6 cents 148.7 cents 100% 100% 100% 100% 1 Rights have vested and shares have been delivered to plan participants. 2 Measurement of the Relative TSR for year three and the three-year period will not be completed until after the release of FY19 results. 3 Both the service and performance criteria have been assessed as met. The relevant number of shares will be delivered to the participants after the release of the FY19 results. 20 Service Stream Limited Directors' report Service agreements The table below sets out the main terms and conditions of the employment contracts of the Managing Director and Senior Executives. Title Notice periods and termination payments Managing Director and Chief Financial Officer > 6 months either party (or payment in lieu) > Immediate for serious misconduct or breach of contract > Statutory requirements only for termination with cause Other Senior Executives > 3 months either party (or payment in lieu) > Immediate for serious misconduct or breach of contract > Statutory requirements only for termination with cause Executive remuneration table Short-term employee benefits Post- employment benefits Long-term employee benefits Salary and fees Short-term incentive Non- monetary Year Super LSL Share- based payments Performance rights Total Fixed At Risk L Mackender 2019 529,469 50,000 1 2018 509,959 - R Grant 2019 464,300 50,000 1 2018 455,276 - J Ash 2019 365,415 84,117 2 2018 358,020 81,380 P McCann 2019 298,847 2018 275,672 K Smith 2019 376,548 2018 358,122 - - - - P Coen 3 2019 262,816 20,625 2 - - - - - - 20,531 18,228 1,487,100 2,105,328 27% 73% 20,049 12,679 1,326,200 1,868,887 29% 71% 20,531 14,078 1,040,970 1,589,879 31% 69% 20,049 9,852 928,340 1,413,517 34% 66% 20,531 10,272 88,307 568,642 70% 30% 20,049 6,659 82,441 548,549 70% 30% 24,384 20,531 15,602 966,615 1,325,979 27% 73% 27,001 20,049 5,821 862,030 1,190,573 28% 72% - - - 20,531 12,823 966,615 1,376,517 30% 70% 20,049 12,873 862,030 1,253,074 31% 69% 10,191 227 - 293,859 93% 7% Total 2019 2,297,395 204,742 24,384 112,846 71,230 4,549,607 7,260,204 35% 65% 2018 1,957,049 81,380 27,001 100,245 47,884 4,061,041 6,274,600 34% 66% 1 These amounts represent one-off discretionary cash bonuses approved by the Board in respect of Service Stream's acquisition of Comdain Infrastructure. 2 These amounts represent cash short-term incentives payable for the year ended 30 June 2019, which are scheduled to be paid in September 2019. 3 Peter Coen was appointed as Executive General Manager, Comdain Infrastructure with effect from 2 January 2019 following completion of Service Stream's acquisition of Comdain Infrastructure. 6 Non-Executive remuneration Overview Aggregate fees approved by shareholders The current maximum aggregate fee pool for the Non-Executive Directors is $750,000 as approved by shareholders. Board and committee fees (inclusive of superannuation where applicable) are included in the aggregate pool. Promote independence and objectivity Non-Executive Directors are remunerated only by way of fixed fees (inclusive of superannuation where applicable). To preserve independence and impartiality, Non-Executive Directors do not receive any performance related compensation. 21 Regular reviews of remuneration Fees are reviewed annually taking into account comparable roles and market data provided by the Board’s independent remuneration advisor. Non-Executive Directors' remuneration Service Stream Limited Directors' report B Gallagher G Adcock T Coen 2 P Dempsey R Murphy 3 D Page Total Year 2019 2018 2019 2018 2019 2019 2018 2019 2018 2019 2018 2019 2018 Board and Committee fees Super Total 146,119 13,881 160,000 141,552 13,447 154,999 113,734 1 105,023 44,901 4,266 9,977 4,266 118,000 115,000 49,167 107,763 10,237 118,000 105,023 118,000 115,000 9,977 115,000 - - 118,000 115,000 114,155 10,845 125,000 109,589 10,411 120,000 644,672 43,495 688,167 576,187 43,812 619,999 1 G Adcock's remuneration for 7 months of the year was paid to Ausadcock Pty Ltd, a company in which Mr Adcock has a beneficial interest. 2 T Coen was appointed to the position of Non-Executive Director on 1 February 2019. 3 R Murphy's remuneration is paid to Wealth For Toil Pty Ltd, a company in which Mrs Murphy has a beneficial interest. 22 7 Shareholdings of key management personnel Service Stream Limited Directors' report Received on vesting of performance rights (Disposed)/ acquired during the year Balance as at 1 July Balance as at date of appointment Balance as at date of resignation Balance as at 30 June No. No. No. No. No. No. 2019 Non-Executives B Gallagher G Adcock T Coen P Dempsey R Murphy D Page Executives L Mackender R Grant J Ash P McCann K Smith 1.000 2018 Non-Executives B Gallagher G Adcock P Dempsey R Murphy D Page Executives L Mackender R Grant J Ash P McCann K Smith 5,376,126 50,000 - 1,441,775 20,000 409,268 - - - - - - (2,225,140) - - (441,775) - 1,450,000 1,000,000 (1,400,000) 1,608,759 700,000 (1,308,759) 103,256 988,522 296,989 650,000 (400,245) (500,000) 1,801,438 650,000 (414,440) 5,376,126 50,000 1,441,775 - 409,268 - - - - - - - - 20,000 - 1,749,499 1,000,000 (1,299,499) 2,124,719 700,000 (1,215,960) - 838,522 292,986 650,000 (189,730) (500,000) 1,500,752 650,000 (349,314) - - 38,444,918 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3,150,986 50,000 38,444,918 1,000,000 20,000 409,268 1,050,000 1,000,000 - 1,138,522 2,036,998 5,376,126 50,000 1,441,775 20,000 409,268 1,450,000 1,608,759 103,256 988,522 1,801,438 8 Voting and comments made at the Company's 2018 Annual General Meeting The Company received 96% of “yes” votes on its Remuneration Report for the 2018 financial year. 23 The Directors’ report is signed in accordance with a resolution of the Directors made pursuant to s.298(2) of the Corporations Act 2001. Service Stream Limited Directors' report On behalf of the Directors Brett Gallagher Chairman 20 August 2019 Leigh Mackender Managing Director 20 August 2019 24 Auditor’s Independence Declaration As lead auditor for the audit of Service Stream Limited for the year ended 30 June 2019, I declare that to the best of my knowledge and belief, there have been: (a) (b) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Service Stream Limited and the entities it controlled during the period. Trevor Johnston Partner PricewaterhouseCoopers Melbourne 20 August 2019 PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Consolidated statement of profit or loss and other comprehensive income for the financial year ended 30 June 2019 Service Stream Limited Revenue from continuing operations Revenue from contracts with customers Other income Expenses Employee salaries and benefits Subcontractor fees Raw materials and consumables used Consulting and temporary staff fees Company administration and insurance expenses Occupancy expenses Technology and communication services Motor vehicle expenses Depreciation and amortisation Interest expense and other finance costs Other expenses Profit before tax Income tax expense Profit for the year Notes 2019 $'000 2018 $'000 3 4 6 5 7 850,959 1,219 852,178 (193,567) (474,919) (37,196) (8,860) (5,631) (8,897) (14,639) (12,669) (16,226) (1,899) (5,560) 72,115 (22,256) 49,859 629,584 3,362 632,946 (148,592) (360,253) (11,138) (5,416) (4,082) (7,898) (12,298) (9,476) (9,445) (504) (5,572) 58,272 (17,165) 41,107 Total comprehensive income for the year Blank 0 Profit attributable to the equity holders of the parent 0 Total comprehensive income attributable to equity holders of the parent 49,859 41,107 49,859 49,859 41,107 41,107 Earnings per share Basic (cents per share) Diluted (cents per share) 8 8 13.09 12.89 11.29 11.10 Notes to the financial statements are included on pages 30 to 68 26 Consolidated balance sheet as at 30 June 2019 ASSETS 1 Current assets Cash and cash equivalents Trade and other receivables Inventories Accrued revenue Other assets Total current assets Non-current assets Plant and equipment Intangible assets Total non-current assets Total assets LIABILITIES 1 Current liabilities Trade and other payables Current tax liabilities Provisions Borrowings Finance lease Lease incentives Total current liabilities Non-current liabilities Deferred tax liability (net) Provisions Borrowings Finance lease Lease incentives Total non-current liabilities Total liabilities Net assets EQUITY 1 Capital and reserves Contributed equity Reserves Retained earnings / (accumulated losses) Total equity Service Stream Limited Notes 2019 $'000 2018 $'000 21 9 10 11 12 13 14 15 16 22 19 7 16 22 19 17 70,809 54,385 8,868 125,988 7,490 267,540 20,119 319,512 339,631 73,698 43,321 3,045 82,373 2,769 205,206 3,948 148,831 152,779 607,171 357,985 161,737 10,136 32,594 9,000 288 394 214,149 28,450 5,785 51,000 - 23 85,258 110,474 3,197 19,111 - 369 847 133,998 12,111 4,393 - 288 301 17,093 299,407 151,091 307,764 206,894 297,757 2,475 7,532 217,281 1,651 (12,038) 307,764 206,894 Notes to the financial statements are included on pages 30 to 68 27 Consolidated statement of changes in equity for the financial year ended 30 June 2019 Service Stream Limited Contributed equity Employee equity- settled benefits reserve Retained earnings Total $'000 $'000 $'000 $'000 Balance at 1 July 2017 Profit for the period Total comprehensive income for the year Equity-settled share-based payments, inclusive of tax adjustments Issue of treasury shares to employees Buy-back of shares, net of tax Acquisition of treasury shares Dividends paid Balance at 30 June 2018 Profit for the period Total comprehensive income for the year Equity-settled share-based payments, inclusive of tax adjustments Issue of shares as consideration for business combination (net of transaction costs) Issue of shares (net of transaction costs) Acquisition of treasury shares Issue of treasury shares to employees Dividends paid Balance at 30 June 2019 233,151 4,590 (31,421) 41,107 206,320 41,107 - - - - - 7,795 10,734 (10,734) 41,107 41,107 - - - - (21,724) 7,795 - (8,007) (18,597) (21,724) - - - 1,651 (12,038) 206,894 - - 10,464 - - - (9,640) 49,859 49,859 49,859 49,859 - - - - - 10,464 70,363 1,777 (1,777) - - (30,289) (29,816) (8,007) (18,597) - 217,281 - - - 70,363 1,777 (1,777) 9,640 473 297,757 2,475 7,532 307,764 Notes to the financial statements are included on pages 30 to 68 28 Consolidated statement of cash flows for the financial year ended 30 June 2019 Cash flows from operating activities Receipts from customers (including GST) Payments to suppliers and employees (including GST) Cash generated from operations before interest and tax Interest received Interest and facility costs paid Income taxes paid Net cash provided by operating activities Cash flows from investing activities Payments for plant and equipment Proceeds from sale of plant and equipment Payments for intangible assets Payments for businesses Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Dividends paid Repayment of finance lease Purchase of shares (net of transaction costs) On market share buy-back Payment for share issue costs Service Stream Limited Notes 2019 $'000 2018 $'000 942,053 706,810 (862,350) (606,899) 79,703 99,911 21 20 697 (2,063) (18,814) 59,523 (3,581) 452 (6,287) (82,752) (92,168) 60,000 (29,816) (369) - - (59) 925 (526) (20,633) 79,677 (1,574) 238 (6,166) (690) (8,192) - (21,724) (353) (18,594) (8,013) - Net cash provided / (used) by financing activities 29,756 (48,684) Net (decrease) / increase in cash and cash equivalents (2,889) 22,801 Cash and cash equivalents at the beginning of the financial year 73,698 50,897 Cash and cash equivalents at end of the financial year 21 70,809 73,698 Notes to the financial statements are included on pages 30 to 68 29 Service Stream Limited Notes to the consolidated financial statements for the year ended 30 June 2019 Notes to the consolidated financial statements 1 General information Section A: Business performance Section B: Operating assets & liabilities 2 Segment information Page 31 9 Trade and other receivables 3 Revenue from contracts with customers Page 33 10 Inventories 4 Other income 5 Finance costs 6 Other expense items 7 Income tax expense 8 Earnings per share Page 34 Page 34 Page 35 Page 35 Page 37 11 Accrued revenue 12 Other assets 13 Plant and equipment 14 Intangible assets 15 Trade and other payables 16 Provisions Section C: Capital and financing Section D: Group structure 17 Contributed equity 18 Dividends 19 Lease arrangements Page 42 Page 43 Page 44 25 Subsidiaries 26 Deed of cross guarantee 27 Related party transactions 20 Business combinations Page 44 28 Parent entity information 21 Notes to the statement of cash flow 22 Financial instruments 23 Capital risk management 24 Share-based payments Page 46 Page 47 Page 50 Page 50 Section E: Unrecognised items Section F: Other 29 Contingent assets and liabilities Page 56 31 Remuneration of auditors 30 Events after the reporting period Page 56 32 Significant accounting policies 33 Critical accounting judgements Page 31 Page 38 Page 38 Page 38 Page 39 Page 39 Page 40 Page 41 Page 42 Page 54 Page 54 Page 55 Page 55 Page 56 Page 56 Page 68 30 Service Stream Limited Notes to the consolidated financial statements Notes to the financial statements for the financial year ended 30 June 2019 1 General information Service Stream Limited (the Company) is a limited company incorporated in Australia and listed on the Australian Securities Exchange (ASX: SSM). Service Stream Limited's registered office and its principal place of business is Level 4, 357 Collins Street, Melbourne, Victoria 3000. The principal activities of the Company and its subsidiaries (the Group) are described in note 2. 2 Segment information (a) Products and services from which reportable segments derive their revenues Following the acquisition of Comdain Infrastructure during the year, the Group has reviewed its operating segments, cash generating units and reportable segments. That review concluded that the Group’s existing operating segments and cash generating units remain the same (Fixed Communications, Network Construction, and Energy & Water) with the addition of Comdain Infrastructure. The Group’s operating segments have been determined based on the nature of the business activities undertaken by the Group and by reference to the structure of internal reporting that is prepared and provided to the chief operating decision maker, being the Chief Executive Officer who provides the strategic direction and management oversight of the company in terms of monitoring results and approving strategic planning for the business. The principal services of the Group's four operating segments are as follows: Fixed Communications1.000 Network Construction Energy & Water Comdain Infrastructure Fixed Communications provides a wide range of operations, maintenance, installation, design and construction services to the owners of fixed-line telecommunication networks in Australia. Service capability includes customer connections; service and network assurance; design, construction and installation of broadband services, as well as minor projects for asset remediation, augmentation and relocation. Principal customers include nbn co and Telstra. Network Construction provides a wide range of design, construction and associated services to the owners of fixed-line and wireless telecommunications networks in Australia. Service capability includes site acquisition, engineering, design and construction of wireless and fixed-line projects. Principal customers include nbn co, Telstra and other wireless carriers. Energy & Water provides a wide range of specialist metering, new energy and inspection services to gas, water and electricity network owners and other customers in Australia. Service capability include meter reading and asset replacement; engineering, design and construction of energy-related products; as well as specialist inspection, auditing and compliance services. Comdain Infrastructure provides a wide range of operations, maintenance, design and construction services to gas and water network owners and operators in Australia. Service capability includes network assurance; asset upgrades and replacement; engineering, design and construction of network assets; as well as specialist electrical and mechanical instrumentation services. Fixed Communications and Network Construction have been assessed as having similar economic characteristics and being similar in terms of each of the other aggregation criteria set out in AASB 8 Operating Segments including the nature of services, the type of customers and the methods by which services are provided, such that they have been aggregated into a single Telecommunications reportable segment. Energy & Water and Comdain Infrastructure have been assessed as having similar economic characteristics and being similar in terms of each of the other aggregation criteria set out in AASB 8 Operating Segments including the nature of services, the type of customers and the methods by which services are provided, such that they have been aggregated into a single Utilities reportable segment. Unallocated costs, unallocated assets and liabilities, and unallocated depreciation, amortisation and additions to non-current assets relate to certain head office functions and commonly used resources that are not considered appropriate to be allocated to the Group’s reportable segments. 31 Service Stream Limited Notes to the consolidated financial statements 2 Segment information (continued) (a) Products and services from which reportable segments derive their revenues Information regarding the Telecommunications and Utilities reportable segments is presented below: (b) Segment revenues and results Segment revenue Segment EBITDA Telecommunications 2 Utilities 2 Total of all segments Other income Eliminations 2 Unallocated EBITDA 1 Depreciation Amortisation of software Amortisation of customer contracts / relationships EBIT Interest revenue Net financing costs Total revenue Profit before tax Income tax expense Profit for the year 2019 $'000 587,815 273,417 861,232 2018 $'000 535,182 106,734 641,916 522 2,437 (10,273) (12,332) 697 925 852,178 632,946 2019 $'000 75,852 23,782 99,634 (10,091) 89,543 (4,547) (4,254) (7,425) 2018 $'000 62,326 10,471 72,797 (5,501) 67,296 (3,427) (4,086) (1,932) 73,317 57,851 (1,202) 421 72,115 58,272 (22,256) (17,165) 49,859 41,107 1 Earnings before interest, tax, depreciation and amortisation. 2 The prior year comparatives have been restated to reflect the change in reportable segments including eliminations of intra / inter-segment transactions. (c) Segment assets and liabilities Telecommunications Utilities Total of all segments Unallocated Consolidated (d) Other segment information Telecommunications Utilities Total of all segments Unallocated Consolidated Segment assets Segment liabilities 2019 $'000 192,483 331,058 523,541 83,630 607,171 2018 $'000 186,854 78,619 265,473 92,512 357,985 2019 $'000 113,087 108,206 221,293 78,114 299,407 2018 $'000 107,377 13,895 121,272 29,819 151,091 Depreciation and amortisation Additions to non-current assets 2019 $'000 1,804 9,701 11,505 4,721 16,226 2018 $'000 1,898 2,790 4,688 4,757 9,445 2019 $'000 1,173 2,266 3,439 6,429 9,868 2018 $'000 812 433 1,245 6,496 7,741 32 2 Segment information (continued) (e) Information about major customers In the current reporting period, there were two customers (2018: two customers) which each contributed more than 10% of the Group’s revenue. The relevant revenue by segment is shown below: Service Stream Limited Notes to the consolidated financial statements Largest customer Second largest customer No other single customer contributed 10% or more of the Group’s total revenue in 2019 and 2018. 2019: Telecommunications $96.9 million (2018: Telecommunications $136.4 million). 1.0002019: Telecommunications $463.3 million (2018: Telecommunications $359.3 million). 3 Revenue from contracts with customers (a) Revenue from contracts with customers Revenue 2019 $'000 850,959 850,959 2018 $'000 629,584 629,584 (b) Disaggregation of segment revenue The Group derives revenue from the transfer of goods and services over time and at a point in time. The table below provides a disaggregation of operating segment revenues from contracts with customers. 30 June 2019 Segment revenue Intra / Inter-segment revenue Fixed Communications Network Construction Energy & Water Comdain Infrastructure Other Total $'000 $'000 $'000 $'000 $'000 372,631 215,255 113,308 160,222 $'000 861,416 - (71) - (113) - (10,273) (10,457) Revenue from contracts with customers 372,560 215,255 113,195 160,222 (10,273) 850,959 Timing of revenue recognition At point in time Over time 30 June 2018 Segment revenue Intra / Inter-segment revenue 311,832 - 98,504 19,271 (7,444) 422,163 60,728 215,255 14,691 140,951 (2,829) 428,796 372,560 215,255 113,195 160,222 (10,273) 850,959 Fixed Communications Network Construction Energy & Water Comdain Infrastructure Other Total $'000 $'000 $'000 $'000 $'000 301,371 233,879 106,734 (68) - - Revenue from contracts with customers 301,303 233,879 106,734 Timing of revenue recognition At point in time Over time 232,158 - 69,145 233,879 94,678 12,056 301,303 233,879 106,734 (c) Assets and liabilities related to contracts with customers 30 June 2019 Revenue recognised that was included in contract liability balance at the beginning of the period Revenue recognised from performance obligations satisfied in previous periods - - - - - - $'000 641,984 - (12,332) (12,400) (12,332) 629,584 (11,251) 315,585 (1,081) 313,999 (12,332) 629,584 Total $'000 27,726 644 33 Service Stream Limited Notes to the consolidated financial statements 3 Revenue from contracts with customers (continued) (d) Significant estimates The Group’s revenue is recognised when and as the control of the goods and services are transferred to its customers. Ticket of work services and cost reimbursable contract Revenue is recognised based on the transaction price as specified in the contract, net of the estimated achievements of the variable considerations. Judgement is required in determining the Group’s total transaction price. Accumulated experience is used to estimate and provide for the variable considerations applicable, and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. Project delivery Revenue is recognised based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs (percentage of completion method). Judgement is required in determining the Group’s total progress and total contract costs, net of variable considerations on each project delivery. Accumulated experience is used to estimate this progress and total contract costs. Revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. No element of financing is deemed present as sales are generally made with credit terms of 30 days, which is consistent with market practice. The Group’s obligation to warranty claims under the standard warranty terms is recognised as a provision, see note 16. 4 Other income Gain on disposal of assets R&D tax incentives Insurance claim 1 Write back of contingent consideration 2 Interest revenue Other 2019 $'000 422 81 - - 697 19 1,219 2018 $'000 181 165 1,091 1,000 925 - 3,362 1 The insurance claim related to a warehouse incident that occurred in January 2018. The claim was to recover the loss of stock, damage repair and associated costs, the expense of which was recognised as at 30 June 2018. The claim was subsequently settled in July 2018. 2 In the financial year ending 30 June 2017, the Group acquired 100% of the issued shares capital of TechSafe Australia Pty Ltd and TechSafe Management Pty Ltd (together TechSafe) and recognised a contingent consideration of $1,000,000. Based on the FY18 audited result, the contingent consideration was not earned and was written back to other income. There was no other contingent consideration as at 30 June 2018. 5 Finance costs Interest expense: finance lease Interest expense: borrowings Other interest expense Facility fees: bank overdraft and loans Facility fees: bank guarantees Total interest expense and facility fees Facility establishment costs Interest expenses and other finance costs 2019 $'000 21 817 51 579 262 1,730 169 1,899 2018 $'000 40 - 5 218 217 480 24 504 34 Service Stream Limited Notes to the consolidated financial statements Notes 13 14 14 6 Other expense items (a) Depreciation and amortisation expense Depreciation of plant and equipment Amortisation of software Amortisation of customer contracts / relationships (b) Operating lease rental expenses Minimum lease payments (c) Employee benefit expense Post-employment benefits plans Equity-settled share-based payments 7 Income tax expense (a) Income tax recognised in profit or loss Tax expense comprises: Current tax expense in respect of the current year Deferred tax Income tax expense (b) Reconciliation of income tax expense to tax payable 1.000 Profit from continuing operations Tax at the Australian tax rate of 30% 1.000 Tax effect of amounts which are not deductible (taxable) in calculating taxable income R&D tax incentives Pre-acquisition costs Write back of earn out Other non-deductible expenses Income tax expense as per statement of comprehensive income 1.000 Movement through deferred tax (note: 7c) Tax payable 1.000 Less current year tax instalments paid during the year Net income tax payable 1.000 Effective tax rate 2019 $'000 4,547 4,254 7,425 16,226 10,875 10,875 11,905 7,873 19,778 2019 $'000 22,855 (599) 22,256 2019 $'000 72,115 21,635 (24) 556 - 89 2018 $'000 3,427 4,086 1,932 9,445 9,909 9,909 10,842 6,932 17,774 2018 $'000 14,094 3,071 17,165 2018 $'000 58,272 17,482 (49) - (297) 29 22,256 17,165 599 22,855 (15,561) 7,294 (3,071) 14,094 (10,897) 3,197 30.86% 29.46% The tax rate used in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. There has been no change in the corporate tax rate when compared with the previous reporting period. 35 Service Stream Limited Notes to the consolidated financial statements 7 Income tax expense (continued) (c) Deferred tax balances Deferred tax balances arise from the following: Opening balance Charged to income Charged to equity Timing difference related to prior periods DTL (net) acquired through business combination Closing balance 2019 $'000 $'000 $'000 $'000 $'000 $'000 Temporary differences Trade and other receivables Accrued revenue Trade, other payables and provisions Share issue costs Employee benefits Property, plant and equipment Customer contracts / relationships Other 40 (23,087) 5,667 26 6,128 (410) (1,353) 878 (12,111) 287 (2,902) (1,450) 71 2,729 256 2,227 (619) 599 - - - - 2,591 - - - 2,591 Opening balance Charged to income Charged to equity - - - - - - - - - 227 303 1,566 - 2,043 - 554 (25,686) 5,783 97 13,491 (154) (23,962) (23,088) 294 553 (19,529) (28,450) Timing difference related to prior periods DTL (net) acquired through business combination Closing balance 2018 $'000 $'000 $'000 $'000 $'000 $'000 Temporary differences Trade and other receivables Accrued revenue Trade, other payables and provisions Share issue costs Employee benefits Property, plant and equipment Customer contracts Other 119 (79) (20,213) (2,874) 4,101 95 8,155 (595) (1,933) 666 (9,605) 1,566 (79) (2,891) 494 580 212 - - - 10 864 - - - - - - - - (309) - - (3,071) 874 (309) - - - - - - - - - 40 (23,087) 5,667 26 6,128 (410) (1,353) 878 (12,111) Deferred tax assets and liabilities have been set-off by the Company and are presented in the statement of financial position as a deferred tax liability. 36 Service Stream Limited Notes to the consolidated financial statements 7 Income tax expense (continued) (d) Tax consolidation Relevance of tax consolidation to the Group The Company and all its wholly-owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. Service Stream Limited is the head entity in the tax-consolidated group. The members of the tax-consolidated group are identified in note 25. A tax funding arrangement and a tax sharing agreement have been entered into between the entities. As such a notional current and deferred tax calculation for each entity as if it were a taxpayer in its own right has been performed (except for unrealised profits, distributions made and received and capital gains and losses and similar items arising on transactions within the tax-consolidated group which are treated as having no tax consequences). Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax-consolidated group are recognised by the Company (as head entity in the tax consolidated group). Nature of tax funding arrangements and tax sharing agreements Entities within the tax-consolidated group have entered into a tax funding arrangement and a tax sharing agreement with the head entity. Under the terms of the tax funding arrangement, Service Stream Limited and each of the other entities in the tax-consolidated group have agreed to pay or receive a tax-equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. (e) Significant estimates Judgement is required in determining the Group's provision for income taxes. The Group estimates its tax liabilities based on its current understanding of the income tax law. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the future period in which such determination is made. 8 Earnings per share Basic earnings per share: Total basic earnings per share Diluted earnings per share: Total diluted earnings per share Basic and diluted earnings per share 2019 Cents per share 13.09 13.09 2018 Cents per share 11.29 11.29 12.89 12.89 11.10 11.10 The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: Profit for the year attributable to owners of the Company Earnings used in the calculation of basic EPS Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Shares deemed to be issued for no consideration in respect of employee share schemes Weighted average number of ordinary shares for the purposes of diluted earnings per share 2019 $'000 49,859 49,859 1 2019 No.'000 2018 $'000 41,107 41,107 2018 No.'000 380,877 363,952 5,963 6,324 386,840 370,276 37 Service Stream Limited Notes to the consolidated financial statements 9 Trade and other receivables Current 1 month 2 months 3 months Over 3 months Insurance claim1 Other receivables Trade receivables Expected credit loss Total Trade receivables Allowance for doubtful debt Total 2019 $'000 45,121 4,058 1,876 1,070 284 52,409 2019 $'000 (27) (25) (48) (88) (26) (214) 2019 $'000 45,094 4,033 1,828 982 258 52,195 - 2,190 54,385 2018 $'000 40,723 1,108 229 180 47 42,287 2018 $'000 - - - (89) (47) (136) 2018 $'000 40,723 1,108 229 91 - 42,151 1,091 79 43,321 1 The insurance claim related to a warehouse incident that occurred in January 2018. The claim was to recover the loss of stock, damage repair and associated costs, the expense of which was recognised as at 30 June 2018. The claim was subsequently settled in July 2018. Trade receivables are amounts due from customers for good sold or services performed in the ordinary course of business. All new customers are subject to credit checks using external credit reporting agency information to ascertain their risk profile against both internal and industry benchmarks and are used in determination of appropriate credit limits. They are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are recognised initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognised at fair value. The Group holds the trade receivables with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. Details about the Group's impairment policies and the calculation of the loss allowance are provided in note 22(d). 10 Inventories Inventories 2019 $'000 8,868 8,868 2018 $'000 3,045 3,045 Inventories recognised as an expense during the year ended 30 June 2019 amounted to $37,196,000 (2018: $11,138,000). These were included in the raw materials and consumables used line item in the consolidated statement of profit or loss. There were no write-downs of inventories to net realisable value in the current period (2018: $61,000). The write-downs in the prior period were recognised as an expense and included in the raw materials and consumables used line in the consolidated statement of profit or loss. 11 Accrued revenue Accrued revenue 2019 $'000 125,988 125,988 2018 $'000 82,373 82,373 Accrued revenue is defined as a contract asset under AASB 15. The accrued revenue balance represents revenue which has yet to be invoiced to customers at year-end, due to work not yet reaching a stage where it can be invoiced and where the Group’s customers require payment claims to be submitted and approved prior to invoices being issued. The Group adopts the principle consistent with AASB 15 and will not recognise revenue until it is considered to be highly probable and historically it does result in a high level of recoverability of amounts invoiced. Where work has not yet reached a stage where it can be invoiced, revenue is accrued in line with the Group’s accounting policies as outlined at note 32(e) revenue recognition. Details about the Group's impairment policy and assessment of the loss allowance are provided in note 22(d). Accrued revenue has increased by approximately $30.0 million following the acquisition of Comdain Infrastructure, with the remainder of the increase relating to higher volume of services provided to customers. 38 Service Stream Limited Notes to the consolidated financial statements 11 Accrued revenue (continued) The Group is not subject to any significant financing component and the transaction price within the customer contacts have not been adjusted. The Group has opted to apply the practical expedient available under AASB 15.121 whereby the financing component of the performance obligations are not disclosed further as they have an original expected duration of one year or less. 12 Other assets Work in progress Prepayments Financing facility establishment costs Other 13 Plant and equipment Year Ended 30 June 2018 Opening net book value Additions Disposals 1 Depreciation charge Closing net book value 1.000 At 30 June 2018 Cost Accumulated depreciation Net book value 1.000 Year Ended 30 June 2019 Opening net book value Acquisition through business combination Additions Disposals 1 Depreciation charge Closing net book value 1.000 At 30 June 2019 Cost Accumulated depreciation Net book value 1 Disposals are net of accumulated depreciation. 2019 $'000 831 5,837 571 251 7,490 2018 $'000 139 2,468 - 162 2,769 Leasehold improvements $'000 Plant and equipment $'000 Motor vehicles $'000 Total $'000 2,588 279 - (1,588) 1,279 10,376 (9,097) 1,279 1,279 1,075 548 (22) (1,155) 1,725 11,633 (9,908) 1,725 2,324 1,296 (4) (1,389) 2,227 18,832 (16,605) 2,227 2,227 8,640 2,998 (8) (2,393) 11,464 29,854 (18,390) 11,464 945 - (53) (450) 442 2,626 (2,184) 442 442 7,452 35 - (999) 6,930 9,763 (2,833) 6,930 5,857 1,575 (57) (3,427) 3,948 31,834 (27,886) 3,948 3,948 17,167 3,581 (30) (4,547) 20,119 51,250 (31,131) 20,119 39 14 Intangible assets Year Ended 30 June 2018 Opening net book value Additions Amortisation charge Closing net book value At 30 June 2018 Cost 1 Accumulated amortisation Net book value 1.000 Year Ended 30 June 2019 Opening net book value Acquisition through business combinations Additions Disposals 2 Amortisation charge Closing net book value 1.000 At 30 June 2019 Cost 1 Accumulated amortisation Net book value Service Stream Limited Notes to the consolidated financial statements Software $'000 Customer contracts Customer relationships $'000 $'000 Goodwill $'000 Total $'000 12,541 6,166 (4,086) 14,621 36,697 (22,076) 14,621 14,621 - 6,287 (46) (4,254) 16,608 42,937 (26,329) 16,608 6,444 - (1,932) 4,512 6,899 (2,387) 4,512 4,512 25,310 - - (4,945) 24,877 32,209 (7,332) 24,877 - - - - - - - - 54,562 - - (2,480) 52,082 54,562 (2,480) 52,082 129,698 148,683 - - 6,166 (6,018) 129,698 148,831 129,698 - 173,294 (24,463) 129,698 148,831 129,698 96,247 - - - 148,831 176,119 6,287 (46) (11,679) 225,945 319,512 225,945 - 355,653 (36,141) 225,945 319,512 1 The cost of goodwill represents the net carrying value at balance date. 2 Disposals are net of accumulated amortisation. (a) Impairment tests for goodwill Goodwill is monitored by management at an operating segment level. The goodwill allocation is presented below. Fixed Communications Network Construction Energy & Water Comdain Infrastructure (b) Significant estimates 2019 $'000 27,691 43,759 58,248 96,247 2018 $'000 27,691 43,759 58,248 - 225,945 129,698 The Group tests whether goodwill is subject to any impairment on an annual basis. The Group's operating segments and cash generating unit (CGU) are one and the same. The recoverable amount of a CGU is determined based on value-in-use calculations which require the use of assumptions. For key assumptions used in the value-in-use calculations refer to note 14(c). (c) Key assumptions used for value-in-use calculations The recoverable amount of each CGU is determined based on a value-in-use calculation which uses cash flow forecasts covering a four-year period. These forecasts are based on historical projections based on financial performance combined with management’s expectations of future performance based on prevailing and anticipated market factors. 40 Service Stream Limited Notes to the consolidated financial statements 14 Intangible assets (continued) (c) Key assumptions used for value-in-use calculations (continued) Cash flows beyond the next four-year period have been extrapolated where relevant using a 0% per annum real growth rate. A pre-tax discount rate of 12.9% (FY18: 12.9%) for Fixed Communications, Network Construction and Energy & Water and 13.6% for Comdain Infrastructure (FY18: n/a) has been applied in order to discount expected future cash flows into present-day values. The cash flow assumptions that are significant to the determination of the recoverable amounts for each CGU are as follows: (i) Fixed Communications The critical cash flow assumption in Fixed Communications is that Service Stream continues to undertake significant work with its major customers and the forecast compound average annual nominal revenue growth over the four-year period from a base of FY19 is 6%. This assumes existing contracts are extended, new contracts are awarded and margins remain stable as fixed-line telecommunications networks are connected and maintained. (ii) Network Construction The critical cash flow assumption for the wireless component of Network Construction is that Service Stream continues to undertake significant work for or on behalf of the major mobile telecommunication carriers in Australia and the forecast compound average annual nominal revenue growth over the four-year period from a base of FY19 is 26%. This assumes existing wireless contracts are extended, new contracts are awarded and margins remain stable. No cash flows have been included for nbn design and construction activities beyond the existing MIMA & DCMA programs. (iii) Energy & Water The critical cash flow assumption in Energy & Water is that Service Stream continues to undertake significant work with its existing and new customers and the forecast compound average annual nominal revenue growth over the four-year period from a base of FY19 is 11%. This assumes that customers continue to pursue improved demand-side management, creating opportunities in smart metering, new energy products and services including residential & commercial solar and battery storage, and asset maintenance, and achieving growth in the electrical inspections / audit sector. (iv) Comdain Infrastructure The critical cash flow assumption in Comdain Infrastructure is that Service Stream continues to undertake significant design, maintenance and construction services with its existing and new customers in the gas and water sectors and the forecast compound average annual nominal revenue growth over the four-year period from a base of FY19 is 7%. This assumes existing contracts are extended, new contracts are awarded and margin growth is achieved in the short term with margins remaining stable thereafter. The Directors and management have considered and assessed reasonably possible changes in the key assumptions and have not identified any instances that could cause the carrying amount of any CGU to exceed its recoverable amount. 15 Trade and other payables Trade creditors1 Sundry creditors and accruals Goods and services tax payable Income in advance 2019 $'000 52,723 59,730 6,057 43,227 161,737 2018 $'000 20,521 53,742 2,777 33,434 110,474 1 Typically, no interest is charged by trade creditors. The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. Income in advance is defined as contract liabilities under AASB 15. A contract liability pertains to the Group’s obligation to transfer services to its customer for which it has already received payment. The amounts included in income in advance reflect a significant portion of the aggregate performance obligation amounts not yet satisfied as at the end of the reporting period. The Group has opted to apply the practical expedient available under AASB 15.121 whereby the performance obligations are not disclosed further as they have an original expected duration of one year of less. Income in advance has predominantly increased following the acquisition of Comdain Infrastructure. 41 16 Provisions Current Employee benefits1 Provision for contractual obligations2 Provision for onerous contracts3 Provision for contractual disputes4 Non-current Employee benefits1 Service Stream Limited Notes to the consolidated financial statements 2019 $'000 2018 $'000 16,471 11,614 1,866 2,643 32,594 5,785 5,785 9,266 9,845 - - 19,111 4,393 4,393 38,379 23,504 1 The provision for employee benefits represents annual leave, RDO and long service leave entitlements. 2 The provision for contractual obligations represents the present value of an estimate for the future outflow of economic benefits that may be required under the Group’s obligations for warranties, rectification and rework, and data and artefact quality, with its various customers under various contracts. 3 The provision for onerous contracts arises from the Group’s acquisition of Comdain Infrastructure during the year and represents best estimation on loss-making projects where total cost is expected to exceed total revenue. 4The provision for contractual disputes includes amounts arising from the Group’s acquisition of Comdain Infrastructure during the year and represents an allowance to settle a number of contractual matters with customers and major subcontractors. The Group does not offer its customers the option to purchase warranties as a separate service. Warranties simply relate to rectifications and rework performed on completed services. In line with the prior period, these assurance-type warranties are accounted for in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and are disclosed within the provision for contractual obligations in the note of the financial statement. (a) Movement in provision Balance at 1 July 2018 Acquired through business combination Additional provisions reclassified from sundry creditors and accruals Charged / (credited) to profit or loss Additional provisions recognised Unused amounts reversed Amounts used during the year Balance at 30 June 2019 (b) Significant estimates Contractual obligations $'000 Onerous contracts $'000 Contractual disputes $'000 9,845 823 - 2,370 (1,424) - 11,614 - 2,542 - - - (676) 1,866 - 1,225 648 770 - - 2,643 Management estimates the provision for future claims based on the value of work historically performed and the claims of any on-going disputes. Actual claim amounts in the next reporting period are likely to vary from management's estimates. Amounts may be reversed if it is determined they are no longer required. 17 Contributed equity Fully paid ordinary shares Treasury shares 1.000 Number of shares Share capital 2019 No.'000 401,620 - 401,620 2018 No.'000 360,210 (5,322) 354,888 2019 $'000 297,757 - 297,757 2018 $'000 225,144 (7,863) 217,281 42 17 Contributed equity (continued) (a) Fully paid ordinary shares Balance at 1 July 2017 Shares bought back on-market and cancelled 1 Buy-back transaction costs Current tax credit recognised directly in equity Balance at 30 June 2018 Issue of shares Dividend reinvestment plan Consideration for business combination (net of transaction costs) Balance at 30 June 2019 Service Stream Limited Notes to the consolidated financial statements Number of shares '000 365,189 (4,979) - - Share capital $'000 233,151 (7,995) (18) 6 360,210 225,144 1,006 215 40,189 1,777 473 70,363 401,620 297,757 1 During FY18 the company purchased and cancelled 4,979,231 ordinary shares on-market as part of the company's on-going capital management. The shares were acquired at an average price of $1.61 per share, with prices ranging from $1.50 to $1.69. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (b) Employee share schemes Information relating to the employee share schemes is set out in note 24. (c) Treasury shares Treasury shares are shares in Service Stream Limited that are held by the Service Stream Employee Share Trust for the purpose of issuing shares under various share-based incentives plans. Shares issued to employees are recognised on the first-in-first-out basis. Balance at 1 July 2017 Acquisition of treasury shares (average price: $1.47 per share) Shares issued under employee share schemes Balance at 30 June 2018 Acquisition of treasury shares (average price: $1.77 per share) Shares issued under employee share schemes Balance at 30 June 2019 Number of shares '000 Share capital $'000 - (12,690) 7,368 (5,322) (1,006) 6,328 - - (18,597) 10,734 (7,863) (1,777) 9,640 - 18 Dividends Recognised amounts Fully paid ordinary shares Interim dividend Unrecognised amounts Fully paid ordinary shares Final dividend 1 1 The FY18 final fully-franked dividend was paid on 27 September 2018. 2019 Cents per share 2018 Cents per share 3.50 3.50 3.00 3.00 2019 Cents per share 2018 Cents per share 2019 $'000 2018 $'000 14,049 14,049 2019 $'000 10,820 10,820 2018 $'000 5.50 5.50 4.50 4.50 22,089 22,089 16,242 16,242 43 Service Stream Limited Notes to the consolidated financial statements 18 Dividends (continued) In respect of current year's earnings, an interim dividend of 3.50 cent per share franked to 100% at 30% corporate income tax rate was paid to the holders of fully paid ordinary shares on 21 March 2019. In addition, on 20 August 2019, the Directors declared a fully-franked final dividend of 5.50 cents per share to the holders of fully paid ordinary shares in respect of the financial year ended 30 June 2019, to be paid to shareholders on 2 October 2019. This dividend has not been included as a liability in these consolidated financial statements. The dividend will be paid to all shareholders on the Register of Members on 17 September 2019 and the total dividend estimated to be paid in respect of the current shares on issue is $22,089,095. Adjusted franking account balance as at 30 June 19 Lease arrangements (a) Finance lease commitments Company 2019 $'000 19,495 2018 $'000 13,718 The Group leases various plant and equipment and software with a carrying amount of $288,000 (2018: $657,000) under a finance lease expiring within two years. Under the terms of the lease, the ownership of the assets transfers to the Group at no cost at the conclusion of the lease term. Commitments in relation to finance lease are payable as follows: Not longer than 1 year Longer than 1 year and not longer than 5 years Minimum lease payments Future finance charges Recognised as finance lease liability The present value of finance lease liabilities is as follows: Not longer than 1 year Longer than 1 year and not longer than 5 years Minimum lease payments (b) Operating lease commitments 2019 $'000 2018 $'000 293 - 293 (5) 288 288 - 288 391 293 684 (27) 657 369 288 657 The Group leases a number of motor vehicles and premises throughout Australia. The remaining rental period of each individual lease agreement varies between one and seven years with the renewal options ranging from one to five years. The lease agreements are non-cancellable and the majority of to rental adjustments in line with movements in the Consumer Price Index or market rentals. these agreements are subject Not longer than 1 year Longer than 1 year and not longer than 5 years Longer than 5 years 20 Business combinations (a) Summary of acquisition 2019 $'000 9,671 21,449 2,033 33,153 2018 $'000 8,851 18,113 5,818 32,782 On 2 January 2019 (Transaction Date), the issued share capital of Comdain Infrastructure Pty Ltd and Ayrab Pty Ltd and 100% of the issued units of the Ayrab Unit Trust (together Comdain Infrastructure) under the terms of a Share and Unit Sale Deed (SUSD). the Group acquired 100% of Comdain Infrastructure provides a wide range of operations, maintenance, design and construction services to gas and water network owners and operators in Australia. The business’ service capabilities include network assurance; asset upgrades and replacement; engineering, design and construction of network assets; as well as specialist electrical and mechanical instrumentation services. 44 Service Stream Limited Notes to the consolidated financial statements 20 Business combinations (continued) (a) Summary of acquisition (continued) The acquisition provides further diversification to the Group’s revenue stream and Comdain Infrastructure’s service offering is highly complementary to the Group’s Energy & Water business, strengthening the Group's market position in the utilities sector. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Purchase consideration Cash consideration paid Ordinary shares issued Total purchase consideration Assets and liabilities acquired Cash and cash equivalents Trade and other receivables Accrued revenue Inventories Other assets Plant and equipment Customer contracts / relationships Trade and other payables Provisions Current tax liabilities Deferred tax asset Deferred tax liability on customer contracts / relationships Net identifiable assets acquired Add: goodwill Net assets acquired Fair value at 2 Jan 2019 $'000 82,789 70,422 153,211 Fair value at 2 Jan 2019 $'000 37 23,489 27,795 1,997 2,086 17,167 79,872 (61,550) (11,493) (2,907) 4,433 (23,962) 56,964 96,247 153,211 The accounting for the acquisition is provisional and will be finalised in the next accounting period. In completing the purchase price allocation, management has been required to make judgements relating to the fair value of assets and liabilities, in particular the valuation of certain liabilities. (i) Cash consideration Cash consideration comprised $91,690,154 paid on the Transaction Date net of a refund of ($8,901,391) received in June 2019 arising from Working Capital and Income Tax Liability adjustments in accordance with the relevant mechanisms prescribed in the SUSD. (ii) Ordinary shares issued 40,189,126 ordinary shares were issued to the sellers of Comdain Infrastructure as scrip consideration, determined by dividing $68,000,000 by $1.6920 per share in accordance with the relevant mechanisms prescribed in the SUSD. The value ascribed to these ordinary shares for the purpose of the purchase consideration is $70,422,039 based on a share price of $1.7523 being the volume-weighted average price of Service Stream’s ordinary shares on the Transaction Date. (iii) Acquired receivables The fair value of acquired trade receivables is $23,334,000. The gross contractual amount receivables due is $23,941,000, of which $607,000 is expected to be uncollectible. for trade (iv) Revenue and profit contribution Comdain Infrastructure contributed revenues of $160,222,000, EBITDA of $11,118,270 and profit before tax of $3,442,485 to the Group from the Transaction Date to 30 June 2019. 45 Service Stream Limited Notes to the consolidated financial statements 20 Business combinations (continued) (a) Summary of acquisition (continued) If the acquisition had occurred on 1 July 2018, consolidated pro-forma revenue and profit for the year ended 30 June 2019 would have been revenues of approximately $340,000,000, EBITDA of approximately $18,900,000 and profit before tax of approximately $3,410,000 respectively. These amounts have been calculated using Comdain Infrastructure’s results and adjusting them for: • • • differences in the accounting policies between the group and the acquired subsidiaries, an estimate of the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to plant and equipment and intangible assets had applied from 1 July 2018, and an estimate of the additional amortisation of customer contracts and customer relationships that would have been charged from 1 July 2018. (v) Acquisition-related costs Acquisition-related costs of $2,473,000 are included in the consulting and temporary staff as well as in the employee salaries and benefits fees line item in the consolidated statement of profit or loss and in operating cash flows within the statement of cash flows. (b) Purchase consideration - cash outflow Cash outflow with respect to the acquisition Cash consideration paid Less: Cash acquired Net outflow of cash - investing activities There were no acquisitions in the year ending 30 June 2018. 21 Notes to the statement of cash flow (a) Reconciliation of cash and cash equivalents Cash and cash equivalents Balance per consolidated statement of cash flows (b) Reconciliation of profit for the year to net cash flows from operating activities Profit for the year Gain on sale of non-current assets R&D tax incentives Depreciation and amortisation Equity-settled share-based payments Increase / (decrease) in tax balances & other tax adjustments 1 Movement in working capital: Decrease in trade and other receivables Increase in accrued revenue (Increase) / decrease in other assets (Increase) / decrease in inventories (Decrease) / increase in trade and other payables Increase in provisions Decrease in lease incentives Net cash inflow from operating activities (c) Debt reconciliation Borrowings Finance lease Debt as at 30 June 2019 $'000 82,789 (37) 82,752 2018 $'000 73,698 73,698 2018 $'000 41,107 (181) (165) 9,445 6,932 (3,478) 5,600 (11,529) 235 521 27,748 4,176 (734) 79,677 2019 $'000 60,000 288 60,288 46 2019 $'000 70,809 70,809 2019 $'000 49,859 (409) (81) 16,226 7,873 3,546 12,425 (15,820) (2,635) (3,826) (10,286) 3,382 (731) 59,523 2018 $'000 - 657 657 Cash flows 60,000 (369) 59,631 Service Stream Limited Notes to the consolidated financial statements 22 Financial instruments (a) Overview The Group’s activities expose it to a variety of financial risks including interest rate, credit and liquidity risk exposures. The Group’s risk management program looks to identify and quantify these exposures and where relevant reduce the sensitivity to potential adverse impacts on its financial performance. The Group operates a centralised treasury function which manages all financing facilities and external payments on behalf of the Group. Compliance with financial risk management policies, financial exposures and compliance with risk management strategy are reviewed by senior management and reported to the Group’s Audit and Risk Committee and Board on a regular basis. (b) Categories of financial instruments Financial assets at amortised cost Cash and cash equivalents Accrued revenue Trade and other receivables Financial liabilities at amortised cost Finance lease Borrowings Trade and other payables 2019 $'000 2018 $'000 70,809 125,988 54,385 251,182 288 60,000 161,737 222,025 73,698 82,373 43,321 199,392 657 - 110,474 111,131 The Group consider that the carrying amounts of financial assets and financial liabilities recognised at amortised cost in the financial statements approximate their fair values. (c) Market risk - Interest rate risk management During the year, the Group's exposure to the risk of change in market interest rates related primarily to its floating rate borrowings and short-term cash investment activities. The Group has managed its interest rate risk during the year in part by maximising the interest earned from available funds balanced against its working capital needs. Based upon a 100 basis point decrease in prevailing market interest rates as applied to the Group’s net cash balance at 30 June 2019, to a $105,210 per annum unfavourable impact to profit before tax (2018: $736,975 unfavourable). the Group’s sensitivity to interest rate risk would be equivalent (d) Credit risk management Credit risk of the Group arises predominately from outstanding receivables and unbilled accrued revenue to its customers. Refer below for details of the Group's impairment of financial assets assessment. The Group will not recognise revenue until it is considered to be highly probable. Historically unbilled accrued revenue leads to a high level of recoverability. Receivable balances are monitored on an ongoing basis and the Group has a policy of only dealing with creditworthy counterparties and where appropriate, obtaining credit support as means of mitigating the risk of financial loss from credit defaults. Credit reporting information is supplied by independent credit rating agencies where available and the Group uses publicly available financial information and its own internal trading history to credit-assess customers. A significant portion of the Group’s revenue is derived from highly credit rated companies including nbn co and Telstra Corporation Ltd as well as various state utilities and Commonwealth agencies. Impairment of financial assets The Group has two types of financial assets that are subject to the expected credit loss model: • • Trade receivables; and Accrued revenue (contract assets) relating to its customer contracts. While cash and cash equivalents are also subject to the impairment requirements of AASB 9, the expected credit loss is immaterial. 47 Service Stream Limited Notes to the consolidated financial statements 22 Financial instruments (continued) (d) Credit risk management (continued) Trade receivables and contract assets The Group applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. The expected loss rates on trade receivables are based on the payment profiles of sales over a period of 12 months and the corresponding historical credit losses experienced within this period. When applying the impairment requirements of AASB 9 to contract assets, the Group recognises that the aging of accrued revenue is not indicative of its recoverability profile, rather the ability to complete work in progress and/or pending customers' approval the Group assessed that the accrued revenue balance carries a similar expected loss profile as those trade receivables aged as current. Applying the associated expected loss rate to the accrued revenue balance results in an immaterial impairment loss. in order to invoice. Under the expected credit loss principle adopted, On that basis, the loss allowance as at 30 June 2019 was determined as follows. 30 June 2019 Expected loss rate Gross carrying amount - trade receivables Less allowance Current $'000 > 30 days $'000 > 60 days $'000 > 90 days $'000 > 120 days $'000 0.06% 45,121 27 0.61% 4,058 25 2.55% 1,876 48 8.19% 1,070 88 9.19% 284 26 The closing loss allowances for trade receivables as at 30 June 2019 reconcile to the opening loss allowances as follows: Opening balance1 Additional provision recognised Receivables written off during the year as uncollectible Unused amount reversed Closing balance 2019 $'000 136 166 (38) (51) 214 1 No change was recognised on the allowance opening balance upon adoption of AASB 9, refer to note 32(a). (e) Liquidity risk management Management of the Group’s liquidity risk exposure is undertaken daily by the Group’s treasury and finance functions via monitoring of the Group’s actual cash flows and regularly updated forecasting of payable and receivable profiles. In order to maintain adequate liquidity, the Group typically maintains an at-call cash buffer as well as having access to overdraft facilities and syndicated funding lines. Included in note 22(e)(ii) are details of the financing facilities available to the Group at 30 June 2019. 48 Service Stream Limited Notes to the consolidated financial statements 22 Financial instruments (continued) (e) Liquidity risk management (continued) (i) Liquidity and interest rate risk tables The following table detail the Group’s maturity profile for financial liabilities. The amounts disclosed in the table represent the undiscounted cash flows of financial liabilities based on the earliest date on which the Group is contracted to repay principal. Where applicable, these amounts represent both interest and principal cash flows. Weighted average interest rate Carrying amount Contractual cash flow 6 months or less 6-12 months 1-2 years 2-5 years $'000 $'000 $'000 $'000 $'000 $'000 - 2.06% - (288) (60,000) (161,737) (288) (62,349) (161,737) (191) (3,618) (161,737) (97) (6,572) - - (12,958) - - (39,201) - - (222,025) (224,374) (165,546) (6,669) (12,958) (39,201) - - - (657) (110,474) (657) (110,474) (183) (110,474) (111,131) (111,131) (110,657) (186) - (186) (288) - (288) - - - Term loan Bank guarantees Bank overdraft Cash advance $'000 $'000 $'000 $'000 60,000 - 60,000 - - - 42,525 17,475 60,000 19,319 10,681 30,000 - 40,000 40,000 - 5,000 5,000 - 30,000 30,000 - 25,000 25,000 2019 Financial liabilities Finance lease Borrowings Trade and other payables 1.000 2018 Financial liabilities Finance lease Trade and other payables (ii) Financing facilities Amount used Amount unused Balance at 30 June 2019 1.000 Amount used Amount unused Balance at 30 June 2018 The Group's financing facilities are due to expire on 30 September 2021. Under the terms of the Group’s Syndicated Facility Agreement, the term loan is required to be repaid by $3.0 million at the end of each calendar quarter, except that no repayment is required at the end of a calendar quarter where the most recent compliance certificate reports that the Group's net leverage ratio is less than a specified hurdle. The net leverage ratio per the compliance certificate as at 30 June 2019 was less than the specified hurdle meaning that no repayment will be required at 30 September 2019. Under the Interpretation of AASB 101 Presentation of Financial Statements, the Group does not have the unconditional right to defer payment of these quarterly instalments, and has therefore classified the $9.0 million aggregate pertaining to the subsequent three calendar quarter-ends over the next 12 months as current borrowings. Financial guarantees provided in the normal course of business are shown above. Based upon current expectations as at 30 June 2019, the Group considers that it is more likely than not that such amounts will not be payable under these arrangements. 49 Service Stream Limited Notes to the consolidated financial statements 23 Capital risk management The Group manages its capital to ensure that it is able to continue as a going concern and to maximise returns to shareholders. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends and return capital paid to shareholders or issue new shares. Capital is managed in order to maintain a strong financial position and ensure that the Group’s funding needs can be optimised at all times in a cost-efficient manner to support the goal of maximising shareholder wealth. The Board and senior management review the capital structure of the Group at least annually considering any restrictions or limitations that may exist under current financing arrangements with regard to mix of capital. The Group is subject to various financial debt covenants under its Syndicated Facilities Agreement regarding minimum levels of equity, gearing, fixed charge cover and borrowing base; all of which are regularly monitored and reported upon. The Group has complied with the financial debt covenants of its borrowing facilities during the 2019 and 2018 financial reporting periods. 24 Share-based payments (a) Long Term Incentive Plan (LTIP) From time to time employees in senior management roles may be invited, with approval from the Board, to participate in the LTIP. The LTIP operates within the shareholder-approved Employee Share Ownership Plan (ESOP), under the administration of individual participation and the associated number of performance rights offered is recommended by the Managing Director and reviewed by the Remuneration and Nomination Committee, which will then make recommendations to the Board for approval. the Remuneration and Nomination Committee. The extent of In accordance with the provisions of the ESOP, certain employees in senior management roles were invited to participate in the LTIP which entitles them to receive a number of performance rights in respect of the year ending 30 June 2019 (FY19). Each performance right converts into one ordinary share of Service Stream Limited on vesting. No amounts are paid or payable by the participant on receipt of the performance rights, and the performance rights carry neither rights to dividends nor voting rights. The number of performance rights granted is based on the employee’s long term incentive participation rate, which is expressed as a percentage of the participant’s total fixed remuneration (TFR), and the volume-weighted average market price of the Company’s shares over a prescribed period of time or other issue price as deemed appropriate by the Board. Performance rights for each of the LTIP tranches are subject to service and performance criteria being: A B (i) The participant must be an employee at the conclusion of the performance period; 50% of the performance rights granted will each vest where: The Group’s earnings per share (EPS) achieves annual growth of 10% or more over the performance period, commencing with growth from an agreed base EPS, as detailed below. LTIP tranches Performance period Vesting date FY17 1 3 years FY18 2 3 years FY19 3 3 years September 2019 September 2020 September 2021 1 The FY17 LTIP targets, from base of 5.20 cps are: Year 1: 5.72 cps, Year 2: 8.56 cps, Year 3: 12.42 cps. 2 The FY18 LTIP targets, from base of 7.78 cps are: Year 1: 8.56 cps, Year 2: 12.42 cps, Year 3: 14.40 cps. 3 The FY19 LTIP targets, from base of 11.29 cps are: Year 1: 12.42 cps, Year 2: 14.40 cps, Year 3: not yet determined. Subject to the following proportional vesting: Percentage of performance rights that vest 0% 40% EPS target Below 75% At 75% Proportional vesting Greater than 75% and less than 100% 100% 100% and above 50 Service Stream Limited Notes to the consolidated financial statements 24 Share-based payments (continued) (a) Long Term Incentive Plan (LTIP) (continued) (ii) The Group’s total shareholder return (TSR) over the performance period is such that it would rank at or above the 75th percentile (full achievement) or the 50th percentile (pro-rata achievement) of a relevant peer group of companies being those comprising the ASX 200 Industrials index, as detailed below: Percentage of performance rights that vest TSR ranking 0% 50% Proportional vesting Below the 50th percentile At the 50th percentile Above the 50th percentile but below the 75th percentile 100% 75th percentile or above (top quartile) Performance rights will vest to the extent that the participant remains employed by the Company on the vesting date and to the extent that the Company’s performance over the relevant period satisfies the vesting conditions. The following LTIP performance rights arrangements were in existence at the end of the current period: Series Number Grant date Grant date fair value Vesting date Performance period FY17 LTIP 853,073 14 September 2016 FY18 LTIP 665,889 14 September 2017 FY19 LTIP 812,893 21 September 2018 Relative TSR hurdle - 45.2 cps September 2019 1 July 2016 - 30 June 2019 EPS hurdle - 79.3 cps Relative TSR hurdle - 92.5 cps September 2020 1 July 2017 - 30 June 2020 EPS hurdle - 125.8 cps Relative TSR hurdle - 81.8 cps September 2021 1 July 2018 - 30 June 2021 EPS hurdle - 139.1 cps Fair value of performance rights The FY19 LTIP performance rights with the relative TSR hurdle vesting condition have been valued by an independent expert using a Monte-Carlo simulation. The FY19 LTIP performance rights with the EPS hurdle vesting condition have been valued using a Binomial tree methodology. Both valuation methodologies are underpinned by a ‘risk-neutral’ probability framework with lognormal share prices. Key assumptions of the framework that underpin the valuations performed are: arbitrage free markets, complete and liquid markets, stationary lognormal share price return distributions, no trading costs or taxes, risk-neutral probability framework, short selling is possible, continuous trading and perfectly divisible securities. Key inputs into the model The table below details the key inputs to the valuation models. Tranche FY17 LTIP FY18 LTIP FY19 LTIP Share price at grant date Expected life Volatility Risk-free interest rate Dividend yield Vesting date $0.850 $1.480 $1.774 2.87 years 2.87 years 2.87 years 50% 45% 35% 1.37% 1.91% 2.06% 4.00% 4.80% 5.90% September 2019 September 2020 September 2021 51 Service Stream Limited Notes to the consolidated financial statements 24 Share-based payments (continued) (a) Long Term Incentive Plan (LTIP) (continued) Movements in the LTIP performance rights during the year The following table reconciles the outstanding performance rights granted under the LTIP at the beginning and end of the financial year: Balance at start of the financial year Granted during the year Vested during the year Forfeited during the year Balance at end of the financial year 2019 2018 Number of rights Grant date weighted avg FV $ Number of rights Grant date weighted avg FV $ 3,130,497 836,231 (1,548,419) (86,454) 2,331,855 0.538 1.104 0.243 0.893 0.924 4,562,526 767,765 (1,930,951) (268,843) 3,130,497 0.290 1.091 0.162 0.609 0.538 Included in the balance at the end of the financial year are rights which have reached their vesting date but where the performance vesting criteria is yet to be calculated. In accordance with the Employee Share Ownership Plan the shares relating to the FY17 Tranche will be issued to the extent that vesting criteria have been satisfied following final calculations of the Relative TSR measure after release of the FY19 financial statements. As at 30 June 2019, 812,893 performance rights granted under the FY17 Tranche remain unforfeited and subject to vesting criteria. The balance of performance rights outstanding at the end of the year have a remaining contractual life of two years (FY19 Tranche) and one year (FY18 Tranche). (b) Executive Share-based Incentive Plan (ESBIP) The ESBIP is a share-based incentive plan that was established by the Board in 2014 to operate for a five-year period from FY15 to FY19 and offered to the Managing Director and to a small number of other key executives of the time. By accepting the offer to participate in the ESBIP, these executives forfeited their entitlement to participate in both the LTIP and the Short Term Incentive Plan (STIP). ESBIP operated within the shareholder-approved Employee Share Ownership Plan (ESOP), under the administration of the Remuneration and Nomination Committee. The number of performance rights offered to participating executives was endorsed by the Remuneration and Nomination Committee and approved by the Board and by shareholders in the case of the Managing Director. The ESBIP invitation letter provided to participants set out their rights and obligation under the plan, and provided details regarding the number of rights that would be offered to them on an annual basis (by way of an annual offer letter) over a period of up to five years. Each performance right would convert into one ordinary share of Service Stream Limited on vesting. No amounts were paid or payable by the participant on receipt of the performance rights, and the performance rights carried neither rights to dividends nor voting rights. The FY19 ESBIP performance rights were subject to service and performance criteria being: A B(i) B(ii) The participant must have been an employee at the latter of the date on which the Company released its results for the financial year ending 30 June 2019 or otherwise determined that the vesting conditions have been satisfied; and at least 10% growth in earnings per share (EPS) for the performance period was achieved; or an average of at least 10% compound growth in EPS per annum for the aggregate period is achieved. ESBIP tranche Performance period Vesting date Aggregate period end date EPS base (cents per share) FY19 1 year to 30 June 2019 20 August 2019 30 June 2021 11.29 Performance rights will vest to the extent that the participant remained employed by the Company on the vesting date and to the extent that the Company’s performance over the relevant period satisfied the vesting conditions. 52 Service Stream Limited Notes to the consolidated financial statements 24 Share-based payments (continued) (b) Executive Share-based Incentive Plan (ESBIP) (continued) The following ESBIP performance rights arrangements were in existence at the end of the current period. Series Number Grant date Grant date fair value Vesting date Performance period start date FY19 ESBIP 4,500,000 31 August 2018 148.7 cps 20 August 2019 1 July 2018 Fair value of ESBIP performance rights The FY19 ESBIP performance rights with the EPS hurdle vesting condition have been valued by an independent expert using a Binomial tree methodology. This methodology is underpinned by a ‘risk-neutral’ probability framework with lognormal share prices. Key assumptions of the framework that underpin the valuations performed are: arbitrage free markets, complete and liquid markets, stationary lognormal share price return distributions, no trading costs or taxes, risk-neutral probability framework, short selling is possible, continuous trading and perfectly divisible securities. Key inputs into the ESBIP valuation model The table below details the key inputs to the valuation models. Series Share price at grant date Expected life Volatility Risk-free interest rate Dividend yield Vesting date FY19 ESBIP $1.757 0.87 years 35% 1.54% 5.28% 20 August 2019 Movements in the ESBIP performance rights during the year The following table reconciles the outstanding performance rights granted under the ESBIP at the beginning and end of the financial year: Balance at beginning of the financial year Granted during the year Vested during the year Balance at end of the financial year 2019 2018 Number of rights Grant date weighted avg FV Number of rights Grant date weighted avg FV 4,500,000 4,500,000 (4,500,000) 4,500,000 1.326 1.487 1.326 1.487 5,150,000 4,500,000 (5,150,000) 4,500,000 0.825 1.326 0.825 1.326 Included in the balance as at 30 June 2019 are rights which have reached their vesting date and both the service and performance criteria have been met (number of rights 4,500,000). The relevant number of shares will be delivered to the participants after the release of the FY19 financial statements. 53 25 Subsidiaries Details of the Company’s subsidiaries at 30 June 2019 are as follows: Name of entity Parent entity Service Stream Limited (i) Subsidiaries Service Stream Holdings Pty Ltd (ii) (iv) Service Stream Fixed Communications Pty Ltd (ii) (iii) (iv) Service Stream Mobile Communications Pty Ltd (ii) (iii) (iv) Service Stream Customer Care Pty Ltd (ii) (iii) (iv) Radhaz Consulting Pty Ltd (ii) (iv) Service Stream Infrastructure Services Pty Ltd (ii) (iii) (iv) Service Stream Energy & Water Pty Ltd (ii) (iii) (iv) Service Stream Nominees Pty Ltd (ii) (iii) (iv) Service Stream Operations Pty Ltd (ii) (iii) TechSafe Australia Pty Ltd (ii) (iii) (iv) TechSafe Management Pty Ltd (ii) (iii) (iv) Ayrab Pty Ltd (ii) (iii) (iv) Comdain Infrastructure Pty Ltd (ii) (iii) (iv) Comdain Civil Constructions Pty Ltd (ii) (iv) Comdain Civil Constructions (QLD) Pty Ltd (ii) (iv) Comdain Services Pty Ltd (ii) (iv) Comdain Asset Management Pty Ltd (ii) (iv) Comdain Gas (Aust) Pty Ltd (ii) (iv) Comdain Services (AMS) Pty Ltd (ii) (iv) Comdain Corporate Pty Ltd (ii) (iv) Comdain Assets Pty Ltd (ii) (iv) Service Stream Limited Notes to the consolidated financial statements Country of incorporation Ownership interest 2019 % 2018 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - - - - - - - - (i) (ii) (iii) (iv) Service Stream Limited is the head entity within the tax-consolidated Group. These companies are members of the tax-consolidated Group. These companies are wholly owned subsidiaries of Service Stream Holdings Pty Ltd. These wholly-owned subsidiaries have entered into a deed of cross guarantee with Service Stream Limited pursuant to ASIC Corporations (wholly-owned companies) Instrument 2016/785 (Instrument) and are relieved of the requirement to prepare and lodge an audited financial and Directors' report. 26 Deed of cross guarantee The parties to a deed of cross guarantees for the Group as listed in note 25 represent a ‘closed group’ for the purposes of the Instrument, and as there are no other parties to the deed of cross guarantee that are controlled by Service Stream Limited, they also represent the ‘extended closed group'. A separate consolidated statement of comprehensive income and consolidated balance sheet of the parties to the deed of cross guarantees have not been disclosed separately as it is not materially different to those of the Group. 54 Service Stream Limited Notes to the consolidated financial statements 27 Related party transactions The immediate parent and ultimate controlling party of the Group is Service Stream Limited. Balances and transactions between the Company and its controlled entities, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. (a) Key management personnel compensation The aggregate compensation made to key management personnel of the Group is set out below: Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments1 2019 $ 3,171,193 156,342 71,230 4,549,607 7,948,372 2018 $ 2,641,617 144,057 47,884 4,061,041 6,894,599 1 The fair value of performance rights issued under the ESBIP and LTIP, allocated on a pro-rata basis to the current financial year. The compensation of each member of the key management personnel of the Group is set out in the remuneration report. (b) Other transaction with key management personnel of the Group During the period, Tom Coen had a beneficial interest in three of the commercial properties and Peter Coen had a beneficial interest in one commercial property that the Group occupied. Total rental income paid to the landlord is approximately $367,500 across the three premises (2018: nil). The terms of the lease have been reviewed and are at arm’s length. 28 Parent entity information The accounting policies of the parent entity, which have been applied in determining the financial information of the parent entity shown below, are the same as those applied in the consolidated financial statements. Refer to note 32 for a summary of the significant accounting policies relating to the Group. (a) Financial position Current assets Non-current assets Total assets 1.000 Current liabilities Non-current liabilities Total liabilities 1.000 Net assets 1.000 Issued capital Reserves – equity-settled employee benefits Accumulated losses Equity (b) Financial performance Profit for the year Total comprehensive income 2019 $'000 73 256,318 256,391 1,395 - 1,395 2018 $'000 49 169,821 169,870 3,415 - 3,415 254,996 166,455 276,221 2,475 (23,700) 254,996 203,609 (6,212) (30,942) 166,455 2019 $'000 37,519 37,519 2018 $'000 43,814 43,814 55 Service Stream Limited Notes to the consolidated financial statements 28 Parent entity information (continued) (c) Determining the parent entity financial information (i) Investment in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of Service Stream Limited. Dividends received from associates are recognised in the parent entity's profit or loss when its right to receive the dividend is established. (ii) Guarantees entered into by the parent entity The parent entity is party to the Group’s financing facilities as a security provider under the Security Trust Deed. In addition, the parent entity provides cross guarantees as described in notes 25 and 26, and the parent entity guarantees to certain clients in relation to subsidiary contract performance obligations. (iii) Share-based payments The grant by the Company of shares over its equity instruments to the employees of subsidiary is treated as a capital contribution to that subsidiary. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity. 29 Contingent assets and liabilities Contingent liabilities and claims, indeterminable in amount, exist in the ordinary course of business. All known liabilities have been brought to account and adequate provision has been made for any known and anticipated losses. 30 Events after the reporting period There has not been any matter or circumstance occurring subsequent to the end of the financial year that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. 31 Remuneration of auditors Audit and review of the financial report Review of income tax return Services relating to the acquisition of Comdain Infrastructure Review of executive long-term incentive plan Tax advice and other services 2019 $ 682,000 21,000 144,000 60,180 25,000 932,180 2018 $ 315,000 27,000 - - 59,640 401,640 The auditor of Service Stream Limited is PricewaterhouseCoopers. 32 Significant accounting policies This note provides a list of significant accounting policies adopted in the preparation of these consolidated financial statements. These policies have been consistently applied to all the years presented, except for the change in accounting requirements of AASB 9 and AASB 15, which is effective from 1 July 2018. The financial statements are for the consolidated entity consisting of Service Stream Limited and its subsidiaries. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. Service Stream Limited is a for-profit entity for the purpose of preparing the financial statements. The financial statements were authorised for issue by the Directors on 20 August 2019. Compliance with IFRS The consolidated financial statements of the Group also comply with International Financial Reporting Standards as issued by the International Accounting Standard Board. 56 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (a) Basis of preparation (continued) New and amended standards adopted by the Group The Group has applied the following standard and amendment for the first time for their annual reporting period commencing 1 July 2018: • • Instruments. This Standard replaces AASB 139 Financial AASB 9 Financial Instruments: Recognition and Measurement. AASB 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculation of impairment on financial assets. It also carries instruments from AASB 139. The Group has forward guidance on recognition and de-recognition of financial applied AASB 9 retrospectively, but has elected not the comparative information provided continues to be accounted for in accordance with the Group's previous accounting policy. to restate comparative information. As a result, To assess for any expected credit losses under AASB 9, there is consideration around the probability of default upon initial recognition of the asset, the subsequent consideration as to whether there have been any significant increases in credit risk on an ongoing basis at each reporting period. To assess whether there is a significant increase in credit risk the Group compares the risk of a default occurring on the asset as at the reporting date with the risk of default as at the date of initial recognition. There were no adjustments recognised upon transition. AASB 15 Revenue from Contracts with Customers replaces AASB 118 and is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The Group adopted the new accounting standard in the financial year using the modified retrospective approach. There were no adjustments recognised upon transition. Management has undertaken a detailed review of AASB 15 together with a detailed review of all material revenue contracts. This review included assessing all contract types for the entire revenue base in Fixed Communications, Network Construction, Energy & Water and Comdain Infrastructure against the 5-step model for recognising revenue outlined in AASB 15. The review considered potential changes in the timing of revenue recognition, measurement of the amount of revenue and note disclosure changes between the current standard, AASB 15, and AASB 118. The key revenue types that were assessed under AASB 15 for each of the Group's operating segments were as follows: (a) Fixed Communications provides services to owners of fixed line telecommunication networks. The revenue types within this segment include ticket of work, minor projects and overhead allowances. (b) Network Construction provides turnkey services associated with engineering, design and construction in the telecommunication sector. Key revenue components include design, construction and overhead allowances. (c) Energy and Water provides a range of new energy services, meter inspection and compliance services to electricity networks owners and regulators. Key revenue components include ticket of work and minor projects. reading, (d) Comdain Infrastructure provides a wide range of operations, maintenance, design and construction services to gas and water network owners and operators in Australia. Key revenue components include ticket of work, design and construction projects and cost reimbursement contracts. Early adoption of standards The Group has not elected to early adopt the Standards and Interpretations issued but not yet effective. Refer to note 32(z). Historical cost convention The consolidated financial statements have been prepared on the basis of historical cost, except for certain assets and liabilities that are measured at revalued amounts or fair values, as explained in the accounting policies below. Historical cost is generally based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars. Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 33. 57 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (b) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. When the Group ceases to consolidate an entity, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This means that amounts previously recognised in other comprehensive income are reclassified to profit or loss. (c) Goodwill Goodwill acquired in a business combination is initially measured at its cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised at the date of the acquisition. Goodwill is subsequently measured at its cost less any impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash generating units, or groups of cash generating units, expected to benefit from the synergies of the business combination. Cash generating units or groups of cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the cash generating unit (or group of cash generating units) is less than the carrying amount of the cash generating unit (or groups of cash generating units), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the cash generating units and then pro-rata on the basis of the carrying amount of each asset in the cash generating unit (or groups of cash generating units). An impairment is recognised immediately in the profit or loss and is not reversed in a subsequent accounting period. loss recognised for goodwill On disposal of the relevant cash generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. (d) Segment reporting Operating segments are determined based on the nature of the business activities undertaken by the Group and by reference to the structure of internal reporting provided to the chief operating decision maker. The chief operating decision maker is responsible for allocating resources and assessing performance of the operating segments. Where operating segments have been assessed as bearing similar economic characteristics and being similar in terms of each of the aggregation criteria set out in AASB 8 Operating Segments including the nature of services, the type of customers and the method by which services are provided, they may be aggregated into a single reportable segment. Details of the Group’s segment reporting is set out in note 2. (e) Revenue recognition The Group has four distinct revenue streams, being (i) revenue from the provision of ticket of work services, (ii) revenue from the delivery of projects, (iii) revenue from cost reimbursable contract and (iv) revenue from overhead recovery. Ticket of work services Ticket of work services are repetitive, high volume tasks performed by the Group such as the provision of: • • • • operations and maintenance services to the owners and operators of networks including customer connections and service assurance; telecommunications, gas and water specialist metering, in-home and new energy services in respect of electricity, gas and water networks; inspection, auditing and compliance services to electricity network owners and regulators, government entities and electrical contractors; and contact centre services and workforce management support for key contracts. 58 32 Significant accounting policies (continued) (e) Revenue recognition (continued) The benefits provided to customers under this category of work type do not transfer to the customer until the completion of the service and as such revenue is recognised upon completion (At point in time). Service Stream Limited Notes to the consolidated financial statements Project delivery Project works relate primarily to: • turnkey services associated with the engineering, design and construction of infrastructure projects in the telecommunications and utilities sectors. Service capability includes program management, site acquisition, town for projects in wireless and fixed-line planning, design, engineering and construction management telecommunications networks, and gas and water utilities networks; and • minor work services such as asset remediation, augmentation and relocation. The benefits provided to customers under this category of work transfer to the customer as the work is performed and as such revenue is recognised over the duration of the project based on percentage complete. The Group’s performance obligation is fulfilled over time and as such revenue is recognised over time (Over time). Percentage complete is measured according to the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Where this is the case, stage of completion is measured on a milestone basis. As work is performed on the assets being constructed they are controlled by the customer and have no alternative use to the Group, with the Group having a right to payment for performance to date. Project revenue earned is typically invoiced monthly or in some cases on achievement of milestones. Invoices are paid on standard commercial terms, which may include the customer withholding a retention amount until finalisation of the construction. Where recognised project revenues exceed progress billings, the surplus is shown in the consolidated balance sheet as an asset, under accrued revenue. Where progress billings exceed recognised revenues, the surplus is shown in the consolidated balance sheet, as a liability, as income in advance under trade and other payables. Amounts billed for work performed but not yet paid by the customer are included in the consolidated balance sheet, as an asset, under trade and other receivables. When it is probable that total contract costs will exceed total contract revenue, the expected loss (onerous) is recognised as an expense and provisions as set out in note 16. Cost reimbursable The Group recognises revenue (and its associated margins) on all direct, indirect and overhead related costs, as prescribed under the cost reimbursable contract. The work performed has no alternative use for the Group and there is an enforceable right to payment, including a profit margin, when the costs are incurred, as such revenue is recognised over time (Over time). Overhead recovery Certain customer contracts allow for the recovery of specified overhead costs. The benefits provided to the customer under this revenue stream are simultaneously received and consumed by the customer and as such revenue is recognised over the period the services are provided (Over time). Variable consideration It is common for contracts to have variable considerations such as variations, performance bonuses or penalties and other performance constraints related KPIs. The expected value of revenue is only recognised when the uncertainty associated with the variable consideration is subsequently resolved, or when it becomes highly probable. The Group assesses the variable consideration to be included in the transaction price periodically. This assessment involves judgements and is based on all available information including historical performance and any variations that are entered into. Contract assets and liabilities AASB 15 uses the terms 'contract asset' and 'contract liability' to describe what is commonly known as 'accrued revenue' and 'income in advance'. Trade receivable represent receivables in respect of which the Group's right to consideration is unconditional subject only to the passage of time. Contract assets represent the Group's right to consideration for services provided to customers for which the Group's right remains conditional on something other than the passage of time. Contract liabilities arise where payment is received prior to the work being performed. Contract assets and contract liabilities are recognised and measured in accordance with this accounting policy. 59 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (e) Revenue recognition (continued) Contract fulfilment costs Costs incurred prior to the commencement of a contract may arise due to mobilisation/site set-up costs, feasibility studies, environmental impact studies and preliminary design activities as these are costs incurred to fulfil a contract. Where these costs are expected to be recovered, they are capitalised and amortised over the course of the contract consistent with the transfer of service to the customer. Where the costs, or a portion of these costs, are reimbursement by the customer, the amount received is recognised as deferred revenue and allocated to the performance obligations within the contract and recognised as revenue over the course of the contract. Financing components The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer represents a financing component. As a consequence, the Group does not adjust any of the transaction prices for the time value of money. Warranties and defect periods Construction and services contracts generally include defect and warranty periods following completion of the project. These obligations are not deemed to be separated performance obligations and therefore estimated and included in the total costs of the contracts. Where required, amounts are recognised accordingly in line with AASB 137 Provision, Contingent Liabilities and Contingent Assets. Revenue in the comparative period is recognised when the amount of revenue can be reliably measured and when it is probable that the future economic benefit will flow to the entity. The Group base its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue from construction contracts in the comparative period is recognised in accordance with the accounting policy set out in note 32(f). (f) Revenue accounting policies applied until 30 June 2018 (i) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue is recognised for the major business activities as follows: Revenue from operations Revenue from a contract to provide services is recognised when probable and measurable, as contracted services are delivered. Revenue from construction contracts is recognised in accordance with the accounting policy set out below. Interest revenue Interest revenue is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. (ii) Construction contracts Under AASB 111 Construction Contracts, where a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the end of reporting period. This is normally measured according to the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Where this is the case, stage of completion is measured on a milestone basis. Variations in contract work, claims and incentive payments are included to the extent that the amount can be measured reliably and its receipt is considered probable. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent that it is probable that contract costs incurred will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. 60 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (f) Revenue accounting policies applied until 30 June 2018 (continued) Where recognised revenues exceed progress billings, the surplus is shown as accrued revenue. For contracts where progress billings exceed recognised revenues, the surplus is shown as income in advance. Amounts received before the related work is performed are included in the consolidated balance sheet, as a liability, as income in advance under trade and other payables. Amounts billed for work performed but not yet paid by the customer are included in the consolidated balance sheet, as an asset, under trade and other receivables. Judgements made in the application of AASB 111 include: • • • determination of stage of completion; estimation of total contract revenue and contract costs; and assessment of the probability of customer approval of variations and acceptance of claims. It is reasonably possible on the basis of existing knowledge that outcomes within the next financial year are different from the estimates and assumptions listed above. (g) Leases Leases of plant and equipment where the group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lower of the lease’s fair value at inception or the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The plant and equipment acquired under finance leases is depreciated over the asset’s useful life. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the profit or loss on a straight-line basis over the period of the lease. (h) Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of employee short-term benefits are measured at their nominal values using the remuneration rate expected to apply at the time of the settlement. Liabilities recognised in respect of long-term employee benefits are measured as the present value of the estimated future cash outflows in respect of services provided by employees up to reporting date. Expected future payments falling due more than 12 months after the end of the reporting period are discounted using corporate bonds market yields. Remeasurements as a result of employment status and changes in actuarial assumptions are recognised in profit or loss. Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or to providing termination benefits as a result of an offer made to encourage voluntary redundancy where applicable. The obligations are presented as current liabilities in the balance sheet if the entity does not have an unconditional right to defer settlement for at least 12 months after the reporting period, regardless of when the actual settlement is expected to occur. (i) Share-based payments Equity-settled share-based payments to executives and Directors are measured at the fair value of the equity instrument at the grant date. Details regarding the determination of the fair value of the equity instruments are set out in note 24. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period. At the end of each reporting period the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve. 61 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (j) Taxation Current tax The income tax expense for the period is the tax payable on the current period's taxable income based on the applicable income tax rate for each jurisdiction adjusted by any changes in the deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted by the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items that are recognised outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognised outside profit or loss, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is included in the accounting for the business combination. R&D tax incentive R&D tax incentives are accounted for in accordance with AASB 120 Accounting for Government Grants and Disclosure of Government Assistance whereby the additional 8.5% incentive from the Government to invest in specific R&D activities is classified as revenue. Where R&D relates to capital items, the incremental 8.5% incentive is recognised as revenue over the period that the asset is amortised. (k) Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred is the sum of the acquisition-date fair values of assets transferred, liabilities incurred and any equity instruments issued. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group's operating and accounting policies and other pertinent conditions in existence at the acquisition date. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If the consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. 62 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (k) Business combinations (continued) Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to the present value as at the date of exchange. Contingent consideration is classified as a financial liability. Amounts classified as financial liabilities are subsequently remeasured to fair value with changes to fair value recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. (l) Plant and equipment Plant and equipment, leasehold improvements and motor vehicles are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the amount payable to their present value as at the date of acquisition. Depreciation is calculated on a straight-line basis so as to write-off the net costs or other revalued amount of each asset over its expected useful life to its estimated residual value. Depreciation methods, estimated useful lives and residual values are reviewed at the end of each annual accounting period, with the effect of any changes recognised on a prospective basis. Plant and equipment is de-recognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of plant and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in profit or loss. The following estimated useful lives are used in the calculation of depreciation: Leasehold improvements: 2 - 7 years Plant and equipment: 1 - 10 years • • • Motor vehicles: 4 - 10 years (m) Intangible assets Costs incurred in developing products or systems and costs incurred in acquiring software and licences that will contribute to future period financial benefits through revenue generation or cost reduction are capitalised to software and systems. Any costs associated with maintaining software and systems are recognised as an expense as incurred. IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where the Group has an intention and ability to use the asset. The amount initially recognised includes direct costs of materials and service and direct payroll and other payroll-related costs of employees’ time spent on the project. Customer contracts and customer relationships acquired in a business combination are initially recognised at their fair value at the acquisition date, which is regarded as their cost. Software, customer contracts and customer accumulated amortisation and any impairment losses. relationships have finite lives and are carried at cost less any Amortisation is recognised on a straight-line basis over each asset’s estimated useful life. The estimated useful life and amortisation method are reviewed at the end of each annual accounting period, with the effect of any changes in estimate being accounted for on a prospective basis. The estimated useful lives used in the calculation of amortisation range from between 3 to 8 years for software and from 1 to 11 years for customer contracts and 11 years for customer relationships. (n) Impairment of tangible and intangible assets excluding goodwill At the end of each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have incurred an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash generating units, or otherwise they are allocated to the smallest group of cash generating units for which a reasonable and consistent allocation basis can be identified. 63 32 Significant accounting policies (continued) (n) Impairment of tangible and intangible assets excluding goodwill (continued) Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired. Service Stream Limited Notes to the consolidated financial statements In assessing The recoverable amount value-in-use, the estimated future cash flows are discounted to their present value using the pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. the fair value less costs of disposal and value-in-use. is the higher of If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. (o) Inventories Inventories are stated at the lower of cost and net realisable value. Costs are assigned to inventories by the method most appropriate to the particular class of inventory, with the majority being valued on a first in, first out basis. The inventory balance is comprised of purchased inventory, the cost of which is determined after deducting rebates and discounts. (p) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. (q) Financial instruments Financial assets and financial provisions of the instrument. liabilities are recognised when a Group entity becomes a party to the contractual (i) Classification From 1 July 2018, the Group classifies its financial assets and liabilities in the following measurement categories: those to be measured subsequently at fair value (either through OCI or through profit or loss), and those to be measured at amortised cost. • • The classification depends on the entity’s business model for managing the financial assets and liabilities and the contractual terms of the cash flows. For assets and liabilities measured at fair value, gains and losses will either be recorded in profit or loss or OCI. (ii) Recognition and derecognition Commonly purchases and sales of financial assets are recognised on trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. (iii) Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss. Changes in the fair value of financial assets at FVPL are recognised in other gains/(losses) in the statement of profit or loss as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value. (iv) Impairment From 1 July 2018, the Group assesses, on a forward-looking basis, the expected credit losses associated with its financial assets carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. 64 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (q) Financial instruments (continued) (iv) Impairment (continued) For trade receivables and contracts assets, the group applies the simplified approach permitted by AASB 9, which requires expected lifetime losses to be recognised from the date of initial recognition, see note 22(d) for further details. (v) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (vi) Accounting policies applied until 30 June 2018 The Group has applied AASB 9 retrospectively, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the Group’s previous accounting policy. Classification Until 30 June 2018, the Group classified its financial assets and liabilities in the following categories: • • • financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets. Financial assets All financial assets are recognised and de-recognised on trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned. Such assets are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value. Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss (FVTPL), held-to-maturity investments, available-for-sale (AFS) financial assets and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortised costs of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) over the expected life of the debt instrument or, a shorter period, to the net carrying amount on initial recognition. Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL. Loans and receivables Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. 65 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (q) Financial instruments (continued) Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectable, it is written-off against the allowance account. Subsequent recoveries of amounts previously written-off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. (vii) Financial liabilities and equity instruments Classification as debt or equity Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs. Financial guarantee liabilities A financial guarantee is a contract that requires the issuer of the guarantee to make a specified payment to the holder of the guarantee in the event that it suffers a loss due to the guarantee drawer’s failure to make payment or otherwise satisfy its contractual obligations under an agreement with the holder. The drawer of the guarantee is required to reimburse the issuer for any loss suffered in satisfaction of the guarantee obligation to the holder. Financial guarantee liabilities are initially measured at their fair values and are subsequently measured at the higher of: • • the amount of the obligation under the contract, as determined in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets; and the amount initially recognised, less where appropriate, cumulative amortisation recognised in accordance with the revenue recognition policies. Financial liabilities Financial financial liabilities. liabilities are classified as either financial liabilities at fair value through profit or loss (FVTPL) or other Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial interest expense recognised on an effective yield basis. liabilities are subsequently measured at amortised cost using the effective interest method, with Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying value on initial recognition. De-recognition of financial liabilities The Group de-recognises financial otherwise expire. The difference between the carrying amount of consideration paid or payable is then recognised in profit or loss. liabilities only when the Group’s obligations are fully discharged, cancelled or liability de-recognised and the the financial 66 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (r) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less loss allowance. See note 9 for further information about the Group's accounting for trade receivables and note 22(d) for an assessment of the Group's impairment methodology. (s) Trade and other payables Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised initially at their fair value and are not discounted if the effect of discounting is immaterial. (t) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or other payables in the consolidated balance sheet as applicable. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority are presented as operating cash flows. (u) Cash and cash equivalents Cash comprises cash on hand and outstanding deposits less any unpresented cheques. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value and have a maturity of three months or less at the date of acquisition. Bank overdrafts are shown within borrowings in current liabilities in the Group's consolidated balance sheet. (v) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’s equity instruments, for example as the result of a share buy-back or a share-based incentive scheme, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the owners of Service Stream Limited as treasury shares until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of Service Stream Limited. Shares held by the Service Stream Employee Share Trust are disclosed as treasury shares and deducted from contributed equity. (w) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period. (x) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing: • • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares; by the weighted average number of ordinary shares outstanding during the financial year. 67 Service Stream Limited Notes to the consolidated financial statements 32 Significant accounting policies (continued) (x) Earnings per share (continued) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares; and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (y) Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial / Directors' Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the Directors' report and the financial report. Amounts in the Directors' report and the financial report have been rounded off to the nearest thousand dollars, in accordance with that Instrument. (z) New accounting standards and interpretations • • • AASB 16 Leases (effective from annual reporting period beginning on or after 1 January 2019). AASB 16 modifies accounting for leases by removing the current distinction between operating and financing leases. The standard requires recognition of an asset and a financial liability for all leases, with exemptions for short term and low value leases. The standard will primarily affect the accounting for the Group’s operating leases in respect of motor vehicles and premises. As at 30 June 2019, the Group had non-cancellable operating lease commitments of $33.2 million as disclosed in note 19 of the financial statements. On transition to AASB 16 and moving forward, for operating leases for which payments are currently required to be expensed, the Group will recognise right of use assets and corresponding liabilities for the principal amount of lease payments, which will then result in amortisation and interest expenses being recognised in the income statement (replacing operating lease expenses). Certain performance metrics and ratios may be impacted as a result of the above changes, including EBITDA and to lesser extent EPS which are measures used to assess senior executive performance as part of the Group’s remuneration framework. If AASB 16 was adopted from 1 July 2018 and the cost model was applied subsequently: • • EBITDA would have increased by approximately $10.1 million due to lower lease charges to motor vehicle expense and occupancy expense, whilst Depreciation would have increased by approximately $10.0 million and Interest Expense would have increased by approximately $1.1 million, resulting in a minor adverse impact to net profit before tax and earnings per share; and Leasehold assets on the balance sheet as at 30 June 2019 would have increased by approximately $30.2 million representing the present value of the Group’s motor vehicle and property leases, with lease liabilities increasing by approximately $31.2 million. 33 Critical accounting judgements and key sources of estimation uncertainty The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies as described in note 32. The areas involving a higher degree of judgement or estimates are: • • • • • Recognition of revenue from contracts with customers - note 3(d); Estimation of current tax payable and deferred tax balances - note 7(e); Testing of goodwill for impairment - notes 14(b) and 14(c); Estimation of provision for contractual obligations, contractual disputes and onerous contracts - note 16(b); and Estimation of fair value of assets and liabilities in business combination - note 20(a). Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. 68 Service Stream Limited Directors' declaration Directors' declaration In the Directors' opinion: (a) the financial statements and notes thereto are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards, professional reporting requirements, and the Corporations Regulations 2001 and other mandatory giving a true and fair view of the consolidated entity's financial position as at 30 June 2019 and of its performance for the year ended on that date, and (b) (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed Group identified in note 25 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 26. Note 32 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Brett Gallagher Chairman 20 August 2019 Leigh Mackender Managing Director 20 August 2019 69 Independent auditor’s report To the members of Service Stream Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Service Stream Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) (b) giving a true and fair view of the Group's financial position as at 30 June 2019 and of its financial performance for the year then ended complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: the consolidated balance sheet as at 30 June 2019 the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the consolidated statement of profit or loss and other comprehensive income for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality For the purpose of our audit we used overall Group materiality of $3.61 million, which represents approximately 5% of the Group’s profit before tax. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose Group profit before tax because it is a generally accepted benchmark for profit making companies. We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Audit Scope The Group operates across Australia in its key operating segments being Fixed Communications, Network Construction, Energy & Water and Comdain Infrastructure, and has a corporate accounting function based in Melbourne. Our work is performed predominantly in Melbourne and we perform site visits to the Group’s warehouse locations annually, on a rotational basis, to attend an inventory count based on our risk assessment. As part of the current year audit we attended inventory counts in Victoria, New South Wales and Queensland. Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit and Risk Committee. Key audit matter How our audit addressed the key audit matter Goodwill impairment assessment (Refer to note 14) $225.9 million The Group’s goodwill is required by Australian Accounting Standards to be tested annually for impairment at the cash generating unit (CGU) level. The CGUs which have goodwill allocated are: Fixed Communications ($27.7 million), Network Construction ($43.8 million), Energy & Water ($58.2 million) and Comdain Infrastructure ($96.2 million). This is a key audit matter as assessing the carrying value of goodwill inherently requires making estimates of uncertain future cash flows. For example, the Group is subject to customer concentration risk and the volume of work is uncertain as many of the Group’s contracts do not contain volume commitments, therefore are dependent on the customer’s future demand. In addition, there is uncertainty relating to the extension, renewal or replacement of key contracts. Discounted cash flow models (the impairment models) are used by the Group to assess potential impairment in each CGU. The recoverable amount is estimated using a four year forecast based on the Board approved business plan for Fixed Communications, Network Construction, Energy & Water and Comdain Infrastructure. The significant estimates relate to revenue and EBITDA assumptions along with the discount rate applied to the forecast cash flows within the model. We assessed whether the Group’s identification of CGUs was consistent with our knowledge of the operations, internal reporting lines and the level of integration of the newly acquired business. We compared the FY19 forecast with the actual FY19 results to assess the accuracy of forecasting. Where there were any deviations from forecast, we assessed how these were considered in forecasts used in the impairment models. We checked that the four year forecasts used in the impairment models were based on the Board approved business plan. We assessed the assumptions and methodology used in the impairment models, in particular, those relating to revenue, EBITDA and discount rates. To do this we: o assessed the discount rate adopted with the assistance of PwC valuation experts; evaluated the underlying cash flow assumptions in the impairment models for all key customer contracts with reference to current year results and expected project pipelines, and considered external industry information and market data; tested the calculations in the model for mathematical accuracy; and, considered the sensitivity of the calculations by varying key assumptions within a reasonably possible range. o o o We considered the adequacy of the Group’s disclosures on goodwill impairment. Key audit matter How our audit addressed the key audit matter Revenue recognition (Refer to note 3 and 32 (e)) $851.0 million The Group adopted a new revenue accounting policy during the year due to the mandatory introduction of Accounting Standard AASB 15 Revenue from Contracts with Customers. The new policy is disclosed in Note 32 (e). Revenue from provision of ticket of work services involves a high volume of transactions and is recognised once services or activities have been completed. Revenue recognition in relation to the delivery of projects is complex because it is based on the Group’s estimates of: the stage of completion of the contract activity; total forecast contract revenue and costs; the probability of customer approval of variations and claims; and, project completion dates. This is a key audit matter because of its significance to profit, the high volume of revenue transactions associated with ticket of work services and the judgment required in recognising revenue from the delivery of projects. For selected revenue streams we evaluated the group’s processes and controls with respect to the recognition of revenue. For revenue from the provision of ticket of work services, we: tested a sample of transactions by sighting evidence of completed subcontractor claims and/or work orders and compared the revenue amount recognised to the contracted rate with the customer for the type of service. For revenue from the delivery of projects, we: obtained an understanding of the terms and conditions of a sample of contracts; assessed, for a sample of contracts, the Group’s estimates of total contract revenue and forecast contract costs and evaluated the percentage of completion based on actual costs incurred to date; assessed, for a sample of contracts, the accrued revenue or income in advance balance at 30 June by assessing the amounts billed up to 30 June 2019 relative to the revenue recognised to that date; assessed the group’s forecasting accuracy by comparing actual costs incurred relative to the forecast of those costs; tested a sample of transactions by sighting evidence of milestone completion; and, performed retrospective analysis of a selection of incomplete projects at year end to assess the allocation of revenue between periods. Recoverability of accrued revenue (Refer to note 11) $126.0 million Several of the Group’s customers require payment claims to be submitted and approved prior to invoices being issued. This process can extend the time that revenue is classified as accrued. The total accrued For all categories of revenue, our procedures included, amongst others, performing testing over a sample of manual journals. We evaluated the aging of accrued revenue to identify areas of higher risk. Whilst each segment has aged accrued revenue balances, the Fixed Communications and Network Construction segments had the most significant balances. We therefore directed the majority of our audit effort to these segments. Key audit matter How our audit addressed the key audit matter revenue balance at 30 June 2019 is $126.0 million. Payment claims may be rejected by customers for a variety of reasons, for example, the claim’s adherence to contractual obligations. Rejected claims are commonly revised, resubmitted and subsequently approved for payment. However, there is a risk that not all claims will be recovered in full, particularly those that have significantly aged since the original services were provided. To address this risk, an assessment is made regarding the revenue that is highly probable of not reversing and revenue not meeting this criteria is not recognised. The recoverability of accrued revenue is a key audit matter because judgement is required to evaluate whether revenue is highly probable of being recovered. Business Combinations / Acquisition Accounting (Refer to note 20) $153.2 million On 2 January 2019 the Group acquired Comdain Infrastructure for a total considerations of $153.2 million, as described in note 20 of the financial report. The accounting for the acquisition is a key audit matter because it is a significant transaction in the year given the financial and operational impacts on the Group. In addition, the Group made complex judgements when accounting for the acquisition, including: identifying all assets and liabilities of the newly acquired business and estimating the fair value of each asset and liability for initial recognition by the Group, particularly the customer contracts and relationships. The Group was assisted by an external valuation expert in this process. The accounting for the acquisition is provisional at the time of authorisation of the financial report. We performed the following procedures in relation to the recoverability of accrued revenue: assessed the reliability of accrued revenue aging reports by testing that the aging profile was accurate; assessed that revenue had not been accrued if it was considered that it was not highly probable of being recovered; and, assessed the group’s key assumptions such as the long term average claim rejection rate which we compared to actual experience, including recent trends. We also performed sample testing over individual accrued revenue balances to test the Group’s entitlement to the accrued revenue balances. Assisted by PwC valuation experts in aspects of our work, our procedures included the following, amongst others: evaluating the identification of the assets and liabilities acquired against the requirements of Australian Accounting Standards, key transaction agreements, our understanding of the business acquired and selected legal correspondence; assessing the fair values of the acquired assets and liabilities recognised, including: o considering key assumptions used in estimating the fair values of customer contracts and relationships; considering the discount rates used in estimating the fair value of customer contracts and relationships in light of the specific assets being valued; considering the valuation methodologies applied against the requirements of Australian Accounting Standards; and, assessing the competence and capability of the group’s experts. o o o considering the adequacy of the business combination disclosures in light of the requirements of Australian Accounting Standards. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the directors’ report. We expect the remaining other information to be made available to us after the date of this auditor's report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 15 to 23 of the directors’ report for the year ended 30 June 2019. In our opinion, the remuneration report of Service Stream Limited for the year ended 30 June 2019 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Trevor Johnston Partner Melbourne 20 August 2019 Service Stream Limited ASX Additional Information ASX Additional Information for the financial year ended 30 June 2019 Additional information required by the Australian Stock Exchange Limited Listing Rules and not disclosed elsewhere in this report. A. Distribution of Shareholders Number as at 16 August 2019 Category (size of holding) 1-1,000 1,001- 5,000 5,001-10,000 10,001-100,000 100,001+ Holders 1,129 1,924 971 1,338 138 5,500 B. There are 5,500 holders of fully paid ordinary shares. The Company has no other class of shares issued. C. The number of shareholdings held in less than marketable parcels is 183. D. The names of the substantial shareholders listed in the holding company’s register, and their shareholdings (including shareholdings of their associates), as at 16 August 2019 are: Shareholder Thorney International Pty Ltd (1) Thorney Opportunities Ltd (1) Comdain nominees Pty LtdOrdinary 15,356,432 5,552,220 38,444,918 % 3.82% 1.38% 9.57% (1) The Company treats Thorney International Pty Ltd and Thorney Opportunities Ltd with an aggregated holding of 5.2% as associated entities as defined in the Corporations Act. E. Voting Rights The voting rights attached to each class of equity security are as follows: Ordinary shares 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. Options These securities have no voting rights. F. Net Tangible Assets The net tangible assets per security is ($0.0293) (2018: $0.1612). Service Stream Limited ASX Additional Information G. 20 Largest Shareholders as at 16 August 2019 - Ordinary Shares Name of 20 largest shareholders in each class of share HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Comdain Nominees Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited Bnp Paribas Nominees Pty Ltd UBS Nominees Pty Ltd Rubi Holdings Pty Ltd Dr Roger Graham Brooke + Mrs Sally Ann Brooke Bnp Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd DRP Netwealth Investments Limited HSBC Custody Nominees (Australia) Limited - A/C 2 Bnp Paribas Noms Pty Ltd AMP Life Limited Citicorp Nominees Pty Limited Warbont Nominees Pty Ltd Mr Kevin Ashley Smith James Gaha Brispot Nominees Pty Ltd Hullbridge Investments Pty Ltd Ordinary shares Fully paid number of shares held 103,740,949 56,312,350 38,444,918 35,392,714 34,573,739 7,048,571 5,747,357 5,500,000 4,145,805 3,386,679 3,216,423 3,028,405 2,978,734 2,653,341 2,402,838 2,294,462 2,000,000 1,744,208 1,209,197 1,138,522 % Held 25.83 14.02 9.57 8.81 8.61 1.76 1.43 1.37 1.03 0.84 0.80 0.75 0.74 0.66 0.60 0.57 0.50 0.43 0.30 0.28 316,959,212 78.92 Service Stream Limited Corporate Directory Corporate Directory Directors Brett Gallagher Leigh Mackender Greg Adcock Tom Coen Peter Dempsey Raelene Murphy Deborah Page AM Company Secretaries Vicki Letcher Chris Chapman Registered Office Level 4 357 Collins Street Melbourne Victoria 3000 Tel: +61 3 9677 8888 Fax: +61 3 9677 8877 www.servicestream.com.au Bankers Australia & New Zealand Banking Group HSBC Bank Australia Limited Share Registry Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 Tel: 1300 850 505 (within Australia) +61 3 9415 4000 (outside Australia) Fax: +61 3 9473 2500 Auditors PricewaterhouseCoopers SERVICE STREAM LIMITED ABN: 46 072 369 870 Level 4, 357 Collins Street Melbourne, Victoria 3000 WWW.SERVICESTREAM.COM.AU SERVICE STREAM LIMITED 2019 ANNUAL REPORTSERVICE STREAM LIMITED 2019 ANNUAL REPORT