ANNUAL REPORT 2021 7YEARS ‘‘ Saunders has achieved great things over its 70 years. Whilst the company’s services and operations have expanded, our underlying values have remained constant. Our success could not have happened without our employees, both past and present and we are proud to celebrate this milestone with our customers, partners and shareholders. We look forward to the next part of the journey.” Our History Our Company Our Vision & Values Sectors Chairman’s Letter Managing Director’s Report BoaBoard & Executive Team SHEQ Our People Our Community Financial Report Director’s Report Auditor’s independence Declaration DiDirector’s Declaration Consolidation Statement of Profit or Loss & other comprehensive income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Corporate Governance Summary Additional Stock Exchange Information Additional S Corporate Directory 1 3 6 7 9 11 1313 16 17 20 21 22 35 4040 41 42 43 44 45 79 8181 83 OUR HISTORY 1951 Established by “Bluey” Saunders in August 1951 and originally named V.G. Saunders 1952 Saunders gains clients such as Shell Oil, AMPOL, BP, Golden Fleece and Vacuum (later known as Mobil) 1962 Stage 1 workshop and office built at 271 Edgar St, Condell Park which wouLd remain home to the company until 2019 1969 Des Bryant joins Saunders as Managing Director 1967 Saunders wins major contract with Mobil to build terminals throughout the Pacific Basin, Papua New Guinea, Samoa, New Hebrides and Norfolk IsIsland 1998 “Saunders Prince Bisley” becomes “Saunders International Pty Ltd” 1994 The Company changes its name to “Saunders Prince Bisley” and provides storage of liquids or solids in steel tanks, silos and concrete tanks 1988 Engineering company “Prince Bisley” becomes a part of the Saunders company 1987 Tim Burnett joins Saunders as Managing Director 1983 Expansion of Edgar St workshop and acquisition of descaling and painting company “Mephalene Pty Ltd” 2003 John Power joins as Saunders Chief Executive Officer 2007 Des Bryant retires from Saunders and Tim Burnett takes over as Chairman. 2007 Saunders International becomes a publicly listed ASX Company and registers as “Saunders International Limited” 2015 Mark Benson joins Saunders as Managing Director after John Power’s retirement 2017 Saunders finalises acquisition of civil construction company “Civilbuild” located in Newcastle 2019 Saunders closes workshop at Condell Park and moves their head office to Rhodes 2021 Celebrating 70 years in business 1 2021 Saunders acquires “PlantWeave Technologies” 2021 Established office in Northern Territory 2021 The Company reports a record revenue of $100m 2020 Saunders enters the Defence sector and wins over $40m of new work 2 OUR COMPANY Saunders International Limited is a multi-disciplined engineering and construction company providing design, fabrication, construction, shutdown, maintenance and industrial automation services to leading organisations across Australia, and the Pacific Region. With over 70 years of experience the Saunders Group provides innovative cost-effective solutions to the oil & gas, infrastructure, defence, water, energy, mining & minerals sectors. TANK CONSTRUCTION & MAINTENANCE CIVIL WORKS, PRECAST FABRICATION, BRIDGE CONSTRUCTION EPC CONSTRUCTION, MECHANICAL, ELECTRICAL, CIVIL ENGINEERING & DESIGN STRUCTURAL MECHANICAL & PIPING INDUSTRIAL MAINTENANCE & SHUTDOWNS ELECTRICAL INSTRUMENTATION & AUTOMATION CONTROL DESIGN 3 4 OUR VISION We are driven by a commitment to safety, innovation, excellence and growth while delivering high quality engineered solutions across the complete asset life cycle. OUR VALUES SAFETY INTEGRITY INNOVATION LEADERSHIP TEAMWORK One team, one goal, zero harm * Safety first culture embedded in everything we do * Empowered to stop work * In our behaviour at work and home In all our decisions * Be accountable for our actions, results, successes and failures * Be honest and reliable * Deliver on our commitments Application of information, imagination and innovation * Continually challenge ourselves to improve * Anticipate and create solutions that meet our customers’ needs and exceed their expectations * Collaborate with others to bring ideas to life The courage to shape our future * Show personal drive - engage with and motivate others * Demonstrate the leadership to speak up and challenge the status quo * Give clear, candid and timely feedback Passionate people working together to deliver excellence * Inspire others to reach their full potential * Collaborate with ourselves and our customers in finding solutions * Recognise and regard high performance 6 5 OIL & GAS INFRASTRUCTURE ENERGY DEFENCE w ater MINING & MINERALS 7 8 For much of FY21 and to date in FY22, Saunders has faced the challenges of the COVID-19 pandemic. The management team continues to implement the appropriate policies, protocols and measures to ensure the safety of its employees, clients and the communities in which it operates. This action has contributed to Saunders being able to safely work at all worksites during FY21, albeit with some temporary site shutdowns, supply chain delays, disruptive restrictions on the movement of our personnel and reduced productivity. TThe ongoing focus by the management team on cash flow and working capital has enabled Saunders to achieve an operating cash flow of $15.5 million and year-end balance of cash and cash equivalents of $23.8 million. This year’s strong profit and cash flow result has enabled Saunders to return to paying dividends. The interim and final dividends for this year total 2.5 cents per share, fully franked. TThe outlook for Saunders is positive. Most of the business sectors and clients relevant to Saunders are forecast to increase their capital expenditure over the coming years. New road, rail and water infrastructure is forecast to grow with increasing government spending to bolster economic activity. The NSW and Federal Governments have allocated more than $500 million to programs to replace road and rail bridges throughout NSW. The defence sector is forecast to expand its infrastructure for liquid fuel storage across many defence bases. The Federal Government has announced $260 million in grants under its “Boosting Australia’s Diesel Storage Program” which is expected to result in the construction of mo result in the construction of more than $600 million of new liquid fuel storage facilities over the next 3 years. The positive outlook flowing from these government capital expenditure plans must be tempered by the ongoing headwinds flowing from the pandemic. These headwinds include delays in the rollout of the government expenditure plans, skilled manpower shortages flowing from state and federal border closures, supply chain disruptions and cost inflation pressures. Earlier this month, Saunders announced the acquisition of PlantWeave, a specialist in industrial process automation and electrical solutions. The strategic rationale for this acquisition will enable Saunders to broaden its service offering by providing technology driven solutions to our customers as they seek to automate and remotely monitor, control and maintain their facilities and processes. Both Saunders and PlantWeave have overlapping and complementary customer bases in our target sectors of defence, oil & gas, energy, water, building, infrastructure, and resources. TThe safety of our employees is our highest priority. We continually review safety performance and invest in improvements of the safety processes and systems. I am pleased that proactive and ongoing management and employee involvement has enabled the Company to reduce the TRFIR rate to a record low of 1.25. The Board and the management team are committed to continual improvement of our systems, procedures and safety culture. I wish I wish to thank our many long-term and loyal shareholders for their patience through the transformation of the business over the past three years and for their confidence in the Board and the management team to achieve this turnaround and improving financial performance into the future. I thank my fellow directors and on behalf of the Board, I wish to thank all Saunders employees for their efforts during the year. Timothy Burnett Chairman 26 August 2021 26 August 2021 CHAIRMAN’S LETTER Dear Shareholder, I present the Chairman’s Letter for the 2021 Annual Report. The revenue in FY21 was $101 million which is 52% more than the $66 million achieved in the prior year. The net profit after tax for FY21 was $5.54 million which is a 336% improvement over the $1.27 million profit recorded in FY20. TThe FY21 revenue and profit result demonstrates that the turnaround objectives put in place in FY19 have been achieved and validates the restructure that commenced in FY19. ReRevenue and profit in FY21 were generated from the expanded range of services that Saunders offers to its clients in Oil & Gas, Infrastructure, Energy, Defence, Water, Mining and Minerals. FY21 started with a substantial order book of $110 million, which provided a solid foundation for the year. Saunders’ management team applied consistently strong operational performance across the range of complex projects that were delivered during the year. The combination of these two factors delivered the improved financial result for FY21. 9 10 The government is investing up to $260 million in grants to expand Australia’s diesel storage capacity as part of its commitment to boost long-term fuel security, create jobs and keep fuel prices low. As stated by the office of the Minister of Energy and Emissions, Hon Angus Taylor MP “These projects will deliver over $637 million of public and private sector investment into ten projects across Australia that will support around 1,000 new jobs and a 40 per cent increase in Australia’s diesel stockholdings.” All grant winners are currently clients of Saunders, and we will look forward to further developing our existing relationships. WWe continue to see significant opportunities across all our groups and our focused approach to the Defence sector has positioned us for further growth in this area. We are also starting to see the flow through of the “NSW Replacing Country Bridge Programs” where the government has put forward approximately $500 million in grants to replace over 400 NSW country bridges over the next two years. In addition to our current near-term pipeline, valued at over $800 million, we are working on further diversification through our recent acquisition of PlantWeave Technologies. TThe acquisition of PlantWeave provides Saunders with an opportunity to expand its technical service offering to its existing clients in the Oil & Gas and Resources sectors. The diversified service will assist with accelerating market penetration into the Defence and Utilities (Power and Water) sectors. Saunders customers are increasingly moving towards technology driven solutions and PlantWeave will drive Saunders market entry into Cyber Security, Industrial Automation Systems, Process Optimisation, and Industry 4.0 Technologies. ReRevenue for the group has increased 52% ($34.8m) to $101m and with gross margin significantly increasing by $7.2m to $18.0m. The primary reason for the gross margin growth was due to a combination of higher revenue and operational efficiencies in project delivery, this led to a gross margin percentage of 17.8% as at the 30 June 2021 up from 16.2% in the prior year. Saunders ba Saunders balance sheet remains robust, supported by strong cash generation across the Group and effective working capital management disciplines. This has seen the Group cash increase by $12.7m during the year to $23.8m. This is a result of $15.6m cash generated from operating activities largely driven by debtor collections due to significant increase in revenue. The Group’s bank guarantee and bonding facility has increased to $25 million which will ensure the company is able to comfortably deliver on the present market opportunities. With strong earnings performance reported in FY21 the Board has declared total dividends for the year to be 2.5 cents including a special dividend representing an earning payout ratio of approximately 46.9% of Reported NPAT. including a special dividend Saunders commitment to the safety and security of our people is unchanged and remains management’s key focus. Saunders strong safety performance demonstrates that our ongoing focus is more than adopting the right processes and procedures but developing a strong safety culture which is focused on putting our people first and caring about their wellbeing above all else. The commitment of our employees has again seen a reduction in our Total Recordable Injury Frequency Rate (TRIFR) to 1.25. Our focus for the coming year will again target our key objectives of reducing our lagging indicators while continuing to focus on proactive leading behaviors that dedevelop a strong safety culture that ultimately keeps our employees safe in our workplaces. In 2021, Saunders launched an internal continuous improvement program called “Raise the Bar”, to actively engage our employees in setting the highest standard across all aspects of the business. Through the leadership and training of our people, the initiative sets clear targets in communication, delivery and accountability, giving everyone the opportunity to unlock their potential and continue to "Raise the Bar” for ourselves and others. Although the outlook is positive, with Saunders set to benefit from increased Government spending across the majority of sectors we operate in (namely bulk liquid storage, civil Infrastructure and Defence), we are seeing delays in the rollout of these projects, and we expect that these opportunities will only convert to earnings in H2-FY22 and beyond. Our FY22 results are dependent on COVID-19 related border closures by both the Federal and State Governments and the demand on resources, materials and cost pressures caused by the increased infrastructure activity. We remain focused on growing our existing businesses and expanding into new regions and sectors as opportunities arise. I would li I would like to take this opportunity to thank my fellow directors, all our stakeholders for their loyalty and support during this year, and particularly our people for their ongoing dedication, commitment, and highly valued contribution. Mark Benson Managing Director & Chief Executive Officer 26 August 2021 12 MANAGING DIRECTOR’S REPORT I present the CEO Annual Report for Saunders International, including record revenue and increased earnings for FY21. The results demonstrate the strength and dependability of our people and our operating model. As a company we delivered the second phase of our strategic roadmap growing 52% and were able to respond to the changing market conditions, through the commitment and resilience of our teams. I am proud of how agile they have been in responding to the ever-changing priorities of our client’s as well as the general working environment. At the same time, our employees have lived our One Team culture, always looking out for each other. WWe believe that our strategic position as market leader in the bulk liquid storage sector will see our business enjoy growth opportunities over the next three years. This will be assisted by the planned construction of approximately 780 megalitres of new tank storage, as part of the “Boosting Australia’s Diesel Storage Program” to increase long-term fuel security. 11 THE BOARD EXECUTIVE TEAM MR TIMOTHY BURNETT Chairman & Non-Executive Director Mr. Burnett has been the Chairman of Saunders since 2007 and a Di Mr. Burnett has been the Chairman of Saunders since 2007 and a Director since 1990. He served as Managing Director of Saunders for 15 years. He has a BE and MBA degree and over 47 years of relevant industry experience managing projects and companies in the field of Engineering and Construction. Mr. Burnett is the Chairman of the Remuneration Committee and a member of the Audit & Risk Committee. Other listed company directorships in the 3 years immediately before the end of the financial year - NIL MR MARK BENSON Managing Director & Chief Executive Officer AdvDipMan, AdvDipP AdvDipMan, AdvDipProjMgt, GAICD - Mr. Benson has over 28 years of relevent industry experience in executive management roles in Engineering & Construction. He served as General Manager of RCR Energy before joining SND and has been Managing Director and Non-Executive Director since October 2015. Other listed company directorships in the 3 years immediately before the end of the financial year - NIL MR GREG FLETCHER Non-Executive Director Mr. FleMr. Fletcher - BComm - has been SND’s Non-Executive Director since July 2015. He is the Chairman of the Saunders Audit & Risk Committee and member of the Rumuneration Committee. Mr. Fletcher is also the Chairman of SMEG Australia Pty Ltd, Chairman of the NSW Electoral Commission, NSW eHealth / HealthShare Audit & Risk Commitees, a member of the NSW State Transit Authority, TAFE NSW and NSW Health Infrastructure Audit & Risk Committee. He is Co-Vice Chairman of Yancoal Australia Limited and was a partner of Deloitte Touche Tohmatsu until May 2009, and Deloit 2009, and Deloitte Touche Tohmatsu has been the registered auditor of Saunders since the year ended 30 June 2007. Other listed company directorships in the 3 years immediately before the end of the financial year - Director Yancoal SNC Limited MR NICK YATES Non-Executive Director Mr. Mr. Yates has been a Non-Executive Director of SND since September 2020. He is a member of the Audit & Risk Commitee and a member of the Remuneration Committee. Nick has over 35 years of relevant industry experience. He is also the Board Chairman of Circus Oz, Chairman of GSA Architects. Other listed company directorships in the 3 years immeditately before the end of the financial year - Non-Executive Director of BSA Limited. RUDY SHERIFF Chief Financial Officer ANGELO DE ANGELIS Executive General Manager RICK BURKE Operations Manager MATTHEW REDMOND Operations Manager JONATHON BROMILOW General Manager - Civilbuild STEVE BAILEY Operations Manager ROBERT HARVEY General Manager PlantWeave FRANK KRAFT General Manager - Business Development & Strategy CLAUDE POFFANDI Commercial Manager 13 KALA NOTLEY People & Capability Manager WAYNE MASTELLO SHEQ Manager 14 SHEQ Saunders’ approach to Safety, Health, Environment and Quality focuses on creating a workplace culture that promotes safety, integrity, innovation, teamwork and leadership. The Saunders vision of delivering project excellence consistently is shaped by our “OneTeam” culture and is underpinned by our robust risk management systems. We proactively identify critical risks in our operations and implement strategies and systems to minimise the risk to our people, other interested parties and our operations. We have delivered on the SHEQ objectives and targets set for 20/21 and will continuously improve our processes across the business. Total Recordable Injury Frequency Rate (TRIFR) 15 16 OUR PEOPLE In 2021, Saunders launched an internal continuous improvement program called Raise the Bar, to actively engage our employees in setting the highest standard across all aspects of the business. Through the leadership and training of our people, the initiative sets clear targets in communication, delivery and accountablility, giving everyone the opportunity to unlock their po unlock their potential and continue to "Raise the Bar" for ourselves and others. 17 18 OUR COMMUNITY Saunders looks to inspire its employees, clients and businesses to deal more conscientiously with each other, the environment and the society we live in. Our employees and teams are engaged in helping charitable causes, either through donations or direct participation in charity events or community projects. The Saunders team across the country have been proudly involved in a number of community initiatives. Whether it be a contribution of time or finances, Saunders is very supportive of activities that provide assistance to some of the more vulnerable in our community. TThe team has put together food hampers through FoodBank, to be delivered to those doing it tough, donated to organisations such as the Westpac Rescue Helicopter Service, OneMeal Northern Beaches who deliver weekly meals to the homeless, and Liverpool West Rotary’s Annual Children’s Circus Extravaganza, providing disadvantaged and sick children and their carer’s a full day of fun and entertainment. Saunders has also purchased Hi-Vis work shirts from Trade Mutt who, through the sale of their shirts, support several mental health initiatives aimed at tradespeople, blue collar workers and their families. Other activities promoted across the business and participated in by employees includes Other activities p fundraisers such as Movember, Dry July and MyMarathon for “The Heart Foundation”. By getting involved we hope to encourage awareness of social issues, foster a positive workplace culture and build strong relationships with out local communities. 19 20 Saunders International Limited Contents Page ACN 050 287 431 FINANCIAL REPORT for the financial year ended 30 June 2021 6 8 21 Saunders International Limited Directors’ Report DIRECTORS’ REPORT The Directors present their report on Saunders International Limited (“Saunders” or the “Group”) for the financial year ended 30 June 2021 and the independent audit report thereon. In order to comply with the provisions of the Corporations Act 2001, the Directors report as follows: DIRECTORS The Directors as at the date of this Director’s Report are: Timothy Burnett Mark Benson Gregory Fletcher Nicholas Yates (appointed 16th September 2020) Unless stated otherwise the above-named directors held office during the whole of the financial year and since the end of the financial year up the date of this report. COMPANY SECRETARY Rudy Sheriff acted in the Company Secretary role during the whole year and up to the date of this report. PRINCIPAL ACTIVITIES During the financial year, the principal activities of Saunders were the design, construction and maintenance of bulk liquid storage facilities, tanks and road and rail bridges. The Group also manufactures precast concrete products for transport infrastructure projects and provides a range of specialized services for the maintenance of commercial, industrial and marine infrastructure and assets. REVIEW OF OPERATIONS A summary of the revenues and results is as follows: - Revenue Profit before income tax Income tax (expense) 2021 $’000 2020 $’000 101,242 66,462 8,085 1,853 (2,543) (587) Profit attributable to the members of Saunders International Limited 5,542 1,266 Reconciliation of profit before income tax to EBITDA (unaudited): Profit before income tax Interest expense on loans and hire purchase finance charges Depreciation of owned and hire purchase assets Depreciation of right of use assets EBITDA 2021 $’000 2020 $’000 8,085 1,853 95 81 1,466 1,022 465 446 10,111 3,402 22 Saunders International Limited Directors’ Report REVIEW OF OPERATIONS (cont.) Saunders’ revenue for the year is $101.2 million, an increase of $34.1m or 52.2% (FY20: $66.5m) and the NPAT was $5.5 million, an improvement of $4.2 million or 323.1% over (FY20: $1.3 million), EBITDA was $10.1 million, an improvement of $6.7 million or 197.1% from prior year (FY20: $3.4 million). Earnings per share for the period was 5.36 cents (FY20: 1.23 cents). Saunders has strengthened its financial position at year end with cash and cash equivalents of $23.8 million (FY2020: $11.1 million). The Group’s disciplined approach to working capital has been the principal driver in the strong cash flow reported and the increase in cash and cash equivalents for the financial year. The Group has no interest-bearing loans, except for finance leases. Saunders continues to comply with all current Government advice and regulations in relation to the COVID-19 pandemic and has a set of robust policies and procedures in place including Business Continuity Plans. The One Team culture within the Group ensures that all teams are continually informed of the evolving situation and are working collaboratively to put in place the appropriate mitigation strategies. The record revenue performance of the Group over the past 12 months is due to a combination of strong operational execution of projects across the Group and increased opportunities from the markets the Group operates within. Key Highlights Safety performance remains strong with TRIFR reported at industry leading 1.25 • • Acquisition of PlantWeave Technologies, a specialist in industrial process automation and electrical solutions • Record Revenue reported for the Group with positive operating cash flow of $15.6 million and strong balance sheet • Continued to successfully navigate the changing operating landscape due to the COVID-19 pandemic • • Established an office in Northern Territory to support Defence projects and other opportunities in the region Secured a further $10 million increase to its bonding facility. Saunders’ revised capacity to provide security is now $25 million Improved focus on employee well-being, diversity, and increased contribution to our communities • Outlook Saunders Work in Hand as at 30 June 2021 is $83.3 million (FY20: $110.5 million). The Group continues to see good market conditions across a number of its key sectors including: • • Fuel Storage – Government has issued grants to select proponents for its $260 million Boosting Australia’s Diesel Storage program. The Group has existing relationships with all proponents and is working on delivery solutions when the opportunities come to market. Infrastructure – There has been a significant increase in the public infrastructure spend by both State and Federal Government. The Group is focussed on NSW Government’s Replacing Country Bridge program which will see $500 million in new bridges over the next three years. • Defence - Tendering activity continues to increase across the Defence sector, which is forecast to grow over the next five years. The Group has an established office and presence in Northern Territory which will assist in capitalising on the growing Defence opportunities in this region. Tendering activity shows the value of live tenders at $490 million (FY20: $303 million). The pipeline (yet to be tendered) is at $313 million (FY20: $368 million). Although the outlook is positive with Saunders set to benefit from increased Government spending across the majority of sectors we operate in (namely the bulk liquid storage, civil Infrastructure and Defence), we are seeing delays in the rollout of these projects, and we expect that these opportunities will only convert to earnings in H2-FY22 and beyond. Our FY22 results are dependent on COVID-19 related border closures by both the Federal and State Governments and the demand on resources and materials caused by the increased infrastructure activity. We remain focused on growing our existing businesses and expanding into new regions and sectors through partnerships and acquisitions as opportunities arise. Employees The Group’s total workforce managed by Saunders was approximately 213. Saunders remain focused on investing in people and capability to ensure the achievement of our vision and strategic objectives. To support forecast growth, we have bolstered the Executive Leadership Team with a few new positions including Executive General Manager and General Manager Business Development and Strategy. The directors wish to take this opportunity to thank the entire Saunders Team for their continued dedication and resilience in safely delivering the financial results throughout the challenging year. 23 Saunders International Limited Directors’ Report REVIEW OF OPERATIONS (cont.) Safety The Group is committed to the safety of our people and customers and the communities in which we operate. During the year, Saunders Total Recordable Injury Frequency Rate (TRIFR) was 1.25. The Groups’ COVID-19 protocols and processes are continually changing to be aligned to the recommended Government guidelines and to ensure we can continue to successfully navigate the changing operating landscape. The Group is confident that our safety is focussed on the correct areas with our leaders committed to the Health, Safety, Quality and Welfare of our staff. Earnings per share The basic and diluted earnings per share is calculated using the weighted average number of shares. This shows the basic earnings per share of 5.36 cents (FY20: 1.23 cents) and diluted earnings pers share of 5.21 cents (FY20: 1.20 cents). DIVIDEND The Board declared on 26 August 2021 that there will be a final dividend payable of 0.75 cents per share fully franked and special dividend of 1.00 cents per share fully franked (FY20 final dividend : Nil dividend paid). Both dividends will be payable on 11th October 2021 with the record date for determining dividends on 15th September 2021. (FY2020 final dividend NIL). DIRECTORS ATTENDANCE AT MEETINGS Attendance at Meetings The following table sets out the number of meetings in the year to 30 June 2021, held during the period that the individual was a director and the number of meetings attended. Directors Meetings Audit and Risk Committee Meetings Remuneration Committee Meetings Held Attended Held Attended Held Attended Timothy Burnett Mark Benson Greg Fletcher Nicholas Yates 10 10 10 9 10 10 10 8 4 4 4 3 4 4 4 3 4 4 4 3 4 4 4 3 INFORMATION ON DIRECTORS Information on the directors who held office during and since the end of the financial year is as follows:- Directors Qualifications, Experience and Special Responsibilities Relevant Interest in Shares of Saunders International Limited Timothy Burnett Non-executive Chairman 11,686,311 Member of the Audit & Risk Committee Member of the Remuneration Committee Director since 28 November 1990 BE, MBA 47 years of relevant industry experience Other listed company directorships in the 3 years immediately before the end of the financial year - Nil 24 Saunders International Limited Directors’ Report INFORMATION ON DIRECTORS (cont.) Information on the directors who held office during and since the end of the financial year is as follows: - Directors Qualifications, Experience and Special Responsibilities Relevant Interest in Shares of Saunders International Limited Mark Benson Managing Director from 5 October 2015 1,075,278 Director since 10 August 2015 AdvDipMan, AdvDipProjMgt, GAICD 28 years of relevant industry experience Other listed company directorships in the 3 years Immediately before the end of the financial year - Nil Greg Fletcher Non-Executive Director 5,420 Chairman of the Audit & Risk Committee Member of the Remuneration Committee Director since 1 July 2015 BCom, CA - Chairman SMEG Australia Pty Ltd - Chairman of the NSW Electoral Commission, NSW eHealth/ HealthShare Audit and Risk Committees - Member of the NSW State Transit Authority, TAFE NSW and NSW Health Infrastructure Audit and Risk Committees Other listed company directorships - Co Vice Chairman Yancoal Australia Limited Other listed company directorships in the 3 years immediately before the end of the financial year - Director Yancoal SNC Limited Greg was a Partner of Deloitte Touche Tohmatsu until 31 May 2009, and Deloitte Touche Tohmatsu has been the registered auditor of Saunders since the year ended 30 June 2007 Nicholas Yates Non-Executive Director 70,422 Member of the Audit & Risk Committee Member of the Remuneration Committee Director since 16 September 2020 35 years of relevant industry experience BE - Board Chair Circus Oz - Chairman Group GSA Architects Other listed company directorships in the 3 years Immediately before the end of the financial year - Non-Executive Director BSA Limited 25 Saunders International Limited Directors’ Report AUDITED REMUNERATION REPORT This remuneration report, which forms part of the directors’ report, contains information about the remuneration of Saunders International Limited’s directors and its key management personnel for the financial year ended 30 June 2021. The Remuneration Report sets out, in accordance with section 300A of the Corporations Act: (i) the Group’s governance relating to remuneration, (ii) the policy for determining the nature and amount or value of remuneration of key management personnel; (iii) the various components or framework of that remuneration; (iv) the prescribed details relating to the amount or value paid to key management personnel, as well as a description of any performance conditions; (v) the relationship between the policy and the performance of the Group. Key management personnel are the non-executive directors, the executive directors and employees who have authority and responsibility for planning, directing and controlling the activities of the entity. Remuneration Policy and Governance The board of directors, through the Remuneration Committee, review and approve remuneration of the non-executive directors, the managing director and key management personnel. Remuneration policy is determined by the needs of the Group and the individual talents, capabilities and experience of relevant executives, and the need to attract and retain talent are conside red important factors in assessing remuneration. Non-executive Directors Non-executive directors are paid fees and where applicable compulsory superannuation contributions are made on their behalf. The current fees are based on the level of fees for comparable listed companies and were reviewed during the year. The non-executive directors have not been granted options and have not participated in the Employee Share Plan or the Performance Rights Plan. Managing Director The managing director is remunerated on a salary package basis which is a component of a formal employment contract. The salary package is considered to be appropriate for the experience and expertise needed for the position and is comparable to other similar sized companies and business units of larger companies. The salary package contains a fixed component and a variable bonus component. The bonus is based on an annual performance appraisal as conducted by the remuneration committee of the board of directors. The performance is measured against a range of objectives set annually by the board. The important objectives are safety, quality, personnel development, quantitative Group financial performance and certain other (subjective and objective) criteria. The managing director has also participated in the Employee Share Plan and the Performance Rights Plan. Mark Benson holds 650,000 options within the Employee Share Plan and 2,405,273 performance rights under the Saunders International Performance Rights Plan. Key Management Personnel Key management personnel are remunerated based on a number of factors, including experience, qualifications, job level and over performance of the company and individual. The remuneration includes a variable short-term incentive (STI), between 10%-60% of salary component. This incentive rewards the key management personnel achieving; financial and operational key performance indicators; progress with the delivery of the Group’s business plan and strategic objectives; and specific goals in relation to the development of people within the Group and its profile within the business community. Examples of key performance indicators measured to assess STI for the Key Management Personnel and Managing Director include: • • • achievement of target work in hand levels at 30 June of each year to ensure the sustainability of revenue in subsequent years; targets set in relation to the achievement of the Group’s business plan such as the diversification of the business and entry into new markets; and targets set for safety performance based on Total Recordable Injury Free. These indicators form approximately 50% of assessable STI with the remaining 50% focussed on the Financial Performance of the Group; EBIT and Cash at hand. Key management personnel as disclosed on page 29 of the remuneration report have participated in the Employee Share Plan. 26 Saunders International Limited Directors’ Report AUDITED REMUNERATION REPORT (cont.) Long-Term Incentive The board of directors have considered the issue of long-term incentive as a component of the remuneration of executive directors and key management personnel. Saunders operates two Long-Term Incentive (“LTI”) plans, which are described below: • Employee Share Plan • Performance Rights Plan As of the date of this report a number of executive officers’ own shares in the Group or interests via the Employee Share Plan and the Performance Rights Plan. Key management personnel, who are not directors, collectively have an interest in 351,250 shares under the Employee Share Plan. In addition, other employees own 1,253,750 shares. The breadth and depth of share ownership fosters an alignment of objectives between shareholders and directors and management of the Group. Employee Share Plan Under the Employee Share Plan (ESP), the Group provides interest free loans to employees to acquire shares in Saunders International Limited, at a specified price per share. The loans are secured by the shares acquired by the eligible employees. The shares will vest and the loans will be repaid, upon a specified anniversary of the issue of the shares. If an eligible employee’s employment with the Group is terminated prior to the specified anniversary of the issue of the shares, the shares will be forfeited, and the Group will be entitled to the total amount raised pursuant to the divestment of the shares. The shares are accounted for as in substance options. Each employee share option converts into one ordinary share of Saunders International Limited on exercise. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither right to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry. During the year 205,000 options were granted to Key Management Personnel under the ESP. The aggregate fair value of the options granted is $141,655 as set out on page 30. Performance Right Plan The Saunders International Rights Plan was approved by the Board and approved by shareholders at the Annual General Meeting in November 2015. The features of the long-term incentive comprise the grant of equity in the form of Performance Rights which vest over a three year period. The maximum number of Performance Rights will vest only if stretch objectives for each tranche are achieved. Half of the Performance Rights will vest if the on-target objectives are achieved. The end of the measurement period for a tranche of Performance Rights will be extended by up to two years at the Board’s discretion if significantly less than target vesting would have been achieved for that tranche at the end of the measurement period, adjusted for the pro-rata increase in hurdles to take into account the additional time. The two vesting conditions that will be used will be relative total shareho lder return (RTSR) and normalised earnings per share growth (NEPSG). RTSR will be measured by comparing the Group’s TSR over the measurement period with the TSRs achieved by companies that are in a comparator group and remain listed on the ASX. TSR is the percentage return generated from an investment in a Group’s shares over the measurement period assuming that dividends are reinvested into the Group’s shares. NEPSG will be assessed as the compound annual growth rate (CAGR) reflected in the increase in normalised earnings per share (EPS) from the base year (FY2016) for tranches 1 to 8 and (FY2017) for tranches 9 and 10 to normalised EPS for the final year of the measurement period. Normalised EPS will relate to normal operations and will exclude abnormal items as determined by the Board in its discretion. For the phase in tranches where the measurement period is less than three years, performance will be evaluated by the Board’s assessment of the establishment of strategic foundations for superior TSR and NESPG over the long-term. For future grants, it is currently intended that the qualitative vesting conditions will be removed (but retaining TSR and NESPG), and that measurement periods will be no shorter than 3 years. The vesting scale will be applied to the tranches subject to objective measurement of Saunders performing relative to the comparator group and NEPSG, as appropriate, with the vesting scale ranging continuously from 0% for very poor performance to 100% for very good performance with 50% for on-target performance. The long-term incentive is aimed at aligning remuneration with the longer-term performance of the Group and retaining the long-term services of the key management personnel. 27 Saunders International Limited Directors’ Report AUDITED REMUNERATION REPORT (cont.) Performance Right Plan (cont.) During the year 407,226 Performance Rights were granted to the CEO under the LTI Plan. The aggregate fair value of the Performance Rights granted is $212,165 as set out on page 30. A further 272,837 Performance rights were granted to other KMP under the LTI Plan. The aggregate fair value of the Performance Rights granted to other KMP is $142,149 as set out on page 30. Key Terms of Employment Contracts The Group entered into an executive service agreement with Mark Benson as Managing Director and Chief Executive Officer effective 5 October 2015. The remuneration component of the agreement is in line with relevant industry comparables. The variable component (Performance Bonus) can range anywhere between 0% to 60% of the fixed component based on performance measured against a range of key performance indicators and targets, set annually by the directors. The attainment of realistically achievable performance and targets on a weighted average measure would result in a bonus of 30% of the fixed component and bonus above and below this would result from overall superior or poorer performance. The executive service agreement contains the following key terms: - Annual Salary: Total fixed remuneration of $546,097 Performance Bonus: Long-term Incentive: Variable, ranging from 0% to 60% of total fixed annual remuneration, based on performance measured against a range of key performance indicators Variable, ranging from 0% to 40% of total fixed annual remuneration, based on performance measured against a range of key performance indicators Notice Period: Six months’ notice Executive officers are employed under ongoing employment arrangements. Their employment thus entails between three to six months’ notice. This is considered appropriate because they have many years of service with the Group and are shareholders of the company. Relationship between Remuneration Policy and Company Performance The remuneration of executive officers contains an annual cash bonus. The total cash bonus paid in a year is discretionary and is closely related to and determined by the current profit levels of the Group. Executive officer’s remuneration is aligned with the long-term Group performance via the shareholdings that these individuals retain in the Group. The tables below set out summary information about the Group’s earnings and movements in shareholder wealth for the five years to June 2021: 30 June 2021 $’000 30 June 2020 $’000 30 June 2019 $’000 30 June 2018 $’000 30 June 2017 $’000 Revenue 101,242 66,462 50,126 75,368 45,805 Net profit/(loss) before income tax Net profit/(loss) after income tax 8,085 5,542 1,853 1,266 (2,260) (4,213) (1,610) (2,840) 1,336 1,428 30 June 2021 30 June 2020 30 June 2019 30 June 2018 30 June 2017 Share price at end of year Interim dividend (cents per share) Final dividend (cents per share) Basic earnings/(losses) per share Diluted earnings/(losses) per share 0.79 0.75 0.00 5.36 5.21 0.48 0.00 0.00 1.23 1.20 0.33 0.00 0.00 (1.72) (1.72) 0.47 1.00 0.00 (3.03) (3.03) All dividends above were franked to 100% at 30% corporate tax rate. 0.50 2.00 1.00 1.76 1.76 28 Saunders International Limited Directors’ Report AUDITED REMUNERATION REPORT (cont.) Particulars of Directors and Executive Officers interests, including interests under the ESP and Performance Rights Plan during the year ended 30 June 2021 were: Fully paid ordinary shares issued/ purchased during 2021 Fully paid ordinary shares 2020 Fully paid ordinary shares 2021 Share options 2020 Share options vested during 2021 Share options granted during 2021 Share options at end 2021 Performance rights 2020 Performance rights granted during 2021 Performance Rights vested during 2021 Performance rights at end 2021 Number Number Number Number Number Number Number Number Number Number Number Non-executive Directors Timothy Burnett 11,556,548 129,763 11,686,311 Greg Fletcher Nicholas Yates TOTAL 5,360 - 11,561,908 60 70,422 200,245 5,420 70,422 11,762,153 Executive Officers Mark Benson1 Rudy Sheriff2 Jonathon Bromilow3 Matthew Redmond4 Rick Burke5 TOTAL 564,240 511,038 1,075,278 - - - 43,374 15,461 - 43,374 15,461 - 564,240 569,873 1,134,113 846,250 GRAND TOTAL 12,126,148 770,118 12,896,266 846,250 - - - - 550,000 100,000 76,250 70,000 50,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 100,000 50,000 20,000 15,000 20,000 650,000 150,000 96,250 85,000 70,000 2,497,145 407,226 (499,098) 2,405,273 572,797 213,310 195,515 - 126,268 (43,374) 48,509 51,219 46,841 (12,960) - 655,691 248,859 246,734 46,841 205,000 1,051,250 3,478,767 680,063 (555,432) 3,603,398 205,000 1,051,250 3,478,767 680,063 (555,432) 3,603,398 1. Managing Director & CEO, 2. Chief Financial Officer 3. General Manager Saunders Civilbuild 4. Operations Manager Maintenance 5. Operations Manager Construction (existing Saunders employee, part of KMP from 1 July 2020) 29 Saunders International Limited Directors’ Report AUDITED REMUNERATION REPORT (cont.) The following table summarises the value of options and performance rights granted during the financial year, in relation to options granted to key management personnel as part of their remuneration: Share options granted during 2021 Share options forfeited during 2021 Share options vested during 2021 Performance rights granted during 2021 Performance rights forfeited during 2021 Performance rights vested during 2021 Fair Value $ Fair Value $ Fair Value $ Fair Value $ Fair Value $ Fair Value $ Non-executive Directors Timothy Burnett Greg Fletcher Nick Yates TOTAL Executive Officers Mark Benson1 Rudy Sheriff2 Jonathon Bromilow3 Matthew Redmond4 Rick Burke5 TOTAL GRAND TOTAL - - - - 69,100 34,550 13,820 10,365 13,820 141,655 141,655 - - - - - - - - - - - - - - - - - - - - - - - - 212,165 65,787 25,273 26,685 24,404 354,314 354,314 - - - - - - - - - - - - - - - - - - - - The value of the options and rights granted to key management personnel as part of their remuneration is calculated as at the grant date using a Black-Scholes pricing model. The amounts disclosed as part of remuneration for the financial year, as disclosed on page 31, have been determined by allocating the grant date value on a straight-line basis over the period from grant date to vesting date. Further details are set out in Note 12. 1. Managing Director & CEO, 2. Chief Financial Officer 3. General Manager Civilbuild 4. Operations Manager Maintenance 5. Operations Manager Construction (existing Saunders employee, part of KMP from 1 July 2020) 30 AUDITED REMUNERATION REPORT (cont.) Remuneration of Executive Officers and Key Management Personnel 2021 Short-term Benefits Post- employment Benefits Long-term employee benefits Cash Fees/Salary Cash Bonus6 Non- monetary Benefit7 Superannuation Equity settled share based payments Total Percentage of remuneration related to performance Cash Bonus as a percentage of maximum achievable8 Saunders International Limited Directors’ Report $ $ $ $ $ $ Non-executive Directors Timothy Burnett Greg Fletcher Nicholas Yates TOTAL Executive Officers Mark Benson1 Rudy Sheriff2 Jonathon Bromilow3 Matthew Redmond4 Rick Burke5 TOTAL 116,986 58,493 46,459 221,938 507,956 296,495 234,693 243,698 208,396 1,491,238 - - - - - - 303,999 91,025 39,821 24,354 47,903 507,102 16,447 8,755 - - 13,000 38,202 11,114 5,557 4,414 21,085 21,694 21,694 22,318 23,151 22,022 110,879 - - - 176,735 39,264 14,733 12,428 3,976 247,136 % - - - 128,100 64,050 50,873 243,023 1,026,831 457,233 311,565 303,631 295,297 2,394,557 29.61% 19.91% 12.78% 8.02% 16.22% % - - - 93.22% 91.72% 104.46% 60.84% 138.22% GRAND TOTAL 1,713,176 507,102 38,202 131,964 247,136 2,637,580 No director or senior management person appointed during the year received a payment as part of his or her remuneration for a greeing to hold the position. Non-executive directors have no entitlement to cash bonus or non-monetary benefits. The key management personnel are also the senior managers of the Group. The value of the options and rights granted to key management personnel as part of their remuneration is calculated as at the grant date using a Black-Scholes pricing model. The amounts disclosed as part of remuneration for the financial year have been determined by allocating the grant date value on a straight-line basis over the period from grant date to vesting date. 1. Managing Director & CEO, 2. Chief Financial Officer 3. General Manager Civilbuild 4. Operations Manager Maintenance. 5. Operations Manager Construction 6. Cash bonuses are disclosed on an accruals basis and represent the amount earned in respect of the current financial year. 7. Non-monetary benefits relate to motor vehicle or other expenses packaged within the employee’s salary package. 8. Excludes equity settled share based payments. Cash bonuses are discretionary and are determined by the Board in September of each year. 31 Saunders International Limited Directors’ Report AUDITED REMUNERATION REPORT (cont.) 2020 Short-term Benefits Post- employment Benefits Long-term employee benefits Cash Fees/Salary Cash Bonus5 Non- monetary Benefit6 Superannuation Equity settled share based payments Total Percentage of remuneration related to performance Cash Bonus as a percentage of maximum achievable7 Non-executive Directors Timothy Burnett Greg Fletcher TOTAL Executive Officers Mark Benson1 Rudy Sheriff2 Jonathon Bromilow3 Matthew Redmond4 TOTAL $ $ $ $ $ $ 115,069 57,534 172,603 468,124 289,375 225,368 242,901 1,225,768 - - - 233,087 71,341 17,911 26,005 348,344 - - - 35,650 8,755 - - 44,405 10,931 5,466 16,397 21,003 21,003 20,691 23,539 86,236 - - - 69,611 20,508 8,115 8,750 106,984 126,000 63,000 189,000 827,475 410,982 272,085 301,195 1,811,737 % - - - 36.58% 22.35% 9.57% 11.54% % - - - 75.1% 75.2% 48.1% 65.0% GRAND TOTAL 1,398,371 348,344 44,405 102,633 106,984 2,000,737 1. Managing Director & CEO, 2. Chief Financial Officer 3. General Manager Civilbuild 4. Operations Manager Construction and Maintenance. 5. Cash bonuses are disclosed on an accruals basis and represent the amount earned in respect of the current financial year. 6. Non-monetary benefits relate to motor vehicle or other expenses packaged within the employee’s salary package. 7. Excludes equity settled share based payments. Cash bonuses are discretionary and are determined by the Board in September of each year. 32 Saunders International Limited Directors’ Report Subsequent Events Subsequent to the end of the financial year, there continues to be considerable economic impacts in Australia and globally arising from the outbreak of the COVID-19 virus and Government actions to reduce the spread of the virus. The Group is closely monitoring the developments and the implications of the spread of the COVID-19 virus, the advice from health and government authorities and the World Health Organisation. Saunders has and continues to actively monitor the rapidly changing impact of COVID-19 (Coronavirus) across the company’s operations. The company has taken decisive action and a pro-active approach to the current situation ensuring that the safety of our teams has been at the forefront of all decisions. Saunders has implemented a rigorous set of company procedures and protocols to ensure safe operational continuity. To date, there has been no confirmed cases of COVID-19 at Saunders and the company is well prepared if this position is to change. Saunders has monitored the outcomes of these impacts on our projects and work sites, which include: • Reduced productivity across some sites (including Saunders’ precast facility) due to the increased requirements to ensure that relevant social distancing guidelines are being adhered to • Delayed receipt of material due to impacts on freight channels for our international supply chain other logistic constraints • Interstate travel restrictions preventing specialist project personnel from being able to attend certain sites Saunders continues to work through the detailed scenarios and business continuity planning to minimise these supply chain and other operational business interruptions. On 1st August 2021 Saunders announced the acquisition of PlantWeave Technologies (PlantWeave), a specialist in industrial process automation and electrical solutions. The purchase of PlantWeave was with the Group’s cash reserves and deferred earn-out payments over the next three years. Other than this, the Directors are not aware of any matter or circumstance, not already disclosed, 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 and Performance Saunders International is subject to a range of environmental regulations. In line with our Safety, Health and Quality objectives, Saunders strives to continually improve its environmental performance. During the financial year, Saunders International, were compliant with the reporting requirements under relevant legislation. There were no incidents which required reporting. Future Developments Details around the Operating and Financial Review and Outlook are disclosed on page 22 and 23. Disclosure of other information regarding likely developments in the operations of the Group in future financial years and the expected results of those operations is likely to result in unreasonable prejudice to the Group. Accordingly, this information has not been disclosed in this report. Indemnification of Officers and Auditors During the financial year, the Group paid a premium in respect of a contract insuring the directors of the Group, the Group secretary, and all executive officers of the Group and of any related body corporate against a liability incurred by such a director, secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. 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 Group or of any related body corporate against a liability incurred as such an officer or auditor. 33 Saunders International Limited Directors’ Report Non-audit Services Details of amounts paid or payable to the auditor for non-audit services are outlined in Note 23 to the financial statements. During this financial year there was $8,188 paid or payable for non-audit services. Auditor’s Independence Declaration The auditor’s independence declaration is included on page 35 of the annual report. Rounding Off of Amounts The Group is of the kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. This directors’ report is signed in accordance with a resolution of directors made pursuant to s298(2) of the Corporations Act 2001. On behalf of the Directors Mark Benson Director Sydney, 26 August 2021 Timothy Burnett Director Sydney, 26 August 2021 34 Deloitte Touche Tohmatsu ABN 74 490 121 060 Eclipse Tower 60 Station Street Parramatta Sydney, NSW, 2150 Australia Phone: +61 2 9840 7000 www.deloitte.com.au The Board of Directors Saunders International Limited L2 Building F, Rhodes Corporate Park 1 Homebush Bay Drive Rhodes NSW 2138 26 August 2021 Dear Board Members, Auditor’s Independence Declaration to Saunders International Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the Directors of Saunders International Limited. As lead audit partner for the audit of the financial report of Saunders International Limited for the year ended 30 June 2021, 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 relation to the audit; and • Any applicable code of professional conduct in relation to the audit. Yours faithfully DELOITTE TOUCHE TOHMATSU David Sartorio Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific and the Deloitte organisation. 35 Deloitte Touche Tohmatsu ABN 74 490 121 060 Eclipse Tower 60 Station Street Parramatta Sydney, NSW, 2150 Australia Phone: +61 2 9840 7000 www.deloitte.com.au Independent Auditor’s Report to the Members of Saunders International Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Saunders International Limited (the “Company”) and its subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at 30 June 2021, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2021 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific and the Deloitte organisation. 36 Key Audit Matter How the scope of our audit responded to the Key Audit Matter Recognition of revenue and contract assets and contract liabilities on construction contracts Our procedures included, but were not limited to: • • Refer to Note 1(c) ‘Construction Contracts’, Note 1(i) ‘Revenue’, Note 2 ‘Critical accounting judgements and key sources of estimation uncertainty’, Note 3 ‘Revenue’ and Note 10 ‘Contract Assets and Contract Liabilities’. As at 30 June 2021 the Group’s revenue from construction contracts is $101.2 million. Construction revenue is recognised by management after assessing all factors relevant to each contract. Significant management estimation is required in assessing the following: • • • • Estimation of total contract revenue, including determination of contractual entitlement and assessment of the probability of customer approval of variations and acceptance of claims; Estimation of total contract costs, including revisions to total forecast costs for events or conditions that occur during the performance of the contract, or are expected to occur to complete the contract; Estimation of project contingencies; and Estimation of stage of completion including determination of project completion date. Evaluating management’s processes and relevant controls in respect of the recognition of revenue and contract assets and contract liabilities on construction contracts; and Testing contracts on a sample basis, and: ▪ ▪ for incurred to date to contractual entitlements agreed the contract terms to the initial contract price; tested changes, variations and claims recognised within contract revenue to supporting documentation, and by reference to the underlying contract, assessed management’s basis for estimates of unapproved variations and claims brought to account within contract revenue, tested a sample of costs supporting documentation; assessed the forecast costs to complete through discussion and challenge of project managers and finance personnel; recalculated the percentage of completion based on costs incurred to date relative to total forecast costs; assessed appropriateness of contingency allowances within forecast costs; evaluated exposure to liquidated damages for late delivery of works; and challenged management’s ability to forecast margins on contracts by analysing the accuracy of previous margin forecasts to actual outcomes. ▪ ▪ ▪ ▪ ▪ ▪ ▪ We also assessed the appropriateness of the disclosures in Notes 1(c), 1(i), 2, 3 and 10 to the financial statements. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2021, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. 37 Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • • • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 38 Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 26 to 32 of the Directors’ Report for the year ended 30 June 2021. In our opinion, the Remuneration Report of Saunders International Limited, for the year ended 30 June 2021, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU David Sartorio Partner Chartered Accountants Sydney, 26 August 2021 39 Saunders International Limited Directors’ Declaration Directors’ Declaration The directors declare that: - (a) (b) (c) in the directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; in the directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standard, as stated in Note 1 to the financial statements; in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the Group, and (d) the directors have been given the declarations required by s.295A of the Corporations Act 2001. Signed in accordance with a resolution of the directors made pursuant to s295(5) of the Corporations Act 2001. On behalf of the Directors Mark Benson Director Sydney, 26 August 2021 Timothy Burnett Director Sydney, 26 August 2021 40 Saunders International Limited Consolidated Statement of Profit or Loss and other Comprehensive Income CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the Financial Year Ended 30 June 2021 Revenue Other income Materials and third-party costs charged to projects Employee benefits expense Depreciation expense Motor vehicle expense Occupancy and operating lease expense Finance costs Other expenses Profit / (loss) before income tax Income tax (expense)/benefit Profit / (loss) for the year attributable to shareholders of the parent entity Other comprehensive income Total comprehensive profit / (loss) attributable to shareholders of the parent entity Earnings/(losses) per share Basic (cents per share) Diluted (cents per share) Note 2021 $’000 2020 $’000 3 4 4 4 5 101,242 66,462 704 185 (58,838) (37,280) (28,100) (22,588) (1,931) (1,468) (317) (237) (95) (306) (244) (81) (4,343) (2,827) 8,085 (2,543) 5,542 - 1,853 (587) 1,266 - 5,542 1,266 14 14 5.36 5.21 1.23 1.20 The accompanying notes form part of these financial statements. 41 CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 30 June 2021 Saunders International Limited Consolidated Statement of Financial Position Current assets Cash and cash equivalents Trade and other receivables Contract Assets Inventories Other current Assets Total current assets Non-current assets Property Plant and equipment Right-of-use assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Contract liabilities Provisions Current tax liability Lease liabilities Total current liabilities Non-current liabilities Provisions Lease liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Treasury shares under employee share plan Share based payments reserve Retained earnings Total equity Note 18 6 10 7 8 5 9 10 11 5 8 11 8 12 12 12 13 2021 $’000 23,816 10,258 2,884 163 151 37,272 10,473 2,534 63 13,070 2020 $’000 11,085 13,297 6,711 374 38 31,505 10,209 2,085 2,215 14,509 50,342 46,014 10,725 5,684 2,642 524 704 20,279 237 1,719 1,956 14,246 4,588 2,034 146 568 21,582 234 1,540 1,774 22,235 23,356 28,107 22,658 20,687 (674) 736 7,358 28,107 19,701 (351) 776 2,532 22,658 The accompanying notes form part of these financial statements. 42 Saunders International Limited Consolidated Statement of Changes in Equity CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the Financial Year Ended 30 June 2021 Balance at 1 July 2019 Profit for the year Total comprehensive income Transactions with owners in their capacity as owners Share based payments vested/lapsed Share-based payments expense Balance at 30 June 2020 Balance at 1 July 2020 (as previously reported) Profit for the year Total comprehensive income Transactions with owners in their capacity as owners Dividends paid Share issued during the year Share based payments vested/lapsed Share-based payments expense Balance at 30 June 2021 Shares (Issued)/Vested Under Employee share plan $’000 (351) Share Based Payments reserve $’000 581 - - - - (351) (351) - - - (323) - - (674) - - - 195 776 776 - - - - (355) 315 736 Issued Capital $’000 19,701 - - - - 19,701 19,701 - - 385 323 278 - 20,687 Retained earnings $’000 1,266 1,266 1,266 - - 2,532 2,532 5,542 5,542 (793) - 77 - 7,358 The accompanying notes form part of these financial statements. Total $’000 21,197 1,266 1,266 - 195 22,658 22,658 5,542 5,542 (408) - - 315 28,107 43 CONSOLIDATED STATEMENT OF CASH FLOWS for the Financial Year Ended 30 June 2021 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Finance costs paid Income taxes refunded / (paid) Saunders International Limited Notes to the Financial Statements Note 2021 $’000 2020 $’000 120,756 73,241 (105,102) (68,243) 2 (95) - 5 (81) - Net cash inflow / (outflow) from operating activities 18 15,561 4,922 Cash flows from investing activities Payments for plant and equipment Proceeds from sale of assets Net cash used in investing activities Cash flows from financing activities Dividends paid Proceeds of borrowings Repayment of borrowings Repayments of lease liabilities Net cash used in financing activities (1,751) (1,439) 26 6 (1,725) (1,433) (408) 1,173 (1,173) (600) - 522 (522) (438) (1,008) (438) Net increase / (decrease) in cash and cash equivalents 12,828 3,051 Cash and cash equivalents at the beginning of the financial year 11,085 8,030 Effects of exchange rate fluctuations on cash held (97) 4 Cash and cash equivalents at the end of the financial year 18 23,816 11,085 The accompanying notes form part of these financial statements. 44 Saunders International Limited Notes to the Financial Statements NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES Statement of Compliance The financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Accounting Standards and other authoritative pronouncements issued by the Australian Accounting Standards Board (AASB), and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the Group. For the purposes of preparing the consolidated financial statements, the Group is a for-profit entity. Accounting Standards include Australian Accounting Standards (‘AAS’). Compliance with AAS ensures that the financial statements and notes of the Group comply with International Financial Reporting Standards (‘IFRS’). The financial statements were authorised for issue by the directors on 26th August 2021. Basis of Preparation The financial statements for the Group have been prepared on the basis of historical cost. Cost is based on the fair values of the consideration given in exchange for goods and services. All amounts are presented in Australian dollars, unless otherwise noted. The Group is of the kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. (a) Amendments to Accounting Standards that are mandatorily effective for the current reporting period The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for an accounting period that begins on or after 1 July 2020. Accounting Standard in issue but not yet effective Certain Australian Accounting Standards and Interpretations have recently been issued or amended but are not yet effective and have not been adopted by the Group for year ended 30 June 2021. There will be no material impact of these new standards or amendments to the consolidated statement of financial position and consolidated statement of profit or loss and other comprehensive income of the Group. (b) Cash and Cash Equivalents Cash of the Group comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (c) Construction Contracts The Group recognises a contract asset for any work performed. Any amount previously recognised as a contract asset is reclassified to trade receivables at the point at which it is invoiced to the customer. If the amount invoiced exceeds the revenue recognised to date then the Group recognises a contract liability for the difference. There is not considered to be a significant financing component in construction contracts with customers as the period between the recognition of revenue and the receipt of payment is always expected to be less than one year. 45 Saunders International Limited Notes to the Financial Statements 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (d) Employee Benefits A liability of the Group is recognised for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave, and sick leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. (e) Income Tax Current Tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred Tax Deferred tax is recognised on temporary differences between the tax base of an asset or liability and its carrying amount in the financial statements. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from the initial recognition of goodwill. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. 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 reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset 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 is recognised as an expense or income in profit and loss, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess. (f) Leases The Group as lessee The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. 46 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (f) Leases (cont.) Saunders International Limited Notes to the Financial Statements The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise: • • • • • fixed payments, less any lease incentives receivable; variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date; amounts expected to be payable by the lessee under residual value guarantees; the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The lease liability is presented as a separate line in the consolidated statement of financial position. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: • • • The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. The Group did not make any such adjustments during the periods presented. The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under AASB 137. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use asset. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The right-of-use assets are presented as a separate line in the consolidated statement of financial position. The Group applies AASB 136 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss, as described in Note 1 47 Saunders International Limited Notes to the Financial Statements 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (g) Plant and Equipment Plant and equipment and leasehold improvements are stated at cost less accumulated depreciation and impairment. Note 7 provides more detail. Cost includes expenditure that is directly attributable to the acquisition of the item. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the amounts payable in the future to their present value as at the date of acquisition. Depreciation is provided on plant and equipment. Depreciation is calculated on a straight-line basis so as to write off the net cost over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes recognised on a prospective basis. Freehold Land is not depreciated. The following estimated useful lives are used in the calculation of depreciation: - Buildings Plant and Equipment Office Furniture and Equipment 40 years 3 – 20 years 3 – 7 years (h) 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 reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cashflows estimated to settle the present obligation, its carrying amount is the present value of those cashflows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the 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. A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectations in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with ongoing activities of the entity. (i) Revenue Engineering and Construction revenue The Group derives revenue from the long-term construction of tanks across Australia and the Pacific region. Contracts entered into may be for the construction of one or several inter-linked pieces of large infrastructure. These contracts include two performance obligations being: 1. The design and provision of plans for the construction of tanks; and 2. The construction, site establishment, erection, commissioning and testing of tanks. 48 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (i) Revenue (cont.) Saunders International Limited Notes to the Financial Statements Each tank is referred to as a project. Where contracts are entered into for the design and construction of several projects the total transaction price is allocated across each performance obligation based on stand-alone selling prices. The transaction price typically contains a fixed lump sum amount. It is normal practice for contracts to include bonus and penalty elements based on timely construction or other performance criteria known as variable consideration, discussed below. The performance obligations are fulfilled over time and as such revenue is recognised over time. This is because as work is performed on the assets being designed or constructed they are controlled by the customer and have no alternative use to the Saunders Group, with the Group having a right to payment for the performance to date. Thus control of the goods and services is transferred to the customer over time. Revenue earned is typically invoiced monthly or in some cases on achievement of milestones or in line with costs incurred. Invoices are paid on commercial terms, which may include the customer withholding a retention amount until finalisation of the construction. Where payment is received prior to or post recognition of revenue using the percentage cost of completion method, revenue is deferred or accrued for on the balance sheet. Services revenue Fixed price contracts For fixed price services contracts, revenue arises from maintenance and other services supplied to infrastructure assets and facilities which may involve a range of services and processes. The Group has assessed the services provided to be one performance obligation. The transaction price typically contains a fixed lump sum amount. The total transaction price may include variable consideration. Performance obligations are fulfilled over time as the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs, and the Group enhances assets which the customer controls as the Group performs. Thus control of the goods and services is transferred to the customer over time. Revenue is recognised as the services are provided using cost as the measure of progress. Customers are in general invoiced on a monthly basis for an amount that is in line with costs incurred. Payment is received following invoicing on normal commercial terms. Where payment is received prior to or post recognition of revenue using the percentage cost of completion method, revenue is deferred or accrued for on the balance sheet. Cost plus contracts For cost plus services contracts, revenue arises from maintenance and other services supplied to infrastructure assets and facilities which may involve a range of services and processes. The Group has assessed the services provided to be one performance obligation. Performance obligations are fulfilled over time as the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs, and Group enhances assets which the customer controls as the Group performs. Thus control of the goods and services are transferred to the customer over time. Customers are in general invoiced on a monthly basis for an amount that is which is calculated on a cost plus basis that are aligned with the stand alone selling prices for each performance obligation. As the amount the Group is entitled to invoice to a customer corresponds directly with the value provided to the customer under the Group’s performance completed to date, the Group has applied the practical expedient under AASB 15 and recognised revenue in the amount that they are entitled to invoice. Payment is received on normal commercial terms. Fabrication and construction revenue Fabrication and construction revenue arises from contracts maintained by the Group to fabricate components and construct bridges. These contracts include three performance obligations being: 1. The design and provision of plans for the construction of bridges; and 2. The fabrication, construction, site establishment, erection, commissioning and testing of bridges. The transaction price typically contains a fixed lump sum amount. The total transaction price is allocated across each performance obligation based on stand-alone selling prices. It is normal practice for contracts to include bonus and penalty elements based on timely construction or other performance criteria known as variable consideration, discussed below. Each performance obligation is fulfilled over time as the Group enhances assets which the customer controls, for which the Group does not have alternative use and for which the Group has right to payment for performance to date. In some cases, the fabrication of bridge components can be contracted for by itself and in these cases, revenue will be recorded over time. Revenue is recognised as the services are provided using cost as the measure of progress. 49 Saunders International Limited Notes to the Financial Statements 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (i) Revenue (cont.) Customers are in general invoiced on a monthly basis for an amount that is in line with costs incurred. Payment is received following invoice on normal commercial terms. Where payment is received prior to or post recognition of revenue using the percentage cost of completion method, revenue is deferred or accrued for on the balance sheet. Variable consideration Where consideration in respect of a contract is variable, the expected value of revenue is only recognised when the uncertainty associated with the variable consideration is subsequently resolved, known as “constraint” requirements. The Group assesses the constraint requirements on a periodic basis when estimating the variable consideration to be included in the transaction price. When calculating the estimates of variable consideration, the Group considers available information including historic performance on similar contracts and other information regarding events that affect the variability that are out of the control of the Group. Where modifications in design or contract requirements are entered into, these are treated as a continuation of the original contract in accordance with the contract modification guidance in AASB 15, and the transaction price and measure of progress is updated to reflect these. Where the price of the modification has not been confirmed, this is treated as variable consideration and an estimate is made of the amount of revenue to recognise whilst also considering the constraint requirement. Tender and contract costs Costs incurred prior to the commencement of a contract that give rise to resources that will be used in the anticipated delivery of the contract and are expected to be recovered are capitalised. Typically, these are design costs. Where these contract assets are capitalised, they are amortised over the course of the contract consistent with the transfer of service to the customer. Tenders costs which are capitalised are only costs incremental in the winning of a contract. (j) Financial Assets Financial assets All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. Classification of financial assets Debt instruments that meet the following conditions are measured subsequently at amortised cost: • • the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Debt instruments that meet the following conditions are measured subsequently at fair value through other comprehensive income (FVTOCI) : • • the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. By default, all other financial assets are measured subsequently at fair value through profit or loss (FVTPL). Despite the foregoing, the Group may make the following irrevocable election / designation at initial recognition of a financial asset: • • the Group may irrevocably elect to present subsequent changes in fair value of an equity investment in other comprehensive income if certain criteria are met; and the Group may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. 50 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (j) Financial Assets (cont.) (i) Amortised cost and effective interest method Saunders International Limited Notes to the Financial Statements The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. For financial assets other than purchased or originated credit- impaired financial assets (i.e. assets that are credit- impaired on initial recognition) , the effective interest rate is the rate that exactly discounts estimated future cash receipts ( including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) excluding expected credit losses, through the expected life of the debt instrument, or, where appropriate, a shorter period, to the gross carrying amount of the debt instrument on initial recognition. For purchased or originated credit- impaired financial assets, a credit- adjusted effective interest rate is calculated by discounting the estimated future cash flows, including expected credit losses, to the amortised cost of the debt instrument on initial recognition. The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance. Interest income is recognised using the effective interest method for debt instruments measured subsequently at amortised cost and at FVTOCI. For financial assets other than purchased or originated credit- impaired financial assets, interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently become credit- impaired ( see below) . For financial assets that have subsequently become credit- impaired, interest income is recognised by applying the effective interest rate to the amortised cost of the financial asset. If, in subsequent reporting periods, the credit risk on the credit- impaired financial instrument improves so that the financial asset is no longer credit- impaired, interest income is recognised by applying the effective interest rate to the gross carrying amount of the financial asset. For purchased or originated credit- impaired financial assets, the Group recognises interest income by applying the credit- adjusted effective interest rate to the amortised cost of the financial asset from initial recognition. The calculation does not revert to the gross basis even if the credit risk of the financial asset subsequently improves so that the financial asset is no longer credit- impaired. Interest income is recognised in profit or loss and is included in the other income line item (note 4). (ii) Financial assets at FVTPL Financial assets that do not meet the criteria for being measured at amortised cost or FVTOCI are measured at FVTPL. Specifically: • • Investments in equity instruments are classified as at FVTPL, unless the Group designates an equity investment that is neither held for trading nor a contingent consideration arising from a business combination as at FVTOCI on initial recognition; Debt instruments that do not meet the amortised cost criteria or the FVTOCI criteria are classified as at FVTPL. In addition, debt instruments that meet either the amortised cost criteria or the FVTOCI criteria may be designated as at FVTPL upon initial recognition if such designation eliminates or significantly reduces a measurement or recognition inconsistency ( so called 'accounting mismatch') that would arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. The Group has not designated any debt instruments as at FVTPL. Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses recognised in profit or loss to the extent they are not part of a designated hedging relationship. The net gain or loss recognised in profit or loss includes any dividend or interest earned on the financial asset and is included in the other income line item. 51 Saunders International Limited Notes to the Financial Statements 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (k) Goods and Services Tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or ii. for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. (l) Impairment of Assets At each reporting date, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered 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 the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash- generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. 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 (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment or loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase. (m) Contributed Equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of income tax. Incremental costs directly attributable to the issue of new shares for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration. (n) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved when the Company: i. ii. has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and iii. has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company's voting rights in an investee are sufficient to give it power, including: 52 Saunders International Limited Notes to the Financial Statements 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (n) Basis of consolidation (cont.) i. the size of the Company's holding of voting rights relative to the size and dispersion of holdings of the other vote holders; ii. potential voting rights held by the Company, other vote holders or other parties; iii. rights arising from other contractual arrangements; and iv. any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non- controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Changes in the Group's ownership interests in existing subsidiaries Changes in the Group's ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group's interests and the non- controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company. When the Group loses control of a subsidiary, a gain or loss is recognised in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable AASB’s). (o) Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that: • • • deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with AASB 112 Income Taxes and AASB 119 respectively; liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with AASB 2 at the acquisition date); and assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard. 53 Saunders International Limited Notes to the Financial Statements 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (o) Business combinations (cont.) Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests' proportionate share of the recognised amounts of the acquiree's identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non- controlling interests are measured at fair value or, when applicable, on the basis specified in another AASB. When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with AASB 139, or AASB 137 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognised in profit or loss. When a business combination is achieved in stages, the Group's previously held equity interest in the acquiree is remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. 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 (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date. (p) Share Based Payments Equity-settled share-based payments with employees and others providing similar services are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of a Black-Scholes-Merton model, which requires the input of highly subjective assumptions. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Equity-settled share-based payment transactions with other parties are measured at the fair value of the goods and services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. For cash-settled share-based payments, a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each reporting date. (q) Comparative amounts When required by accounting standards, comparative amounts have been adjusted to conform to changes in presentation for the current financial year. 54 Saunders International Limited Notes to the Financial Statements 1. SUMMARY OF ACCOUNTING POLICIES (cont.) (r) Government Grants During the Financial year, the Group became eligible for certain government support in response to the coronavirus pandemic, as explained in Note 4. The Group’s accounting policy for government grants is explained below. Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Government grants are recognised in profit or loss on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate. Specifically, wage subsidies received under the JobKeeper scheme are presented as other income in profit or loss. Government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets (including property, plant and equipment) are recognised as deferred income in the consolidated statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable. The benefit of a government loan at a below-market rate of interest is treated as a government grant, measured as the difference between proceeds received and the fair value of the loan based on prevailing market interest rates. 2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of Saunders’ accounting policies, which are described in Note 1, the directors of the Group are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Key Sources of Estimation Uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Construction contracts Construction revenue is recognised by management after assessing all factors relevant to each contract. Significant management estimation is required in assessing the following: • • • • Estimation of total contract revenue, including determination of contractual entitlement and assessment of the probability of customer approval of variations and acceptance of claims; Estimation of total contract costs, including revisions to total forecast costs for events or conditions that occur during the performance of the contract, or are expected to occur to complete the contract; Estimation of project contingencies; and Estimation of stage of completion including determination of project completion date. Recoverability of deferred tax assets Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses can be utilised. The factors considered by management in making this assessment includes expectations of future profitability, and in the case of unused tax losses, that these will continue to be available under current tax legislation. COVID-19 The Group continues to monitor the impact of the COVID-19 pandemic. There remains a level of uncertainty around the economic impact and duration of what COVID-19 related issues will be on the markets in which the Group operates, COVID-19 was not considered an indicator of impairment for the Group’s asset values as at 30 June 2021. 55 Saunders International Limited Notes to the Financial Statements 3. REVENUE Revenue stream Revenue recognition Australia $’000 PNG $’000 Engineering & Construction Over time 36,026 Services Over time Fabrication & Construction Over time 35,918 29,297 Interest Received Point in time 1 Total revenue 101,242 - - - - - Total 2021 $’000 Australia PNG $’000 $’000 Total 2020 $’000 36,026 11,175 19 11,194 35,918 29,232 29,297 26,031 1 5 - - - 29,232 26,031 5 101,242 66,443 19 66,462 4. PROFIT FOR THE YEAR Other income JobKeeper subsidy (Government grants) Profit on sale of asset Other Profit before income tax has been arrived at after (crediting)/charging the following expenses: Cost of sales Depreciation Expense: Buildings Plant and equipment Right-of-use-assets Office furniture and equipment Finance costs: Finance cost on lease liabilities Employee benefits expense: Post-employment benefits – defined contributions Payroll tax expense Employee Share Plan Salary and wages 2021 $’000 2020 $’000 598 5 101 704 - 3 182 185 82,058 55,665 2021 $’000 27 1,262 465 177 2020 $’000 29 822 446 171 1,931 1,468 95 81 1,743 1,348 315 24,694 28,100 1,318 859 195 20,216 22,588 56 Saunders International Limited Notes to the Financial Statements 5. INCOME TAX Income tax recognised in profit Income tax expense comprises: Current income tax (benefit) / expense Deferred tax expense / (benefit) relating to the origination and reversal of temporary differences Total income tax expense The prima facie income tax expense on pre-tax accounting profit reconciles to income tax expense in the financial statements as follows: Profit before taxation Income tax at 30% Other Total income tax expense Current tax liability 2021 $’000 391 2,152 2,543 8,085 2,426 117 2,543 (524) 2020 $’000 (23) 610 587 1,853 556 31 587 (146) The income 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. Deferred Tax Balances The deferred tax expense above is itemised as follows: 57 5. INCOME TAX (cont.) 2021 Deferred tax assets Employee benefits Restructure provision Contract assets Lease liabilities Tax losses Share issue costs Accruals and other payables Deferred tax asset 2021 Deferred tax liabilities Property, plant and equipment Right of use asset Other Deferred tax liabilities Net deferred tax asset 2020 Deferred tax assets Employee benefits Restructure provision Contract assets Lease liabilities Tax losses Share issue costs Accruals and other Deferred tax asset 2020 Deferred tax liabilities Property, plant and equipment Right of use asset Other Deferred tax liabilities Net deferred tax asset Saunders International Limited Notes to the Financial Statements Opening balance $’000 (Charged)/ Credited to income $’000 Recognised directly to equity $’000 Closing balance $’000 620 90 41 366 1,591 63 403 116 38 (37) (59) (1,548) - (50) 3,174 (1,540) (589) (370) - (959) 2,215 (597) 4 (19) (612) (2,152) - - - - - - - - - - - - - 736 129 4 306 43 63 353 1,634 (1,186) (366) (19) (1,571) 63 Opening balance $’000 (Charged)/ Credited to income $’000 Recognised directly to equity $’000 Closing balance $’000 526 87 40 - 2,139 111 318 3,221 (381) - (15) (396) 2,825 94 3 1 366 (548) (48) 85 (47) (208) (370) 15 (563) (610) - - - - - - - - - - - - - 620 90 41 366 1,591 63 403 3,174 (589) (370) - (959) 2,215 58 6. TRADE AND OTHER RECEIVABLES Trade receivables (i) Saunders International Limited Notes to the Financial Statements 2021 $’000 2020 $’000 10,258 13,297 A provision matrix is determined based on historic credit loss rates for each group of customers, adjusted for any material expected changes to the customer’s future credit risk. On that basis, the credit loss allowance as at 30 June 2021 and 30 June 2020 was determined as follows: Provision matrix Current 1 to 30 days 30 to 60 days 60 to 90 days Over 90 days Contract assets Receivables Current 1 to 30 days 30 to 60 days 60 to 90 days Over 90 days Total receivables Contract assets (Note 10) Allowance based on historic credit losses Adjustment for expected changes in credit risk ¹ Credit loss allowance Net carrying amount 2021 Australia 0.0% 0.0% 0.0% 0.2% 0.5% 0.1% 2021 Total Group $’000 8,538 1,354 115 114 137 2021 PNG 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2020 Australia 0.0% 0.0% 0.0% 0.2% 0.5% 0.1% 2020 2020 Australia $’000 PNG $’000 9,810 1,177 682 1,108 469 2020 PNG 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2020 Total Group $’000 9,810 1,177 682 1,108 520 13,297 6,711 11 100 111 - - - - 51 51 - - - - 282 10,258 13,246 - - - - 2,884 6,711 - - - 11 100 111 2021 2021 PNG $’000 282 - - - - Australia $’000 8,256 1,354 115 114 137 9,976 2,884 6 (6) - 12,860 282 13,142 19,846 51 19,897 ¹ Adjustment to reflect the lower credit risk and probability of default relating to customers that are over 90 days past due. Trade receivables and contract assets are written off when there has been a significant change in the risk characteristics of a debtor and there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group. (i) The average credit period on sale of goods and rendering of services is approximately 35 days. No interest is charged on trade receivables. Each receivable 60 days overdue has been reviewed to assess whether there is a risk that it might be irrecoverable. On the basis of this review, management has provided for trade receivable balances which may be at risk of being irrecoverable. Ageing of past due but not impaired 60 days over the due date 2021 $’000 251 2020 $’000 1,517 59 Saunders International Limited Notes to the Financial Statements 7. PROPERTY, PLANT AND EQUIPMENT Impairment Testing Saunders International Limited reviews the carrying amounts of its tangible assets annually at each reporting date to determine whether there is any impairment. As at 30 June 2021 the directors reviewed the future budgets of the Group to determine whether there are any indications of impairment. No indicators of impairment were noted and no impairment losses are recorded. Land at cost $’000 Buildings at cost $’000 Plant and Equipment at cost $’000 Office furniture and equipment at cost $’000 Gross carrying amount Balance at 1 July 2019 Additions Reclassification (i) Disposals Balance at 30 June 2020 Additions Disposals Balance at 30 June 2021 Accumulated depreciation Balance at 1 July 2019 Disposals Reclassification (i) Depreciation expense Balance at 30 June 2020 Disposals Depreciation expense Balance at 30 June 2021 Net book value As at 30 June 2020 As at 30 June 2021 3,400 - - - 1,150 - - - 3,400 1,150 - - - - 3,400 1,150 - - - - - - - - 65 - - 29 94 - 27 121 3,400 3,400 1,056 1,029 13,613 1,237 (735) (20) 14,095 1,664 (100) 15,659 8,074 (18) (96) 822 8,782 (79) 1,262 9,965 5,313 5694 Total $’000 18,883 1,483 (671) (20) 720 246 64 - 1,030 19,675 87 - 1,751 (100) 1,117 21,326 392 - 27 171 590 - 177 767 440 350 8,531 (18) (69) 1,022 9,466 (79) 1,466 10,853 10,209 10,473 (i) The net reclassification out of property, plant and equipment of $602,000 relates to the initial application of AASB 16 Leases. 8. LEASES (GROUP AS LESSEE) The Group has entered into an office lease and a number of motor vehicle leases. The office lease has fixed annual rent increases. The motor vehicle leases do not reflect any rent increases over the term of the lease. The average lease term is 4.2 years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than security interests in the leased assets that are held by the lessor. Leased asset may not be used as security for borrowing purposes. This note provides information for leases where the Group is a lessee. 60 Saunders International Limited Notes to the Financial Statements 8. LEASES (GROUP AS LESSEE) (cont.) Amounts recognised in the consolidated income statement The Consolidated Income Statement includes the following amounts relating to leases: Depreciation Charge for Right of Use Assets Total Depreciation Charge for Right of Use Assets Other cost relating to leases Interest expense on lease liabilities (included in Finance Costs) Expenses relating to leases of low value assets Expenses relating to variable lease payments not included in the measurement of the lease liabilities 2021 $’000 465 465 95 22 38 2020 $’000 446 446 81 33 61 Total costs relating to leases 155 175 Amounts recognised in the balance sheet This Balance Sheet shows the following amounts in relation to leases: Right of Use Assets Gross amount Opening balance, 1 July 2019 Impact of AASB 16 Reclassification from PPE Additions Balance as at 30 June 2020 Impact of AASB 16 Reclassification from PPE Additions Balance as at 30 June 2021 Accumulated depreciation Opening balance, 1 July 2019 Reclassification from PPE Depreciation expense Balance as at 30 June 2020 Reclassification from PPE Depreciation expense Balance as at 30 June 2021 Net book value As at 30 June 2020 As at 30 June 2021 Property Other - 1,285 - - 1,285 - 57 - 1,342 - - 270 270 14 94 378 - 106 671 538 1,315 - (57) 914 2,172 - 69 176 245 (14) 371 602 Total $’000 - 1,391 671 538 2,600 - - 914 3,514 - 69 446 515 - 465 980 1,015 964 1,070 1,570 2,085 2,534 61 8. LEASES (GROUP AS LESSEE) (cont.) Lease Liabilities Current Non-Current Total Lease Liabilities Maturity Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Onwards 9. TRADE AND OTHER PAYABLES Current Trade payables (i) Goods and services tax payable Accruals and other payables Saunders International Limited Notes to the Financial Statements 2021 $’000 704 1,719 2,423 2021 $’000 704 716 530 360 113 - 2020 $’000 568 1,540 2,108 2020 $’000 568 564 449 323 204 - 2,423 2,108 2021 $’000 8,212 351 2,162 2020 $’000 11,030 261 2,955 10,725 14,246 (i) The average credit period on purchases of goods is between 45-60 days. No interest is charged on the trade payables. The Group has a policy that all payables are paid within the agreed credit timeframe. 10. CONTRACT ASSETS AND CONTRACT LIABILITIES Contract assets related to contracts Contract liabilities relating to contracts Contract assets 2021 $’000 2,884 5,684 2020 $’000 6,711 4,588 Contract assets are balances due from customers under long-term contracts as work is performed and therefore a contract asset is recognised over the period in which the performance obligation is fulfilled. This represents the Group’s right to consideration for the services transferred to date. Amounts are generally reclassified to accounts receivable when these have been invoiced to a customer. The directors of the Group always measure the loss allowance on amounts due from customers at an amount equal to lifetime ECL, taking into account the historical default experience and the future prospects of the construction industry. None of the amounts due from customers at the end of the reporting period is past due. There has been no change in the estimation techniques or significant assumptions made during the current reporting period in assessing the loss allowance for the amounts due from customers under construction contracts. Refer to Note 6 for the risk profile of amounts due from customers based on the Group’s provision matrix. 62 10. CONTRACT ASSETS AND CONTRACT LIABILITIES (cont.) Saunders International Limited Notes to the Financial Statements Contract liabilities Contract liabilities relating to construction contracts are balances due to customers under construction contracts. These arise if a particular milestone payment exceeds the revenue recognised to date under the percentage cost complete method. Revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period was $4.59 million (FY20: $1.79 million). Revenue recognised in the reporting period from performance obligations satisfied or partially satisfied in previous periods was nil (FY20: $0.72 million). Partially satisfied performance obligations continue to incur revenue and costs in the period. Remaining performance obligations (Work in hand) Contracts which have remaining performance obligations as at 30 June 2021 and 30 June 2020 are set out below. Revenue stream 2021 $’000 2020 $’000 Engineering & Construction 30,799 39,835 Services 9,032 54,136 Fabrication & Construction 43,499 16,575 Total work in hand 83,330 110,546 Contracts in the different sectors have different lengths. The average duration of contracts is 12 – 24 months, however some contracts will vary from these typical lengths. Revenue is typically earned over these varying timeframes, however more of the revenue noted above is expected to be earned within 12 months. 11. PROVISIONS Current Employee benefits Other provisions Non-current Employee benefits 2021 $’000 2,104 538 2,642 237 237 2020 $’000 2,034 - 2,034 234 234 63 12. ISSUED CAPITAL Fully paid ordinary shares carry one vote per share and carry the right to dividends. Saunders International Limited Notes to the Financial Statements Ordinary shares Ordinary shares at beginning of financial year Shares issued under Dividend Reinvestment Plan Shares issued Performance Rights Plan Treasury issued during the year Ordinary shares at end of financial year Fully paid ordinary shares Balance at beginning of financial year Shares issued under Dividend Reinvestment Plan Shares issued Performance Rights Plan Treasury issued during the year Balance at end of financial year Treasury shares under employee share plan Balance at beginning of financial year Treasury shares vested during the year Share issued during the year Balance at end of financial year Treasury shares under employee share plan Balance at beginning of financial year Treasury shares vested during the year Share issued during the year Balance at end of financial year 2021 Number 102,848,127 2020 Number 102,848,127 1,044,471 564,969 (467,500) - - - 103,990,067 102,848,127 2021 $’000 19,701 385 278 323 2020 $’000 19,701 - - - 20,687 19,701 2021 Number 1,878,125 - 467,500 2020 Number 1,878,125 - - 2,345,625 1,878,125 2021 $’000 (351) - (323) (674) 2020 $’000 (351) - - (351) Reserves Nature and purpose of reserves (a) Treasury shares under employee share plan The value of shares bought back are allocated to this reserve (b) Share-based payments reserve The share-based payments reserve is for the fair value of options granted and recognised to date but not yet exercised, and treasury shares purchased and recognised to date which have not yet vested. 64 Saunders International Limited Notes to the Financial Statements 12. ISSUED CAPITAL (cont.) Employee Share Plan The Board has approved and implemented an Employee Share Plan (“ESP”). Under the ESP, the Group provides interest free loans to employees to acquire shares in Saunders International Limited, at a specified price per share. The loans are secured by the shares acquired by the eligible employees. The shares will vest and the loans will be repaid, upon a specified anniversary of the issue of the shares. If an eligible employee’s employment with the Group is terminated prior to the specified anniversary of the issue of the shares, the shares will be forfeited, and the Group will be entitled to the total amount raised pursuant to the divestment of the shares. The shares are accounted for as in substance options. Each employee share option converts into one ordinary share of Saunders International Limited on exercise. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither rights to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry. At balance date, a total of 15 tranches of the ESP have been issued. Tranche 8: Offer of 400,000 shares in January 2016 with all offers accepted. The tranche has been modified, by the Board in February 2020, to vest in February 2022. Tranche 9: During the financial year 15,000 shares were forfeited. Tranche 10: During the financial year 5,000 shares were forfeited. Tranche 11: During the financial year 9,375 shares were forfeited. Tranche 12: During the financial year 20,000 shares were forfeited. Tranche 13: During the financial year 35,000 shares were forfeited. Tranche 14: During the financial year 50,000 shares were forfeited. Tranche 15: During the financial year 612,500 new shares were issued of which 20,000 shares were forfeited. The fair value of the share options granted during the financial year is included in below table. Options have been valued using the Black Scholes pricing model. Expected volatility is based on the historical share price volatility over the past 3 years. One individual employee holds more than 200,000 options under the ESP. 65 12. ISSUED CAPITAL (cont.) Details of the fair value assumptions used are as follows: Saunders International Limited Notes to the Financial Statements Tranche 8 Tranche 9 Tranche 10 Tranche 11 Tranche 12 Tranche 13 Tranche 14 Tranche 15 Grant Date Jan 2016 Feb 2016 Feb 2017 Oct 2017 Feb 2018 Feb 2019 Feb 2020 Feb 2021 Grant Price $0.58 Opening Volume 400,000 New grants Forfeitures - - Closing Volume 400,000 Exercise Price Expected Volatility Option Life Dividend Yield Risk Free Interest Rate Grant date fair value $0.58 45% 4 years 0% 2.05% $0.22 $0.58 80,000 - (15,000) 65,000 $0.58 45% 4 years 0% 1.72% $0.21 $0.58 170,000 - (25,000) 145,000 $0.58 45% 4 years 0% 2.00% $0.22 $0.50 105,625 - (10,625) 95,000 $0.50 45% 4 years 0% 2.75% $0.19 $0.59 200,000 - (20,000) 180,000 $0.59 45% 4 years 0% 2.82% $0.23 $0.33 355,000 - (35,000) 320,000 $0.33 45% 4 years 0% 2.82% $0.12 $0.38 477,500 - (35,000) 442,500 $0.38 45% 4 years 0% 2.82% $0.15 $0.69 - 612,500 (5,000) 607,500 $0.69 45% 4 years 0% 2.82% $0.27 There has been no alteration of the terms and conditions of the above share-based payment arrangements since the grant date. Tranche 8 was extended until February 2022 as set out above. 66 Saunders International Limited Notes to the Financial Statements 12. ISSUED CAPITAL (cont.) Movement in share options during the year The following reconciles the share options outstanding at the beginning and end of the year. 2021 2020 Number of options Weighted average exercise price 1,788,125 612,500 (145,625) - 2,255,000 - 0.48 0.69 0.47 - 0.53 - Number of options 1,375,625 Weighted average exercise price 0.52 477,500 (65,000) - 1,788,125 - 0.38 0.72 - 0.48 - Balance at beginning of year Granted during the year Forfeited during the year Exercised during the year Balance at end of year Exercisable at end of year Performance Rights Plan The Saunders International Rights Plan was approved by the Board and approved by shareholders at the Annual General Meeting in October 2015. The features of the long-term incentive comprises the grant of equity in the form of Performance Rights which vest over a three year period. The maximum number of Performance Rights will vest only if stretch objectives for each tranche are achieved. Half of the Performance Rights will vest if the target objectives are achieved. The end of the measurement period for a tranche of Performance Rights will be extended by up to two years at the Board’s discretion if significantly less than target vesting would have been achieved for that tranche at the end of the measurement period, adjusted for the pro-rata increase in hurdles to take into account the additional time. The two vesting conditions that will be used will be relative total shareholder return (RTSR) and normalised earnings per share growth (NEPSG). RTSR will be measured by comparing the Group’s TSR over the measurement period with the TSRs achieved by companies that are in a comparator group and remain listed on the ASX. TSR is the percentage return generated from an investment in a Group’s shares over the measurement period assuming that dividends are reinvested into the Group’s shares. NEPSG will be assessed as the compound annual growth rate (CAGR) reflected in the increase in normalised earnings per share (EPS) from the base year (FY2016) for tranches 1 to 8 and (FY2017) for tranches 9 and 10 to normalised EPS for the final year of the measurement period. Normalised EPS will relate to normal operations and will exclude abnormal items as determined by the Board in its discretion. For the phase in tranches where the measurement period is less than three years, performance will be evaluated by the Board’s assessment of the establishment of strategic foundations for superior TSR and NESPG over the long-term. For future grants, it is currently intended that the qualitative vesting conditions will be removed (but retaining TSR and NESPG), and that measurement periods will be no shorter than 3 years. The vesting scale will be applied to the tranches subject to objective measurement of Saunders performing relative to the comparator group and NEPSG, as appropriate, with the vesting scale ranging continuously from 0% for very poor performance to 100% for very good performance with 50% for on-target performance. The long-term incentive is aimed at aligning remuneration with the longer term performance of the Group and retaining the long-term services of the key management personnel. 67 12. ISSUED CAPITAL (cont.) Saunders International Limited Notes to the Financial Statements The Managing Director and certain Key Management Personnel participate in the Saunders International Rights Plan. This plan is part of the long-term incentive component of the respective remuneration packages. The total number of Performance Rights issued under the plan is 4,044,255 of which 564,969 have vested, 174,350 have lapsed and a further 26,792 have been forfeited as at 30 June 2021. Details of the fair value assumptions used are as follows: Tranche 3 Tranche 9 Tranche 10 Tranche 11 Tranche 12 Tranche 13 Tranche 14 Tranche 15 Tranche 16 Tranche 17 Tranche 18 Grant Date 2 June 2016 1 Sept 2016 1 Sept 2016 1 Sept 2017 1 Sept 2017 1 Sept 2018 1 Sept 2018 1 Sept 2019 1 Sept 2019 1 Sept 2019 1 Sept 2019 Grant Price $0 $0 $0 $0 $0 $0 $0 $0 $0 Opening Volume 194,477 238,095 238,095 320,143 320,143 401,299 401,299 590,979 590,979 New grants Lapsed Forfeited - - - - (76,190) - Vested (194,477) (161,905) - - - - - - (13,396) (13,396) (101,799) (13,396) (204,948) - - - - - - - - - - - - - - - - - $0 - $0 - 374,373 374,373 - - - - - - Closing Volume Exercise Price Expected Volatility - $0 - $0 238,095 $0 - $0 306,747 401,299 401,299 590,979 590,979 374,373 374,373 $0 $0 $0 $0 $0 $0 $0 26.87% 26.87% 26.87% 26.87% 26.87% 26.87% 26.87% 26.87% 26.87% 26.87% 26.87% Option Life 0 years 0 years 0 years 0 years 0 years 0.25 years 0.25 years 1.25 years 1.25 years 2.25 years 2.25 years Dividend value $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 Risk Free Interest Rate Grant date fair value 1.93% 1.93% 1.93% 1.93% 1.93% 1.93% 1.93% 1.93% 1.93% 1.93% 1.93% $0.41 $0.46 $0.46 $0.49 $0.49 $0.41 $0.41 $0.29 $0.29 $0.52 $0.52 There has been no alteration of the terms and conditions of the above share-based payment arrangements since the grant date and number of options granted were outstanding at the end of the year. The weighted average exercise price of the option is $0.00 per option and the share price on grant date was $0.41 per share for tranche 3, $0.46 per share for tranches 9 and 10, $0.49 for tranches 11and 12, $0.41 for tranches 13 and 14, $0.29 for tranches 15 and 16 and $0.52 for tranches 17 and 18. The share options outstanding at the end of the year has a weighted average remaining contractual life of 0.97 year. 68 Saunders International Limited Notes to the Financial Statements 13. RETAINED EARNINGS Balance at beginning of financial year Profit for the year Dividends provided for or paid Share based payments vested/lapsed Balance at end of financial year 14. EARNINGS PER SHARE Basic earnings/(losses) per share Diluted earnings/(losses) per share The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: Net profit/(loss) Earnings used in the calculation of basic and diluted EPS Weighted average number of ordinary shares for the purposes of basic earnings per share Diluted earnings per share Weighted average numbers of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Weighted average number of ordinary shares used in the calculation of basic EPS Shares deemed to be issued for no consideration in respect of employee options and performance rights (a) 2021 $’000 2,532 5,542 (793) 77 7,358 2020 $’000 1,266 1,266 - - 2,532 2021 Cents per share 2020 Cents per share 5.36 5.21 1.23 1.20 2021 $’000 5,542 5,542 2020 $’000 1,266 1,266 2021 No.’000 2020 No.’000 103,340 102,848 103,340 102,848 3,035 2,427 Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share 106,375 105,275 (a) During the year ended 30 June 2021 a portion of the potential ordinary shares associated with the employee share option plan as set out in Note 13 are dilutive and therefore included in from the weighted average number of ordinary shares for the purposes of diluted earnings per share. The potential ordinary shares associated with the Performance Rights are dilutive and have been included in the weighted average number of ordinary shares for the purposes of diluted earnings per share. 69 15. DIVIDENDS Recognised amounts Fully paid ordinary shares Final dividend (2020): Fully franked at a 30% tax rate Interim dividend (2021): Fully franked at a 30% tax rate Unrecognised amounts Fully paid ordinary shares Final dividend (2021): Saunders International Limited Notes to the Financial Statements 2021 Cents per share Total $’000 2020 Cents per share Total $’000 - 793 793 - - - - - - - - - - - - - The Board declared on 26 August 2021 that there will be a final dividend payable of 0.75 cents per share fully franked and special dividend of 1.00 cents per share fully franked (FY20 final dividend : Nil dividend paid). Both dividends will be payable on 11th October 2021 with the record date for determining dividends on 15th September 2021. Adjusted franking account balance 16. SEGMENT INFORMATION 2021 $’000 1,666 2020 $’000 1,774 The Group operates in one reporting segment being the design, construction, and maintenance of steel storage tanks and concrete bridges. In the current period 3 customers made up 36% of the revenue earned (2020: 1 customer made up 16% of the revenue earned). These customers accounted for $36,627,000 of the Groups’ total revenue. 17. CONTINGENT LIABILITIES AND CONTINGENT ASSETS In the ordinary course of business, the Group receives claims against it which may involve litigation. In the event that a claim is successful, it is expected to be adequately covered by the insurance policies held by the Group. Where the outcome is probable and can be reasonably quantified, provision is made in these financial statements. Proceedings against the group in relation to a legal matter continue, which the entity intends to defend. In the event the action is successful it is expected that the group’s insurance policy will respond accordingly. 70 18. NOTES TO THE STATEMENT OF CASH FLOWS Saunders International Limited Notes to the Financial Statements 2021 $’000 2020 $’000 (a) Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments. Cash and cash equivalents at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash and cash equivalents 23,816 11,085 (b) Reconciliation of profit/(loss) for the year to net cash flows from operating activities Profit for the year Share-based payments expense Depreciation Gain on disposal Unrealised foreign exchange loss (Increase)/decrease in assets: Current tax balance Deferred tax asset Trade and other receivables Contract assets Inventories Other assets Increase/(decrease) in liabilities: Trade and other payables Contract liabilities Provisions Lease incentives Net cash inflow from operating activities (c) Financing facilities The Group’s principal financing facilities for the provision of bank guarantees as described in Note 20 is secured by a fixed and floating charge over the assets of the Group. Amount used Amount unused 5,542 315 1,931 (5) 97 377 2,152 3,039 3,827 211 (112) (3,520) 1,095 612 - 15,561 1,266 195 1,468 (3) - (18) 610 (4,822) (4,030) (205) 248 7,037 2,803 373 - 4,922 10,121 9,879 20,000 6,637 3,363 10,000 The facilities have financial covenants relating to the Group’s capital adequacy ratio and its leverage ratio. During the financial year, the total facilities increased from $10 million to $20 million. Subsequent to year end, total facility increased to $25 million. (d) Asset and liabilities The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non- cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows from financing activities. Lease liabilities Balance at 1 July 2020 $’000 2,108 Financing Cash Flows (i) $’000 (600) Non -Cash Movement in Finance Leases $’000 915 Balance at 30 June 2021 $’000 2,423 (i) Financing cash flows comprise of repayment of borrowings and payments in relation to finance leases. 71 19. FINANCIAL INSTRUMENTS The Group has three significant categories of financial instruments which are described below together with the policies and risk management processes which the Group utilises: Saunders International Limited Notes to the Financial Statements (a) Cash and cash equivalents The Group deposits its cash and cash equivalents with Australian banks. Funds can be deposited in cheque accounts, cash management accounts and term deposits. The policy is to utilise at least two Australian banks for cash management accounts and term deposits. The policy with term deposits is to provide for liquidity with a range of maturities up to 6 months. (b) Debtors and credit risk management The Group has a credit risk policy to protect against the risk of debtor default. The majority of the Group’s debtors are long-term customers and are multinational oil and gas companies, government authorities and large Australian corporations where the credit risk is considered to be low. New customers are assessed for credit risk using credit references and reports from credit agencies as necessary. (c) Bank guarantees The Group has a preference to provide bank guarantees to customers in lieu of the cash retention required under contracts. This preference is pursued subject to specific contract requirements and the Group’s bank facility requirements. Capital risk management The Group’s capital structure currently consists of equity and retained earnings and there is no external long-term debt or short-term debt except for an interest-free vendor loan. The operating cash flows of the Group are used to finance short-term capital. The capital risk management is continuously reviewed as the Group has surplus cash available for investment. Categories of financial instruments Financial assets Cash and cash equivalents Loans and receivables Financial liabilities Trade payables and accruals Lease Liabilities Obligations under finance leases Leasing arrangements 2021 $’000 23,816 10,258 34,074 10,725 2,423 13,148 2020 $’000 11,085 13,297 24,382 14,246 2,108 16,354 The Group leased certain of its construction equipment under finance leases. The average lease term is five years. The Group’s obligations under finance leases are secured by the lessor’s title to the leased assets. 72 19. FINANCIAL INSTRUMENTS (cont.) Financial risk management objectives Saunders International Limited Notes to the Financial Statements The Group’s exposure to market risk mainly arising from interest rate risk, is disclosed (including currency risk, fair value interest rate risk and price risk) and cash flow interest rate risk is disclosed in the interest rate sensitivity analysis below. Credit risk is monitored monthly through continuous management of the ongoing projects. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the board of directors, who have built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term liquidity management requirements. The Group manages liquidity risk by continually monitoring and maintaining adequate banking facilities. Cash flows are monitored and matched to the maturity profiles of financial assets and liabilities. Liquidity and interest risk tables The following tables detail the Group’s remaining contractual maturity for its non-derivative financial assets and liabilities. The tables have been drawn up based on the undiscounted cash flows of financial assets and liabilities based on the earliest date on which the Group can be required to receive or pay. The table includes both interest and principal cash flows. Weighted average effective interest rate Less than 1 month 1 to 3 months 3 months to 2 years % $’000 $’000 $’000 2021 Financial assets Cash and cash equivalents Trade receivables Financial liabilities Trade payables and accruals Lease liabilities 2020 Financial assets 0.52% - - 4.8% Cash and cash equivalents 0.35% Trade receivables Financial liabilities Trade payables and accruals Lease liabilities Interest rate sensitivity analysis - - 11.1% 23,816 9,896 3,625 58 11,085 2,967 1,435 43 - 231 6,675 115 - 9,921 4,474 129 - 131 314 2,250 - 409 8,337 1,936 Total $’000 23,816 10,258 10,614 2,423 11,085 13,297 14,246 2,108 The sensitivity analysis below has been determined based on exposure to interest rates for cash and cash equivalents that were subject to interest rate fluctuations at the reporting date. At reporting date, if interest rates had been 1% higher or lower and all other variables were held constant, the Group’s profit or loss would increase or decrease by $149,825 (2020: $110,846). Foreign currency risk The Group manages its foreign currency risk arising from significant supplier contracts in foreign currencies by holding foreign currency. As a result of operations in Papua New Guinea the Group’s statement of financial position can be affected by movements in the PGK/A$ exchange rate. The Group also has transactional currency exposures. Such exposure arises from sales or purchases by an operating entity in currencies other than the functional currency. Where possible, Saunders does not take on foreign exchange risk. At 30 June 2021, the Group had no forward contracts. The Group also mitigates its exposure to foreign currency risk by minimising excess foreign currency balances in overseas jurisdictions not required for working capital. At 30 June 2021, the Group had A$690,432 (2020: $1,253,019) of cash in PGK. At reporting date, if the PKG/AUD exchange rate had moved by 5%, with all other variables held constant, the group's profit or loss would increase or decrease by $34,609 (2020: $59,667). 73 Saunders International Limited Notes to the Financial Statements 19. FINANCIAL INSTRUMENTS (cont.) Fair value of financial instruments No financial asset or financial liability is held at fair value. The directors consider the fair value of the financial assets and financials liabilities to approximate their carrying amounts. 20. DIRECTORS AND KEY MANAGEMENT PERSONNEL COMPENSATION The board of directors approves on an annual basis the amounts of compensation for directors and key management personnel with reference to the Group’s performance and general compensation levels in equivalent companies and industries. (a) Remuneration of Directors and Key Management Personnel Short-term employee benefits Post-employment benefits Share-based payments 2021 $ 2,258,480 131,964 247,136 2020 $ 1,791,120 102,633 106,984 2,637,580 2,000,737 The names of and positions held by the key management are set out on page 31 of the Remuneration Report. Further details of the remuneration of key management are disclosed in the Remuneration Report. (b) Other Transactions with Key Management Personnel There were no transactions with directors and other key management personnel apart from those disclosed in this note. (c) Directors’ and Key Management Equity Holdings Refer to the table on page 29 of the Remuneration Report. 21. SUBSIDIARIES Details of the Group's material subsidiaries at the end of the reporting period are as follows. Name of subsidiary Principal activity Saunders Civilbuild Pty Ltd Bridge construction and maintenance Place of incorporation and operation Proportion of ownership interest and voting power held by the Group 2021 2020 Australia 100% 100% Saunders Property (NSW) Pty Ltd Real property investments Australia Saunders Asset Services Pty Ltd Maintenance Australia Saunders PNG Limited Tank construction and maintenance PNG 100% 100% 100% 100% 100% 100% 74 Saunders International Limited Notes to the Financial Statements 22. PARENT ENTITY INFORMATION The accounting policies of the parent entity, which have been applied in determining the financial information shown below, are the same as those applied in the consolidated financial statements except as set out below. See Note 1 for a summary of the significant accounting policies relating to the Group. Investments in subsidiaries, associates and joint ventures Investments in subsidiaries, associates and joint ventures are accounted for at cost. Dividends received from subsidiaries, associates and joint ventures are recognised in profit or loss when a right to receive the dividend is established (provided that it is probable that the economic benefits will flow to the Parent and the amount of income can be measured reliably). Tax consolidation The company and its wholly-owned Australian resident entities are members of a tax-consolidated group under Australian tax law. The company is the head entity within the tax-consolidated group. In addition to its own current and deferred tax amounts, the company also recognises the current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax-consolidated group. Amounts payable or receivable under the tax-funding arrangement between the company and the entities in the tax consolidated group are determined using a ‘separate taxpayer within group approach to determine the tax contribution amounts payable or receivable by each member of the tax-consolidated group. This approach results in the tax effect of transactions being recognised in the legal entity where that transaction occurred, and does not tax effect transactions that have no tax consequences to the group. The same basis is used for tax allocation within the tax-consolidated group. Summary financial information The individual financial statements for the parent entity, Saunders International Limited show the following aggregate amounts: Financial Position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Equity Issued capital Shares buy-back reserve under employee share plan Share based payments reserve Retained earnings Total equity Financial Performance Profit for the year Other comprehensive income Total comprehensive income The parent entity has no capital commitments. 2021 $’000 31,562 11,895 43,457 15,672 1,170 16,842 2020 $’000 19,963 16,733 36,696 13,235 1,313 14,548 20,687 19,701 (674) 736 5,866 (351) 776 2,022 26,615 22,148 2021 $’000 4,560 - 4,560 2020 $’000 710 - 710 75 23. REMUNERATION OF AUDITOR Audit or review of the financial report PNG tax services Saunders International Limited Notes to the Financial Statements 2021 $ 2020 $ 135,000 8,188 143,188 135,000 26,781 161,781 The auditor of Saunders International Limited is Deloitte Touche Tohmatsu. 24. GOVERNMENT GRANTS AND GOVERNMENT ASSISTANCE The Group has benefited from government support package as a result of COVID-19 during the period. JobKeeper Scheme (Australia) Due to the impact of COVID-19 on the Groups’ turnover, government subsidies of $598 thousand (2020: nil) were received under the Australian Federal Government’s JobKeeper scheme. The entity became eligible for the Scheme and in September 2021 no longer received any payments under the Scheme. The amounts were paid to employees in line with government’s objectives of helping businesses to continue paying employees to keep them in their jobs so that businesses can re-start when business conditions improve. The amounts received have been recognised as other income in the statement of profit or loss. 25. SUBSEQUENT EVENTS Subsequent to the end of the financial year, there continues to be considerable economic impacts in Australia and globally arising from the outbreak of the COVID-19 virus and Government actions to reduce the spread of the virus. The Group is closely monitoring the developments and the implications of the spread of the COVID-19 virus, the advice from health and government authorities and the World Health Organisation. Saunders has and continues to actively monitor the rapidly changing impact of COVID-19 (Coronavirus) across the Group’s operations. The Group has taken decisive action and a pro-active approach to the current situation ensuring that the safety of our teams has been at the forefront of all decisions. Saunders has implemented a rigorous set of company procedures and protocols to ensure safe operational continuity. To date, there has been no confirmed cases of COVID-19 at Saunders and the Group is well prepared if this position is to change. Saunders has monitored the outcomes of these impacts on our projects and work sites, which include: • Reduced productivity across some sites (including Saunders’ precast facility) due to the increased requirements to ensure that relevant social distancing guidelines are being adhered to • Delayed receipt of material due to impacts of freight channels for our international supply chain other logistic constraints • Interstate travel restrictions preventing specialist project personnel from being able to attend certain sites Saunders continues to work through the detailed scenarios and business continuity planning to minimise these supply chain and other operational business interruptions. On 1st August 2021 Saunders announced the acquisition of PlantWeave Technologies (PlantWeave), a specialist in industrial process automation and electrical solutions. The purchase of PlantWeave with the Group’s cash reserves and deferred earn-out payments over the next three years. 76 Saunders International Limited Notes to the Financial Statements 25. SUBSEQUENT EVENTS (cont.) Other than this, the directors are not aware of any matter or circumstance, not already disclosed, 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. 26. ADDITIONAL COMPANY INFORMATION General Information Saunders International Limited is incorporated and operating in Australia. Saunders International Limited’s registered office and its principal place of business is as follows: Registered office Principal place of business Suite 2.04, Level 2 Building F Rhodes Corporate Park, 1 Homebush Bay Drive Suite 2.04, Level 2 Building F Rhodes Corporate Park, 1 Homebush Bay Drive Tel: (02) 9792 2444 Tel: (02) 9792 2444 77 CORPORATE GOVERNANCE The Board of Saunders International has adopted a suite of Corporate Governance Practices to ensure that the company effectively identifies, monitors and manages risks, with the appropriate disclosures. In deIn developing and adopting the Practices, the Board considered the fourth edition of the ASX Corporate Governance Principles and Recommendations. The Board incorporates the Principles and Recommendations into its Practices to the extent that they are appropriate, taking into account the Company's size, activities and resources. The Board has adopted the following Charters Policies and Codes: - The Board Charter TThe Board Charter sets out matters relating to the responsibilities of the Board and its directors and matters relating to the composition of the Board and appointment of directors. Board Committees and their Charters In order to better manage its responsibilities, the Board has established an Audit and Risk Committee and a Remuneration Committee. Each committee has adopted a Charter approved by the Board. Policies and Codes of Conduct TThe Company has adopted Policies and Codes of Conduct which are available on the Company’s website. Corporate Governance Statement and Appendix 4G The Company reports on an annual basis, its compliance and/or reasons for non-compliance with the fourth edition of the ASX Corporate Governance Principles and Recommendations. The Corporate Governance Statement and the Appendix 4G have been released on the ASX Announcements platform and are on the Company’s Website. Further information on the abo Further information on the above Charters Policies and Codes can be found on the Company's website: www.saundersint.com/investors/corporate-governance/ 78 79 ADDITIONAL STOCK EXCHANGE INFORMATION 80 CORPORATE DIRECTORY Auditors Deloitte Touche Tohmatsu Eclipse Tower, Level 19 60 Station Street, Parramatta NSW 2150 Principal Banker Commonwealth Bank Commonwealth Bank Corporate Financial Services Level 1, 430 Forest Rd, Hurstville NSW 2220 Share Register Link Market Services Limited Level 12, 680 George Street, Sydney NSW 2000 Phone (02) 8280 7111 Phone (02) 8280 7111 Stock Exchange Listing Australia Securities Exchange 20 Bridge St, Sydney NSW 2000 Website www.saundersint.com Saunders International Sydney ABN 14 050 287 431 Level 2, 1F Homebush Bay Drive, Rhodes NSW 2138 Phone (02) 9792 2444 Saunders Civilbuild ABN 86 617 431 562 ABN 86 617 431 562 74 Kalaroo Rd, Redhead NSW 2290 Phone (02) 4946 0266 Saunders PlantWeave ABN 14 652 303 305 Unit 10, 47-48 Buffalo Rd, GGladesville NSW 2111 Phone (02) 9848 4488 Saunders (PNG) Limited 1-114512 Ground Floor, Century 21 House Lot 51, Section 35 Kunai Street Hohola National Capital District, Papua New Guinea Papua New Guinea Saunders Asset Services ABN 95 610 760 426 Saunders Property Group ABN 39 617 486 021 Board of Directors Timothy Burnett - Chairman Mark Benson - Managing Di Mark Benson - Managing Director Greg Fletcher - Non-Executive Director Nick Yates - Non-Executive Director Rudy Sheriff - Company Secretary 82 83