Service Stream
Annual Report 2020

Plain-text annual report

SERVICE STREAM LIMITED 2020 ANNUAL REPORTAnnual General Meeting The Annual General Meeting of Service Stream Limited will be held as a virtual meeting which will conducted online on Wednesday 21 October 2020, 10.00am Service Stream Limited ABN 46 072 369 870 Annual report for the financial year ended 30 June 2020 Service Stream Limited ABN 46 072 369 870 Annual Report for the year ended 30 June 2020 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 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 68 Page 69 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 Australian dollars. 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 4 to 11, which is not part of these financial statements. The financial statements were authorised for issue by the Directors on 18 August 2020. 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 2020, and in order to comply with the provisions of the Corporations Act 2001. The Directors report is 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 brings to the Board extensive commercial and operational expertise, and strategic leadership gained in the telecommunications, utilities, infrastructure and technical services industries. He has spent over 25 years as a senior executive, director and owner of businesses within these sectors. Brett has specific experience in service delivery, contract management, business development, health, safety & environment, corporate finance and mergers & acquisitions. Brett is an experienced company director and has experience in governance and compliance, reporting and investor relations. His current directorships include not-for-profit and several private businesses that operate predominantly in the utilities and services sector. Brett is a member of the Sustainability, Safety, Health & Environment Committee. 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), MAICD. Leigh Mackender joined Service Stream Limited when it acquired AMRS (now Energy & Water) in February 2008, and has worked predominantly within the telecommunications, utilities and infrastructure industries, through roles in both private and public businesses. Prior to being appointed Managing Director, Leigh had executive responsibility for the Energy and Water division’s national operations. Leigh has specific expertise in strategic leadership, development and implementation of business strategy, operational and financial management, commercial negotiations, client service and business development. He also has extensive experience in health, safety & environment, governance and compliance, investor relations, mergers & acquisitions, technology, human resources and remuneration practices. 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 brings to the Board extensive commercial and operational expertise developed from senior executive roles at Concrete Constructions, Telstra Corporation and nbn co, where he was the Chief Operating Officer. He has specific experience in strategic leadership, large scale infrastructure and construction, telecommunications technology, health, safety & environment, risk management and human resources. Greg has served on numerous Boards throughout his executive career and has experience in governance and compliance, corporate finance and mergers & acquisitions. Greg is Chairman of the Sustainability, Safety, Health & Environment Committee, a member of the Audit and Risk Committee, and was a member of the Remuneration and Nomination Committee until 30 June 2020. 1 Greg is currently a non-executive director of OptiComm Limited and has held no other listed company directorships in the last three years. Service Stream Limited Directors' report Tom Coen Non-Executive Director Term of Office: Non-Executive Director since February 2019. Qualifications: GAICD. Tom Coen brings to the Board extensive commercial and operational expertise following a 35-year career at Comdain Infrastructure where he served as Managing Director and Chairman. He has specific experience in strategic leadership, civil construction, contract and project management, health, safety & environment, and joint ventures across the utilities, engineering and infrastructure services industries, particularly in the water and gas sectors. Tom has served on numerous Boards throughout his executive career and has experience in governance, compliance and reporting. Tom is a member of the Sustainability, Safety, Health and Environment Committee, and from 1 July 2020, the Remuneration and Nomination Committee. 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 Term of Office: Chairman from November 2010 to February 2015, Non-Executive Director since March 2015. Qualifications: B. Tech. (Civil Eng.) (Adel), Grad. Diploma (Bus. Admin.), SAIT, FIEAust, MAICD. Peter Dempsey brings to the Board extensive construction and development expertise following a 40-year career in those industries. He spent 30 years at Baulderstone, including five years as Managing Director. He has specific expertise in engineering, strategic leadership, health, safety & environment, corporate finance, mergers & acquisitions and human resources. Peter has extensive experience as a company director gained across ASX listed and private companies over the last 15 years. His relevant sector experience includes engineering, construction, utilities and telecommunications. Peter’s experience includes Board leadership, governance and compliance, risk management, reporting and remuneration practices. Peter is Chairman of the Remuneration and Nomination Committee and a member of the Audit and Risk Committee. Peter is currently a Non-Executive Director of Monadelphous Limited and has held no other listed company directorships in the last three years. Deborah Page AM Non-Executive Director Term of Office: Non-Executive Director since September 2010. Qualifications: B Ec (Syd), FCA, FAICD, Member CEW. Deborah Page brings to the Board extensive financial expertise from her time at Touche Ross/KPMG including as a Partner, and subsequently from senior finance and operating executive roles with the Lendlease Group, Allen, Allen & Hemsley and the Commonwealth Bank. She has specific experience in corporate finance, accounting, audit, mergers & acquisitions, capital markets, insurance and joint venture arrangements. Deborah has extensive experience as a company director gained across ASX listed, private, public sector and regulated entities since 2001. Her relevant sector experience includes telecommunications, utilities, insurance, renewables and infrastructure. Deborah’s experience includes Board leadership, governance and technology, relations and health, safety & risk management, compliance, environment. remuneration practices, technology, investor 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 and Pendal Group Limited. During the last three years, Deborah held a listed company directorship with GBST Holdings Limited (retired as entity delisted in November 2019). 2 Service Stream Limited Directors' report Raelene Murphy Non-Executive Director Term of Office: Non-Executive Director from November 2015 to October 2019. Raelene Murphy held the role of Non-Executive Director from November 2015 to her retirement from the Company on 23 October 2019. Directors' shareholdings The following table sets out each Director’s relevant interest in shares and rights in shares of the Company as at the date of this report. Service Stream Limited Fully paid ordinary shares Performance rights Directors Number Number B Gallagher G Adcock T Coen P Dempsey D Page L Mackender 1 3,299,673 50,000 38,444,918 1,050,000 443,293 1,100,700 - - - - - 238,544 1 As L Mackender is a Director of the Company, the issuance of performance rights under the FY20 LTIP Tranche was approved by shareholders at the Company's Annual General Meeting on 23 October 2019. Remuneration of key management personnel Information about the remuneration of key management personnel is set out in the remuneration report of this Directors' report, on pages 14 to 22. 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. 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: Director and senior executives Number of rights granted Number of ordinary shares under rights Service Stream Limited L Mackender R Grant 1 J Ash P McCann K Smith 238,544 - 75,114 76,776 106,903 497,337 238,544 - 75,114 76,776 106,903 497,337 1 During the year, R Grant retired from the role of Chief Financial Officer and did not participate in the FY20 LTIP Tranche. Company secretaries Chris Chapman Qualifications: LLB BA (Politics) and GAICD. Chris Chapman was appointed General Counsel in-house experience having held senior legal positions at large private and listed construction and infrastructure businesses. Chris was appointed Company Secretary in February 2019. for the Group in August 2015. Chris has significant 3 Service Stream Limited Directors' report Vicki Letcher Qualifications: BLaw, BCom (major in Accounting), CA, FGIA FCIS. Vicki Letcher joined Service Stream Limited in June 2010 and was appointed Company Secretary in August 2012 until her resignation from the company on 29 July 2020. Principal activities Service Stream is a provider of essential network services, 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. including access, design, build, Review of operations and financial performance Financial overview 1.000 $'000 Revenue EBITDA 1 1.000FY20 1.000FY19 1.000 Change 929,133 852,178 76,955 9.0% ▲ 105,588 89,543 16,045 17.9% ▲ Depreciation & amortisation (20,673) (8,801) (11,872) 134.9% ▼ Amortisation of customer contracts / relationships (11,005) (7,425) (3,580) 48.2% ▼ EBIT Net financing costs Income tax expense Net profit after tax Statutory EPS (cents) 73,910 73,317 593 0.8% ▲ (3,445) (1,202) (2,243) 186.6% ▼ (21,150) (22,256) 1,106 (5.0%) ▲ 49,315 49,859 (544) (1.1%) ▼ 12.13 13.09 (0.96) (7.4%) ▼ Dividends declared per share (cents) 9.00 9.00 - - 1.000 Adjusted profitability 2: EBITDA from Operations EBITDA from Operations % Adjusted EBIT (EBITA) Adjusted NPAT (NPATA) Adjusted EPS (cents) 108,115 93,266 14,849 15.9% ▲ 11.6% 10.9% 87,442 84,465 58,787 57,663 0.7% 2,977 1,124 ▲ 3.5% ▲ 1.9% ▲ 14.46 15.14 (0.68) (4.5%) ▼ 1Earnings before interest, tax, depreciation and amortisation. 2Adjusted for relevant non-operational expenditure and amortisation of customer contracts / relationships. Refer to reconciliation between IFRS and non-IFRS financial information for further details on page 5. The Group’s FY20 results include the impact from the application of AASB 16 Leases with effect from 1 July 2019. FY19 prior year comparatives have not been restated in line with the transitional arrangements permitted by the Standard. Group results Group revenue improved by 9.0% to $929.1 million from $852.2 million with Telecommunications reporting a net decrease of 7.7% and Utilities revenue increasing by 45.3%. Group earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 17.9% from $89.5 million to $105.6 million. This includes a $10.3 million benefit from the adoption of AASB 16. Earnings growth was achieved across both the Telecommunications and Utilities segments. EBITDA from Operations excludes $2.5m of non-operational expenditure associated with the integration of Comdain Infrastructure and assessment of M&A opportunities. 4 Service Stream Limited Directors' report Depreciation & amortisation expense increased by $11.9 million to $20.7 million, with $9.5 million of the increase due to depreciation on capitalised right of use assets from the adoption of AASB 16. The balance of the increase was largely due to the full year impact of Comdain Infrastructure. Amortisation of customer contracts / relationships expense relates to the Techsafe (2017) and Comdain Infrastructure (2019) acquisitions. The increase from FY19 of $3.6 million is primarily due to a full year impact from the amortisation of Comdain Infrastructure customer contracts / relationships. This non-operational expense is excluded from the calculation of Adjusted Profitability metrics EBITA and NPATA. Group earnings before interest and tax (EBIT) was $73.9 million, an increase of $0.6 million on FY19. This is due to the aforementioned increases in EBITDA, offset by the higher depreciation & amortisation expense. The Group’s net financing costs increased by $2.2 million to $3.4 million, with $0.9 million of the increase due to the adoption of AASB 16, and the balance reflective of the full-year impact of the debt facilities established to fund the Comdain Infrastructure acquisition. Tax expense for the year was $21.2 million, which is an effective tax rate of 30.0%. Group net profit after tax (NPAT) decreased from $49.9 million, to $49.3 million, however NPATA which excludes non-operational items and the amortisation of customer contracts / relationships expenses increased by $1.1 million from $57.7 million to $58.8 million. Within this result the net impact from the adoption of AASB 16 was a net reduction of $0.1 million to NPAT. Adjusted earnings per share (Adjusted EPS) reduced from 15.1 cents to 14.5 cents due to the full year impact of shares issued as part of the Comdain Infrastructure acquisition. A final dividend of 5.0 cents per share (fully franked) has been declared in respect of FY20, taking total FY20 dividends to 9.0 cents per share (fully franked), which is consistent with total FY19 dividend of 9.0 cents per share (fully franked). Reconciliations between IFRS and non-IFRS financial information $'000 Reported EBITDA Add-back adjustments: - Due diligence costs on potential acquisitions - Acquisition costs (Comdain) - Integration costs (Comdain) EBITDA 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) 1 1.000 FY20 1.000FY19 105,588 89,543 1,312 - 1,215 - 2,473 1,250 108,115 93,266 49,315 49,859 2,527 11,005 3,723 7,425 (4,060) (3,344) 58,787 57,663 Avg number of shares on issue (millions) 406.647 380.877 1.000 Statutory EPS (cents) Adjusted EPS (cents) 1Adjusted net profit after tax. 12.13 14.46 13.09 15.14 5 Service Stream Limited Directors' report Impact to the Group from COVID-19 pandemic Service Stream provides essential infrastructure services to gas, electricity, water and telecommunications network owners and operators nationally. To date, these industries have been allowed to continue operations under various lock-down restrictions imposed to manage the pandemic. Although there have been some negative impacts to Service Stream’s operations from the pandemic, demand for essential network services has remained firm, and the Group’s earnings to date have not been significantly impacted. Servicing these networks is core to the Group’s strategy, with exposure to these sectors providing a solid revenue base and sustained resilience through the pandemic and subsequent economic recession. To date, restrictions on people movement have not had a significant impact on the Group’s field-based operations. The Group has implemented appropriate safety and hygiene protocols and procedures designed to minimise the risk of any spread of the COVID-19 virus. The majority of our office-based staff have moved to working from home arrangements with the company’s IT infrastructure and other support networks capable of supporting these arrangements effectively. The Group’s balance sheet, cash flow and liquidity remain very strong. Service Stream has not drawn upon JobKeeper or other government support packages. The business has continued to pay our suppliers and contractors as and when due, and has not entered into any factoring arrangement of its working capital. The nature of the Group’s customers, which includes government enterprises and large private sector corporations, is such that the risk of default of receivables is low. Due to uncertainty at the time, the Group did seek payment deferral on a limited number of leaseholds at the onset of the pandemic with some of the concessions granted remedied by 30 June 2020. The Group also sought and received a $5.0 million income tax payment deferral from the Australian Tax Office as part of its initial response to managing potential risks from the COVID-19 pandemic. This amount will be paid in Q1 FY21. The impacts to earnings to date are described below: • • • • • • Increased costs to support specific safety-related protocols across business operations. This includes additional including operating distinct shifts across our warehouse expenditure on protective equipment and hygiene, operations with additional cleaning incurred between each shift; Customer determined moratoriums on electricity and gas disconnections (and subsequent impacting meter reading operations; Reduced residential land development activity (new housing estates); Deferral of proactive maintenance activities by asset owners to ensure networks remain available to consumers working from home; Delays in projects due to availability of client-supplied free-issue materials; and Deferral of some projects due to travel and access restrictions across remote locations. reconnections) At this point in time, and on the basis that the Utilities and Telecommunications sectors will continue to be classified as essential services, it is not expected that COVID-19 will have a material adverse impact to the carrying value of the Group’s assets. Although impacts to the Group’s operations to date have not been significant, the evolution of the pandemic and any escalation of the government’s response, including but not limited to, increased restriction of workforce movement, increased safety protocols, and/or reduction in demand from the Group’s customers may further negatively impact the Group’s operations. 6 Segment Results 1.000 $'000 1.000FY20 1.000FY19 1.000 Change Service Stream Limited Directors' report Telecommunications 544,170 589,388 (45,218) (7.7%) ▼ Utilities 384,083 264,284 119,799 45.3% ▲ Eliminations, interest & other revenue 880 (1,494) 2,374 Total Revenue 1.000 929,133 852,178 76,955 9.0% ▲ Telecommunications 83,125 77,096 6,029 7.8% ▲ Utilities 30,810 22,538 8,272 36.7% ▲ Unallocated corporate costs (5,820) (6,368) 548 EBITDA from Operations 108,115 93,266 14,849 15.9% ▲ Non-operational costs (2,527) (3,723) 1,196 EBITDA 1.000 105,588 89,543 16,045 17.9% ▲ Telecommunications 15.3% 13.1% 2.2% Utilities EBITDA margin 8.0% 8.5% (0.5%) 11.4% 10.5% 0.9% ▲ ▼ ▲ Telecommunications The Group’s Telecommunications segment 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 and Telstra. • • During the year, the business successfully concluded and demobilised design and construct (D&C) operations with nbn under the Multi-Technology Integrated Master Agreement (MIMA) and Design and Construction Master Agreement (DCMA) contracts. During the year, the Network Maintenance and Restoration Activities (NMRA) agreement with nbn was extended to June 2021, with a potential further extension to December 2021. The Operations & Maintenance Master Agreement (OMMA) was extended to December 2020, and the Company is currently in negotiation with nbn for a further 6-month term extension to the end of June 2021, with a further option for nbn to extend for another 6 months. Telecommunications’ financial performance in FY20 improved over the prior year, delivering revenue of $544.2 million and an EBITDA of $83.1 million (15.3% margin), compared with revenue of $589.4 million and EBITDA of $77.1 million (13.1% margin) in the prior year. Revenue decreased by $45.2 million (7.7%) compared to FY19 due to: • • conclusion of nbn D&C activities following the successful completion of the program during H2 FY20 resulting in revenue reduction of $89.1 million; increase in revenue associated with nbn activation and maintenance activities, despite COVID-19 reducing some operations & maintenance (O&M) activities; and • Wireless revenue was lower than FY19, due to the slow ramp-up of 5G expenditure by mobile carriers and COVID-19 impacts delaying the commencement of some project works. Telecommunications' EBITDA was $83.1 million, an increase of 7.8% against prior year: • EBITDA margin grew to 15.3% and was aided by the adoption of AASB 16, the profitable wind-up of nbn D&C operations and favourable O&M work mix. Utilities The Group’s Utilities segment provides a wide range of specialist metering, new energy, inspection & compliance, operations, maintenance, design & construction services to utility network owners and operators and other customers in Australia. • During the year, Comdain Infrastructure, as a 30% partner in the Delivering for Customers (D4C) Joint Venture, secured a 10-year asset management agreement with Sydney Water. This contract was successfully mobilised during H2 FY20 with operations commencing on 1 July 2020. D4C’s revenue from service delivery is expected to be in the order of $200 million per annum. 7 • There has been strong demand for utility services and projects, despite delays to some commencements in H2 FY20 due to COVID-19 restrictions and client-initiated delays. Utilities achieved further growth in FY20, delivering revenue of $384.1 million and an EBITDA of $30.8 million (8.0% margin) compared with revenue of $264.3 million and EBITDA of $22.5 million (8.5% margin) in the prior year. Revenue increased by $119.8 million (45.3%) compared to FY19: Service Stream Limited Directors' report The increase was largely due to the inclusion of Comdain Infrastructure for the full year; • • Metering services revenue was flat against the prior year, which was a good outcome noting COVID-19 related reduced activity due to the moratorium on electrical and gas disconnections and reduced residential land development activity; and Lower revenue from New Energy due to fluctuating volumes across commercial solar and battery storage work programs. • Utilities' EBITDA was $30.8 million, an increase of 36.7% against prior year: • The EBITDA margin reduction of 0.5% was due to work-mix and inclusion of a full year of lower margin Comdain Infrastructure operations. Cashflow and Financial Position 1.000 $'000 FY20 1.000FY19 1.000Change Reported EBITDA 105,588 89,543 16,045 +/- non-cash items & change in working capital (19,142) (9,840) (9,302) OCFBIT 1 EBITDA to OCFBIT 1 conversion % Net interest and financing paid Income taxes paid Operating cashflow 86,446 79,703 6,743 81.9% 89.0% (7.1%) (3,586) (1,366) (2,220) (25,177) (18,814) (6,363) 57,683 59,523 (1,840) Capital expenditure (net of proceeds from sales) (6,485) (9,416) 2,931 Business acquisitions (net of cash acquired) - (82,752) 82,752 Free cashflow Dividends paid Principal elements of lease payments Lease incentives received Purchase of shares (net of costs) Proceeds from borrowings Net increase / (decrease) in cash Net cash 2 51,198 (32,645) 83,843 (36,303) (29,816) (6,487) (9,655) (369) (9,286) 4,164 (741) - 4,164 (59) (682) - 60,000 (60,000) 8,663 (2,889) 11,552 19,472 10,521 8,951 1Operating cashflow before interest & tax. 2Net cash at 30 June 20 excludes lease liabilities arising from the application of AASB 16 Leases. Cash Flow Cash flow from operations for the year was $57.7 million compared to $59.5 million in FY19, with key components being: • • Operating cash flow from operations before interest and tax (OCFBIT) was $86.4 million, representing an 81.9% cash flow conversion rate which is consistent with the Group’s long-term cash flow conversion target; Net interest and financing cash outflows were $3.6 million, $2.2 million higher than FY19 due to the full year impact of increased debt facilities and debt drawn for the Comdain Infrastructure acquisition; and 8 Service Stream Limited Directors' report • Tax paid of $25.2 million was $6.4 million higher than FY19, with the increase due to payment of the Comdain Infrastructure stub tax return, and adjustment for final FY19 tax payable against the Group’s tax instalment regime over FY19. The Group received a $5.0 million tax payment deferral from the Australian Tax Office as part of its initial response to managing potential risks from the COVID-19 pandemic. This amount will be paid in Q1 FY21. Net investing cash outflows were $6.5 million and comprised: • • $7.8 million of capital expenditure investment in technology and plant & equipment. The IFS ERP implementation across Comdain Infrastructure was placed on hold due to COVID-19, and is due to recommence in Q1 FY21; offset by $1.3 million of proceeds from the sale of minor assets. Net financing outflows for the year were $42.5 million and included: • • • • Payment of leases of $9.7 million, which are now reported outside of cash flow from operations following the adoption of AASB 16; $36.3 million paid in dividends, an increase of $6.5 million over the previous year; Lease incentives of $4.2 million were received in relation to the renewal of rental arrangements of the Group’s corporate offices in Melbourne; and $0.7 million expended to acquire shares in Service Stream Limited to satisfy the Group's obligation under certain share-based incentive arrangements. Financial position The financial position of the Group improved during the year, with Net Assets at 30 June 2020 of $321.8 million compared to $307.8 million at 30 June 2019. At 30 June 2020, Current Assets exceeded Current Liabilities by $69.2 million (30 June 2019: $48.9 million). Net cash and financing facilities • • • • The Group ended the year with Net Cash (excluding lease liabilities) of $19.5 million, an increase of $9.0 million against the prior period end. Net Cash at 30 June 2020 comprised cash of $79.5 million less borrowings of $60.0 million; Bank guarantee utilisation at year-end of $36.7 million, as compared to $42.5 million at the prior year end; The Group’s finance facilities at 30 June 2020 comprised a Term Loan of $60.0 million (drawn: $60.0 million), cash advance lines totalling $45.0 million (drawn: nil) and overdraft facilities totalling $40.0 million (drawn: nil); and 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. 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, other assets, trade & other payables and provisions) at 30 June 2020 was a net asset position of $12.7 million. The closing balance represents an increase of $20.9 million from the prior year’s closing net liability balance of $8.2 million, and is predominantly due to the cessation of the nbn D&C activities; Plant and equipment at 30 June 2020 was $15.2 million compared to $20.1 million at 30 June 2019; Intangibles at 30 June 2020 were $313.2 million compared to $323.6 million with the decrease primarily attributable to amortisation of customer contracts/ relationships, net of additional capitalised IT software; and Right-of-use assets and liabilities recognised in respect of AASB 16 of $29.1 million and $33.4 million respectively. • • • Overall Group strategy, prospects and risks The financial performance of the Group further improved during the year, and the Group has continued to deliver on its strategic plan in line with the Board’s expectations. 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. In the Telecommunications segment, the securing of the OMMA and NMRA contract extensions continues to position the company well as the leading service provider in this segment, with further future prospects in 5G design and construction opportunities. In the Utilities segment, the Board notes the positive progress achieved with the integration of Comdain Infrastructure and its continued strong future prospects including securing a major ten-year Sydney Water contract as part of the D4C consortium, in joint venture with Lendlease Services, John Holland and WSP Australia. 9 Service Stream Limited Directors' report The achievement of the Group’s business objectives may be impacted by the following risks: COVID-19 pandemic The COVID-19 pandemic has created an unprecedented level of uncertainty. Although impact to the Group’s operations to date have not been significant, the evolution of the pandemic and any escalation of limited to, increased restriction of workforce movement, increased safety protocols, and reduction in demand from the Group’s customers may further negatively impact the Group’s operations. the government’s response, including but not 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 and Telstra is a natural consequence of operating in this market in Australia. Customer demand Contract management 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. The acquisition of Comdain Infrastructure which provides a range of operations, maintenance, design and construction service to gas and water network operators in Australia has assisted with diversifying the Group’s revenue base and managing this risk. 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. Many of the Group’s customer contracts do not contain volume commitments and are therefore dependent on the customer’s demand requirements which can change at any time. The rate of adoption of new technology by the Group’s customers, such as 5G technology, can also provide variability against expected future earnings. Whilst Management and the Board take a balanced view on the level of customer demand that is expected to arise when forecasting financial performance, there is a risk that the level of customer demand may change over time. In addition, the potential variability in 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 Group’s 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 well-established Group Commercial function is now 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. Renewal of customer contracts in renewing and extending the majority of all customer Whilst the Group has been successful 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 FY20, in securing extensions of its contracts with nbn co. The Group was also successful in winning a number of new contracts across the Telecommunications and Utilities segments. lose any major contracts and was successful The Group is currently tendering for a number of material contracts, which includes: • nbn Unify Networks (NMRA replacement) for a term of 4 years + 2x2 year options; and • nbn Unify Services (OMMA replacement) for a term of 4 years + 2x2 year options. The Board is confident that the Group’s superior performance and consistency of service delivery will underpin successful award of those contracts, but failure to do so would have a material impact on the Group. 10 Service Stream Limited Directors' report 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. 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 FY20, 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 market leading IT-related platforms which assist with the engagement, deployment, daily management and retention of the Group's 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 During FY20, 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 ensure that funds are sufficient and made available to maintain fit-for-purpose system applications and infrastructure, and that IT investments are appropriately prioritised and undertaken effectively as part of the Group’s annual strategic planning process. During FY20, the Group has further expanded 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 19 to the financial statements and further set out below: Per share (cents) Total amount ($'000) Franked Payment date Final 2020 Interim 2020 Final 2019 5.00 20,4011 100% 4.00 16,299 100% 5.50 22,384 100% 1 October 2020 19 March 2020 2 October 2019 1 This is the estimated total amount of dividend to be paid in respect of the current shares on issue at 30 June 2020. 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. 11 Service Stream Limited Directors' report 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. Environmental regulation Other than compliance with general obligations under Federal and State environmental laws and regulations, the 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: Series Class of shares Exercise price of right FY18 LTIP Tranche Ordinary FY19 LTIP Tranche Ordinary FY20 LTIP Tranche Ordinary $0.00 $0.00 $0.00 Vesting date September 2020 September 2021 September 2022 Number of shares under rights 614,932 731,108 1,078,007 2,424,047 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) 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 D Page R Murphy 2 L Mackender Meetings of Committees Remuneration and Nomination Sustainability, Safety, Health & Environment Audit and Risk Term of Directorship 4 4* 4# 4* 4 4 1 4* 4 4* 4 4* 4 4 1 4* 4 4 4 4 4* 4* 1 4 10 years 4 years 1 year 10 years 10 years 4 years 6 years Board meetings 161 15 15 15 16 16 5 16 * Attended as Standing Invitee. 1 The number of board meetings held during the year comprised eleven regular monthly meetings, and five unscheduled meetings that related to large contract tender submissions. 2 R Murphy retired from the Company on 23 October 2019. # G Adcock was appointed as a member of the Audit and Risk Committee on 20 November 2019. He attended three meetings in the financial year as a committee member and another as standing invitee. 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. 12 Service Stream Limited Directors' report 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. 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 33 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 33 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 24 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 4th edition ASX Corporate Governance Principles and Recommendations. Service Stream is materially 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 18 August 2020 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 18 August 2020 and has been approved by the Board. 13 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 2020 (FY20). 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 Peter Dempsey Deborah Page AM Raelene Murphy (retired 23 October 2019) Executive Director Leigh Mackender Senior Executives Linda Kow (appointed 4 May 2020) Robert Grant (retired 4 May 2020) John Ash 1 Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Managing Director Chief Financial Officer Chief Financial Officer Executive General Manager, Network Construction Peter Coen (resigned 28 January 2020) Executive General Manager, Comdain Infrastructure Shannon Laffey (appointed 28 January 2020) Acting Executive General Manager, Energy & Water Paul McCann 2 Kevin Smith Executive General Manager, Comdain Infrastructure Executive General Manager, Fixed Communications 1 J Ash resigned from his position as the Executive General Manager, Network Construction effective 6 July 2020. 2 P McCann was the Executive General Manager of Energy & Water until 27 January 2020, before becoming the Executive General Manager of Comdain Infrastructure on 28 January 2020. 2 Role of the Remuneration and Nomination Committee The Board’s Remuneration and Nomination Committee (RNC) reviewing and making 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 Whilst the RNC periodically seeks independent advice from external consultants on various remuneration-related matters to assist in performing its duties and making recommendations to the Board, no external consultants were engaged by the Group during the financial year. 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; • 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 14 Service Stream Limited Directors' report • 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 potential remuneration components that apply to the Managing Director and Senior Executives who are in the KMP position for the entire financial period. Fixed remuneration Incentive remuneration Managing Director: 44% of total remuneration Senior Executives: 53% of total remuneration Managing Director: 56% of total remuneration Senior Executives: 47% of total remuneration > Fixed salary set by reference to appropriate benchmark information and individual performance > Performance hurdle linked to annual EPS target and Relative Total Shareholder Return (TSR) under a Long-Term Incentive Plan (LTIP) > Includes non-monetary benefits superannuation and salary-sacrificed > Cash bonus paid under the Short-Term Incentive Plan (STIP) Full details of each component payable to all KMPs are set out in section 5 of this remuneration report. 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 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) EBITDA 1 ($'000) Net profit after tax ($'000) Earnings per share (cents) Dividends per share 2 (cents) Share price 30 June ($) 2016 2017 2018 2019 438,940 501,810 632,946 852,178 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 2020 929,133 105,588 49,315 12.13 9.00 1.91 1 Earnings before interest, tax, depreciation and amortisation. 2 Franked to 100% at 30% corporate income tax rate. 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 2020, Managing Director and Senior Executives incentive remuneration consisted of participation in the Group’s LTIP and STIP as set out in the table below. 15 Summary of incentive plan participation Service Stream Limited Directors' report L Mackender L Kow 2 R Grant 3 J Ash P McCann P Coen 4 K Smith S Laffey LTIP Yes - - Yes Yes - Yes Yes 2020 STIP Yes - - Yes Yes - Yes Yes ESBIP 1 Yes n/a Yes - Yes - Yes n/a 2019 LTIP - n/a - Yes - - - n/a STIP - n/a - Yes - Yes - n/a 1 Details of the Group’s Executive Share Based Incentive Plan (ESBIP) that operated in FY19 was disclosed in the FY19 annual report. 2 L Kow was appointed as Chief Financial Officer with effect from 4 May 2020, and was not eligible to participate in the FY20 LTIP and FY20 STIP. 3 During the period, R Grant retired from the role of Chief Financial Officer and did not participate in the FY20 LTIP and FY20 STIP. 4 P Coen was appointed as Executive General Manager, Comdain Infrastructure with effect from 2 January 2019, and resigned on 28 January 2020 and forfeited his entitlements to the FY20 LTIP and FY20 STIP. 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 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. 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 FY20 are subject to service and performance criteria being: A B C The participant must be an employee at the conclusion of the performance period; and 80% of the performance rights granted with respect to the FY20 tranche will vest where the Group’s adjusted earnings per share (Adjusted EPS) achieves the target as set by the Board of Directors. For FY18 and FY19 tranches, 50% of the performance rights granted will vest where the Group’s earnings per share achieves an annual growth of 10% or more over the performance period, commencing with growth from an agreed base EPS; and 20% of the performance rights granted with respect to the FY20 tranche (50% for FY18 and FY19 tranches) will vest where 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. 16 Why was this performance condition chosen? The Board considered the Adjusted EPS and TSR hurdles to be appropriate measures on the basis that they were relevant measures of increase in shareholder value, after adjusting for non-operational expense and both outcomes are highly correlated with the effectiveness of LTIP participants. In addition, Adjusted EPS was calculated based on the figures in the financial statements after giving effect for Board approved non-operational costs, whilst TSR performance was independently assessed by third-party experts. Service Stream Limited Directors' report 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 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 Performance 1 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. 17 Summary of grants under ESBIP and LTIP Balance at 1 July 2019 Number Granted as compensation Vested Forfeited Balance at 30 June 2020 Number Number Number Number Fair value when granted 2 $ Value of shares at vesting $ Service Stream Limited Directors' report L Mackender FY19 ESBIP FY20 LTIP 3 Total R Grant FY19 ESBIP Total J Ash FY17 LTIP FY18 LTIP 1 FY19 LTIP FY20 LTIP 5 Total S Laffey 4 FY20 LTIP Total P McCann FY19 ESBIP FY20 LTIP Total K Smith FY19 ESBIP FY20 LTIP Total Plan FY17 LTIP FY18 LTIP FY19 LTIP FY20 LTIP 1,000,000 - 1,000,000 700,000 700,000 123,411 90,299 81,140 - 294,850 - - 650,000 - 650,000 650,000 - 650,000 - (1,000,000) 238,544 - 238,544 (1,000,000) - - - - - 75,114 (700,000) (700,000) (123,411) - - - - - - - - - - - - 1,487,100 2,760,000 238,544 524,838 n/a 238,544 - - - 90,299 81,140 1,040,970 1,932,000 76,774 98,530 89,618 312,230 n/a n/a n/a (75,114) - 161,876 75,114 (123,411) (75,114) 171,439 13,262 13,262 - - - (650,000) 76,776 - 76,776 (650,000) - (650,000) 106,903 - 106,903 (650,000) - - - - - - - - 13,262 13,262 - 76,776 76,776 - 106,903 106,903 28,581 n/a 966,615 165,458 1,794,000 n/a 966,615 230,384 1,794,000 n/a Grant dates Vesting dates 14 September 2016 13 September 2019 14 September 2017 September 2020 21 September 2018 September 2021 18 September 2019 September 2022 FY19 ESBIP 31 August 2018 20 August 2019 1 The relevant number of shares will be issued to the participants after the release of these FY20 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 2020 in line with each of the tranche's performance periods. 3 As L Mackender is a Director of the Company, the issuance of performance rights under the FY20 LTIP Tranche was approved by shareholders at the Company's Annual General Meeting on 23 October 2019, with relative TSR hurdle valued at $1.311 and EPS hurdle at $2.422. 4 S Laffey was appointed Acting Executive General Manager, Energy & Water on 28 January 2020 and such only the FY20 LTIP Tranche has been included. 5 J Ash resigned from his position as the Executive General Manager, Network Construction effective 6 July 2020, and forfeited his eligibility from participating in the FY20 LTIP Tranche. 18 Service Stream Limited Directors' report 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 FY17 LTIP 1 FY18 LTIP 2 FY19 ESBIP 1 Grant date Vesting date Fair value of each performance right at grant date % of performance hurdles achieved % of rights vested 14 September 2016 13 September 2019 62.2 cents 100% 100% 14 September 2017 September 2020 109.1 cents To be determined To be determined 31 August 2018 20 August 2019 148.7 cents 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 FY20 results. Service agreements The table below sets out the main terms and conditions of the employment contracts of the Managing Director and Senior Executives. Title Managing Director Notice periods and termination payments > 6 months either party (or payment in lieu) > Immediate for serious misconduct or breach of contract > Statutory requirements only for termination with cause Chief Financial Officer and other Senior Executives > 1 to 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 The remuneration arrangements of the Managing Director and a small number of other key executives were reviewed during the year to coincide with the cessation of Service Stream’s ESBIP. Participation in the ESBIP was conditional on each invited Executive agreeing to forgo participation in the STIP and LTIP applicable to that five-year period. During that period, the Group delivered a Total Shareholder Return of 1441%, with the participating Executives’ total remuneration reflective of this. In line with the Group’s policy to periodically review its remuneration framework, Service Stream’s Board of Directors engaged external remuneration consultants to perform a broad review of the Company’s executive arrangements encompassing appropriate levels of fixed and at risk remuneration. These revised remunerations arrangements applied to the FY20 year, and were expected to be lower in value than the previous legacy arrangement. 19 Service Stream Limited Directors' report 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 2020 878,997 427,500 2019 529,469 50,0001 L Kow 2 R Grant 3 2020 94,202 2020 888,826 - - 2019 464,300 50,0001 J Ash 2020 365,445 22,655 2019 365,415 84,117 P Coen 4 2020 513,648 - 2019 262,816 20,625 S Laffey 5 2020 111,882 11,258 - - - - - - - - - - 21,003 104,857 174,946 1,607,303 63% 37% 20,531 18,228 1,487,100 2,105,328 27% 73% 3,417 81 17,732 29,651 - - 97,700 100% 936,209 100% 0% 0% 20,531 14,078 1,040,970 1,589,879 31% 69% 21,003 12,008 55,541 476,652 84% 16% 20,531 10,272 88,307 568,642 70% 30% 17,502 10,191 - 227 - - 531,150 100% 293,859 93% 0% 7% 8,895 11,808 9,764 153,607 86% 14% P McCann 2020 393,815 47,250 24,384 21,003 35,301 55,153 576,906 82% 18% 2019 298,847 - 24,384 20,531 15,602 966,615 1,325,979 27% 73% K Smith 2020 528,997 179,506 2019 376,548 - - - 21,003 68,939 76,795 875,240 71% 29% 20,531 12,823 966,615 1,376,517 30% 70% Total 2020 3,775,812 688,169 24,384 131,558 262,645 372,199 5,254,767 80% 20% 2019 2,297,395 204,742 24,384 112,846 71,230 4,549,607 7,260,204 35% 65% 1 These amounts represent one-off discretionary cash bonuses approved by the Board in respect of Service Stream's acquisition of Comdain Infrastructure. 2 L Kow was appointed as Chief Financial Officer with effect from 4 May 2020, and was not eligible to participate in FY20 LTIP and FY20 STIP. 3 During the year, R Grant retired from the role of Chief Financial Officer and did not participate in the FY20 STIP & FY20 LTIP Tranche. Included in his salary and fees is a retention bonus amounting to $400,000. 4 P Coen was appointed as Executive General Manager, Comdain Infrastructure with effect from 2 January 2019, resigned on 28 January 2020 and forfeited his entitlements to the FY20 LTIP and FY20 STIP. 5 S Laffey was appointed Acting Executive General Manager, Energy & Water with effect from 28 January 2020. 20 Service Stream Limited Directors' report 6 Non-Executive remuneration Overview Aggregate fees approved by shareholders The current maximum aggregate fee pool for the Non-Executive Directors is $1,000,000 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 receive any performance related preserve independence and impartiality, Non-Executive Directors do not compensation. Regular reviews of remuneration Fees are reviewed annually, independent remuneration advisor. taking into account comparable roles and market data provided by the Board’s Non-Executive Directors' remuneration B Gallagher G Adcock 1 T Coen 2 P Dempsey R Murphy 3 D Page Total Year 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Board and Committee fees Super Total 182,648 17,352 200,000 146,119 13,881 160,000 125,000 113,734 - 125,000 4,266 118,000 107,763 10,237 118,000 44,901 4,266 49,167 118,721 11,279 130,000 107,763 10,237 118,000 39,333 118,000 124,361 - - 39,333 118,000 5,639 130,000 114,155 10,845 125,000 697,826 44,507 742,333 644,672 43,495 688,167 1 Since December 2018, G Adcock's remuneration 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 was paid to Wealth For Toil Pty Ltd, a company in which Mrs Murphy has a beneficial interest, up to the date of her retirement. 21 7 Shareholdings of key management personnel Service Stream Limited Directors' report Received on vesting of performance rights (Disposed)/ acquired during the year Balance at 1 July Balance at date of appointment Balance at date of resignation Balance at 30 June No. No. No. No. No. No. 3,150,986 50,000 38,444,918 1,000,000 20,000 409,268 - - - - - - 148,687 - - 50,000 - 34,025 1,050,000 1,000,000 (949,300) - - - - - - - - - - 70,000 1,000,000 700,000 (1,200,000) - - 123,411 - - - 1,138,522 2,036,998 650,000 (1,250,000) 650,000 (205,068) 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) - - - - - - - 38,444,918 - - - - - - - - - - - - (20,000) - - - (500,000) - - - - - - - - - - - - - - - 3,299,673 50,000 38,444,918 1,050,000 - 443,293 1,100,700 70,000 - 123,411 - 538,522 2,481,930 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 2020 Non-Executives B Gallagher G Adcock T Coen P Dempsey R Murphy D Page Executives L Mackender L Kow R Grant J Ash S Laffey P McCann K Smith 1.000 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 8 Voting and comments made at the Company's 2019 Annual General Meeting The Company received 97% of “yes” votes on its Remuneration Report for the 2019 financial year. 22 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 18 August 2020 Leigh Mackender Managing Director 18 August 2020 23 Auditor’s Independence Declaration As lead auditor for the audit of Service Stream Limited for the year ended 30 June 2020, I declare that to the best of my knowledge and belief, there have been: no contraventions of the auditor independence requirements of the Corporations Act 2001 in (a) relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Service Stream L imited and the entities it controlled during the period. Trevor Johnston Partner PricewaterhouseCoopers Melbourne 18 August 2020 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 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 2020 $'000 2019 $'000 3 4 6 5 7 927,951 1,182 929,133 (217,726) (499,801) (54,513) (9,448) (7,193) (2,002) (15,843) (12,163) (31,678) (3,548) (4,753) 70,465 (21,150) 49,315 850,959 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 Total comprehensive income for the year 0 Profit attributable to the equity holders of the parent 0 Total comprehensive income attributable to equity holders of the parent 49,315 49,859 49,315 49,315 49,859 49,859 Earnings per share Basic (cents per share) Diluted (cents per share) 8 8 12.13 12.09 13.09 12.89 Notes to the financial statements are included on pages 29 to 67 25 Consolidated balance sheet at 30 June 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 Right-of-use assets Intangible assets Total non-current assets Total assets LIABILITIES 1 Current liabilities Trade and other payables Provisions Borrowings Lease liabilities Current tax liabilities Total current liabilities Non-current liabilities Deferred tax liability (net) Provisions Borrowings Lease liabilities Total non-current liabilities Total liabilities Net assets EQUITY 1 Capital and reserves Contributed equity Reserves Retained earnings Total equity Service Stream Limited Notes 2020 $'000 20191 $'000 20 9 10 11 12 13 15 14 16 17 21 15 7 7 17 21 15 18 79,472 39,204 6,259 101,801 4,520 231,256 15,156 29,090 313,179 357,425 70,809 54,385 8,868 125,988 7,448 267,498 20,119 - 323,550 343,669 588,681 611,167 103,055 29,458 9,000 9,900 10,670 162,083 23,807 6,531 51,000 23,464 104,802 162,131 36,995 9,000 288 10,136 218,550 28,045 5,808 51,000 - 84,853 266,885 303,403 321,796 307,764 314,741 (11,109) 18,164 297,757 2,475 7,532 321,796 307,764 1 The 30 June 2019 balance sheet has been restated to reflect the final fair value of the purchase price allocation balances of Comdain Infrastructure, which was acquired on 2 January 2019. Refer to note 27. Notes to the financial statements are included on pages 29 to 67 26 Consolidated statement of changes in equity for the financial year ended 30 June Service Stream Limited Balance at 1 July 2018 Profit for the period Total comprehensive income for the year Equity-settled share-based payments, inclusive of tax adjustments 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 Profit for the period Total comprehensive income for the year Equity-settled share-based payments, inclusive of tax adjustments Issue of shares (net of transaction costs) Acquisition of treasury shares Issue of treasury shares to employees Dividends paid Balance at 30 June 2020 Contributed equity Employee equity- settled benefits reserve Retained earnings Total $'000 $'000 $'000 $'000 217,281 - 1,651 - (12,038) 49,859 206,894 49,859 - - 70,363 1,777 (1,777) 9,640 473 - 49,859 49,859 10,464 - - - (9,640) - - - - - 10,464 70,363 1,777 (1,777) - - (30,289) (29,816) 297,757 2,475 7,532 307,764 - - - 14,604 (15,345) - - 1,761 - - 15,345 (15,345) 49,315 49,315 49,315 49,315 - - - - 1,761 14,604 (15,345) - 2,380 - (38,683) (36,303) 314,741 (11,109) 18,164 321,796 Notes to the financial statements are included on pages 29 to 67 27 Consolidated statement of cash flows for the financial year ended 30 June Cash flows from operating activities Receipts from customers (including GST) Payments to suppliers and employees (including GST) Cash generated from operations Interest received Interest and facility costs paid Income taxes paid Net cash provided by operating activities 20 Cash flows from investing activities Payments for plant and equipment Proceeds on the sale of plant and equipment Payment for intangible assets Payments for businesses Net cash used in investing activities Cash flows from financing activities Purchase of shares (net of transaction costs) Payment for share issue costs Lease incentives received Principal elements of lease payments Dividends paid Proceeds from borrowings Service Stream Limited Notes 2020 $'000 2019 $'000 1,028,079 942,053 (941,633) (862,350) 86,446 79,703 103 (3,689) (25,177) 57,683 (2,185) 1,336 (5,636) - (6,485) (741) - 4,164 (9,655) (36,303) - 697 (2,063) (18,814) 59,523 (3,581) 452 (6,287) (82,752) (92,168) - (59) - (369) (29,816) 60,000 Net cash (used in)/provided by financing activities (42,535) 29,756 Net increase/(decrease) in cash held Cash at the beginning of the year Cash at the end of the period 8,663 (2,889) 70,809 79,472 73,698 70,809 20 Notes to the financial statements are included on pages 29 to 67 28 Service Stream Limited Notes to the consolidated financial statements for the year ended 30 June 2020 Notes to the consolidated financial statements 1 General information Section A: Business performance Section B: Operating assets & liabilities 2 Segment information Page 30 9 Trade and other receivables 3 Revenue from contracts with customers Page 32 10 Inventories 4 Other income 5 Finance costs Page 34 11 Accrued revenue Page 34 12 Other assets 6 Other expense items Page 34 13 Plant and equipment 7 Income tax expense Page 35 14 Intangible assets 8 Earnings per share Page 37 15 Leases 16 Trade and other payables 17 Provisions Section C: Capital and financing Section D: Group structure 18 Contributed equity 19 Dividends 20 Notes to the statement of cash flow 21 Financial instruments 22 Capital risk management 23 Share-based payments Page 44 Page 45 Page 46 Page 46 Page 49 Page 50 24 Subsidiaries 25 Deed of cross guarantee 26 Joint operations 27 Business combinations 28 Related party transactions 29 Parent entity information Section E: Unrecognised items Section F: Other 30 COVID-19 impact 31 Contingent assets and liabilities 32 Events after the reporting period Page 56 Page 56 Page 56 33 Remuneration of auditors 34 Significant accounting policies 35 Critical accounting judgements Page 30 Page 38 Page 38 Page 38 Page 39 Page 39 Page 40 Page 42 Page 43 Page 44 Page 53 Page 53 Page 53 Page 54 Page 54 Page 55 Page 56 Page 57 Page 67 29 Service Stream Limited Notes to the consolidated financial statements Notes to the financial statements for the financial year ended 30 June 2020 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 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, fixed-line installation, design and construction services to the owners of 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 includes 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. During the period, the Group's call centre function was transferred from the Utilities to Telecommunications reportable segment in order to enhance the provision of customer support and field scheduling services of nbn operations. The segment reporting is based on this revised segment structure for the first time in this annual financial report. To enable comparisons with prior period performance, historical segment information for the prior reporting period ended 30 June 2019 has been restated. Information regarding the reportable segments is presented below. 30 2 Segment information (continued) (b) Segment revenues and results Telecommunications 1 Utilities 1 Total of all segments Other income Eliminations 1 Unallocated EBITDA 2 Depreciation of plant and equipment Depreciation of right-of-use assets 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 Service Stream Limited Notes to the consolidated financial statements Segment revenue Segment EBITDA 2020 $'000 544,170 384,083 928,253 1,079 (302) 2019 $'000 589,388 264,284 853,672 522 (2,713) 103 697 929,133 852,178 2020 $'000 83,125 30,810 113,935 (8,347) 105,588 (6,204) (9,467) (5,002) (11,005) 2019 $'000 77,096 22,538 99,634 (10,091) 89,543 (4,547) - (4,254) (7,425) 73,910 73,317 (3,445) (1,202) 70,465 72,115 (21,150) (22,256) 49,315 49,859 1 The prior year comparatives have been restated to reflect the change in the composition of the reportable segments, including eliminations of intra/inter-segment transactions. 2 Earnings before interest, tax, depreciation and amortisation. (c) Segment assets and liabilities Telecommunications 1 Utilities 1 Total of all segments Unallocated Consolidated Segment assets Segment liabilities 2020 $'000 162,062 345,944 508,006 80,675 588,681 2019 $'000 192,507 335,030 527,537 83,630 611,167 2020 $'000 70,867 81,037 151,904 114,981 266,885 2019 $'000 113,744 111,545 225,289 78,114 303,403 1 The prior year comparatives have been restated to reflect the change in the composition of the reportable segments, including eliminations of intra/inter-segment transactions. 31 2 Segment information (continued) (d) Other segment information Telecommunications 1 Utilities 1 Total of all segments Unallocated Consolidated Service Stream Limited Notes to the consolidated financial statements Depreciation and amortisation Additions to non-current assets 2020 $'000 5,175 19,707 24,882 6,796 31,678 2019 $'000 1,804 9,701 11,505 4,721 16,226 2020 $'000 2,035 5,027 7,062 8,349 15,411 2019 $'000 1,190 2,249 3,439 6,429 9,868 1 The prior year comparatives have been restated to reflect the change in the composition of the reportable segments, including eliminations of intra/inter-segment transactions. (e) Information about major customers In the current reporting period, there was one customer (2019: two customers) which contributed more than 10% of the Group’s revenue. The relevant revenue by segment is shown below: Largest customer Second largest customer 1.0002020: Not applicable (2019: Telecommunications $96.9 million). 1.0002020: Telecommunications $442.7 million (2019: Telecommunications $463.3 million). No other single customer contributed 10% or more of the Group’s total revenue in 2020 and 2019. 3 Revenue from contracts with customers (a) Revenue from contracts with customers Revenue 2020 $'000 927,951 927,951 2019 $'000 850,959 850,959 (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 2020 Segment revenue Fixed Communications Network Construction Energy & Water Comdain Infrastructure Other Total $'000 $'000 $'000 $'000 $'000 432,494 111,676 96,096 288,131 - $'000 928,397 Intra / Inter-segment revenue - - (144) - (302) (446) Revenue from contracts with customers 432,494 111,676 95,952 288,131 (302) 927,951 Timing of revenue recognition At point in time Over time 380,164 52,330 432,494 - 111,676 111,676 87,893 56,957 483 525,497 8,059 231,174 95,952 288,131 (785) (302) 402,454 927,951 32 3 Revenue from contracts with customers (continued) (b) Disaggregation of segment revenue (continued) Service Stream Limited Notes to the consolidated financial statements 30 June 2019 Segment revenue Intra / Inter-segment revenue Revenue from contracts with customers Timing of revenue recognition At point in time Over time Fixed Communications 1 $'000 Network Construction $'000 Energy & Water 1 $'000 Comdain Infrastructure Other 1 $'000 $'000 215,255 104,175 160,222 - Total $'000 861,416 381,764 (7,631) 374,133 313,405 60,728 374,133 - (113) - (2,713) (10,457) 215,255 104,062 160,222 (2,713) 850,959 - 89,371 19,271 116 422,163 215,255 14,691 140,951 (2,829) 428,796 215,255 104,062 160,222 (2,713) 850,959 1 The prior year comparatives have been restated to reflect the change in the composition of the reportable segments, including eliminations of intra/inter-segment transactions. (c) Assets and liabilities related to contracts with customers Revenue recognised that was included in contract liability balance at the beginning of the period 2020 $'000 2019 $'000 37,703 27,726 Revenue (reversed) / recognised from performance obligations satisfied in previous periods (596) 644 (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 17. 33 4 Other income Gain on disposal of assets R&D tax incentives Interest revenue Other 5 Finance costs Interest expense: leases 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 6 Other expense items (a) Depreciation and amortisation expense Depreciation of plant and equipment Depreciation of right-of-use assets Amortisation of software Amortisation of customer contracts / relationships (b) Employee benefit expense Post-employment benefits plans Equity-settled share-based payments (c) Operating lease rental expenses Minimum lease payments Service Stream Limited Notes to the consolidated financial statements 2020 $'000 411 136 103 532 2019 $'000 422 81 697 19 1,182 1,219 2020 $'000 939 1,029 35 823 434 3,260 288 3,548 2020 $'000 6,204 9,467 5,002 11,005 31,678 16,359 2,004 18,363 2019 $'000 21 817 51 579 262 1,730 169 1,899 2019 $'000 4,547 - 4,254 7,425 16,226 11,905 7,873 19,778 - - 10,875 10,875 Notes 13 15 14 14 From 1 July 2019, the Group has recognised right-of-use assets for these leases, except for short-term leases, refer to notes 15(b) and 34(a) for further information. 34 Service Stream Limited Notes to the consolidated financial statements 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 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 2020 $'000 24,852 (3,702) 21,150 2020 $'000 70,465 21,140 (41) - 51 2019 $'000 22,855 (599) 22,256 2019 $'000 72,115 21,635 (24) 556 89 21,150 22,256 3,702 24,852 (14,182) 10,670 599 22,855 (15,561) 7,294 30.01% 30.86% 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 AASB 16 Adoption Timing difference related to prior periods 1 Charged to income Charged to equity Closing balance 2020 $'000 $'000 $'000 $'000 $'000 $'000 Temporary differences Trade and other receivables Accrued revenue Trade, other payables and provisions Share issue costs Employee benefits Plant and equipment 554 (25,686) 6,188 97 13,491 (154) Customer contracts / relationships (23,088) - - - - - - - Right of use assets Lease liabilities Other - - (9,293) 9,293 (182) - (82) 4,022 1,328 (2,309) - (27) - - - - (183) (3,126) (243) - - - - 331 3,301 566 716 310 - - - - - 290 (21,664) 5,207 70 9,939 177 (19,787) (8,727) 10,009 679 553 (28,045) - - (184) 779 3,702 (243) (23,807) 1 The prior period timing difference arose from a true-up of deferred tax and tax payable position at balance date to the subsequent tax return lodgement date. 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 Plant and equipment Customer contracts 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 - - - - - - - - - 227 303 1,971 - 2,043 - (23,962) 294 (19,124) 554 (25,686) 6,188 97 13,491 (154) (23,088) 553 (28,045) Deferred tax assets and liabilities have been set-off by the Company and are presented in the balance sheet 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 24. 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 2020 Cents per share 12.13 12.13 2019 Cents per share 13.09 13.09 12.09 12.09 12.89 12.89 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 2020 $'000 49,315 49,315 1 2020 No.'000 2019 $'000 49,859 49,859 2019 No.'000 406,647 380,877 1,134 5,963 407,781 386,840 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 Other receivables Trade receivables Expected credit loss Total Trade receivables Expected credit loss Total 2020 $'000 32,211 2,975 1,220 200 946 37,552 2020 $'000 (146) (65) (244) (74) (440) (969) 2020 $'000 32,065 2,910 976 126 506 36,583 2,621 39,204 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 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, then 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 21(d). 10 Inventories Inventories 2020 $'000 6,259 6,259 2019 $'000 8,868 8,868 Inventories recognised as an expense during the year ended 30 June 2020 amounted to $54,513,000 (2019: $37,196,000). 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 (2019: nil). 11 Accrued revenue Accrued revenue 2020 $'000 101,801 101,801 2019 $'000 125,988 125,988 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 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 which has historically resulted 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 34(f) revenue recognition. Details about the Group's impairment policy and assessment of the loss allowance are provided in note 21(d). Accrued revenue has decreased during the year predominantly due to the conclusion of nbn design and construction activities. 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. 38 12 Other assets Work in progress Prepayments Financing facility establishment costs Other 13 Plant and equipment 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 1.000 Year Ended 30 June 2020 Opening net book value Additions Disposals 1 Depreciation charge Closing net book value 1.000 At 30 June 2020 Cost Accumulated depreciation Net book value 1 Disposals are net of accumulated depreciation. Service Stream Limited Notes to the consolidated financial statements 2020 $'000 - 3,947 332 241 4,520 2019 $'000 789 5,837 571 251 7,448 Leasehold improvements $'000 Plant and equipment $'000 Motor vehicles $'000 Total $'000 1,279 1,075 548 (22) (1,155) 1,725 11,633 (9,908) 1,725 1,725 6 - (599) 1,132 9,892 (8,760) 1,132 2,227 8,640 2,998 (8) (2,393) 11,464 29,854 (18,390) 11,464 11,464 2,179 (839) (3,345) 9,459 30,129 (20,670) 9,459 442 7,452 35 - (999) 6,930 9,763 (2,833) 6,930 6,930 - (105) (2,260) 4,565 8,110 (3,545) 4,565 3,948 17,167 3,581 (30) (4,547) 20,119 51,250 (31,131) 20,119 20,119 2,185 (944) (6,204) 15,156 48,131 (32,975) 15,156 39 14 Intangible assets Year Ended 30 June 2019 Opening net book value Acquisition through business combination Additions Disposals Amortisation charge Closing net book value At 30 June 2019 Cost 1 Accumulated amortisation Net book value 1.000 Year Ended 30 June 2020 Opening net book value Additions Amortisation charge Closing net book value 1.000 At 30 June 2020 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 14,621 - 6,287 (46) (4,254) 16,608 42,937 (26,329) 16,608 16,608 5,636 (5,002) 17,242 4,512 25,310 - - (4,945) 24,877 32,209 (7,332) 24,877 - (6,045) 18,832 48,541 (31,299) 32,209 (13,377) 17,242 18,832 - 54,562 129,698 100,285 148,831 180,157 6,287 (46) (11,679) - - - - - 229,983 323,550 229,983 - 359,691 (36,141) 229,983 323,550 323,550 5,636 (16,007) 229,983 313,179 229,983 - 365,295 (52,116) 229,983 313,179 - - (2,480) 52,082 54,562 (2,480) 52,082 - (4,960) 47,122 54,562 (7,440) 47,122 24,877 52,082 229,983 1 The cost of goodwill represents the net carrying value at balance date. (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 2020 $'000 27,691 43,759 58,248 100,285 229,983 2019 $'000 27,691 43,759 58,248 100,285 229,983 The Group tests whether goodwill is subject to any impairment on an annual basis. The Group's operating segments and cash generating units (CGUs) 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 projections based on financial forecasts covering a four-year period. These forecasts are based on historical 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) Acknowledging that there have been changes in the observable markets over the years, an independent valuation expert was engaged during the period to perform a WACC rate review for the Group. From the review undertaken, they concluded that: (i) (ii) The majority of the risks and assumptions embedded across the 4 CGUs are the same, and therefore a single discount rate can be applied across all 4 CGUs; and There are observable differences in the market that justify the reduction in WACC rates adopted by the Group from the prior period. These primarily relates to a reduction in the observed 10-year Australian Government Bond rate (the ‘risk free’ rate) and a reduction in the Company’s asset beta and post-tax cost of debt. The Group have adopted a nominal discount rate in this year’s impairment calculation in line with the underlying financial forecast assumptions. In prior period a real discount rate was used in line with the underlying financial forecast assumptions adopted in the impairment models at that time. Cash flows beyond the next four-year period have been extrapolated where relevant using a 2.5% per annum nominal growth rate (FY19: 0% per annum real growth rate). A pre-tax discount rate of 12.9% nominal for each CGU (FY19 pre-tax discount rate: 12.9% real for Fixed Communications, Network Construction and Energy & Water and 13.6% real for Comdain Infrastructure) 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 forecast period from a base of FY20 is 0%. 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 wireless telecommunication carriers in Australia and the forecast compound average annual nominal revenue growth over the forecast period from a base of FY20 is 19%. This assumes existing wireless contracts are extended, new contracts are awarded and margins remain stable. No cash flows have been included for the nbn design and construction activities. (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 forecast period from a base of FY20 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, battery storage, 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 forecast period from a base of FY20 is 12%. This assumes existing contracts are extended, new contracts are awarded and margins remain stable. The recoverable amount of all CGUs is sensitive to changes in customer contractual arrangements. Should any material contracts not be renewed, material tenders not be won, or volumes assigned from contracts be lower than expected it will result in a reduction to the recoverable amount and may result in an impairment. 41 15 Leases (a) Amount recognised in the balance sheet The balance sheet shows the following amounts relating to leases: Properties Motor vehicles Equipment Total right-of-use assets 1.000 Current lease liabilities Non-current lease liabilities Total lease liabilities Service Stream Limited Notes to the consolidated financial statements 30 Jun 2020 $'000 23,066 1 Jul 2019 $'000 27,462 4,486 1,538 29,090 9,900 23,464 33,364 3,227 288 30,977 5,789 25,188 30,977 On adoption of AASB 16, the Group recognised lease liabilities in relation to leases which had previously been classified as operating leases under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group’s incremental borrowing rate as of 1 July 2019. The Group's weighted average incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 2.9%. Additions to the right-of-use assets during the 2020 financial year were $6,677,000. (b) Amounts recognised in the profit or loss The statement of profit or loss shows the following amounts relating to leases: Depreciation of right-of-use assets Properties Motor vehicles Equipment Interest expense (included in interest expense and other finance costs) Expense relating to short-term leases (included in the occupancy and motor vehicle expenses) The total cash outflow for leases in 2020 was $10,594,000. (c) The Group's leasing activities and how these are accounted for 2020 $'000 7,488 1,889 90 9,467 939 1,458 The Group leases various properties, equipment and motor vehicles. Rental contracts are typically made for fixed periods of two to five years but may have extension options as described in (ii) below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Until the 2019 financial year, leases of properties, equipment and motor vehicles were predominantly classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease. From 1 July 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • • • • amounts expected to be payable by the Group under residual value guarantees; fixed payments (including in-substance fixed payments), less any lease incentives receivable; variable lease payments that are based on an index or a rate; and the exercise price of a purchase option if the Group is reasonably certain to exercise that option. 42 Service Stream Limited Notes to the consolidated financial statements 15 Leases (continued) (c) The Group's leasing activities and how these are accounted for (continued) The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the Group’s incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are measured at cost comprising the following: • • • the amount of the initial measurement of lease liability; any lease payments made at or before the commencement date less any lease incentives received; and any initial direct costs. (i) Variable lease payments There are no variable lease payments requiring estimations. (ii) Extension and termination options Extension and termination options are included in a number of properties, equipment and motor vehicles leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. (d) Significant estimates In determining the lease term, management consider all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options or periods after termination options are only included in the lease term if the lease is reasonably certain to be extended or not terminated. Potential future cash outflows of approximately $40,800,000 (undiscounted) have not been included in the lease liability because it is not reasonably certain that the leases will be extended or not terminated. 16 Trade and other payables Trade creditors 1 Sundry creditors and accruals Goods and services tax payable Income in advance 2020 $'000 45,092 41,186 3,103 13,674 103,055 2019 $'000 52,723 60,124 6,057 43,227 162,131 1 Typically, no interest is charged by trade creditors. The Group has financial risk management policies in place to ensure that all payable 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 decreased during the year predominantly due to the conclusion of nbn design and construction activities. 43 17 Provisions Current Employee benefits 1 Provision for contractual obligations 2 Provision for onerous contracts 3 Provision for contractual disputes 4 Non-current Employee benefits 1 Service Stream Limited Notes to the consolidated financial statements 2020 $'000 2019 $'000 19,210 9,490 65 693 29,458 6,531 6,531 16,471 16,340 1,541 2,643 36,995 5,808 5,808 35,989 42,803 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 with its various customers. 3 The provision for onerous contracts represents best estimation on loss-making projects where total cost is expected to exceed total revenue. 4 The provision for contractual disputes represents the present value of an estimate for the future outflow that may be required 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. These assurance-type warranties are accounted for in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets. (a) Movement in provision Balance at 1 July 2019 Charged / (credited) to profit or loss Additional provisions recognised Unused amounts reversed Amounts used during the year Balance at 30 June 2020 (b) Significant estimates Contractual obligations $'000 Onerous contracts $'000 Contractual disputes $'000 16,340 1,541 2,643 910 (6,496) (1,264) 9,490 33 - (1,509) 65 - (1,950) - 693 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. 18 Contributed equity Fully paid ordinary shares Treasury shares 1.000 Number of shares Share capital 2020 No.'000 408,026 - 408,026 2019 No.'000 401,620 - 401,620 2020 $'000 314,741 - 314,741 2019 $'000 297,757 - 297,757 44 18 Contributed equity (continued) (a) Fully paid ordinary shares Balance at 1 July 2018 Issue of shares Dividend reinvestment plan Consideration for business combination (net of transaction costs) Balance at 30 June 2019 Issue of shares Dividend reinvestment plan Balance at 30 June 2020 Service Stream Limited Notes to the consolidated financial statements Number of shares '000 360,210 1,006 215 40,189 Share capital $'000 225,144 1,777 473 70,363 401,620 297,757 5,353 1,053 14,604 2,380 408,026 314,741 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 23. (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 a first-in-first-out basis. Balance at 1 July 2018 Acquisition of treasury shares (average price: $1.77 per share) Shares issued under employee share schemes Balance at 30 June 2019 Acquisition of treasury shares (average price: $2.73 per share) Shares issued under employee share schemes Balance at 30 June 2020 Number of shares '000 Share capital $'000 (5,322) (1,006) 6,328 - (5,629) 5,629 - (7,863) (1,777) 9,640 - (15,345) 15,345 - 19 Dividends Recognised amounts Fully paid ordinary shares Interim dividend Unrecognised amounts Fully paid ordinary shares Final dividend 1 1 The FY19 final fully-franked dividend was paid on 2 October 2019. 2020 Cents per share 2019 Cents per share 4.00 4.00 3.50 3.50 2020 Cents per share 2019 Cents per share 2020 $'000 2019 $'000 16,299 16,299 2020 $'000 14,049 14,049 2019 $'000 5.00 5.00 5.50 5.50 20,401 20,401 22,384 22,384 45 Service Stream Limited Notes to the consolidated financial statements 19 Dividends (continued) In respect of current year's earnings, an interim dividend of 4.00 cent per share franked to 100% at 30% corporate income tax rate was paid to the holders of fully paid ordinary shares on 19 March 2020. In addition, on 18 August 2020, the Directors declared a fully-franked final dividend of 5.00 cents per share to the holders of fully paid ordinary shares in respect of the financial year ended 30 June 2020, to be paid to shareholders on 1 October 2020. 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 15 September 2020 and the total dividend estimated to be paid in respect of the current shares on issue is $20,401,000. Company 2020 $'000 38,763 2019 $'000 29,631 Adjusted franking account balance at 30 June 20 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 disposal of non-current assets R&D tax incentives Depreciation and amortisation Equity-settled share-based payments expense (Decrease) / increase in tax balances & other tax adjustments 1 Movement in working capital: Decrease in trade and other receivables Decrease / (increase) in accrued income Decrease / (increase) in other assets Decrease / (increase) in inventories Decrease in trade and other payables (Decrease) / increase in provisions Net cash provided by operating activities 2020 $'000 79,472 79,472 2020 $'000 49,315 (411) (136) 31,678 2,004 (3,782) 15,181 24,187 2,928 2,609 (59,076) (6,814) 57,683 (c) Debt reconciliation $'000 Borrowings Lease liabilities Debt at 30 June 21 Financial instruments (a) Overview 2019 60,000 288 60,288 AASB 16 Adoption Additions / Remeasurement - 30,977 30,977 - 7,590 7,590 Net Cash flows - (5,491) (5,491) 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) (11,017) 3,382 59,523 2020 60,000 33,364 93,364 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. 46 21 Financial instruments (continued) (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 Lease liabilities Borrowings Trade and other payables Service Stream Limited Notes to the consolidated financial statements 2020 $'000 2019 $'000 79,472 101,801 39,204 220,477 33,364 60,000 103,055 196,419 70,809 125,988 54,385 251,182 288 60,000 162,131 222,419 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 to a $194,720 per annum at 30 June 2020, unfavourable impact to profit before tax (2019: $105,210 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 had led 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. 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. 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. This historical loss rate is adjusted to reflect current and forward-looking information affecting the ability of specific customers to settle their receivables. The nature of the Group’s customers, which includes government enterprises and large private sector corporations, is such that the risk of default of receivables is low. To date, the Group have not observed or expect to see material decline on its customers’ ability to pay as a result of the COVID-19 pandemic. Accordingly, no additional expected credit loss allowance pertaining to COVID-19 have been included. 47 Service Stream Limited Notes to the consolidated financial statements 21 Financial instruments (continued) (d) Credit risk management (continued) When applying the impairment requirements of AASB 9 to contract assets, the Group recognises that the ageing of accrued revenue is not indicative of its recoverability profile, rather the ability to complete work in progress and/or pending customers' approval in order to invoice. Under the expected credit loss principle adopted, the Group assessed that the accrued revenue balance carries a similar expected loss profile as those trade receivables aged as current, before adjusting for any specific forward-looking factors. Applying the associated expected loss rate to the accrued revenue balance results in an immaterial impairment loss. On that basis, the loss allowance as at 30 June was determined as follows. Current $'000 > 30 days $'000 > 60 days $'000 > 90 days $'000 > 120 days $'000 Total $'000 30 June 2020 Expected loss rate 1 Gross carrying amount - trade receivables Loss allowance 1 0.45% 32,211 146 2.17% 2,975 65 19.99% 1,220 244 36.88% 200 74 46.51% 946 440 37,552 969 Current $'000 > 30 days $'000 > 60 days $'000 > 90 days $'000 > 120 days $'000 Total $'000 30 June 2019 Expected loss rate Gross carrying amount - trade receivables Loss allowance 0.06% 45,121 27 0.61% 4,058 25 2.55% 1,876 48 8.19% 1,070 88 9.19% 284 26 52,409 214 1 The increase in expected loss rates and loss allowance is due to specific factors included in the current period's assessment. The loss allowances for trade receivables at 30 June 2020 reconciles to the opening loss allowances as follows: Opening balance Additional provision recognised Receivables written off during the year as uncollectible Unused amount reversed Closing balance (e) Liquidity risk management 2020 $'000 214 783 (28) - 969 2019 $'000 136 166 (38) (50) 214 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 21(e)(ii) are details of the financing facilities available to the Group at 30 June 2020. (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. 48 Service Stream Limited Notes to the consolidated financial statements 21 Financial instruments (continued) (e) Liquidity risk management (continued) (i) Liquidity and interest rate risk tables (continued) 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 2.78% 0.94% - (33,364) (60,000) (103,055) (35,081) (60,744) (103,055) (5,519) (3,282) (103,055) (5,134) (6,261) - (8,983) (51,201) - (15,445) - - (196,419) (198,880) (111,856) (11,395) (60,184) (15,445) - 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) Term loan Bank guarantees Bank overdraft Cash advance $'000 $'000 $'000 $'000 60,000 - 60,000 60,000 - 60,000 36,660 8,340 45,000 42,525 17,475 60,000 - 40,000 40,000 - 40,000 40,000 - 45,000 45,000 - 30,000 30,000 2020 Financial liabilities Lease liabilities Borrowings Trade and other payables 1.000 2019 Financial liabilities Lease liabilities Borrowings Trade and other payables (ii) Financing facilities Amount used Amount unused Balance at 30 June 2020 1.000 Amount used Amount unused Balance at 30 June 2019 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 2020 was less than the specified hurdle meaning that no repayment will be required at 30 September 2020. 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. Performance guarantees provided in the normal course of business are shown above. Based upon current expectations as at 30 June 2020, the Group considers that it is more likely than not that such amounts will not be payable under these arrangements. 22 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. 49 22 Capital risk management (continued) 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 2020 and 2019 financial reporting periods. Service Stream Limited Notes to the consolidated financial statements 23 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 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. 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 2020 (FY20). 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 The participant must be an employee at the conclusion of the performance period; 80% of the performance rights granted with respect to the FY20 tranche will vest where the Group’s adjusted earnings per share (Adjusted EPS) achieves the target as set by the Board of Directors. For the FY18 and FY19 tranches, 50% of the performance rights will vest where the Group’s earnings per share achieves an 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 FY18 1 3 years FY19 2 3 years FY20 3 3 years September 2020 September 2021 September 2022 1 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. 2 The FY19 LTIP targets, from base of 11.29 cps are: Year 1: 12.42 cps, Year 2: 14.40 cps, Year 3: 13.34 cps. 3 The FY20 LTIP targets, Year 1: 15.02 cps, Year 2: 13.65 cps, Year 3: not yet determined. Subject to the following proportional vesting: Percentage of performance rights that vest 0% 40% Proportional vesting FY20 EPS target Below PY Adjusted EPS 1 At PY Adjusted EPS 1 Greater than PY Adjusted EPS 1 and less than 100% FY18 & FY19 EPS target Below 75% At 75% Greater than 75% and less than 100% 100% 100% of target and above 100% and above 1 Where the previous year's Adjusted EPS is less than the current year's Adjusted EPS target. 50 Service Stream Limited Notes to the consolidated financial statements 23 Share-based payments (continued) (a) Long-Term Incentive Plan (LTIP) (continued) C 20% of the performance rights granted (50% for FY18 and FY19 tranches) will vest where 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 0% 50% Proportional vesting 100% TSR ranking Below the 50th percentile At the 50th percentile Above the 50th percentile but below the 75th percentile 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 FY18 LTIP 614,932 14 September 2017 Relative TSR hurdle - 92.5 cps September 2020 FY19 LTIP 731,108 21 September 2018 Relative TSR hurdle - 81.8 cps September 2021 FY20 LTIP 1 1,078,007 2 18 September 2019 Relative TSR hurdle - 128.4 cps September 2022 EPS hurdle - 139.1 cps EPS hurdle - 125.8 cps EPS hurdle - 237.3 cps Performance period 1 July 2017 - 30 June 2020 1 July 2018 - 30 June 2021 1 July 2019 - 30 June 2022 1 As L Mackender is a Director of the Company, the issuance of performance rights under the FY20 LTIP Tranche was approved by shareholders at the Company's Annual General Meeting on 23 October 2019, with relative TSR hurdle valued at $1.311 and EPS hurdle at $2.422. 2 J Ash resigned from his position as the Executive General Manager, Network Construction effective 6 July 2020, and forfeited his eligibility from participating in the FY20 LTIP Tranche. Fair value of performance rights The FY20 LTIP performance rights with the relative TSR hurdle vesting condition have been valued by an independent expert using a Monte-Carlo simulation. The FY20 LTIP performance rights with the Adjusted 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, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield, the risk-free interest rate for the term of the option and the correlations and volatilities of the peer group companies. 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 FY18 LTIP FY19 LTIP FY20 LTIP FY20 LTIP - CEO Share price at grant date Expected life Volatility 1 Risk-free interest rate Dividend yield Vesting date $1.480 $1.774 $2.600 $2.650 2.87 years 2.87 years 2.78 years 2.69 years 45% 35% 30% 30% 1.91% 2.06% 0.82% 0.72% 4.80% 5.90% 4.04% 3.96% September 2020 September 2021 September 2022 September 2022 1 The expected volatility is based on the historic volatility (based on the remaining life of the options), adjusted for any expected changes in future volatility due to publicly available information. 51 Service Stream Limited Notes to the consolidated financial statements 23 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 2020 2019 Number of rights Grant date weighted avg FV $ Number of rights Grant date weighted avg FV $ 2,331,855 1,315,056 (853,073) (369,791) 2,424,047 0.924 2.163 0.622 1.776 1.573 3,130,497 836,231 (1,548,419) (86,454) 2,331,855 0.538 1.104 0.243 0.893 0.924 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 FY18 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 FY20 financial statements. As at 30 June 2020, 614,932 performance rights granted under the FY18 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 (FY20 Tranche) and one year (FY19 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 RNC. The number of performance rights offered to participating executives was endorsed by the RNC 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. 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 2020 2019 Number of rights Grant date weighted avg FV Number of rights Grant date weighted avg FV 4,500,000 - (4,500,000) - 1.487 - 1.487 - 4,500,000 4,500,000 (4,500,000) 4,500,000 1.326 1.487 1.326 1.487 The relevant number of shares for the FY19 tranche has been delivered to the participants during the year. 52 24 Subsidiaries Details of the Company’s subsidiaries at 30 June 2020 are as follows: Name of entity Parent entity Service Stream Limited Subsidiaries Service Stream Holdings Pty Ltd (i) Service Stream Fixed Communications Pty Ltd (i) Service Stream Mobile Communications Pty Ltd (i) Service Stream Customer Care Pty Ltd (i) Radhaz Consulting Pty Ltd (i) Service Stream Infrastructure Services Pty Ltd (i) Service Stream Energy & Water Pty Ltd (i) Service Stream Nominees Pty Ltd (i) Service Stream Operations Pty Ltd (i) TechSafe Australia Pty Ltd (i) TechSafe Management Pty Ltd (i) Ayrab Pty Ltd (i) Comdain Infrastructure Pty Ltd (i) Comdain Civil Constructions Pty Ltd (i) Comdain Civil Constructions (QLD) Pty Ltd (i) Comdain Services Pty Ltd (i) Comdain Asset Management Pty Ltd (i) Comdain Gas (Aust) Pty Ltd (i) Comdain Services (AMS) Pty Ltd (i) Comdain Corporate Pty Ltd (i) Comdain Assets Pty Ltd (i) Service Stream Limited Notes to the consolidated financial statements Country of incorporation Ownership interest 2020 % 2019 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 (i) 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. 25 Deed of cross guarantee The parties to a deed of cross guarantee for the Group as listed in note 24 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. 26 Joint operations The Delivering for Customers (D4C) is an unincorporated jointly controlled entity between Comdain Infrastructure Pty Ltd, Lendlease Services Pty Ltd, John Holland Pty Ltd and WSP Australia Pty Ltd. This arrangement was established on 18 December 2019. The principal place of business of the joint operation is in Australia. Comdain Infrastructure Pty Ltd is a wholly owned subsidiary of Service Stream Holdings Pty Ltd. It holds a 30% direct interest in D4C. The Joint Venture Deed in relation to the D4C requires unanimous consent from all joint venture parties for all relevant activities. The four partners have direct rights to the assets of the partnership and are jointly and severally liable for the liabilities incurred by the partnership. In accordance with AASB 11 Joint Arrangements, this entity is therefore classified as a joint operation and the group recognises its direct right to the jointly held assets, liabilities, revenues and expenses as described in note 34(c). 53 Service Stream Limited Notes to the consolidated financial statements 27 Business combinations Year ended 30 June 2019 acquisition On 2 January 2019, the Group acquired 100% of 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). Fair values of acquired assets and liabilities as at acquisition were reported on a provisional basis in the prior year's financial statements and have been adjusted within the twelve-month measurement period as outlined below. The final fair values of the assets and liabilities of Comdain Infrastructure as at acquisition date are as follows: Purchase consideration at fair value Cash and cash equivalents Trade and other receivables Accrued revenue Inventories Other assets Plant and equipment Customer contracts Trade and other payables Provisions Current tax liabilities Deferred tax asset Deferred tax liability on customer contracts Net identifiable assets acquired Add: goodwill Net assets acquired Provisional fair value $'000 Adjustments to provisional fair value $'000 Final fair value $'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 - - - - (42) - - - (4,401) - 405 - (4,038) 4,038 37 23,489 27,795 1,997 2,044 17,167 79,872 (61,550) (15,894) (2,907) 4,838 (23,962) 52,926 100,285 153,211 In completing the provisional purchase price allocation in the prior financial period, management was required to make judgements relating to the fair value of certain liabilities. During the financial year, management has finalised its assessment over these uncertain liabilities, most notably those relating to employment related obligations, onerous contracts and project WIP, which are reflected in an adjustment to provisions. The 30 June 2019 balance sheet and relevant notes within the financial statements have been restated to reflect the final adjustments to fair value detailed above. 28 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 payments 1 2020 $ 5,186,191 176,065 262,645 372,199 5,997,100 2019 $ 3,171,193 156,341 71,230 4,549,607 7,948,371 1 The fair value of performance rights issued under the LTIP are 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. 54 Service Stream Limited Notes to the consolidated financial statements 28 Related party transactions (continued) (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 also had a beneficial interest in one of these commercial properties that the Group occupied. Total rental income paid to the landlord is approximately $580,000 across these three properties (2019: $367,500). At the onset of the COVID-19 pandemic, the Group sought and received payment deferrals from its related parties in relation to these properties with $195,000 timing benefit remaining at balance date. The terms of the leases have been reviewed and are at arm’s length with the duration of lease for one property expiring in December 2024 and the other two properties expiring in August 2025. 29 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 34 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 1 The 30 June 2019 financial position has been restated to reflect the re-classification of tax related balances. (b) Financial performance Profit for the year Total comprehensive income 2020 $'000 134 273,794 273,928 10,668 - 10,668 20191 $'000 73 262,400 262,473 7,477 - 7,477 263,260 254,996 293,205 (11,108) (18,837) 263,260 276,221 2,475 (23,700) 254,996 2020 $'000 43,546 43,546 2019 $'000 37,519 37,519 (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 24 and 25, and the parent entity guarantees to certain clients in relation to subsidiary contract performance obligations. 55 Service Stream Limited Notes to the consolidated financial statements 29 Parent entity information (continued) (c) Determining the parent entity financial information (continued) (iii) Share-based payments The grant by the Company of shares over its equity instruments to the employees of subsidiaries 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. 30 COVID-19 impact The Group provides essential infrastructure services to gas, electricity, water and telecommunications network owners and operators nationally. To date, these industries have been allowed to continue operations under various lock-down restrictions imposed to manage the pandemic. Although there have been some negative impacts to Service Stream’s operations from the pandemic, demand for essential network services has remained firm. In addition, the Group’s balance sheet, cash flow and liquidity have not been materially impacted. The impacts to earnings to date are described below: • • • • • • Increased costs to support specific safety-related protocols across business operations. This includes additional including operating distinct shifts across our warehouse expenditure on protective equipment and hygiene, operations with additional cleaning incurred between each shift; Customer determined moratoriums on electricity and gas disconnections (and subsequent impacting meter reading operations; Reduced residential land development activity (new housing estates); Deferral of proactive maintenance activities by asset owners to ensure networks remain available to consumers working from home; Delays in projects due to availability of client-supplied free-issue materials; and Deferral of some projects due to travel and access restrictions across remote locations. reconnections) Servicing the Utilities and Telecommunications networks is core to the Group’s strategy, with exposure to these sectors providing a solid revenue base and sustained resilience through the pandemic and subsequent economic recession. In relation to the Group’s operations, restrictions on people movement have not had a significant impact on the Group’s field-based operations. The Group has implemented appropriate safety and hygiene protocols and procedures designed to minimise the risk of any spread of the COVID-19 virus. The majority of our office-based staff have moved to working from home arrangements with the company’s IT infrastructure and other support networks capable of supporting these arrangements effectively. At this point in time, and on the basis that the Utilities and Telecommunications sectors will continue to be classified as essential services, it is not expected that COVID-19 will have a material adverse impact to the carrying value of the Group’s assets. 31 Contingent assets and liabilities The Group is not aware of any material contingent assets and liabilities at balance date that have not been disclosed in these financial statements (2019: nil). 32 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. 33 Remuneration of auditors Audit and review of the financial report Other assurance services Review of income tax return Services relating to the acquisition of Comdain Infrastructure Services relating to the GST Streamline Assurance Review Review of executive long-term incentive plan Tax advice and other services The auditor of Service Stream Limited is PricewaterhouseCoopers. 2020 $ 693,000 60,000 33,000 12,250 142,837 - 48,000 989,087 2019 $ 682,000 - 21,000 144,000 - 60,180 25,000 932,180 56 Service Stream Limited Notes to the consolidated financial statements 34 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 16, which is effective from 1 July 2019. 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 18 August 2020. 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. New and amended standards adopted by the Group The Group adopted AASB 16 retrospectively from 1 July 2019 and has not restated comparatives for the prior reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 July 2019. Changes in accounting policy On adoption of AASB 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group’s incremental borrowing rate as of 1 July 2019. The Group's weighted average incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 2.9%. Impact on profitability and earnings per share (i) EBITDA has increased by $10.3 million with immaterial impact to earnings per share for the period ending 30 June 2020 as a result of the adoption of AASB 16. (ii) Practical expedients applied In applying AASB 16 for the first time, the Group has used the following practical expedients permitted by the standard: • • • • • the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; reliance on previous assessments on whether leases are onerous; the accounting for operating leases with a remaining lease term of less than twelve months as at 1 July 2019 as short-term leases; the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying AASB 117 Leases and Interpretation 4 Determining whether an Arrangement contains a Lease. (iii) Operating lease commitments 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 2020 $'000 - - - - 2019 $'000 9,671 21,449 2,033 33,153 57 Service Stream Limited Notes to the consolidated financial statements 34 Significant accounting policies (continued) (a) Basis of preparation (continued) (iii) Operating lease commitments (continued) From 1 July 2019, the Group has recognised right-of-use assets for these leases, except for short-term leases, refer to reconciliation below (iv) and note 15(b) for further information. (iv) Measurement of lease liabilities Operating lease commitments at 30 June 2019 Discounted using Group's incremental borrowing rate at date of initial application Add: finance lease at 30 June 2019 Less: short-term leases recognised on straight-line basis as expense Add: contracts reassessed as leases Lease liability recognised at 1 July 2019 Of which were: Current lease liabilities Non-current lease liabilities 1 Jul 2019 $'000 33,153 29,771 288 (448) 1,366 30,977 5,789 25,188 30,977 (v) Measurement of right-of-use assets The associated right-of-use assets for property leases were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 30 June 2019. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. Early adoption of standards The Group has not elected to early adopt the Standards and Interpretations issued but not yet effective. 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 35. (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. the asset Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of 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. 58 Service Stream Limited Notes to the consolidated financial statements 34 Significant accounting policies (continued) (c) Joint arrangements Under AASB 11 Joint Arrangements investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Group has a joint operation in place during the year. Joint operations The Group recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial statements. Details of the joint operation is set out in note 26. (d) 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-rate on the basis of the carrying amount of each asset in the cash generating unit (or groups of cash generating units). An impairment loss recognised for goodwill is recognised immediately in the profit or loss and is not reversed in a subsequent accounting period. 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. (e) 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. (f) 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. 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). 59 Service Stream Limited Notes to the consolidated financial statements 34 Significant accounting policies (continued) (f) Revenue recognition (continued) 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 planning, design, engineering and construction management for projects in wireless and fixed-line 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 is recognised as an expense and onerous contract provision as set out in note 17. 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 assets and contract liabilities to describe what the Group refers to as accrued revenue and income in advance respectively. 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. 60 Service Stream Limited Notes to the consolidated financial statements 34 Significant accounting policies (continued) (f) 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 reimbursed 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 separate 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. (g) Leases Until 30 June 2019, 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. Lease income from operating leases where the group is a lessor is recognised in income on a straight-line basis over the lease term. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognised as expense over the lease term on the same basis as lease income. (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 the equity Equity-settled share-based payments to executives and Directors are measured at instrument at the grant date. Details regarding the determination of the fair value of the equity instruments are set out in note 23. the fair value of 61 Service Stream Limited Notes to the consolidated financial statements 34 Significant accounting policies (continued) (i) Share-based payments (continued) 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. (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, 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. 62 Service Stream Limited Notes to the consolidated financial statements 34 Significant accounting policies (continued) (k) Business combinations (continued) Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised over the net identifiable assets acquired. 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. 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: 5 - 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 as software. Any costs associated with maintaining this software 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 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 relationships have finite lives and are carried at cost amortisation and any impairment losses. less any accumulated 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 3 to 8 years for software, 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 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. is not possible to estimate the recoverable amount of an individual asset, 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. 63 34 Significant accounting policies (continued) (n) Impairment of tangible and intangible assets excluding goodwill (continued) Service Stream Limited Notes to the consolidated financial statements The recoverable amount In assessing 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 The Group classifies its financial assets and liabilities in the following measurement categories: • those to be measured subsequently at fair value (either through other comprehensive income (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, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss (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 fair value through other comprehensive income (FVOCI) are not reported separately from other changes in fair value. (iv) Impairment 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 34 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 21(d) for further details. (v) Borrowings Borrowings are initially 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) 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 obligation under the contract, as determined in accordance with AASB 137 Provisions, the amount of 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 liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. 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 65 Service Stream Limited Notes to the consolidated financial statements 34 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, the Group's impairment less loss allowance. See note 21(d) for an assessment of 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. 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 66 Service Stream Limited Notes to the consolidated financial statements 34 Significant accounting policies (continued) (x) Earnings per share (continued) • 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. 35 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 34. 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 uncertainties and judgements made in relation to lease accounting - note 15(d); Estimation of provision for contractual obligations, contractual disputes and onerous contracts - note 17(b); and Estimation of fair value of assets and liabilities in business combination - note 27. 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. 67 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 2020 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 24 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 25. Note 34 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 18 August 2020 Leigh Mackender Managing Director 18 August 2020 68 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 2020 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 2020 the consolidated statement of profit or loss and other comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows 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 (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. 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 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 audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • For the purpose of our audit we used overall Group materiality of $3.5 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. 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) $230.0 million The Group is required by Australian Accounting Standards to test goodwill 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 ($100.3 million). The CGUs are tested for impairment using a discounted cash flow model. In undertaking impairment testing, the following assumptions require estimation:    expected cash flows, as taken from Board approved budgets and strategic plans, including assumptions regarding extending existing and winning new contracts discount rates used to discount the estimated cash flows the long term growth rate to be applied to the forecast cash flows in the terminal year. This was a key audit matter because of the level of estimation required by the Group in determining the assumptions used to perform the impairment testing. Revenue recognition (Refer to note 3 and 34 (f)) $928.0 million For the year ended 30 June 2020, the Group recognised $928.0 million of revenue from contracts with customers. Revenue from provision of ticket of work services involves a high volume of transactions and is We assessed whether the Group’s identification of CGUs was consistent with our knowledge of the operations and internal reporting lines. We compared actual historical results to budget to assess the level of the Group’s accuracy in forecasting cash flows. We checked that the four-year forecasts used in the impairment models were based on the Board approved budgets and strategic plans.   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: evaluated the reasonableness of the Group’s discount rate assumptions with the assistance of PwC valuation experts evaluated the underlying cash flow assumptions in the impairment models for key customer contracts with reference to historical results and expected project pipelines, and considered external industry information evaluated the reasonableness of the Group’s long term growth rate based on relevant external market data tested the calculations in the model for mathematical accuracy.   We considered the adequacy of the Group’s disclosures on goodwill impairment in light of the requirements of Australian Accounting Standards. We evaluated the design and implementation of relevant key internal controls over the recognition of revenue. For revenue from the provision of ticket of work services, amongst other procedures and for a sample of transactions, we obtained evidence of completed subcontractor claims and/or work orders and compared the revenue amount recognised to the Key audit matter How our audit addressed the key audit matter recognised at a point in time once services or activities have been completed. contracted rate with the customer for the type of service. 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 costs, and variable consideration. This was a key audit matter because of its significance to profit, the high volume of revenue transactions associated with ticket of work services and the estimation required in recognising revenue from the delivery of projects. Recoverability of accrued revenue (Refer to note 11) $101.8 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 revenue balance at 30 June 2020 was $101.8 million. Judgement was required in order to determine if accrued revenue will be recoverable. This included considering the nature of transactions and the aging of claims. Only revenue that is highly probable of not reversing can be recorded. The recoverability of accrued revenue was a key audit matter because judgement was required to evaluate For revenue from the delivery of projects, amongst other procedures and for a sample of contracts, we:      obtained an understanding of the terms and conditions of contracts obtained an understanding, and agreed to supporting documents, the estimates of total contract revenue and forecast contract costs and evaluated the percentage of completion based on the actual costs incurred to date assessed the Group’s forecasting accuracy by comparing historical actual costs incurred relative to the forecast of those costs assessed the accrued revenue or income in advance balance at 30 June by assessing the amounts billed up to 30 June 2020 relative to the revenue recognised to that date considered the status of projects to assess the allocation of revenue to the periods before and after 30 June 2020. For all categories of revenue our procedures included identifying a sample of journal entries impacting revenue based on specific criteria and obtaining source documents to determine the journals were reasonable. We evaluated the aging of accrued revenue to identify areas of higher risk. Whilst each segment has aged accrued revenue balances, the Fixed Communications segment had the most significant balance. We therefore directed the majority of our audit effort to that segment. We performed the following procedures, amongst others, in relation to the recoverability of accrued revenue:  for a sample of accrued revenue transactions, we obtained evidence to assess if the work had been completed and the Group was entitled to the accrued revenue balance assessed the reliability of accrued revenue aging reports by obtaining source documents and using the date of the transaction to verify  Key audit matter How our audit addressed the key audit matter whether revenue is highly probable of not reversing.   the aging of the amount assessed the long-term average claim rejection rate which we compared to actual experience, including recent trends for claims that reached an outcome subsequent to 30 June 2020 we obtained evidence of the outcome. 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 2020, 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: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.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 14 to 22 of the Directors’ report for the year ended 30 June 2020. In our opinion, the remuneration report of Service Stream Limited for the year ended 30 June 2020 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Trevor Johnston Partner Melbourne 18 August 2020 Service Stream Limited ASX Additional Information ASX Additional Information for the financial year ended 30 June 2020 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 17 August 2020 Category (size of holding) 1-1,000 1,001- 5,000 5,001-10,000 10,001-100,000 100,001+ Holders 2,943 3,966 1,809 2,076 137 10,931 B. There are 10,931 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 552. D. The names of the substantial shareholders listed in the holding company’s register, and their shareholdings (including shareholdings of their associates), as at 17 August 2020 are: Shareholder Comdain nominees Pty Ltd FIL Limited Thorney Opportunities Ltd(1) Tiga Trading Pty Ltd(1) Jasforce Pty Ltd (as trustee for the Alex Waislitz Retirement Plan)(1) Waislitz Charitable Corporation Pty Ltd (as trustee for the Waislitz Family Foundation)(1) Ordinary % 38,444,918 23,853,483 6,396,590 15,432,787 316,000 9.42% 5.85% 1.57% 3.78% 0.08% 177,500 0.04% (1) The Company treats Thorney Opportunities Ltd, Tiga Trading Pty Ltd, Jasforce Pty Ltd (as trustee for the Alex Waislitz Retirement Plan) and Waislitz Charitable Corporation Pty Ltd (as trustee for the Waislitz Family Foundation) with an aggregated holding of 5.47%, 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 $0.0211 (2019: ($0.0393)) G. 20 Largest Shareholders as at 17 August 2020 - Ordinary Shares Service Stream Limited ASX Additional Information Name of 20 largest shareholders in each class of share HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED COMDAIN NOMINEES PTY LTD CITICORP NOMINEES PTY LIMITED UBS NOMINEES PTY LTD NATIONAL NOMINEES LIMITED BNP PARIBAS NOMINEES PTY LTD RUBI HOLDINGS PTY LTD BNP PARIBAS NOMS PTY LTD BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD NETWEALTH INVESTMENTS LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED MR KEVIN ASHLEY SMITH HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 CRISTATUS PTY LTD MACKENDER HOLDINGS PTY LTD CITICORP NOMINEES PTY LIMITED MR KEVIN ASHLEY SMITH HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA MR ASHLEY HAYNES Ordinary shares Fully paid number of shares held 100,939,482 47,137,196 38,444,918 30,897,568 23,808,536 17,921,517 8,740,019 6,000,000 5,658,203 4,377,423 3,918,687 1,715,381 1,500,000 1,370,894 1,050,000 1,000,000 963,172 953,002 900,089 890,081 % Held 24.74 11.55 9.42 7.57 5.84 4.39 2.14 1.47 1.39 1.07 0.96 0.42 0.37 0.34 0.26 0.25 0.24 0.23 0.22 0.22 298,186,168 73.08 Service Stream Limited Corporate Directory Corporate Directory Directors Brett Gallagher Leigh Mackender Greg Adcock Tom Coen Peter Dempsey Deborah Page AM Company Secretary 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 Auditor PricewaterhouseCoopers Service Stream Limited ABN: 46 072 369 870 Level 4, 357 Collins Street, Melbourne, Victoria 3000 www.servicestream.com.au SERVICE STREAM LIMITED 2020 ANNUAL REPORT

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