Southcross Energy Partners LP
Annual Report 2021

Plain-text annual report

Annual Report 2021 Southern Cross Electrical Engineering Limited ABN: 92 009 307 046 Established 1978 1 SCEE GROUP ANNUAL REPORT 2021CONTENTS 2021 HIGHLIGHTS 2021 Highlights About SCEE Chairman’s Report Managing Director’s Review Directors’ Report (including remuneration report) Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Index to Notes to the Financial Statements Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Lead Auditor’s Independence Declaration ASX Additional Information 2 3 13 15 21 35 36 37 38 39 40 83 84 90 91 REVENUE $370.2m DOWN 11% EBITDA $29.6m UP 37% NPAT $13.8m UP 27% H2 revenue of $234.8m a record half year for the Group Strong balance sheet cash of $51.0m and no debt Order book $430m with over $350m secured for FY22 Fully franked dividend 4cps UP 33% Workforce doubled in year to over 1,800 Trivantage outperforming expectations Continuing to pursue acquisitions 1 2 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021ABOUT SCEE TRIVANTAGE ACQUISTION Southern Cross Electrical Engineering (SCEE) is an ASX listed electrical, instrumentation, communication and maintenance services company recognised for our industry leading capabilities. Established in 1978 in WA, and primarily servicing the resources sector, the combination in 2016 with Datatel Communications and in 2017 with NSW & ACT-based Heyday created a national group. The acquisition of the Trivantage Group in 2020 brought further diversification into the retail sector, security services and switchboard design and manufacturing, with a significant geographic presence in Victoria and SA. SCEE operates across three broad sectors: • Commercial • Resources • Infrastructure SCEE is headquartered in Perth with additional offices across Australia and has talented and committed staff delivering projects and services throughout the country. Heyday Group The Trivantage Group was acquired in December 2020. Trivantage is a leading specialised electrical services provider and operates under three divisions: S.J. Electric: SEME Solutions: Electrical services to the commercial and retail sector Electronic security services to resources, law enforcemnet, custodial, industrial, and health sectors Trivantage Manufacturing: Leading manufacturer of premium quality switchboards to a range of end users OUR MARKETS R e s o u r c e s e r v E &I S i c e s and Mainten a n c e structure ra f n I SCEE HEYDAY TRIVANTAGE DATATEL s n atio m unic m C o E & I C o n s t r u c tio n OUR CAPABILITIES Commer c i a l 3 SCEE GROUP ANNUAL REPORT 2021 SCEE GROUP ANNUAL REPORT 2021 4 LEADING NATIONAL DIVERSIFIED ELECTRICAL CONTRACTOR WA NT SA QLD NSW & ACT VIC & TAS COMMERCIAL RESOURCES INFRASTRUCTURE NSW & ACT Parramatta Square 3, 4, 5 & 7 Wynyard Place Edmondson Park Ribbon Project 32 Smith Street Greenland Tower Republic Sandstone Precinct Locomotive Sheds 6 Hassall Street Aspen & Establishment apartments Major supermarkets and retail Westconnex M5 Sydney Metro Pitt Street Station Australian National University RUData SYD053 datacentre NextDC S3 datacentre University of Western Sydney campus VIC & TAS Major supermarkets and retail NBN Bryn Estyn Water Treatment Plant Westgate Tunnel Switchboards WA MARBL JV Kemerton Lithium Plant Rio Tinto Gudai-Darri Rio Tinto - Cape Lambert, Tom Price, Paraburdoo BHP – Newman, Port Hedland, Mt Whaleback, South Flank Sino Iron Boddington Gold Security works Major supermarkets and retail Forrestfield Airport Link Causarina Prison CBH Esperance grain terminal Health, education and government panel works NBN Department of Justice security works NT Rio Tinto Gove ERA Ranger Mine MSA SA Major supermarkets and retail QLD Arrow MSA Major supermarkets and retail Energy Queensland Services Agreement Water projects NBN Goodna, Kalkie and Commbabah Treatment Plants 5 SCEE GROUP ANNUAL REPORT 2021 SCEE GROUP ANNUAL REPORT 2021 6 COMMERCIAL SCEE has the expertise in designing, supplying, installing and maintaining a wide range of commercial building electrical and utility services. These include a comprehensive range of electrical infrastructure, building controls, energy management, security, communications, networking and structured cabling systems. We work closely with leading property developers and builders on new builds and with interior design and other specialists on fit-outs, refurbishments and upgrades. Our focus in the commercial property sector includes: • Offices • Shopping centres, supermarkets and retail • Multi-storey residential developments • Hotels • Sporting, recreation and leisure facilities • Warehouses We recognise that commercial developments are often bespoke and require significant expertise in optimising design and construction. In addition, clients often require buildings and precincts remain operational during construction. We work closely with our clients and the public to ensure seamless operations continue while the project is delivered safely. We remain abreast of the latest technologies and industry standards and pride ourselves on developing and installing smart and energy efficient solutions. Project name: Australian Technology Park – Building 1 Location: NSW Client name: Mirvac Construction Scope of work: Heyday delivered the Electrical, Communications and Security Services for the Building and Integrated Fitout for the Commonwealth Bank 7 8 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021RESOURCES SCEE provides electrical, instrumentation and communication services to the mining and oil and gas sectors. In the mining sector, we have broad exposure to many commodities including iron ore, gold, lithium, zinc, alumina and coal. We have extensive experience in the delivery of electrical projects at some of Australia’s largest mining and mineral processing sites and have operated extensively overseas. Our capability covers the entire construction life-cycle from establishing first power sources at greenfield sites, through to constructing and commissioning major ore handling, processing and transport infrastructure and decommissioning of operations. We also specialise in designing and installing electrical, communications and security services to operational centres, mine and camp utilities and administrative buildings, and telecommunication services that support the control and management of mine and transport operations. Under various framework arrangements we have teams of electricians at clients’ facilities supporting and maintain their operations. In the oil and gas sector we offer electrical, instrumentation and communication services for onshore and offshore facilities and for petrochemical refineries. Project name: Kemerton Lithium Plant Location: WA Client name: MARBL Lithium Joint Venture Scope of work: SCEE is delivering the full E&I scope for both the Hydromet and Pyromet sections of the plant 9 10 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021INFRASTRUCTURE SCEE recognises the important role that the Federal, State and Local governments play in developing and providing infrastructure to enhance and protect the lives of all Australians. We work alongside some of Australia’s leading contractors in the construction and maintenance of publicly funded infrastructure and assets in: • Transport including road, rail, air and port facilities • Defence facilities and installations • Social infrastructure including hospitals, medical clinics, aged care and prisons • Education including universities, colleges and schools • Government facilities • Telecommunications and datacentres • Energy, renewables and utilities We are also members of various works panels in these sectors. Our flexibility and adaptive commercial approach enables us to competitively bid and deliver these critical works. Project name: Forrestfield-Airport Link Location: WA Client name: Leonardo Australia Scope of work: Datatel are completing the Tunnel and Station SCADA Package 11 12 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021CHAIRMAN’S REPORT record workforce of over 1,800 employees. On behalf of the Board I would like to take this opportunity to thank our CEO, Graeme Dunn, our executive team and our staff for their efforts during the year. We are forecasting further growth in the 2022 financial year with revenues of approximately $500m and EBITDA in the range of $29-33m. We enter the year with a strong order book which underpins these forecasts and have good visibility of a growing opportunity pipeline across many of our sectors. We continue to operate in uncertain times with the coronavirus pandemic ongoing. To date we have been successful in minimising disruption and at this stage do not foresee a material impact on our FY22 forecast, however circumstances are volatile and conditions may change. I would like to close by thanking you, our shareholders, for your continuing support. Together with the Board and management, I look forward to delivering you further growth in the year ahead. Derek Parkin Chairman Dear Shareholders I am delighted to be reporting to you at the end of a year which has seen the SCEE Group continue to grow in a number of key areas. Whilst revenue for the full year of $370.2m fell short of our previous target, nevertheless the second half revenue of $234.8m represented a record half year for the Group, with a significant ramp-up in activity. Our full year EBITDA was $29.6m and NPAT was $13.8m, up 37% and 27% respectively compared to the prior year. This significant increase in profitability has allowed the Board to increase returns to shareholders with a fully franked final dividend of 4 cents per share declared, an increase of 33% on the prior year. The acquisition of the Trivantage Group in December 2020 has been another key strategic milestone. In addition to further expanding the Group’s capabilities and geographical footprint the acquisition has transformed our recurring, services and maintenance platform. I am pleased to report that all three of its businesses outperformed expectations in FY21 and we expect to realise further benefits as we continue to explore cross selling opportunities and synergies. Growth through acquisition remains a core part of the Board’s strategy and we continue to evaluate opportunities. With a strong balance sheet and cash of over $50m at 30 June 2021 we are well placed in this regard. We would not be able to deliver the results that we have without the hard work and dedication of our Derek Parkin Chairman 13 SCEE GROUP ANNUAL REPORT 2021 SCEE GROUP ANNUAL REPORT 2021 14 MANAGING DIRECTOR’S REVIEW In 2021 SCEE has significantly increased profitability after delivering a record half-year revenue in the six months to 30 June 2021. The strategic acquisition in December 2020 of Trivantage Group, a leading specialised electrical services provider to a range of sectors across Australia, brought a transformational change in the breadth and depth of the Group’s recurring, services and maintenance offerings while also increasing our geographical presence. In a further indication of SCEE’s increasing scale our workforce doubled during the year to over 1,800 employees. This represents another record for the Group and was driven by the addition of Trivantage and the recruitment of net 400 employees in the second half to meet client requirements to ramp up on our large-scale mining projects. I am pleased to report that Trivantage has exceeded our expectations to date with all three businesses outperforming forecasts and earn out targets for FY21. We see significant cross selling opportunities and synergies as we continue to integrate Trivantage into the Group. Graeme Dunn Managing Director 15 SCEE GROUP ANNUAL REPORT 2021 SCEE GROUP ANNUAL REPORT 2021 16 MANAGING DIRECTOR’S REVIEW (cont) MANAGING DIRECTOR’S REVIEW (cont) Financial Results Revenue for the year was $370.2m. While this was below our target for the year and down 10.8% on prior year revenue of $415.1m, the second half revenue of $234.8m represented a 73.4% increase on the first half of the year when activity was impacted by later than anticipated award and execution of key resources projects which then ramped up in the second half. work continues at the Australian National University in Canberra 53 data centre in Sydney. Utilities work continued under the Ergon Energy Queensland Service Agreement throughout the year. SCEE’s operations generally continued as planned during the year with construction designated as an essential service in all states throughout FY21. However, coronavirus continued to have multiple impacts throughout the year including: Key revenue contributors in the year by market sectors were as follows: • Inter-state travel restrictions; • Commercial – revenue remained steady at $165m compared to $173m in the prior year and was the Group’s largest segment. Most of the revenue in the sector continues to be generated in the New South Wales market on a range of large construction and fit-out projects including Multiplex Wynyard Place and Parramatta Square 3 & 4 where the works were completed during the year and ongoing works at Parramatta Square 5 & 7 and the Mirvac Locomotive Workshops. Electrical expenditure by the major supermarkets continued at high levels. • Resources – revenue increased significantly to $130m from $46m in the prior year as major mining projects ramped up. The Albemarle Kemerton Lithium Plant and Rio Tinto Gudai-Darri iron ore projects in WA both fully mobilised in the second half and activity also increased at Rio Tinto’s Gove Operations in the Northern Territory. We continued to perform minor works and services for Rio Tinto, BHP, Sino Iron and at the Newmont Boddington gold mine throughout the year. • Infrastructure – revenue decreased to $76m from $196m with significant transport infrastructure projects being completed in the prior year. Work at the Multiplex Westmead Hospital project in New South Wales was successfully closed out in the first half. The CPB Sydney Metro Pitt Street Station project commenced during the year and • Some projects delayed mobilisation; • Unproductive time although this was largely recoverable under contract terms; • Additional recruitment requirements; • Changes to our work methodologies; and • Additional cleaning and PPE costs. Gross profit for the year of $58.2m was up 30.8% on the prior year with gross margins improving to 15.7% from 10.7%. The increase in margins was primarily attributable to: • a more profitable project mix in the current year, including no repeat of lower margin FY20 transport infrastructure projects; and • current year contract expenses including $8.1m of Job Keeper, primarily in the first half, which offset the coronavirus impacts noted above and was an increase from the $2.9m in the prior year. Overheads of $29.5m were up from $23.4m in the prior year but included Trivantage acquisition costs of $1.4m and six months of overhead contribution from the Trivantage businesses. EBITDA for the year of $29.6m was up 37.0% from $21.6m in the prior year. Depreciation expense for the year remained stable at $3.0m while amortisation charges increased from $2.2m to $4.4m due to the amortisation of intangibles recognised from the Trivantage acquisition in the second half of the year. Outlook Order Book and Pipeline EBIT for the year of $22.3m was up 36.0% and NPAT of $13.8m was up 26.6% against the prior year. Subsequent to the year end the Board has declared a fully franked 2021 dividend of 4 cents per share representing a 33% increase on the prior year’s dividend. The Group’s balance sheet remained strong throughout the year. Good working capital collection meant that the closing cash balance of $51.0m was down only $4.3m on the prior period despite funding the $22.2m net outlay for the Trivantage acquisition and the FY20 dividend of $7.2m. The Group remains debt free. The acquisition of Trivantage in the period resulted in the addition of $3.4m of net tangible assets, $13.5m of intangible assets (mainly customer contracts and relationships amortised over five years) and $29.3m of goodwill onto the Group’s balance sheet. A liability for deferred acquisition consideration of $20.1m has been recognised at 30 June 2021 with $10.0m to be paid in September 2021 and the balance subject to achievement of earn-out targets in FY22 and FY23. A further $5.5m of deferred consideration will be settled by the issue of SCEE shares in September 2021 and has been recognised in reserves at 30 June 2021. The Decmil arbitration proceedings are in the discovery phase with a hearing of the matter scheduled for early 2022 unless the proceedings settle earlier. In accordance with its accounting policies, the Group has previously recognised revenue in relation to this contract, applying constraint, and the Group has reviewed the balance at 30 June 2021. The amount is included within contract assets. Capital expenditure for the year was $1.8m and is expected to remain at these low levels. The Group finished the year with an order book of $430m which included $350m of work secured for FY22 and continues to secure work across its sectors and geographies. Commercial remained the largest sector by revenue in FY21 and now includes a contribution from Trivantage’s supermarket services business where electrical spend is expected to remain at high levels. The Sydney CBD office construction market is quieter than in recent times but there are still significant targets there being tendered by Heyday. Commercial developments around transport infrastructure hubs are commencing and anticipated to be a growing revenue stream. Resources activity more than doubled on prior year as major mining projects ramped up and these projects remain at high levels of activity moving into FY22. The resources pipeline continues to grow with significant new opportunities presenting across multiple commodities. In the near-term tendering on safety lighting upgrade projects at BHP mine sites is a key prospect. Decarbonisation of the resources sector is commencing with renewable power projects under development and SCEE is well positioned to address these opportunities. Infrastructure activity declined in FY21 as projects completed however Sydney Metro and Western Sydney Airport are presenting as significant opportunities with multiple packages being tendered now which will flow on into commercial opportunities going forward. There is a strong pipeline of prospects across social infrastructure sectors with the NSW hospitals programme, government buildings and datacentres all being actively bid. Record levels of transport investment has been sanctioned with peak activity still to come representing a medium- term opportunity for SCEE. 17 18 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 MANAGING DIRECTOR’S REVIEW (cont) MANAGING DIRECTOR’S REVIEW (cont) Importantly we maintain our strong balance sheet, ending the year with $51.0m of cash, despite having incurred a net cash outflow of $22.2m in the first half to complete the Trivantage acquisition. As we move into FY22 I am looking forward to working with the Board, management and employees throughout the Group to capitalise on the opportunities that exist in the current market and deliver increased returns to our shareholders. Graeme Dunn Managing Director Earnings Strategy With a strong order book and visibility of an emerging opportunity pipeline we are targeting FY22 revenue of circa $500m and EBITDA in the range of $29m-$33m. These forecasts assume no repeat of Job Keeper in FY22 and are subject to there being no material impact from coronavirus developments as discussed below. Coronavirus Post year end the lockdowns on the East Coast resulted in a Sydney construction shutdown for part of July. Costs during this period were minimised as the workforce was stood down and works were delayed rather than lost. The industry has now reopened but still has some disruption as part of the workforce remain locked down. However, accelerated catch-up of many delayed works is anticipated as restrictions loosen. On the West Coast where significant new growth opportunities are presenting in the resources sector interstate labour travel restrictions may constrain the ability to maximise them in near term. The Group’s July results were in line with budget as the Sydney shortfall was made up for by extra activity in WA and at the time of writing a material impact on the Group’s FY22 results is not being forecast. However, the extent of any future impact of the pandemic on the Group’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, regulations imposed by governments with respect to the outbreak response and impacts on customers, employees and vendors—all of which are uncertain and cannot be predicted at this time. SCEE primarily sees itself as an electrical contractor diversified across the resources, commercial and infrastructure sectors. Our growth strategy continues to be to deepen our presence in those sectors and broaden our geographic diversity. This includes particularly targeting maintenance and recurring earnings. The acquisition of Trivantage substantially increases SCEE’s exposure to this service and maintenance style work. Trivantage further offers considerable cross- selling opportunities including the provision of manufactured switchboards across the Group, providing security and access control systems to commercial projects and widened scopes of work being delivered in the supermarket and retail sectors. During the coming year there will be a focus on realising integration synergies across the Group. We continue to pursue further acquisition opportunities. Conclusion I am delighted to be able to announce that SCEE has delivered significantly improved profitability in 2021 and I would like to acknowledge the response of our organisation to the scale of our second half ramp-up that saw us deliver record half year revenues for the Group and end the year with a record number of employees. The performance of the Trivantage Group since acquisition is particularly pleasing and while all three businesses have exceeded our expectations to date, I note that we have barely begun to realise the synergies and opportunities they offer across the Group. 19 SCEE GROUP ANNUAL REPORT 2021 SCEE GROUP ANNUAL REPORT 2021 20 DIRECTORS’ REPORT DIRECTORS’ REPORT (cont) Your Directors submit their report for Southern Cross Electrical Engineering Limited (“SCEE” or “the Company”) for the year ended 30 June 2021. The names and details of the Company’s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. Derek is a Fellow of the Institute of Chartered Accountants Australia and New Zealand (CAANZ) and a Fellow of the Australian Institute of Company Directors. Derek’s accounting experience has spanned over 40 years and four continents, primarily in the public company environment. He was most recently Professor of Accounting at the University of Notre Dame Australia, having previously been an assurance partner with Arthur Andersen and Ernst & Young. Derek’s non-executive directorships to date have been in the non-listed sphere and he has also chaired a number of advisory committees in both the government and not-for-profit sectors. Derek is a past national Board member of the Institute of Chartered Accountants Australia (“ICAA”) and has served on a number of the ICAA’s national and state advisory committees. In 2011, he was a recipient of the ICAA’s prestigious Meritorious Service Award and in 2015 was awarded the Medal of the Order of Australia for services to accountancy . Derek is the Chairman of the Audit and Risk Management Committee and a member of the Nomination and Remuneration Committee. Graeme has over 30 years international experience in heavy civil infrastructure, mining, oil & gas and building projects. Graeme’s strong technical knowledge, coupled with his extensive executive management experience, has seen him hold senior management positions throughout Australasia and the Middle East. Graeme has a Bachelor of Civil Engineering from the University of Sydney, an MBA from the University of Southern Queensland and has completed the Senior Executive Program from the London School of Business. He is also a graduate of the Australian Institute of Company Directors. David was a vending shareholder of Heyday5 Pty Ltd and was appointed to SCEE’s Board as an Executive Director on completion of the acquisition of Heyday by SCEE in March 2017. David has more than 35 years’ electrical contracting experience and has been involved in the Heyday business for over 20 years. During his tenure, David has held various positions up to and including his current role of Executive Director where his responsibilities include driving business development. Derek Parkin OAM Independent Chairman and Non-Executive Director Graeme Dunn Managing Director and Chief Executive Officer David Hammond Executive Director 21 Simon has a comprehensive understanding of SCEE’s operations having been employed by the Company for over 30 years prior to retiring in 2014. During this time he worked in a number of key positions across the business including over 6 years as Chief Operating Officer and a period as interim Chief Executive Officer. He was also the General Manager of SCEE’s LNG focused Joint Venture KSJV. Simon brings to the Board significant experience in contract delivery and operational performance both domestically and internationally. He is also a graduate of the Australian Institute of Company Directors. Simon is a member of the Audit and Risk Management Committee and the Nomination and Remuneration Committee. Karl has over 15 years of senior executive experience in Investment Banking, specialising in transaction structuring, equity capital markets, mergers and acquisitions and providing strategic management advice to listed public companies. Prior to that, Karl was Director of Major Projects and Senior Legal Counsel for Heytesbury Pty Ltd (the private company of the Holmes a Court family) which was the proprietor of John Holland Group Pty Ltd. Karl is the Chairman of the Nomination and Remuneration Committee and a member of the Audit and Risk Management Committee. Karl is also the Non-Executive Chairman of ASX listed Veris Limited. Paul Chisholm was a significant shareholder and Chairman of Trivantage Holdings Pty Ltd prior to the acquisition by SCEE in December 2020. Paul has over 40 years of experience in the electrical industry including 10 of which as a director of Trivantage. He was the founder of SCADA Group Pty Ltd which was a global company servicing the energy, mining, utility and defence sectors with automation and control products and services solutions. Paul has also been the Chairman of a number of private companies and is an advisor for private equity funds. Simon Buchhorn Independent Non-Executive Director Karl Paganin Independent Non-Executive Director Paul Chisholm Non-Executive Director (appointed 16 December 2020) 22 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021DIRECTORS’ REPORT (cont) DIRECTORS’ REPORT (cont) Executive Officers The names and details of the Company’s Executive Officers during the financial year and until the date of this report are as follows. Executive Officers were in office for this entire period unless otherwise stated. Prior to joining SCEE in 2011 Chris was the Chief Financial Officer at Pacific Energy Ltd and has previously held a number of senior finance roles with Clough Ltd. Chris, a Chartered Accountant and member of the Governance Institute of Australia, commenced his finance career with Deloitte. Prior to his time with Deloitte, Chris qualified and practiced as a solicitor in London. Colin is a Chartered Accountant with over 15 years experience in public company finance. Colin is also a member of the Governance Institute of Australia. Prior to joining SCEE in 2012 Colin was the Chief Financial Officer and Company Secretary of FAR Limited and previously worked for Ernst & Young in both Australia and the UK. Chris Douglass Chief Financial Officer and Company Secretary Colin Harper Company Secretary Directors’ interests As at the date of this report, the relevant interests of the directors in the shares and rights or options over shares issued by the Company are as follows: Director Derek Parkin Graeme Dunn1 Simon Buchhorn Karl Paganin David Hammond Paul Chisholm2 Ordinary shares Rights over ordinary shares Options over ordinary shares 112,320 1,561,546 800,000 1,524,022 3,629,544 - - 1,971,706 - - - - - - - - 1 Included in the Performance Rights held by Graeme Dunn are 464,286 2019 Performance Rights which have been performance tested on finalising the 2021 results and it has been determined that 50% of these 2019 Performance Rights have vested and 50% did not vest and will be forfeited. 2 Paul Chisholm and related entities have an entitlement, subject to shareholder approval, to 2,759,101 Ordinary Shares as part consideration for the acquisition of Trivantage Holdings Pty Ltd. Directors’ meetings The number of Directors’ meetings and meetings of committees of Directors held and attended by each of the Directors of the Company during the financial year are: Director Board Meetings Audit and Risk Management Committee Meetings Nomination and Remuneration Committee Meetings Held Attended Held Attended Held Attended Derek Parkin Graeme Dunn Simon Buchhorn Karl Paganin David Hammond Paul Chisholm 12 12 12 12 12 4 12 12 12 12 12 3 4 - 4 4 - - 4 - 4 4 - - 2 - 2 2 - - 2 - 2 2 - - The number of meetings held represents the time the director held office or was a member of the committee during the year. Principal Activities The principal activities during the year of the entities within the consolidated group were the provision of electrical, instrumentation, communication and maintenance services to a diverse range of sectors across Australia. Significant Changes in the State of Affairs There have been no significant changes in the state of affairs of the company or consolidated group during this financial year. Operating and Financial Review A review of operations of the consolidated group during the financial year, the results of those operations and the likely developments in the operations are set out in the Managing Director’s Review on page 15. Operating results for the year were: 2021 $’000 2020 $’000 Contract revenue Profit/(loss) after income tax from continuing operations 370,206 13,761 415,104 10,870 23 24 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021DIRECTORS’ REPORT (cont) DIRECTORS’ REPORT (cont) Dividends Indemnification and Insurance of Directors and Officers Cents per share Total amount $’000 During or since the end of the financial year, the Company has paid premiums in respect of a contract insuring all the directors of the Company against a liability incurred in their role as directors of the Company, except where: Declared and paid during the period (fully franked at 30%) Final franked dividend for 2020 Declared after balance date and not recognised as a liability (fully franked at 30%) Final franked dividend for 2021 3.0 4.0 7,428 10,387 the liability arises out of conduct involving a wilful breach of duty; or there has been a contravention of Sections 182 or 183 of the Corporations Act 2001. The total amount of insurance contract premiums paid was $353,725 (2020: $248,552). Significant Events after Balance Sheet Date Since 30 June 2021, the Group has experienced disruption to its operations in some States as a result of lockdowns and restrictions resulting from the Coronavirus pandemic. The costs of disruptions have been minimised as workforces were stood down and works have been delayed rather than lost. Some significant restrictions have already been lifted and when restrictions loosen further accelerated catch-up of many delayed works is anticipated and so at the time of writing a material impact on the Group’s FY22 results is not being forecast. However the extent of any future impact of the pandemic on the Group’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, regulations imposed by governments with respect to the outbreak response and impacts on customers, employees and vendors—all of which are uncertain and cannot be predicted at this time. Otherwise there are no matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in subsequent financial years. Likely Developments and Expected Results Other than as referred to in this report, further information as to the likely developments in the operations of the consolidated entity would, in the opinion of the directors, be likely to result in unreasonable prejudice to the consolidated entity. Environmental Regulation The operations of the Group are subject to the environmental regulations that apply to our clients. During 2021 the Group complied with the regulations. Proceedings on Behalf of Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Non-audit Services There were no non-audit services provided by the external auditors during the year. Auditor’s Independence Declaration The lead auditor’s independence declaration is set out on page 90 and forms part of the Directors’ report for the financial year ended 30 June 2021. Remuneration Report The Remuneration Report is set out on pages 27 to 33 and forms part of this report. Share Options and Performance Rights Rounding off At the date of this report there are no unissued ordinary shares of the Company under options. During the reporting period, no shares were issued from the exercise of options or performance rights previously granted as remuneration. Further details are contained in note 27 to the financial statements. The Company is of a kind referred to in ASIC Instrument 2016/191 dated 24 March 2016 and in accordance with that Class Order, amounts in the consolidated financial statements and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the directors. Derek Parkin Chairman 24 August 2021 25 26 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Remuneration report – audited Remuneration report – audited (cont) This Remuneration Report outlines the Director and executive remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the parent Company. Nomination and Remuneration Committee The Nomination and Remuneration Committee of the Board of Directors is responsible for determining and reviewing remuneration arrangements for the directors and executives. The Nomination and Remuneration Committee assesses the appropriateness of the nature and amount of remuneration of executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality, high performing Director and executive team. Remuneration Structure In accordance with best practice corporate governance, the structure of executive and non-executive remuneration is separate and distinct. Executive Remuneration Objective The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group so as to: • attract, motivate and retain highly skilled executives; • reward executives for Group, business and individual performance against targets set by reference to appropriate benchmarks; • align the interests of executives with those of shareholders; and • ensure remuneration is competitive by market standards. Structure The Company has entered into contracts of employment with the Managing Director and the executives. These contracts contain some or all of the following key elements: • • • Fixed remuneration; Variable remuneration - Short term incentive (“STI”); and Variable remuneration - Long term incentive (“LTI”). The nature, amount and proportion of remuneration that is performance related for each executive is set out in Table 1. Fixed Remuneration Executives are given the opportunity to receive their fixed remuneration in a variety of forms including cash and fringe benefits such as motor vehicles. It is intended that the manner of payment chosen will be optimal for the recipient without undue cost for the Group. Fixed remuneration is reviewed annually by the Nomination and Remuneration Committee. There are no guaranteed base pay increases for any executive. Variable Remuneration – Short Term Incentive (STI) The objective of the Group STI program is to link the achievement of the Group’s short term operational targets with the remuneration received by the executives charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the executive to achieve the operational targets and such that the cost to the Group is reasonable in the circumstances. Executives can earn up to a maximum of 50% of their fixed remuneration under the STI program. Graeme Dunn and Chris Douglass are the only KMPs who participate in the Group STI program. Actual STI payments granted to each executive depend on the extent to which specific targets as set at the beginning of the financial year are met. The targets consist of a number of Key Performance Indicators (“KPIs”) covering both financial and non- financial measures of performance. For the year ended 30 June 2021, the financial KPIs accounted for 70% of the executive team’s STI and is achievable on outperforming specific targets for profit, excluding any Job Keeper receipts, and order book. The non-financial KPIs accounted for 30% of the executive team’s STI and comprised the achievement of strategic objectives. The 27 strategic objectives were chosen to align with the key drivers for the short term success of the business and provide a framework for delivering long term value. The assessment of performance against KPIs is based on the audited financial results for the Company. For each component of the STI against a KPI no award is made where performance falls below the minimum threshold for that KPI. The Nomination and Remuneration Committee recommends the STI to be paid to the individuals for approval by the Board. For the 2021 financial year STI 81% of the available bonus is expected to vest and 19% is expected to be forfeited. The cash bonus will be paid in the 2022 financial year and has been accrued for in the 2021 financial year. The vesting of the 2020 financial year STI was assessed during the current financial year and it was determined that 50% of the available bonus had vested and 50% was forfeited. The vesting determination was deferred from the normal timeframe so that the Board could satisfy themselves that there had been no material adverse impact on the group as a result of the coronavirus pandemic and that it was appropriate to award executive bonuses. As such no amount had been accrued at 30 June 2020. This amount was therefore paid and recognised as an expense in the current year. David Hammond, who does not participate in the Group STI scheme, is the only other KMP who may receive a cash bonus, paid at the discretion of the Nomination and Remuneration Committee, based on the performance of the Heyday business of which he is an executive. Variable Remuneration – Long Term Incentive (LTI) The objective of the LTI plan is to retain and reward the members of the executive management team in a manner which aligns this element of remuneration with the creation of shareholder wealth. LTI grants to executives are delivered at the discretion of the Nomination and Remuneration Committee in the form of performance rights or share options under the Senior Management Long Term Incentive Plan. The Key Performance Indicators (“KPIs”) used to measure performance for these incentives are earnings per share growth and absolute total shareholder return. These KPIs are measured over a three year performance period and were chosen because they are aligned to shareholder wealth creation. Executives can be issued with performance rights under the LTI plan up to a maximum of 50% of their fixed remuneration converted at the 5 day volume weighted average price of the Company’s ordinary shares at the start of the three year performance period. Graeme Dunn and Chris Douglass are the only KMPs who participate in the LTI plan. Non-Executive Director Remuneration Objective The Board seeks to set aggregate remuneration at a level that provides the Group with the ability to attract and retain Non- Executive Directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be determined from time to time by a general meeting. The aggregate remuneration as approved by shareholders at the annual general meeting held on 26 November 2008 is $600,000 per year. The Non-Executive Director fee structure is reviewed annually. The Board considers external market surveys as well as the fees paid to Non-Executive Directors of comparable companies in our sector when undertaking the annual review process. The annual fee paid to the Chairman of the Board is $110,000. The fee paid to other Non-Executive Directors is $80,000 per annum. No additional fees are paid to Directors who sit on Board Committees. Directors also receive superannuation at the statutory rate in addition to their Director fees. The Non-Executive Directors do not receive retirement benefits, nor do they participate in any incentive programs. The remuneration paid to Non-Executive Directors is detailed in Table 1 of this report. Consequences of performance on shareholder wealth In considering the impact of the Group’s performance on shareholder wealth and the related rewards earned by executives, the Nomination and Remuneration Committee had regard to the following measures over the years below: 2021 $’000 2020 $’000 2019 $’000 2018 $’000 2017 $’000 Profit/(loss) attributable to owners of the company Dividends declared and paid during the year Change in share price Return on capital employed 13,761 7,428 23% 11% 10,870 7,042 (19%) 10% 12,713 7,022 (24%) 12% 8,406 - 23% 9% (369) 2,152 4% 0% 28 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Remuneration report – audited (cont) Remuneration report – audited (cont) f o % n o i t a r e n u m e r s i t a h t e c n a m r o f r e p d e t a e r l l a t o T $ s t n e m y a p ) C ( s t h g i r $ s t fi e n e b $ d n a s n o i t p O n o i t a u n n a r e p u S l a t o T $ - n o N y r a t e n o m s t fi e n e b $ h s a c I T S s u n o b ) B ( $ s e e f & y r a a S l $ d e s a b - e r a h S l t n e m y o p m e - t s o P m r e t - t r o h S e t o N - - - - - - - - % 4 5 ) % 6 ( % 2 5 - % 4 5 ) % 4 ( % 4 5 ) % 4 ( 0 5 4 0 2 1 , 0 5 4 0 2 1 , 0 0 6 7, 8 0 0 6 7, 8 0 0 6 7, 8 0 0 6 7, 8 0 5 4 7, 4 - 3 1 5 7, 5 4 , 1 , 7 5 2 5 3 6 0 0 0 0 4 5 , 6 8 6 6 9 2 , - - - - - - - - - - , 7 6 0 6 5 3 ) 4 3 8 6 4 , ( 0 5 4 0 1 , 0 5 4 0 1 , 0 0 6 7, 0 0 6 7, 0 0 6 7, 0 0 6 7, 7 1 1 , 4 - 0 0 0 5 2 , 0 0 0 5 2 , 0 0 0 5 2 , 0 5 9 9, 1 0 0 0 0 1 1 , 0 0 0 0 1 1 , 0 0 0 0 8 , 0 0 0 0 8 , 0 0 0 0 8 , 0 0 0 0 8 , 3 3 3 3 4 , - , 6 4 4 6 7 0 , 1 1 9 0 7, 5 6 0 0 0 5 1 5 , 6 3 7 6 7 2 , 5 3 3 9, 5 8 4 4 4 7, 0 2 0 0 0 5 2 , , 1 9 8 6 2 6 , 1 0 0 0 8 3 8 4 9 9, 9 1 , 3 4 9 5 7, 0 6 , 1 ) 9 9 7 5 1 ( , 1 1 5 , 3 6 5 ) 3 3 6 2 6 ( , 0 0 0 5 2 , 7 6 7 , 4 0 1 0 0 6 5 9 , 0 0 8 0 7 3 , 0 7 6 , 1 3 5 , 2 , 7 2 6 4 7 5 , 1 - - - - - - - - - - - - - - - - - - - - - - - - - , 6 9 6 2 3 4 0 0 0 0 8 2 , 0 0 0 0 1 1 , 0 0 0 0 1 1 , 0 0 0 0 8 , 0 0 0 0 8 , 0 0 0 0 8 , 0 0 0 0 8 , 3 3 3 3 4 , - , 0 5 7 3 4 6 1 9 0 7, 5 6 0 0 0 5 3 2 , 6 3 7 6 7 2 , 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 , 1 9 0 6 5 2 0 0 8 0 7 3 , 1 2 0 2 - - 7 8 7 , 8 6 9 3 8 8 , 2 6 5 , 1 , 7 2 6 4 7 5 , 1 0 0 8 0 7 3 , 0 2 0 2 A A. Appointed 16 December 2020. B. The STI cash bonus payable in respect of a financial year is determined after the results for the year have been audited and performance reviews are completed and approved by the Nomination and Remuneration Committee and Board. The value disclosed for the 2021 financial year represents the cash payment made during the year in respect of the 2020 financial year plus an accrual for the bonuses currently expected to be paid in respect of the 2021 financial year. C. The fair value of the performance rights with market related vesting conditions were valued using a Monte Carlo simulation model. The use of a Monte Carlo Simulation model simulates multiple future price projections for both SCEE shares and the shares of the peer group against which they are tested. The performance rights with non-market related vesting conditions were valued using the Black-Scholes option model. The values derived from these models are allocated to each reporting period evenly over the period from grant date to vesting date. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. The value disclosed is the fair value of the performance rights recognised in this reporting period. The credit recognised in the 2020 financial year was the result of a reversal of expenses recognised in previous financial years for performance rights which were no longer expected to meet the non-market performance conditions. In the 2021 financial year the vesting expectations for some of these performance rights changed and the previously reversed expense was again expectations for some of these performance rights changed and the previously reversed expense was again recognised in the current year. No shares were issued to KMPs on the vesting of performance rights during the year. Employment Contracts The following executives have non-fixed term employment contracts. The company may terminate the employment contract by providing the other party notice as follows: Executive Notice Period Graeme Dunn Chris Douglass David Hammond 6 months 6 months 3 months The Group retains the right to terminate a contract immediately by making a payment in lieu of the notice period. An executive may be terminated immediately for a breach of their employment conditions. Upon termination the executive is entitled to receive their accrued annual leave and long service leave together with any superannuation benefits. There are no other termination payment entitlements. Options and rights over equity instruments The movement during the reporting period in the number of options and rights over ordinary shares in Southern Cross Electrical Engineering Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Performance Rights over equity instruments Executive Graeme Dunn Chris Douglass Held at 30 June 2020 1,737,267 1,016,597 Granted as remuneration Vested and exercised Forfeited Held at 30 June 2021 Vested and exercisable at 30 June 2021 804,614 462,383 2,763,864 1,266,997 - - - (570,175) (337,719) (907,894) 1,971,706 1,141,261 3,112,967 - - - l . s e t o n y r o t a n a p x e r o f e g a p g n w o i s r o t c e r i D e v i t u c e x E - n o N n a m r i a h C , i n k r a P k e r e D n r o h h c u B n o m S i i n n a g a P l r a K : e r a l e n n o s r e p s r o t c e r i D e v i t u c e x E n n u D e m e a G r d n o m m a H d v a D i l – s s a g u o D s i r h C s e v i t u c e x E l m o h s h C i l u a P r e c ffi O l i i a c n a n F f e h C i 1 2 0 2 l a t o T 0 2 0 2 l a t o T l l o f e h t o t r e f e R t n e m e g a n a m y e k e r a o h w s e v i t u c e x e y n a p m o C d e m a n e h t f o h c a e d n a y n a p m o C e h t f o r o t c e r i d h c a e f o n o i t a r e n u m e r l j f o t n e m e e r o a m h c a e f o t n u o m a d n a e r u t a n e h t f o s l i a t e D l e n n o s r e P t n e m e g a n a M y e K f o n o i t a r e n u m e R 1 e b a T l 29 30 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Remuneration report – audited (cont) Remuneration report – audited (cont) Performance rights granted as remuneration in 2021 During the period performance rights over ordinary shares in the company were granted as remuneration to KMP. These performance rights will vest subject to the meeting of performance set out below. Details on performance rights that were granted during the period are as follows: Executive Instrument Number Grant date Graeme Dunn1 2021 Rights 402,307 Graeme Dunn2 2021 Rights 402,307 Chris Douglass1 2021 Rights Chris Douglass2 2021 Rights 231,192 231,191 1,266,997 4/12/20 4/12/20 4/12/20 4/12/20 Fair value per performance right at grant date ($) Exercise price per performance right ($) Performance testing date Expiry Date 0.48 0.31 0.48 0.31 0.00 0.00 0.00 0.00 30/6/23 30/6/23 30/6/23 30/6/23 4/12/24 4/12/24 4/12/24 4/12/24 1. Performance rights granted with EPS growth as the vesting condition 2. Performance rights granted with Absolute TSR as the vesting condition 2021 Financial Year Performance Rights Up to 100% of the allocated performance rights may vest, subject to the achievement of the performance conditions as set out below. The key terms of the performance rights are: • To be performance tested over a three year period from 1 July 2020 to 30 June 2023 (“Performance Period”); • No performance rights will vest until 30 June 2023; • Performance testing criteria are 50% against Absolute Total Shareholder Return (“TSR”) performance, and 50% against Earnings Per Share (“EPS”) performance; and • Expiry on the 4th anniversary of the grant date unless an earlier lapsing date applies The TSR formula is: ((Share Price at Test Date – Share Price at Start Date) + (Dividends Reinvested))/Share Price at Start Date TSR will be assessed against targets for threshold performance of 8% per annum compounded over the Performance Period and for stretch performance of 12% per annum compounded over the Performance Period. The vesting schedule is as follows for TSR performance over the Performance Period: Less than 8% per annum compounded 8% per annum compounded 0% vesting 50% vesting Between 8% and 12% per annum compounded Pro-rata vesting between 50% and 100% At or above 12% per annum compounded 100% vesting EPS performance will be measured in the 2023 financial year. For the purposes of performance testing the Performance Rights, EPS in the 2023 financial year will be the Basic EPS for the year, as prescribed by the accounting standards and set out in the Company’s Financial Reports, adjusted to remove the following non-cash items from the calculation of profit or loss attributable to ordinary shareholders in the year, in order to reflect the companies underlying profitability: amortisation of acquired intangibles; unwinding of interest on deferred acquisition consideration payments; adjustments to the assessment of deferred consideration payable; and acquisition costs. (a) (b) (c) (d) 31 EPS, as described above, will be assessed against targets for threshold performance of 5.62 cents per share in the 2023 financial year and for stretch performance of 6.27 cents per share in the 2023 financial year. The vesting schedule is as follows for EPS performance in the 2023 financial year: Less than 5.62 cents per share 5.62 cents per share 0% vesting 50% vesting Between 5.62 and 6.27 cents per share Pro-rata vesting between 50% and 100% At or above 6.27 cents per share 100% vesting Once the performance measurement calculation has been finalised the company will allot and issue the equivalent number of shares at nil consideration on the basis of one ordinary share per vested performance right for all performance rights exercised. Where a participant ceases employment prior to the vesting of their share options or performance rights, the share options or performance rights are forfeited unless in the event of retirement, permanent disablement or death the Board, at their absolute discretion, waive the exercise and vesting conditions associated with the performance rights or allow the performance rights to continue to be assessed over the original performance assessment period. In the event of a change of control of the Company, all options and performance rights that have not lapsed may be exercised. Details of equity incentives affecting current and future remuneration Details of the vesting profiles of the rights and options held by each key management person are as follows: Executive Instrument Number Grant Date % vested in year Graeme Dunn 2018 Rights 570,175 2019 Rights (A) 464,286 2020 Rights (B) 702,806 2021 Rights (C) 804,614 Chris Douglass 2018 Rights 337,719 2019 Rights (A) 275,000 2020 Rights (B) 2021 Rights (C) 403,878 462,383 7/11/17 9/11/18 8/11/19 4/12/20 7/11/17 9/11/18 8/11/19 4/12/20 - - - - - - - - % forfeited in year 100% - - - 100% - - - Performance testing date Expiry Date 30/6/20 30/6/21 30/6/22 30/6/23 30/6/20 30/6/21 30/6/22 30/6/23 7/11/21 9/11/22 8/11/23 4/12/24 7/11/21 9/11/22 8/11/23 4/12/24 A. 50% of the 2019 performance rights have TSR as the vesting condition with a threshold target of 8% per annum compounded and a stretch target of 12% per annum compounded. These performance rights have a fair value of $0.29 each. 50% of the 2019 performance rights have EPS growth as the vesting condition with a threshold target of 6.1 cents per share and a stretch target of 6.8 cents per share. These performance rights have a fair value of $0.59 each. Subsequent to 30 June 2021, the vesting conditions in respect of the 2019 performance rights have been performance tested and it has been determined that 50% of the performance rights held by Mr Dunn and Mr Douglass have vested and 50% of the performance rights will be forfeited. B. 50% of the 2020 performance rights have TSR as the vesting condition with a threshold target of 8% per annum compounded and a stretch target of 12% per annum compounded. These performance rights have a fair value of $0.29 each. 50% of the 2019 performance rights have EPS growth as the vesting condition with a threshold target of 6.8 cents per share and a stretch target of 7.6 cents per share. These performance rights have a fair value of $0.49 each. C. The vesting conditions and fair values of the 2021 performance rights are set out above. 32 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Remuneration report – audited (cont) Movements in shares The movement during the reporting period in the number of ordinary shares in Southern Cross Electrical Engineering Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows Held at 30 June 2020 Purchases Sales Dividend Reinvestment Plan Held at 30 June 2021 Ordinary shares Directors Derek Parkin Graeme Dunn Simon Buchhorn Karl Paganin David Hammond Paul Chisholm1 Executives 105,492 1,561,546 800,000 1,467,852 3,729,544 - - - - - - - - - - - - (100,000) - - 6,828 - - 56,170 - - 112,320 1,561,546 800,000 1,524,022 3,629,544 - 78,743 1,512,366 Financial statements Chris Douglass 1,433,623 1. Paul Chisholm and related entities have an entitlement, subject to shareholder approval, to 2,759,101 Ordinary Shares as part consideration for the acquisition of Trivantage Holdings Pty Ltd. Transactions with key management personnel There were no transactions between the company and Key Management Personnel during the year. There are no loans between the company and Key Management Personnel. 33 SCEE GROUP ANNUAL REPORT 2021 SCEE GROUP ANNUAL REPORT 2021 34 Consolidated Statement of Comprehensive Income For the year ended 30 June 2021 Consolidated Balance Sheet For the year ended 30 June 2021 Contract revenue Contract expenses Gross profit Other income Employee benefits expenses Occupancy expenses Administration expenses Depreciation expense Amortisation expense Amortisation of customer contracts and relationships Other expenses from ordinary activities Profit from operations Finance income Finance expenses Net finance expense Profit before tax Income tax expense Profit from continuing operations Other comprehensive income Items that are or may be reclassified to the profit and loss Other comprehensive income net of income tax Total comprehensive income Total comprehensive income attributable to: Owners of the Company Earnings per share: Basic earnings per share (cents) Diluted earnings per share (cents) Note 2021 $’000 2020 $’000 4 5 6 7 7 7 8 8 9 370,206 (311,994) 58,212 892 (17,006) (1,851) (8,340) (2,949) (2,742) (1,636) (2,293) 22,287 271 (1,740) (1,469) 415,104 (370,579) 44,525 492 (13,155) (1,235) (7,489) (3,001) (2,153) - (1,566) 16,418 310 (1,259) (949) 20,818 15,469 (7,057) 13,761 (4,599) 10,870 - - - - 13,761 10,870 13,761 10,870 10 10 5.55 5.27 4.46 4.46 Note 2021 $’000 2020 $’000 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Prepayments Total current assets Non-current assets Property, plant and equipment Right-of-use assets Intangible assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Provisions Lease liability Deferred acquisition consideration Tax payable Total current liabilities Non-current liabilities Lease liability Provisions Deferred acquisition consideration Deferred tax liability Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity 11 12 13 15 16 17 18 20 19 21 19 20 21 9 22 51,006 147,703 1,796 1,089 201,594 12,664 7,992 114,986 135,642 337,236 102,094 17,878 2,585 9,954 5,704 138,215 5,687 405 10,206 11,550 27,848 166,063 171,173 109,967 6,046 55,160 171,173 55,272 113,073 1,588 901 170,834 11,148 5,967 73,792 90,907 261,741 75,278 9,114 1,749 - 4,031 90,172 4,218 197 - 8,781 13,196 103,368 158,373 109,767 108 48,498 158,373 The above statement of comprehensive income should be read in conjunction with the accompanying notes. The above statement of comprehensive income should be read in conjunction with the accompanying notes. 35 36 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Consolidated Statement of Changes in Equity For the year ended 30 June 2021 Consolidated Statement of Cash Flows For the year ended 30 June 2021 Share Capital $’000 Retained Earnings $’000 Share Based Payments Reserve $’000 Deferred acquisition payment Reserve $’000 Translation Reserve $’000 Total Equity $’000 Balance as at 1 July 2019 102,873 44,284 1,065 Total comprehensive income for the year Profit for the year Total comprehensive income Transactions with owners, recorded directly in equity Dividends - - - 10,870 10,870 - - - - - (514) 147,708 - - 10,870 10,870 Dividend re-investment and share placements, net 6,894 - - - - Performance rights (net of tax) Equity-settled share-based payment Total transactions with owners Balance as at 30 June 2020 - - 386 - 6,894 109,767 (6,656) 48,498 (1,013) 570 (443) 622 - - - - - - - (514) 158,373 (7,042) - - - (7,042) 6,894 (627) 570 (205) Share Capital $’000 Retained Earnings $’000 Share Based Payments Reserve $’000 Deferred acquisition payment Reserve $’000 Translation Reserve $’000 Total Equity $’000 Balance as at 1 July 2020 109,767 48,498 622 Total comprehensive income for the year Profit for the year Total comprehensive income Transactions with owners, recorded directly in equity Dividends - - - Dividend re-investment and share placements, net 200 Deferred acquisition payment Performance rights (net of tax) Equity-settled share-based payment Total transactions with owners Balance as at 30 June 2021 13,761 13,761 (7,428) - - 329 - - - - 200 109,967 (7,099) 55,160 - - - - - (329) 767 438 1,060 - - - - - 5,500 - - 5,500 5,500 (514) 158,373 - - - - - - - - 13,761 13,761 (7,428) 200 5,500 - 767 (961) (514) 171,173 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Government grants (Job Keeper) received Interest received Interest paid Income taxes received/(paid) Net cash from operating activities Cash flows from investing activities Acquisition of subsidiary, net of cash acquired Payment of deferred acquisition consideration Proceeds from the sale of assets Acquisition of property, plant and equipment Acquisition of intangible asset Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Dividends paid Payment of lease liabilities principal Net cash used in financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Effect of exchange rate fluctuations on cash held Cash and cash equivalents at 30 June Note 2021 $’000 2020 $’000 364,195 (337,175) 9,795 271 (1,460) (6,342) 29,284 (22,247) - 492 (1,789) (88) 424,081 (415,673) 2,655 310 (1,259) (5) 10,109 - (6,500) 1,362 (594) - (23,632) (5,732) 200 (7,428) (2,690) (9,918) (4,266) 55,272 - 51,006 6,831 (7,042) (2,151) (2,362) 2,015 53,257 - 55,272 28 25 21 15 17 22 11 The above statement of comprehensive income should be read in conjunction with the accompanying notes. The above statement of comprehensive income should be read in conjunction with the accompanying notes. 37 38 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Notes to the financial statements Notes to the financial statements 22. Capital and reserves 23. Financial instruments 24. Investments in subsidiaries 25. Business combination 26. Interest in joint operations 27. Share-based payments 28. Reconciliation of cash flows from operating activities 29. Contingencies 30. Subsequent events 31. Auditor’s remuneration 32. Parent entity disclosures 33. Related parties 34. Significant accounting policies 35. Determination of fair values 54 56 61 62 64 64 68 68 69 69 69 70 70 82 1. Reporting entity 2. Basis of preparation 3. Segment reporting 4. Contract revenue 5. Other income 6. Employee benefits expenses 7. Depreciation and amortisation expenses 8. Finance income and expenses 9. Income tax expense 10. Earnings per share 11. Cash and cash equivalents 12. Trade and other receivables 13. Inventories 14. Contract assets 15. Property, plant and equipment 16. Right-of-use assets 40 40 41 42 43 43 43 44 44 46 47 47 48 48 49 50 17. Intangible assets – goodwill and customer contracts 51 18. Trade and other payables 19. Lease liability 20. Provisions 21. Deferred acquisition consideration 52 53 53 54 1. Reporting entity Southern Cross Electrical Engineering Limited (“the Company”, “the parent”) is a company incorporated and domiciled in Australia. The company’s shares are publicly traded on the Australian Securities Exchange. The consolidated financial statements for the year ended 30 June 2021 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). The Group is a for-profit entity and the nature of the operations and principal activities of the Group are described in the Directors’ Report. 2. Basis of preparation (a) Statement of compliance The consolidated financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (“AASBs”) (including Australian Accounting Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial report of the Group complies with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). A listing of new standards and interpretations not yet adopted is included in note 34(w). These financial statements have been rounded to the nearest thousand dollars where permitted by ASIC Instrument 2016/191 dated 24 March 2016. The consolidated financial statements were authorised for issue by the Board of Directors on 24 August 2021. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except as set out below: • • Share-based payment arrangements are measured at fair value. Assets and liabilities acquired in a business combination are initially recognised at fair value. The methods used to measure fair values are discussed further in note 35. (c) Functional and presentation currency (i) Functional and presentation currency Both the functional and presentation currency of Southern Cross Electrical Engineering Limited and its Australian subsidiaries are Australian dollars ($). The functional currency for the Peruvian subsidiary is Neuvos Soles. Overseas functional currencies are translated to the presentation currency (see below). (ii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. (iii) Translation of Group Entities functional currency to presentation currency The results of the overseas subsidiaries are translated into Australian Dollars as at the date of each transaction. Assets and liabilities are translated at exchange rates prevailing at balance sheet date. Exchange variations resulting from the translation are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity. (d) Use of estimates and judgements The preparation of financial statements in conformity with AASBs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. 39 40 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements (d) Use of estimates and judgements The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 30 June 2020. 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 and in any future periods affected. Information about these accounting estimates is included in the following notes: • • • • • • Note 4, 14 and 34 (n) – estimation of total contract cost and measurement of variable consideration; Note 25 – fair value of net assets and acquired through business combination including intangibles; Note 15, 17 and 34 (k) – recoverable amount for testing property, plant and equipment and goodwill; Note 16, 19, and 34 (g) – initial and subsequent measurement of Right-of-use (ROU) assets and Lease liability; Note 21 and 34 (u) – measurement of deferred consideration; and Note 27 – measurement of share-based payments; Critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements relate to contract revenue (note 34(n) and 4), contract assets (note 34(i) and 14) and business combination (note 25). Estimates and judgements are made by management with due consideration for the historical and potential impacts of Coronavirus on the Group’s operations and forecast cash flows based on best estimates and reasonably possible scenarios, and taking into account the evolving nature of Coronavirus which makes it inherently difficult to forecast outcomes with more certainty. The impacts of Coronavirus are included in the specific notes such as but not limited to impairment testing and impairment of financial instruments (note 23) and non-financial assets (note 17). Details of the Group’s accounting policies are included in notes 34 and 35. 3. Segment reporting Revenue is principally derived by the Group from the provision of electrical services through construction and services contracts to customers in the following sectors: Commercial; Resources; and Infrastructure. The Group identified its operating segments based on the internal reports that are reviewed and used by the Group Managing Director in assessing performance and in determining the allocation of resources, and on the nature of the services provided. Financial information about each of these operating segments is reported to the Group Managing Director on a recurring basis. The Group provides its services through three key segments of SCEE, Heyday, and Trivantage. During the year, the composition of the reporting segments was realigned to reflect the change in the Group’s activities and internal reporting. As a result, the SCEE and Datatel segments were consolidated. 4. Contract revenue Disaggregated revenue information Operating sectors Commercial Resources Infrastructure Total Revenue Revenue type Construction revenue Services revenue Total revenue Timing of revenue recognition Products and services transferred over time Revenue from contracts with customers Contract balances Trade receivables Contract assets Note 2021 $’000 2020 $’000 164,671 129,510 76,025 370,206 217,281 152,925 370,206 172,755 46,209 196,140 415,104 341,856 73,248 415,104 370,206 370,206 415,104 415,104 12 14 68,250 79,049 147,299 24,324 86,374 110,698 Trade receivables are non-interest bearing and are generally on 30 to 45 days term. In 2021, no additional amount (2020: $32,000) was recognised as provision for expected credit losses on trade receivables. Contract assets and revenue includes contract modifications recognised in accordance with the Group’s accounting policy (note 34(n)(iii)) for which amounts are not yet finalised with the customer. The following amounts are included in revenue from contracts for the year ended 30 June 2021: The directors believe that the aggregation of the operating segments is appropriate as to differing extents they: Revenue recognised as a contract liability in prior period 33,205 13,052 • • • • • have similar economic characteristics; perform similar services using similar business processes; provide their services to a similar client base; have a centralised pool of shared assets and services; and operate in similar regulatory environments. All segments have therefore been aggregated to form one operating segment. In presenting information on the basis of geographical location, segment revenue, based on the geographical location of customers and segment assets, based on the geographical location of the assets are all located in Australia. Revenues from the two largest customers of the Group’s Australian segment generated $102 million of the Group’s total revenue (2020: $169 million generated from the three largest customers). Unsatisfied Performance Obligations Transaction price expected to be recognised in future years for unsatisfied performance obligations at 30 June 2021: Construction revenue Services revenue 303,901 83,060 386,961 296,540 59,472 356,012 In line with the Group’s accounting policy described in Note 34 (n), the transaction price expected to be recognised in future years excludes variable consideration that is constrained. The average duration of contracts is given below. However, some contracts will vary from these typical lengths. Revenue is typically earned over these varying timeframes: Construction revenue Services revenue 1 to 2 years 1 to 5 years 41 42 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements 5. Other income Other income Apprenticeship incentive Net gain on disposals Other 6. Employee benefits expenses Remuneration, bonuses and on-costs Superannuation contributions Amounts provided for employee entitlements Share-based payments expense Government grant (Job Keeper) applied Note 2021 $’000 2020 $’000 226 179 487 892 - 90 402 492 27 (14,657) (12,035) (1,380) (1,123) (767) 921 (903) (1,016) 56 743 (17,006) (13,155) The above employee benefits expenses do not include employee benefits expenses recorded within contract expenses. Employee benefits included in contract expenses were $86.9m (2020: $76.3m), inclusive of Government grant (Job Keeper) applied amounting to $8.1m (2020: $2.9m). The total employee benefits expense is therefore $103.9m (2020: $89.5m). 7. Depreciation and amortisation expenses Buildings Leasehold improvements Plant and equipment Motor vehicles Office furniture and equipment Total depreciation expense for the year Amortisation of ROU asset Amortisation of customer contract intangibles Amortisation of intellectual properties Other (17) (242) (926) (788) (976) (17) (196) (1,115) (768) (905) (2,949) (3,001) (2,544) (1,636) (55) (143) (2,151) - (2) - 15 16 17 17 Total amortisation expense for the year (4,378) (2,153) 8. Finance income and expenses Interest income on bank deposits Finance income Interest expense Bank charges Bank guarantee fees Deferred consideration Lease liability interest Other Finance expenses Net finance expense 9. Income tax expense (a) Income Statement Current tax expense Current period Under provision from prior year Deferred tax expense Origination and reversal of temporary differences Under provision from prior year Income tax expense reported in the income statement (b) Amounts charged or credited directly to equity Expenses in relation to capital raising Income tax expense reported in the income statement (c) Reconciliation between tax expense and pre-tax accounting profit Note 2021 $’000 2020 $’000 271 271 310 310 (645) (484) (281) (288) (42) (1,740) (1,469) (604) (406) - (146) (103) (1,259) (949) 21 (5,979) (4,037) - - (5,979) (4,037) (1,076) (2) (7,057) (562) - (4,599) (1) (1) (63) (63) Accounting profit before income tax 20,818 15,469 Income tax expense using the Company’s domestic tax rate of 30% (6,245) (4,641) Acquisition costs included in cost base Share based payments Non-deductible deferred consideration interest Other Income tax expense reported in the income statement The applicable effective tax rates are: (428) (230) (84) (70) (7,057) 33.9% - 126 - (84) (4,599) 29.7% 43 44 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements Deferred tax assets and liabilities Deferred tax assets and liabilities Balance Sheet Income Statement Equity Acquisition of Subsidiary 2021 $’000 2020 $’000 2021 $’000 2020 $’000 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Deferred tax liabilities Retentions receivable Contract assets Right-of-use assets Sundry debtors Intangible assets Property, plant and equipment Deferred tax assets Provisions Employee entitlements Property, plant and equipment Unearned revenue Lease liability Tax losses Other (60) (339) (279) (149) (17,360) (12,847) (2,398) (1,790) - (432) (3,603) (243) - (23) 4,513 (677) (432) (457) (86) (3,040) 1,790 432 - - (23,664) (15,431) 2,582 (967) 73 73 6,329 3,203 19 2,300 2,513 - 880 12,114 19 550 1,790 - 1,015 6,650 13 (894) - (10) 267 - (1,750) (425) 6,33 (1,790) - (492) (1,506) 1,076 3,747 (260) 1,529 562 - - - - - - - - - - - - - (1) (1) (1) - - - - - - - - - - - - - (63) (63) (63) - - (1,285) - (4,060) (306) (5,651) 13 2,232 - - 1,356 - 356 3,957 1,694 - - - - - - - - - - - - - - - Net deferred tax liabilities (11,550) (8,781) 10. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 June 2021 was based on the profit attributable to ordinary shareholders of $13,761,000 (2020: $10,870,000) and a weighted average number of ordinary shares outstanding of 247,914,045 (2020: 243,919,677), calculated as follows: Profit attributable to ordinary shareholders Profit for the period 13,761 10,870 Note 2021 $’000 2020 $’000 Weighted average number of ordinary shares Issued ordinary shares at 1 July 22 247,614,481 234,067,408 Effective new balance resulting from issue of shares in the year Weighted average number of ordinary shares at 30 June 299,564 9,852,269 247,914,045 243,919,677 2021 2020 Diluted earnings per share The calculation of diluted earnings per share at 30 June 2021 was based on the profit attributable to ordinary shareholders of $13,270,000 (2020: $10,870,000) and a weighted average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares of 260,991,548 (2020: 243,919,677) as follows: Profit attributable to ordinary shareholders (diluted) Profit for the period Weighted average number of ordinary shares (diluted) 2021 $’000 2020 $’000 13,761 10,870 Weighted average number of ordinary shares for basic earnings per share 247,914,045 243,919,677 2021 2020 Effect of dilution: Contingently issuable shares – acquisition Share options and performance rights on issue 11,120,923 1,956,580 - - Weighted average number of ordinary shares at 30 June 260,991,548 243,919,677 45 46 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Notes to the financial statements Notes to the financial statements 11. Cash and cash equivalents 13. Inventories Note 2021 $’000 2020 $’000 Raw materials and consumables – cost Bank balances Short term deposits Cash and cash equivalents in the statement of cash flows 34,538 16,468 51,006 10,544 44,728 55,272 The effective interest rate on cash and cash equivalents was 0.5% (2020: 0.7%); these deposits are either at call or on short term deposit. 14. Contract assets Costs incurred to date Recognised profit Progress billings 2021 $’000 2020 $’000 1,796 1,588 166,529 74,132 (161,612) 79,049 237,968 70,701 (222,295) 86,374 12. Trade and other receivables Trade receivables Sundry debtors Provision for impairment of trade receivables Contract assets Retentions 14 68,250 315 (112) 79,049 201 147,703 24,324 1,358 (112) 86,374 1,129 113,073 Contract assets represents the unbilled amount expected to be collected from customers for contract work performed to date. Cost includes all expenditure related directly to specific projects. Recognised profit is based on the percentage completion method and is determined using the costs incurred to date and the total forecast contract costs. The timing of cash inflows for contract assets is dependent on the status of processes underway to gain acceptance from customers as to the enforceability of recognised modifications resulting from contractual claims and variations. The Group pursues various options with customers to accelerate the inflow of cash including, but not limited to, negotiations, security of payment adjudications and arbitration involving the support of legal counsel and external consultants. Accordingly, there remains a risk that settlement of contract assets takes longer than 12 months. The period in which revenue has been earned and for which cash is yet to be received included in contract assets at 30 June 2021 is as follows: Trade receivables are non-interest bearing and are generally on 30 to 45 day terms. The provision for impairment of trade receivables relates to expected credit losses and is used to record impairment losses. When the Group is reasonably certain that no recovery of the amount owing is possible, the amount is considered irrecoverable and is written off against the financial asset directly. The Group will continue to strongly pursue all debts provided for. The movement in the allowance for impairment in respect of Trade receivables during the year was as follows: Balance at start of year Impairment losses recognised Write-offs Balance at 30 June 112 6 (6) 112 80 502 (470) 112 The ageing of trade receivables and the related provision for expected credit losses are detailed in note 23. All write-offs of bad debts are made when there is no reasonable expectation of recovering the contractual cash flows. 2021 2020 2019 2018 Total 31,353 28,443 19,253 - 79,049 - 62,131 20,253 3,990 86,374 On 11 June 2020, the Group announced that it was pursuing Decmil Australia Pty Ltd in relation to amounts it considers entitled pursuant to a contract for electrical services in which the Group had demobilised from site by the end of November 2018. At the time of writing the arbitration proceedings are in the discovery phase with a hearing of the matter scheduled for early 2022 unless the proceedings settle earlier. In accordance with its accounting policies, the Group has previously recognised revenue in relation to this contract, applying constraint, and the Group has reviewed the balance at 30 June 2021. The amount is included within contract assets. 47 48 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Notes to the financial statements Notes to the financial statements 15. Property, plant and equipment 16. Right-of-use assets The Group leases assets including property, motor vehicles and office furniture and equipment. Information about leased assets for which the Group is a lessee is presented below: Note Land and Buildings $’000 Motor Vehicles $’000 Office Furniture and Equipment $’000 Total $’000 Recognised on application of AASB 16 Additions Remeasurement Amortisation charged for the year Closing carrying amount at 30 June 2020 Opening carrying amount at 1 July 2020 Additions Acquired through acquisition Remeasurement Amortisation charged for the year Derecognition during the year (net) Closing carrying amount at 30 June 2021 7 7 4,213 262 1,671 (1,238) 4,908 4,908 295 4,281 123 (1,945) (29) 7,633 1,181 332 244 (836) 921 921 - - - (522) (101) 298 215 - - (77) 138 138 - - - (77) - 61 5,609 594 1,915 (2,151) 5,967 5,967 295 4,281 123 (2,544) (130) 7,992 Note Land and Buildings $’000 Leasehold Improvements $’000 Plant and equipment $’000 Motor Vehicles $’000 Office Furniture and Equipment $’000 Total $’000 Cost Balance at 1 July 2019 Additions Disposals Balance at 30 June 2020 Balance at 1 July 2020 Acquisitions through business combination Additions Disposals 25 7 916 - - 916 916 - - - 2,813 20,924 12 - 2,825 2,825 385 73 - 66 (2,704) 18,286 18,286 1,060 467 (308) 19,505 Balance at 30 June 2021 916 3,283 Depreciation and impairment losses Balance at 1 July 2019 Depreciation for the year Disposals Balance at 30 June 2020 Balance at 1 July 2020 Depreciation for the year 7 Disposals Balance at 30 June 2021 Carrying amounts At 30 June 2020 At 30 June 2021 (184) (17) - (201) (201) (17) - (218) 715 698 (1,036) (15,964) (196) - (1,115) 2,028 (1,232) (15,051) (1,232) (242) - (15,051) (926) 245 (1,474) (15,732) 1,593 1,809 3,235 3,773 14,200 149 (2,480) 11,869 11,869 1,181 891 (1,861) 12,080 (10,173) (768) 1,884 (9,057) (9,057) (788) 1,649 (8,196) 2,812 3,884 11,149 367 (166) 11,350 11,350 325 358 - 12,033 (7,818) (905) 166 (8,557) 50,002 594 (5,350) 45,246 45,246 2,951 1,789 (2,169) 47,817 (35,175) (3,001) 4,078 (34,098) (8,557) (34,098) (976) - (9,533) 2,793 2,500 (2,949) 1,894 (35,153) 11,148 12,664 49 50 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Notes to the financial statements Notes to the financial statements 17. Intangible assets – goodwill, customer contracts and relationships, and other Value in use was determined by preparing five year discounted cash flow forecasts, and extrapolating the cash flows beyond the terminal year using a terminal growth-rate. The calculation of value in use was based on the following key assumptions: Cost Balance as at 1 July 2019 Acquisitions Balance as at 30 June 2020 Balance as at 1 July 2020 Acquisitions through business combina- tions 25 Additions Balance as at 30 June 2021 Amortisation and impairment losses Balance as at 1 July 2019 Amortisation Balance as at 30 June 2020 Balance as at 1 July 2020 Amortisation Balance as at 30 June 2021 Carrying amounts At 30 June 2020 At 30 June 2021 7 7 Note Goodwill $’000 Customer Contracts and Relationships $’000 Other $’000 Total $’000 82,169 - 82,169 82,169 29,263 - 111,432 (8,390) - (8,390) (8,390) - (8,390) 73,779 103,042 7,491 - 7,491 7,491 12,258 - 19,749 (7,491) - (7,491) (7,491) (1,636) (9,127) - 10,622 19 - 19 19 1,276 88 1,383 (4) (2) (6) (6) (55) (61) 13 1,322 89,679 - 89,679 89,679 42,797 88 132,564 (15,885) (2) (15,887) (15,887) (1,691) (17,578) 73,792 114,986 Impairment testing for cash-generating units containing goodwill For the purpose of impairment testing, goodwill is allocated to the Group’s operating segments which represent the lowest level within the Group at which goodwill is monitored for internal management purposes. During the year, the composition of the reporting segments was realigned to reflect changes in the Group’s activities. As a result, Datatel segment’s goodwill (2020: $12.3 million) is being assessed at the SCEE segment. The aggregate carrying amounts of goodwill allocated to each segment are as follows: SCEE Heyday Trivantage 2021 $’000 2020 $’000 21,082 52,697 29,263 103,042 21,082 52,697 - 73,779 The recoverable amounts of the above segments were based on their value in use with the group performing its annual impairment test in June 2021. The carrying amount of the operating segments were determined to be lower than their recoverable amounts and therefore no impairment charge has been recognised. The Group has paid particular attention to those indicators impacted by the Coronavirus pandemic. We have considered the effect of the pandemic on our clients’ activities which may include resources commodity prices, commercial construction activity, awards of new contracts, deferrals of existing contracts, disruptions to supply chain and disruptions to existing operations. The Group’s operations were classified as essential services and whilst experiencing some disruption due to state border closures, the Group subsequently continued to operate materially unaffected. The management team continues to monitor and manage the impacts and risks arising from the global pandemic. • • • • Cash flows were projected based on past experience, actual operating results and independent research on the markets in which the segments operate. The five year cash flow estimates used in assessments for all CGU’s were based on Board approved budgets for the year ending 30 June 2022. Growth assumptions thereafter are SCEE -2.9% (2020: 0.0%), Heyday -2.6% (2020: -0.1%), and Trivantage -0.6% per annum for each future year, each being reductions in revenues. The terminal value assumes perpetual growth of 2.5% (2020: 2.5%). The margins included in the projected cash flow are the same rate that has been achieved by projects commencing in 2021. A pre-tax discount rate between 14.2% and 14.6% (2020: between 12.0% and 13.4%) was applied. This discount rate was estimated based on past experience and industry average weighted cost of capital. Sensitivity to changes in assumptions The value in use assessment for SCEE estimates a recoverable amount $6.3 million in excess of its carrying amount. This estimate is sensitive to the realisation of the budgeted and forecast overall net cash flows to 2026. These forecasts reflect Board and management’s expectations for future growth. In the event that the overall net cash flows are 10.1% less, year on year, than those which have been assumed in calculating the value in use, then the value in use would be less than the carrying value. Management believes that any reasonable change in the key assumptions for the Heyday and Trivantage segments would not cause the carrying value to exceed its recoverable amount. 18. Trade and other payables Trade payables Contract liabilities Accrued expenses Goods and services tax payable Retentions payable 2021 $’000 2020 $’000 31,066 36,114 29,410 4,672 832 102,094 27,990 34,158 11,417 665 1,048 75,278 Due to the short-term nature of these payables, their carrying value is assumed to approximate their fair value. The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 23. Contract liabilities Current Unearned revenue 36,114 34,158 Unearned revenue arises when the Group has invoiced the client in advance of performing the contracted services. Contract liabilities fluctuate based on progress of completion of contracts. 51 52 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements 19. Lease liability Current portion Non-current portion 2021 2020 2,585 5,687 8,272 1,749 4,218 5,967 Expense relating to short-term and low value leases was $0.1 million. The weighted average discount rate used for the leases is 5.2%. The average remaining lease term for the leased assets per underlying asset class as at 30 June 2021 are as follows: Land and building Motor vehicles Office equipment 20. Provisions Current Annual leave Long service leave Other employee leave Other Non-current Long service leave 2021 (in years) 2020 (in years) 1.98 1.06 0.95 2.43 1.37 2.04 2021 $’000 2020 $’000 12,355 3,314 2,104 105 17,878 405 405 6,635 1,434 1,045 - 9,114 197 197 A provision has been recognised for employee entitlements relating to long service leave. In calculating the present value of future cash flows in respect of long service leave, the probability of long service leave being taken is based on historical data. The measurement and recognition accounting policy relating to employee benefits have been included in note 34(l) to this report. 21. Deferred acquisition consideration Current portion Non-current portion Balance at 30 June Deferred acquisition consideration movements Balance at 1 July From acquisition of Trivantage – note 25 Finance costs Payments Balance at 30 June 22. Capital and reserves Ordinary shares Issued and fully paid Movements in shares on issue 2021 $’000 2020 $’000 9,954 10,206 20,160 - 19,879 281 - 20,160 - - - 6,500 - - (6,500) - 2021 2020 Number $’000 Number $’000 248,050,102 109,967 247,614,481 109,767 Balance at the beginning of the financial year 247,614,481 109,767 234,067,408 102,873 Exercise of Employee performance rights Issue of ordinary shares under dividend reinvest- ment plan, net of transaction costs - 435,621 - 655,034 200 12,892,039 - 6,894 Balance at the end of the financial year 248,050,102 109,967 247,614,481 109,767 The Company does not have authorised capital or par value in respect of its issued shares. All shares have voting rights and rights to dividends. Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. Deferred consideration payment reserve The Group has agreed to pay the selling shareholders additional consideration $5.5 million in the Company’s shares subject to Trivantage Group’s future earnings before interest and tax (EBIT) achieving the predetermined targets (note 25). Share based payments reserve The share based payments reserve records the fair value of share based payments provided to employees. 53 54 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements Dividends Dividends recognised in the current year by the Group are: 2021 Final 2020 ordinary Total amount 2020 Final 2019 ordinary Total amount Cents per share Total amount $’000 Franked Date of payment 3.00 3.00 7,428 7,428 7,042 7,042 Franked 22 October 2020 Franked 10 October 2019 Franked dividends declared or paid during the year were franked at the tax rate of 30%. Declared after end of year Subsequent to 30 June 2021, a dividend of 4.00 cents per share in the amount of $10.4 million, including dividends paid to shares anticipated to be issued in respect of vested and exercisable performance rights and contingent acquisition shares, was proposed by the directors. The dividend has not been provided in the financial statements. Franking account balance Company 2021 $’000 2020 $’000 23,824 14,184 23. Financial instruments Overview The Group has exposure to the following risks from their use of financial instruments: • • • Credit risk Liquidity risk Market risk This note presents information about the Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risks, and the management of capital. Further quantitative disclosures are included throughout this financial report. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established an Audit and Risk Management Committee, which is responsible for overseeing how management monitors risk and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Group. The committee reports regularly to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations in relation to the management and mitigation of these risks. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers including contract assets. Exposure to credit risk The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was: The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: (a) franking credits that will arise from the payment of the current tax liabilities; and Cash and cash equivalents Trade receivables (net of provision for impairment) (b) franking debits that will arise from the payment of dividends recognised as a liability at the year end. Contract assets The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. Carrying amount 2021 $’000 2020 $’000 51,006 68,654 79,049 55,272 26,699 86,374 198,709 168,345 55 56 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements Cash The Group’s cash and cash equivalents are held with major banks and financial institutions. Trade receivables and contract assets The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer and contract with customer. The demographics of the Group’s customer base, including the default risk of the industry and country, in which customers operate, has less of an influence on credit risk. Geographically, the concentration of credit risk is within Australia and, by industry, the concentration is within the commercial, infrastructure and resources industries. When entering into new customer contracts for service, the Group only enters into contracts with credit-worthy companies. Management monitors the Group’s exposure on a monthly basis. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal entity, aging profile, maturity and existence of previous financial difficulties. The Group does not require collateral in respect of trade receivables and contract assets. The Group’s maximum exposure to credit risk for trade receivables and contract assets at the reporting date by geographic region was: Australia Impairment losses Carrying amount 2021 $’000 2020 $’000 147,703 147,703 113,073 113,073 The ageing of the Group’s trade receivables and contract assets at the reporting date was: Note Gross 2021 $’000 Allowance for Impairment 2021 $’000 Gross 2020 $’000 Allowance for Impairment 2020 $’000 Contract assets – not past due 14 79,049 Trade Receivables: Not past due Past due 0-30 days Past due 30-60 days Past due 60 days and less than 1 year More than 1 year 58,219 6,730 1,788 1,524 505 68,766 147,815 - - - - - (112) (112) (112) 86,374 19,138 3,394 602 1,531 2,146 26,811 113,185 - (2) (3) (0) (1) (106) (112) (112) The provision of $112,000 relates to expected credit losses. Impairment provision related to specific debts that are more than one year overdue pertains to a small number of customers. The Group continues to strongly pursue all debts provided for. The Group has established an allowance for impairment that represents their expected credit losses in respect of trade receivables and contract assets. The Group recognises a provision for impairment related to expected credit losses (“ECLs”) for trade receivables, contract assets and other debt financial assets not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group uses a provision matrix to calculate the ECLs. The provision matrix is established based on Group’s historically observed default rates. The Group calibrates the matrix to adjust historical credit loss experience with forward looking factors specific to debtors and the economic environment where appropriate. At every reporting date, historical default rates are updated and changes in the forward-looking estimates are analysed. To date, the Group has not observed or expects to see material decline in its customers’ abilities to pay as a result of the Coronavirus pandemic due in part to the nature of those customers, which mainly includes large private sector corporations and government organisations, meaning the risk of default of receivables is low. Accordingly, no additional expected credit loss allowance pertaining to the Coronavirus pandemic have been included. The assessment of the correlation between historical observed default rates, forecast of economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecasts in economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The Group considers a financial asset’s potential for default when contractual payments are more than 120 days past due, factoring in other qualitative indicators where appropriate. Exception shall apply to financial assets that relate to entities under common controls or covered by letter of credit or credit insurance. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group uses project costing to assess the cash flows required for each project currently underway and entered into. Cash flow is monitored by management using rolling forecasts and annual budgets that are reviewed monthly at the Board level. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: 57 58 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Notes to the financial statements Notes to the financial statements Carrying amount $’000 Contractual cash flows $’000 6 mths or less $’000 More than 6 mths up to 1 year $’000 More than 1 year up to 2 years $’000 More than 2 years up to 5 years $’000 More than 5 years $’000 Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect profit or loss. 30 June 2021 Non-derivative financial liabilities Trade and other payables Deferred consideration Lease liability 30 June 2020 Non-derivative financial liabilities Trade and other payables Lease liability Market Risk 65,980 20,160 8,272 94,412 65,980 20,674 9,376 96,030 65,090 10,000 1,487 76,577 41,120 5,967 47,087 41,120 40,905 6,765 47,885 1,039 41,944 890 - 1,362 2,252 145 856 1,001 - 5,666 2,054 7,720 - 5,008 4,168 9,176 - - 305 305 70 1,407 1,477 - 2,436 2,436 - 1,027 1,027 Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Currency risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the functional currency in which they are measured. The Group has no material currency risk exposures at 30 June 2021 or 30 June 2020. In respect of other monetary assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances. Interest rate risk Profile At the reporting date the interest rate profile of the Company’s and the Group’s interest-bearing financial instruments was: Variable rate instruments Financial assets Carrying amount 2021 $’000 2020 $’000 51,006 55,272 Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis as 2020. Profit or loss Equity 100bp increase 100bp decrease 100bp increase 100bp decrease $’000 1,189 1,189 1,093 1,093 $’000 (1,189) (1,189) (1,093) (1,093) $’000 $’000 - - - - - - - - 30 June 2021 Variable rate instruments Cash flow sensitivity (net) 30 June 2020 Variable rate instruments Cash flow sensitivity (net) Fair values Fair values versus carrying amounts The fair values of financial assets and liabilities materially equates to the carrying values shown in the balance sheet. Other Price Risk The Group is not directly exposed to any other price risk. Capital Management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Group intends to make an annual distribution to shareholders in the form of fully franked dividends, subject to the Group’s financial results in a given year, general business and financial conditions, the Group’s taxation position, its working capital and future capital expenditure requirements, the availability of sufficient franking credits and any other factors the Board considers relevant. There were no changes in the Group’s approach to capital management during the year. The Group is not subject to externally imposed capital requirements. 59 60 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Notes to the financial statements Notes to the financial statements 24. Investments in subsidiaries 25. Business combinations The consolidated financial statements include the financial statements of Southern Cross Electrical Engineering Ltd and the subsidiaries listed in the following table. On 16 December 2020, the Company acquired 100% of Trivantage Holdings Pty Ltd (“Trivantage”) and its subsidiaries (together referred to as “Trivantage Group”). Cruz Del Sur Ingeniería Electra (Peru) S.A Southern Cross Electrical Engineering (WA) Pty Ltd (i) Southern Cross Electrical Engineering Tanzania Pty Ltd Southern Cross Electrical Engineering Ghana Pty Ltd S&DH Enterprises Pty Ltd (i) FMC Corporation Pty Ltd (i) Southern Cross Electrical Engineering (Australia) Pty Ltd (i) Hazquip Industries Pty Ltd (i) Datatel Communications Pty Ltd (i) Heyday5 Pty Ltd (i) Electrical Data Projects Pty Ltd (i) Trivantage Holdings Pty Ltd (i) & (ii) Trivantage Group Pty Ltd (i) & (ii) Trivantage Pty Ltd (i) & (ii) S.J. Electric Group Pty Ltd(i) & (ii) S.J. Electric Group (NSW) Pty Ltd (i) & (ii) S.J. Electric Group (QLD) Pty Ltd (i) & (ii) S.J. Electric (SA) Pty Ltd (i) & (ii) S.J. Electric (VIC) Pty Ltd (i) & (ii) S.J. Electric (WA) Pty Ltd (i) & (ii) Seme Solutions Pty Ltd (i) & (ii) Group CCTV Pty Ltd (i) & (ii) Central Control Sheetmetal Pty Ltd (i) & (ii) Positive Systems Pty Ltd (i) & (ii) Ladd Electric Pty Ltd (i) & (ii) Country of Incorporation Equity Interest (%) 2021 2020 Peru Australia Tanzania Ghana Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - - - - - - - - - - - - (i) These wholly-owned subsidiaries have entered into a deed of cross guarantee with Southern Cross Electrical Engineering Limited pursuant to ASIC Corporations (wholly-owned companies) Instrument 2016/785 (Instrument) and are relieved of the requirement to prepare and lodge an audited financial and Directors’ report. (ii) During the year, the Group acquired Trivantage Holdings Pty Ltd and all its subsidiaries which are all 100% owned (note 25). (a) Deed of cross guarantee The parties to a deed of cross guarantee for the Group as listed in note 24 represent a ‘majority group’ for the purposes of the Instrument, as the parties not subject to the Instrument are non-trading entities. A separate consolidated statement of comprehensive income and consolidated balance sheet of the parties to the deed of cross guarantee have not been disclosed separately as it is not materially different to those of the Group. Trivantage Group is a specialised electrical services group with over 50 years of operational experience providing complex electrical solutions across Australia. It is primarily a services-oriented business characterised by a strong degree of recurring and maintenance work. It operates via three specialty divisions. S.J. Electrical (electrical services to commercial and retail markets), SEME Solutions (electronic security services) and Trivantage Manufacturing (switchboard design and manufacture). Trivantage Group is headquartered in Melbourne and has around 400 employees and sub-contractors throughout Australia—with offices in Victoria, Western Australia, Queensland, New South Wales, South Australia and Tasmania. The acquisition forms part of SCEE’s strategy of growth through expansion into adjacent and complementary sectors and new geographies. Fair values measured on a provisional basis The initial accounting for the acquisition of Trivantage Group has been provisionally determined at the end of the reporting period. Should this assessment change, including in respect of the identification of any additional intangible assets which may by their nature be amortised over their useful life, then the goodwill arising on acquisition will be adjusted accordingly. Initial cash payment (net of Net Financial Debt) (i) Contingent deferred shares (ii) Contingent consideration arrangement (ii) $’000 20,817 5,500 19,879 46,196 (i) Initial cash payment comprised the purchase price on completion of $25.0 million less the aggregate of items defined as Net Financial Debt in the Share Purchase Agreement which included the financial indebtedness, other debt-like items and cash of the Trivantage Group. $19.8m of this initial cash payment was paid on completion on 16 December 2020 with the net financial debt adjustment of $1.0m being paid in February 2021. (ii) The Group has agreed to pay the selling shareholders additional consideration of up to $28.5 million subject to Trivantage Group’s future earnings before interest and tax (EBIT) achieving the following targets: - Results confirmation payment for financial year ending 30 June 2021 (“FY21”): Following the confirmation that Trivantage Group FY21 EBIT is equal to or greater than $10.1 million: a) $10 million in cash; and b) $5.5 million in the Company’s shares. If FY21 EBIT is less than $10.1 million, elements (a) and (b) above are each reduced on a pro-rata basis to nil at EBIT of $4.0 million. If the EBIT in FY21 is greater than $10.1 million, the incremental EBIT above $10.1 million will be added to EBIT of financial year ending 30 June 2022 (“FY22”) for the purpose of calculating FY22 earn-out consideration as set out below. - Earn-out payments for financial years ending 30 June 2022 (“FY22”) and 30 June 2023 (“FY23”): a) Deferred consideration of $4.0 million in cash for each year that Trivantage Group EBIT result is equal to or greater than $10.1 million in FY22 and FY23. To the extent that EBIT is below $10.1 million in either FY22 or FY23, the deferred consideration amount payable for the respective year would be calculated based on the following formula reducing the payment to zero: $4.0 million less 5 x ($10.1 million less actual EBIT). b) Outperformance consideration of $1.7 million in cash for FY22 if EBIT results for FY22 is equal to or greater than $11.4 million, and $3.3 million in cash for FY23 if EBIT results for FY23 is equal to or greater than $14.4 million. For each year, the amount is reduced on a pro-rata basis down to nil at EBIT of $10.1 million. The Directors’ assessment of the expected achievement of these earn out targets were estimated to result to a contingent consideration of $26.2 million so the fair value recognised at acquisition date is the discounted value of these expected future payments of $25.4 million. Acquisition-related costs amounting to $1.6 million have been excluded from the consideration transferred and have been recognised as an expense in the period, within ‘Administration expenses’ and ‘Finance expense’ line items for $1.4 million and $0.2 million, respectively, in the statement of comprehensive income. 61 62 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements Assets acquired and liabilities assumed at the date of acquisition 26. Interest in joint operations The provisional fair values of the identifiable assets and liabilities of Trivantage Group as at the date of acquisition were: Cash and cash equivalents Trade receivables Sundry debtors Contract assets Inventories Prepayments and other Property, plant and equipment Right of use assets Deferred tax liabilities Intangible assets acquired (intellectual properties) Intangible assets acquired (customer contracts and relationships) Trade and other payables Lease liabilities Loans and borrowings Provisions Tax payable Net identifiable assets / liabilities acquired Goodwill and intangibles arising on acquisition Consideration Less: fair value of identifiable net assets / liabilities acquired Goodwill arising on acquisition $’000 11,137 21,220 144 5,349 1,380 288 2,951 4,281 1,631 1,276 12,258 (15,958) (4,521) (12,260) (6,948) (2,033) 16,933 46,196 16,933 29,263 Goodwill arising on acquisitions in the year comprises the value of expected in-sourced specialist capabilities and new sector opportunities. Net cash outflow on acquisition of subsidiary Consideration paid in cash Add back: Cash and cash equivalents balances acquired Less: Settlement of debt and other costs on completion Net cash flow on acquisition Impact of acquisition on the result of the Group (20,817) 11,137 (12,567) (22,247) Had the business combination been effected at 1 July 2020, management estimates the revenue of the Group would have been $436.6 million and the net profit after tax for the year from continuing operations would have been $18.5 million. The Group has a 50% interest in KSJV Unincorporated and KSJV Australia Pty Ltd, both of which have been dormant for the period. These joint arrangements are accounted for as joint operations. The Group’s share of the underlying assets and liabilities as at 30 June 2021 and 2020 and revenues and expenses of the joint operations for the year ended 30 June 2021 and 2020, which are proportionally consolidated in the consolidated financial statements, is as follows: Share of the joint operations’ statement of financial position: Current assets Current liabilities Equity Share of the joint operations’ revenue and profit: Revenue Contract expenses Other expenses Profit/(loss) before tax Income tax expense Profit/(loss) for the year from continuing operations 2021 $’000 2020 $’000 9 - 9 - - (1) (1) - (1) 592 (5) 587 - - (9) (9) - (9) The joint operations have no contingent liabilities or capital commitments as at 30 June 2021 and 30 June 2020. 27. Share-based payments (a) Expense recognised in profit or loss Share based payments expenses for the year comprises: 2021 Performance Rights 2020 Performance Rights 2019 Performance Rights 2018 Performance Rights (i) (ii) (iii) 2021 $’000 2020 $’000 (224) (195) (348) - (767) - 195 (50) (201) (56) The amount recognised is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. 63 64 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021Notes to the financial statements Notes to the financial statements (i) 2021 Performance Rights During the year Performance Rights were offered to key management personnel and senior management under the terms of the Senior Management Long Term Incentive Plan. The terms and conditions of the Performance Rights are as follows. All Performance Rights are to be settled by the physical delivery of shares. EPS, as described above, will be assessed against targets for threshold performance of 5.62 cents per share in the 2023 financial year and for stretch performance of 6.27 cents per share in the 2023 financial year. The vesting schedule is as follows for EPS performance in the 2023 financial year: Less than 5.62 cents per share 5.62 cents per share 0% vesting 50% vesting Grant date / employees entitled Number of instruments Vesting conditions Contractual life Between 5.62 and 6.27 cents per share Pro-rata vesting between 50% and 100% At or above 6.27 cents per share 100% vesting Once the performance measurement calculation has been finalised the company will allot and issue the equivalent number of shares at nil consideration on the basis of one ordinary share per vested performance right for all performance rights exercised. Where a participant ceases employment prior to the vesting of their share options or performance rights, the share options or performance rights are forfeited unless in the event of retirement, permanent disablement or death the Board, at their absolute discretion, waive the exercise and vesting conditions associated with the performance rights or allow the performance rights to continue to be assessed over the original performance assessment period. In the event of a change of control of the Company, all options and performance rights that have not lapsed may be exercised. There were 1,502,329 financial year 2020 Performance Rights on issue at 1 July 2020. No 2020 Performance Rights were granted, none vested and none were forfeited during the year. The 2020 Performance Rights will be performance tested over a three-year period from 1 July 2019 to 30 June 2022. The hurdles used to determine performance are Absolute Total Shareholder Return (TSR) and Earnings per Share (EPS) performance. (iii) 2019 Performance Rights There were 1,010,625 financial year 2019 Performance Rights on issue at 1 July 2019. No 2019 Performance Rights were granted, none vested and none were forfeited during the year. The 2019 Performance Rights will be performance tested over a three-year period from 1 July 2018 to 30 June 2021. The hurdles used to determine performance are Absolute Total Shareholder Return (TSR) and Earnings per Share (EPS) performance. Performance testing over a three-year period from 1 July 2020 to 30 June 2023 (“Performance Period”); (ii) 2020 Performance Rights Performance rights issued to senior man- agement on 4 December 2020 Performance rights issued to key manage- ment on 4 December 2020 452,957 Employed on 30 June 2023 and exceed 30 months performance hurdle 1,266,997 Employed on 30 June 2023 and exceed 30 months performance hurdle Total /performance rights 1,719,954 Up to 100% of the allocated performance rights may vest, subject to the achievement of the performance conditions. The key terms of the performance rights are as set out below: • • • • No performance rights will vest until 30 June 2023; Performance testing criteria are 50% against Absolute Total Shareholder Return (“TSR”) performance, and 50% against Earnings Per Share (“EPS”) performance; and Expiry on the 4th anniversary of the grant date unless an earlier lapsing date applies The TSR formula is: ((Share Price at Test Date – Share Price at Start Date) + (Dividends Reinvested))/Share Price at Start Date TSR will be assessed against targets for threshold performance of 8% per annum compounded over the Performance Period and for stretch performance of 12% per annum compounded over the Performance Period. The vesting schedule is as follows for TSR performance over the Performance Period: Less than 8% per annum compounded 8% per annum compounded 0% vesting 50% vesting Between 8% and 12% per annum compounded Pro-rata vesting between 50% and 100% At or above 12% per annum compounded 100% vesting EPS performance will be measured in the 2023 financial year. For the purposes of performance testing the Performance Rights, EPS in the 2023 financial year will be the Basic EPS for the year, as prescribed by the accounting standards and set out in the Company’s Financial Reports, adjusted to remove the following non-cash items from the calculation of profit or loss attributable to ordinary shareholders in the year, in order to reflect the companies underlying profitability: (a) amortisation of acquired intangibles; (b) unwinding of interest on deferred acquisition consideration payments; (c) adjustments to the assessment of deferred consideration payable; and (d) acquisition costs. 65 66 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements (b) Measurement of fair values 28. Reconciliation of cash flows from operating activities The fair value of the TSR Performance Rights has been measured using the Monte-Carlo simulation. The EPS Performance Rights has been measured using the Binomial tree methodology. The inputs used in the measurement of the fair values at grant date were as follows: The performance rights issued were granted in one tranche as follows: Grant date Vesting date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Fair value of TSR component Fair value of EPS component (c) Reconciliation of outstanding performance rights The number of performance rights under the programmes were as follows: Outstanding at 1 July Granted during the year Exercised during the year Forfeited or withdrawn during the year Outstanding at 30 June Vested and exercisable at 30 June 2021 2020 4 December 2020 8 November 2019 30 June 2023 30 June 2022 $0.55 2.6 years 36% 0.11% 5.5% $0.31 $0.48 $0.56 2.6 years 37% 0.88% 4.9% $0.29 $0.49 2021 Number of rights 2020 Number of rights 3,754,072 1,719,954 - (1,241,118) 4,232,908 - 3,561,812 1,502,329 (655,034) (655,035) 3,754,072 - The performance rights forfeited during the year were the 2018 financial year performance rights which were performance tested on finalisation of the 2020 financial year results and did not vest. Subsequent to 30 June 2021, the vesting conditions in respect of the 2019 performance rights have been performance tested and it has been determined that 505,313 of the 2019 performance rights have vested and 505,312 of the 2019 performance rights will be forfeited. Profit for the year Adjustments for: Depreciation and amortisation Profit on sale of property, plant and equipment and other Expense recognised in respect of capital raising Equity-settled share-based payment transactions (Increase)/decrease in assets: Trade and other receivables Inventories Prepayments Increase/(decrease) in liabilities: Trade and other payables Provisions and employee benefits Deferred acquisition consideration Income tax payable Deferred income tax Net cash from operating activities 29. Contingencies 2021 $’000 2020 $’000 13,761 10,870 7,327 (179) - 767 (7,916) 1,172 100 12,535 2,024 281 (793) 205 29,284 5,154 (90) 63 (56) (9,123) 746 792 (1,910) (867) - 4,463 67 10,109 The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Bank Guarantees Surety Bonds 33,813 33,089 20,559 37,355 Bank Guarantees and Surety Bonds are provided to customers for satisfactory contract performance. Total bank guarantee facilities at 30 June 2021 were $51.6 million (2020: $51.0 million) and the unused portion was $17.8 million (2020: $30.4 million). These facilities are subject to annual review. Total surety bonds facilities at 30 June 2021 were $67.2 million (2020: $85.0 million) and the unused portion was $34.1 million (2020: $47.6 million). These facilities are subject to annual review. All facilities are set to mature during the 2021/22 year. It is management’s intention to review these facilities at maturity to a level appropriate to support the ongoing business of the Group. Other contingent liabilities The Group is currently managing a number of claims, security of payment adjudications and an arbitration process in relation to construction contracts. The Directors are of the opinion that disclosure of any further information relating to these claims, adjudication and arbitration processes would be prejudicial to the interests of the Group. 67 68 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements 30. Subsequent events Since 30 June 2021, the Group has experienced disruption to its operations in some States as a result of lockdowns and restrictions resulting from the Coronavirus pandemic. The costs of disruptions have been minimised as workforces were stood down and works have been delayed rather than lost. Some significant restrictions have already been lifted and when restrictions loosen further accelerated catch-up of many delayed works is anticipated and so at the time of writing a material impact on the Group’s FY22 results is not being forecast. However the extent of any future impact of the pandemic on the Group’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, regulations imposed by governments with respect to the outbreak response and impacts on customers, employees and vendors—all of which are uncertain and cannot be predicted at this time. Otherwise there are no matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in subsequent financial years. 33. Related parties Transactions with key management personnel (i) Key management personnel compensation Key management personnel compensation comprised the following: Short-term employee benefits Post-employment benefits Share-based payments 2021 $’000 2020 $’000 2,532 105 564 3,200 1,575 96 (63) 1,608 31. Auditor’s remuneration Remuneration of KPMG Australia as the auditor of the parent entity for: 2021 $’000 2020 $’000 - Auditing or reviewing the financial report Remuneration of PwC Australia as the component auditor of Trivantage for: - Auditing or reviewing the financial report of component 397 397 102 102 358 358 - - 32. Parent entity disclosures As at, and throughout, the financial year ending 30 June 2021 the parent company of the Consolidated entity was Southern Cross Electrical Engineering Limited. Result of the parent entity Loss for the period Total comprehensive loss for the period Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising: Share capital Reserves Retained earnings Total Equity Parent entity contingencies: (8,131) (8,131) 79,220 224,925 (105,181) (9,764) (9,764) 76,690 177,492 (61,256) (130,059) (73,534) 109,967 6,227 (21,328) 94,866 109,767 288 (6,097) 103,958 The parent entity has contingent liabilities which are included in note 29. At 30 June 2021, there were in existence guarantees of performance of a subsidiary. Compensation of the Group’s key management personnel includes salaries and non-cash benefits made up of a short-term incentive and long-term incentive scheme (see note 27 (a)(i)). (ii) Key management personnel transactions Directors of the Company control 3% of the voting shares of the Company. 34. Significant accounting policies The accounting policies applied by the Group in this financial report are the same as those applied by the Group in its consolidated financial report as at and for the year ended 30 June 2020. The Group did not early adopt any standard, interpretation or amendment that has been issued but is not yet effective. The Group did not adopt any new standard and amendments or interpretation to standards from 1 July 2020 which had a material effect on the financial position or performance of the Group. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. The group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. (ii) Interest in a joint arrangement The Group has interests in joint arrangements which are classified as joint operations, which are jointly controlled entities, whereby the ventures have a contractual arrangement that establishes joint control over the economic activity of the entities. The Group recognises its right to the underlying assets and obligations for liabilities and are accounted for by recognising the share of those assets and liabilities. The Group combines its proportionate share of each of the assets, liabilities, income and expenses which are accounted for by separately recognising the Group’s share of underlying assets and liabilities of the joint arrangement with similar items, line by line, in its consolidated financial statements. (iii) Transactions eliminated on consolidation Intra-group balances and any unrealised income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investments to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 69 70 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. Income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income and presented in the foreign currency translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profit or loss. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity. (c) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and on hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in fair value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (d) Financial instruments (i) Non-derivative financial assets The Group initially recognises non-derivative financial assets on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction which substantially all the rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. The Group has the following non-derivative financial assets: • • Financial assets at amortised cost Cash and cash equivalents Financial assets at amortised cost • Financial assets at amortised cost are receivables with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial assets are measured at amortised cost using the effective interest method, less any impairment losses. • Financial assets at amortised cost comprise trade and other receivables (see note 12). (ii) Non-derivative financial liabilities Financial liabilities are recognised initially on the trade date at which the Group becomes party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. The Group’s non-derivative financial liabilities comprise Lease liability, Deferred acquisition consideration and Trade and other payables. (iii) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. (e) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. (i) Recognition and measurement (continued) Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Borrowing costs related to the acquisition or construction of qualifying assets are recognised as part of the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in profit or loss. (ii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. 71 72 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements (iii) Depreciation (iii) Subsequent expenditure Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure including expenditure on internally generated goodwill and brands is recognised in profit or loss as incurred. Depreciation is recognised in profit or loss on a diminishing value basis over the estimated useful life of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. (iv) Amortisation Leasehold assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Buildings Leasehold improvements Plant and equipment Motor vehicles Office furniture and fittings 40 years 1 – 40 years 2 – 20 years 2 – 10 years 2 – 20 years Depreciation methods, useful lives and residual values are reviewed at each reporting date. (f) Intangible assets (i) Goodwill Goodwill is measured at cost less accumulated impairment losses. The Group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. (ii) Other intangible assets Amortisation is calculated over the cost of the asset, or another amount substituted for cost, less its residual value. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the current period are as follows: • Customer contracts 1 – 5 years 2021 2020 1 – 5 years Amortisation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. (g) Leases The Group recognises lease assets and lease liabilities in accordance to AASB 16 - Leases in for accounting its leases previously classified as operating leases other than those leases with short-term, i.e. twelve (12) months or less, and/or of low-value, i.e. less than $7,000. Leased assets The right-of-use asset recognised by the Group comprise the initial measurement of the related lease liability, any lease payments made at or before the commencement of the contract, less any lease incentives received and any direct costs. Costs incurred by the Group to dismantle the asset, restore the site or restore the asset are included in the cost of the right-of-use asset. Subsequently, right-of-use asset is measured at cost less any accumulated amortisation and impairment losses and adjusted for certain remeasurements of the lease liability. The Group amortises the right-of-use assets on a straight-line basis from the lease commencement date to the end of the useful life of the underlying asset or the end of the lease term, whichever is earlier. If the recoverable amount of a right-of-use asset is less than its carrying value, an impairment charge is recognised in the profit or loss and the carrying value of the asset is written down to its recoverable amount. Short-term or low-value operating leases subject to recognition exemption under AASB 16 are not recognised in the Balance Sheet. The costs incurred during the period related to these leases are recognised in the profit or loss. Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses. Lease liabilities 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. The lease liability is separately disclosed on the statement of financial position. The liabilities which will be repaid within twelve months are recognised as current and the liabilities which will be repaid in excess of twelve months are recognised as non-current. The lease liability is subsequently measured by reducing the balance to reflect the principal lease repayments made and increasing the carrying amount by the interest on the lease liability. The Group remeasures the lease liability and make an adjustment to the right-of-use asset in the following instances: • • The term of the lease has been modified or there has been a change in the Group’s assessment of the purchase option being exercised, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; 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 by discounting the revised lease payments using a revised discount rate; and 73 74 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements • The lease payments are adjusted due to changes in the index 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 the initial discount rate. (k) Impairment (i) Financial assets However, if a change in lease payments is due to a change in a floating interest rate, a revised discount rate is used. Lease and non-lease components of a contract are accounted for separately. Non-lease components of the lease payments are expensed as incurred and are not included in determining the present value. The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extended the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has the option, under some of its leases to lease the assets for additional periods. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew and considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew. (h) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (i) Contract assets Contract assets represents construction work equal to gross unbilled amount expected to be collected from customers for contract work performed to date. It is measured at cost plus profit recognised to date (note 34(n)) less progress billings and recognised losses. Cost includes all expenditure related directly to projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities based on normal operating capacity. If payments received from customers exceed the income recognised, then the difference is presented as contract liabilities under Trade and other payables in the balance sheet. Payments from customers are received based on a billing schedule or milestone basis, as established in our contracts. (j) Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets which continue to be measured in accordance with the Group’s other accounting policies. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on re-measurement are recognised in profit or loss. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortised or depreciated, and any equity-accounted investee is no longer equity accounted. A financial asset not carried at fair value through the profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of the asset that can be estimated reliably. (i) Financial assets (continued) Objective evidence that a financial asset (including equity securities) is impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Group considers evidence of impairment for receivables at both a specific asset level and collective level (see note 23). All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. In assessing collective impairment, the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current forward-looking economic and credit conditions are such that actual losses are likely to be greater or less than suggested by historical trends (see note 23). An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (ii) Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, the recoverable amount is estimated each year at the same time. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. 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 the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. The Group’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised based on cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 75 76 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements (l) Employee benefits (i) Long-term benefits The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on costs; that benefit is discounted to determine its present value. The discount rate is the yield at the reporting date on high quality corporate bonds or government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed using the Projected Unit Credit method. (ii) Termination benefits Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. (iii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (iv) Share-based payment transactions The fair value of performance rights and share options granted to employees is recognised at grant date as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the performance rights and share options. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. 1) 2) 3) 4) 5) Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognise revenue when (or as) the entity satisfies a performance obligation Judgement is required in determining the timing of the transfer of control, at a point in time or over time, as well as in each of the five enumerated steps in the revenue recognition model above. (i) Construction revenue The benefits being provided by the Group’s construction work transfer to the customer as the work is performed and as such revenue is recognised over the duration of the project based on percentage complete. Percentage complete is generally measured according to the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs (input method). If this would not be representative of the stage of completion then it is measured by reference to surveys of work performed (output method). When it is probable that total contract costs will exceed total contract revenue, the unavoidable loss is recognised as an expense immediately. (ii) Services revenue The Group performs maintenance and other services for a variety of different sectors. Typically, under the performance obligations of a service contract, the customer consumes and receive the benefit of the service as it is provided. As such, service revenue is recognised over time as the services are provided. (m) Provisions (iii) Contract modifications A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. (n) Revenue Revenue recognition accounting policy The Group applies two approaches to recognising revenue to contracts with customers: either at a point in time or over time, depending on the manner the customer obtains control of the goods or services. Revenue is recognised over time if one of the following is met: • • • The customer simultaneously receives and consumes the benefits as the Group performs; The customer controls the asset as the Group creates or enhances it; or The Group’s performance does not create an asset for which the Group has an alternative use and there is a right to payment for the performance to date. Revenue from contracts is recognised in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the group expects to be entitled in exchange for the goods or services. The following are the steps in determining revenue from contracts as prescribed by Five (5) Step Revenue Recognition Model introduced by AASB 15: Revenue in relation to modifications, such as a change in the scope or price (or both) of the contract, are to be included in the contract price when it is approved by the parties to the contract and the modification is enforceable. Approval of a contract modification can be in writing, by oral agreement or implied by customary business practices. Revenue estimated and recognised in relation to claims and variations is only included in the contract price to the extent that it is highly probable that a significant reversal in the amount recognised will not occur. In making this assessment the Group considers a number of factors, including the nature of the claim, formal or informal acceptance by the customer of the validity of the claim, the stage of negotiations, assessments by independent experts and the historical outcome of similar claims to determine whether the enforceable and “highly probable” thresholds have been met. (iv) Performance obligations Revenue is allocated to each performance obligation and recognised as the performance obligation is satisfied which may be at a point in time or over time. AASB 15 requires a detailed and technical approach to identify the different revenue streams (i.e. performance obligations) in a contract. This is done by identifying the different activities that are being undertaken and then aggregating only those where the different activities are significantly integrated or highly interdependent. Revenue is to be continuously recognised, on certain contracts over time, as a single performance obligation when the services are part of a series of distinct goods and services that are substantially integrated with the same pattern of transfer. The term over which revenue may be recognised is limited to the period for which the parties have enforceable rights and obligations. When the customer can terminate a contract for convenience (without a substantive penalty), the contract term and related revenue is limited to the termination period. The Group has elected to apply the practical expedient to not adjust the total consideration over the contract term for the effect of a financing component if the period between the transfer of services to the customer and the customer’s payment for these services is expected to be one year or less. 77 78 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements (i) Variable consideration (r) Earnings per share Variable consideration includes performance or other incentive fees or penalties associated with contracts. If the consideration in the contract includes a variable amount, the Group estimates the amount of the consideration to which it is entitled in exchange for transferring the goods and services to the customer. The variable consideration is estimated at contract inception and constrained to the extent that it is highly probable that a significant reversal in the amount recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved. The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise performance rights and share options granted to employees. All revenue is stated net of the amount of goods and services tax (GST). (o) Finance income and expenses Finance income comprises interest income on funds invested. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Finance expenses comprise interest expense on borrowings, bank charges and lease payments. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest rate method. Foreign currency gains and losses are reported on a net basis. (s) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s components. All operating segments’ operating results are reviewed regularly by the Group’s Managing Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the Managing Director include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. (p) Income tax (t) Financial guarantees Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. (q) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. Financial guarantee contracts are initially measured at their fair values and subsequently measured at the higher of: - - the loss allowance determined in accordance with AASB 9 Financial Instruments; and the amount initially recognised less, when appropriate, the cumulative amount of income recognised in accordance with AASB 15 Revenue from Contracts with Customer. The fair value of financial guarantee contracts has been assessed using a probability weighted discounted cash flow approach. The probability has been based on: - - - the likelihood of the guaranteed party defaulting in a year period; the proportion of the exposure that is not expected to be recovered due to the guaranteed party defaulting; and the maximum loss exposed if the guaranteed party were to default. (u) 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 assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are 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 at the acquisition date, except that: - deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with AASB 112 ‘Income Taxes’ and AASB 119 ‘Employee Benefits’ 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 ‘Share-based Payment’ 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. 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. 79 80 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Notes to the financial statements Notes to the financial statements 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 Standard. Where 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. 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 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 liability is remeasured at subsequent reporting dates in accordance with AASB 9 ‘Financial Instruments’, or AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets’, as appropriate, with the corresponding gain or loss being recognised in profit or loss. Where a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date (i.e. the date when the Group attains control) 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 as of the acquisition date that, if known, would have affected the amounts recognised as of that date. (v) Government grants Government grants are recognised only when there is reasonable assurance that the Group will comply with the conditions attaching to them and the grants will be received. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. When the grant relates to an asset, it is recognised as deferred income and released to income in equal amounts over the expected useful life of the related asset. 35. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non- financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The fair value of items of plant, equipment, fixtures and fittings are determined using market comparison technique and cost technique – the valuation model considers quoted market prices for similar items when available and depreciated replacement cost when appropriate. (ii) Inventories The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. (iii) Trade and other receivables The fair value of trade and other receivables acquired in a business combination, including contract asset as well as service concession receivables, is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. (iv) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements. (v) Share-based payment transactions The fair value of employee performance rights and share options is measured using an appropriate pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. (w) New standards and interpretations issued but not yet effective (vi) Customer contracts and relationships The new standards and amendments to standards and interpretations effective for annual reporting periods beginning after 30 June 2021, such as those disclosed below, have not been applied in preparing these consolidated financial statements. The Group intends to adopt these new standards and amendment to standards and interpretations, if applicable, when they become effective: The fair value of customer contracts and relationships acquired in a business combination is estimated as the present value of future cash flows, discounted at the market rate of interest at the acquisition date. Amendments to Australian Accounting Standards: AASB 2020-1 – Classification of Liabilities as Current or Non-current AASB 2020-3 – Annual Improvements 2018-2020 and other Amendments AASB 2020-6 – Classification of Liabilities as Current or Non-current – Deferral of Effective Date AASB 2020-7 – Covid-19-Related Rent Concessions: Tier 2 Disclosures AASB 2020-9 – Tier 2 Disclosures: Interest Rate Benchmark Reform (Phase 2) and Other Amendments AASB 2021-2 – Disclosure of Accounting Policies and Definition of Accounting Estimates AASB 2021-4 – Modified Retrospective Transition Approach for Service Concession Grantors The Group has yet to determine the likely impact of these new standards. 81 82 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Directors’ declaration Independent Auditor’s Report 1. In the opinion of the directors of Southern Cross Electrical Engineering Limited (the “Company”): a. The consolidated financial statements and notes, and the Remuneration report in the Directors’ Report, are 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 performance for the financial year ended on that date; and ii. complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; Independent Auditor’s Report b. the financial report also complies with International Financial Reporting Standards as disclosed in note 2(a), To the shareholders of Southern Cross Electrical Engineering Limited c. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. 3. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the managing director and chief financial officer for the financial year ended 30 June 2021. At the date of this declaration, there are reasonable grounds to believe that the Company and the group entities identified in Note 24 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those group entities pursuant to ASIC Corporations (Wholly owned Companies) Instrument 2016/785. This declaration is made in accordance with a resolution of the Board of Directors. Signed in accordance with a resolution of the directors: Derek Parkin Chairman 24 August 2021 Report on the audit of the Financial Report Opinion We have audited the Financial Report of Southern Cross Electrical Engineering Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • • giving a true and fair view of the Group’s financial position as at 30 June 2021 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion The Financial Report comprises: • Consolidated balance sheet as at 30 June 2021 • Consolidated statement of comprehensive income, Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year then ended; • Notes including a summary of significant accounting policies; and, • Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 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 fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters The Key Audit Matters we identified are: • Recognition of Contract Revenue; • Value of Goodwill; and • Acquisition accounting. Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of 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. KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. 83 84 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Independent Auditor’s Report Independent Auditor’s Report Recognition of Contract Revenue ($370 million) Refer to Note 4 to the Financial Report – Contract Revenue Value of Goodwill ($103 million) Refer to Note 17 to the Financial Report – Intangible assets - goodwill and customer contracts The key audit matter How the matter was addressed in our audit The key audit matter How the matter was addressed in our audit Recognition of Contract revenue is a key audit matter due to the: • Significance of revenue to the financial statements; and • Large number of customer contracts with numerous estimation events that may occur over the course of the contract's life. This results in complex and judgemental revenue recognition from rendering of services and construction contracts. Therefore, significant audit effort is required to gather sufficient appropriate audit evidence for revenue recognition. We focused on the Group's assessment of the following elements of revenue recognition for rendering of services and construction contracts, as applicable: • The Group's determination of contractual entitlement and assessment of the probability of customer approval of changes in scope and/or price. The Group's consideration of the enforceability or approval of the modification of the terms of a contract may include evidence that is written, oral, or implied by customary business practice and may include involvement from the Group’s legal, time and cost experts. The Group's determination of modifications requires a degree of judgement and can drive different accounting treatments, increasing the risk of inappropriately recognising revenue; • Estimating total expected costs at initiation of the customer contract, which have a high level of estimation uncertainty; and • Revisions to total expected costs for certain events or conditions that occur during the performance of the contract, or are expected to occur to complete the customer contract, which is difficult to estimate. Our procedures included: • Understanding the Group’s contract revenue accounting process. We tested a sample of the key controls in this process including customer approval of progress claim submissions; and • For a sample of customer contracts: − we read the contracts and other underlying documentation such as customer correspondence to evaluate the inputs to the Group’s calculation of revenue; − we assessed the total expected cost estimates by (1) obtaining an understanding of the activities required to complete the customer contract from the Group’s contract teams, (2) analysing the costs of those activities compared to recent project cost trends and prices, (3) testing a sample of committed expenditure to underlying documentation such as purchase orders, and (4) using our knowledge of the contract characteristics to challenge the completeness of costs and activities; − we evaluated the Group's assessment of when a modification to the contract scope and/or price for variations and claims is approved and enforceable. This included assessing underlying records, legal documents, and customer correspondence; − we assessed the Group's estimation of variations and claims by comparing underlying evidence such as customer correspondence and reports from the Group’s time and cost experts (where applicable) for consistency with contract terms. We recalculated the amount of revenue including the modifications to the contract. We compared the recalculated amounts against the amounts recorded by the Group; − we evaluated the Group's legal, time and cost experts' reports received on contentious matters to assess the recognition of variations and claims under the revenue accounting standard. We checked the consistency of this to the inclusion or not of an amount in the Group’s estimates used for revenue recognition; and − we assessed the scope, competency, and objectivity of the legal, time and cost experts engaged by the Group. − we evaluated the Group’s ability to recover outstanding variation and claim amounts not yet settled with customers by assessing the status of contract negotiations, historical recoveries and expert reports obtained by the Group • Assessing the appropriateness of the disclosures in Notes 4, 14 and 34(n). We focused on the Group’s annual testing of Goodwill for impairment as a key audit matter due to the size of the balance, being 30% of total assets. We focused on the significant forward- looking assumptions the Group applied in their value in use models for the SCEE, Heyday, Trivantage segments, including: • • The valuation models are sensitive to changes in forecast revenues and margins which could reduce or remove available headroom, and increasing the possibility of goodwill being impaired. This drives additional audit effort specific to their feasibility within the Group’s strategy; and discount rates - these are complicated in nature and vary according to the conditions and environment the specific segments are subject to from time to time. The Group’s modelling is sensitive to changes in the discount rate. We involve our valuation specialists with the assessment. Our procedures included: • • • • • • considering the Group’s determination of the level at which goodwill is tested based on our understanding of the operations of the Group’s business and how independent cash inflows were generated, against the requirements of the accounting standards; considering the appropriateness of the value in use method applied by the Group to perform the annual test of goodwill for impairment against the requirements of the accounting standards. We, along with our modelling specialists, assessed the integrity of the value in use models used, including the accuracy of the underlying calculation formulas; challenging the feasibility of the Group’s revenue and margin assumptions within the forecast cash flows in light of varying competitive conditions in the markets in which the Group operates. We compared growth rates and terminal growth rates to published studies of industry trends and expectations for the SCEE segment. We further assessed forecast cash flows against the secured value of work for those respective years and the level of secured work at similar times in previous years. We used our knowledge of the Group, their past performance, business and customers, and our industry experience; comparing the forecast cash flows contained in the value in use models to Board approved forecasts; assessing the accuracy of previous Group forecasting to inform our evaluation of forecasts included in the value in use models. We applied increased scepticism to current period forecasts in areas where previous forecasts were not achieved and/or where future uncertainty is greater or volatility is expected; considering the sensitivity of the models by varying key assumptions, such as forecast revenue, margins, growth rates, terminal growth rates and discount rates, within a reasonably possible range. We did this to identify those segments with a higher risk of impairment and to focus our further procedures; • working with our valuation specialists, we independently developed a discount rate range considered comparable using publicly available market data for comparable entities, adjusted by risk factors specific to the Group and the industry it operates in; and • we assessed the Group's disclosures of the quantitative and qualitative considerations in relation to the valuation of goodwill, by comparing these disclosures to our understanding obtained from our testing and the requirements of the accounting standards. 85 86 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Independent Auditor’s Report Independent Auditor’s Report Acquisition Accounting – Trivantage Group Refer to Note 25 to the Financial Report - Business combinations The key audit matter How the matter was addressed in our audit We focused on the Group’s acquisition of Trivantage Holdings Pty Ltd and its subsidiaries (“Trivantage”) as a key audit matter due to the level of judgment required in evaluating the purchase price allocation (“PPA”) against the criteria in the accounting standards. We specifically focused on the Group’s identification and measurement of intangible assets which form part of the PPA, including: • • the forecast revenues and margin assumptions of Trivantage underlying the cash flows used for measurement of the customer contract intangibles. the discount rate assumptions with the measurement of customer contracts which are complicated in nature and vary according to the conditions and environment of Trivantage. We involved our valuations specialists with the assessment. We also considered the PPA for the inclusion of other intangible assets such as brand names and customer relationships, considering the nature of the Trivantage operations and industry. Our procedures included: • Challenging the forecast revenue and margin assumptions used in the measurement of customer contract intangibles. We compared these forecasts to approved revenue forecasts, historical Trivantage results, as well as results during the remainder of the financial year. • Working with our valuation specialists we independently developed a discount rate range considered comparable using publicly available market data for comparable entities, adjusted by risk factors specific to Trivantage and the industry it operates in. We also considered publically available information on recent transactions in the industry of comparable entities to challenge the Group’s determination that no other intangible assets be recognised in the PPA. Other Information Other Information is financial and non-financial information in Southern Cross Electrical Engineering Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we 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. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error • assessing the Group and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • • 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 Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our Auditor’s Report. 87 88 SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 Independent Auditor’s Report Lead Auditor’s Independence Declaration Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Southern Cross Electrical Engineering Limited for the year ended 30 June 2021, complies with Section 300A of the Corporations Act 2001. 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 responsibilities We have audited the Remuneration Report included in Directors’ report for the year ended 30 June 2021. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG R Gambitta Partner Perth 24 August 2021 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Southern Cross Electrical Engineering Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Southern Cross Electrical Engineering Limited for the financial year ended 30 June 2021 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG R Gambitta Partner Perth 24 August 2021 89 90 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. SCEE GROUP ANNUAL REPORT 2021SCEE GROUP ANNUAL REPORT 2021 ASX additional information ASX additional information Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. The information is current at 5 August 2021. Substantial shareholders The number of shares held by substantial shareholders and their associates as disclosed in substantial holding notices are: Shareholder Frank Tomasi Nominees Pty Ltd TIGA Trading Pty Ltd Mitsubishi UFJ Financial Group Inc Perennial Value Management Limited Number 46,862,764 45,880,371 23,528,704 15,970,982 Corporate Governance Statement The Corporate Governance Statement can be found at https://www.scee.com.au/investors/corporate-governance Distribution of equity security holders Number of equity security holders Category Ordinary shares Options/ Performance rights 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over 279 828 494 1,193 163 2,957 - - - - 4 4 The number of shareholders holding less than a marketable parcel of ordinary shares is 215. Twenty largest shareholders Name Frank Tomasi Nominees Pty Ltd UBS Nominees Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited J P Morgan Nominees Australia Pty Limited DHHD5 Pty Ltd Chemco Superannuation Fund Pty Ltd Asgard Capital Management Ltd<1109440 Kaleidoscope a/c> HSBC Custody Nominees (Australia) Limited Westor Asset Management Pty Ltd Alfiedoug Pty Ltd CS Fourth Nominees Pty Ltd Mr Raymond John Wise Neweconomy Com Au Nominees Pty Limited <900 account> DPHD5 Pty Ltd Carman Super Pty Ltd Mr Roger Edward Koch Icon Holdings Pty Ltd Buchhorn Pty Ltd BNP Paribas Noms Pty Ltd Number of ordinary shares held Percentage of capital held 46,862,764 43,063,527 28,965,288 20,925,416 11,508,018 3,629,544 2,030,000 1,561,546 1,517,879 1,506,345 1,295,324 1,287,696 1,076,846 1,030,041 1,000,008 1,000,000 900,000 898,564 800,000 694,784 171,553,590 18.89 17.36 11.68 8.44 4.64 1.46 0.82 0.63 0.61 0.61 0.52 0.52 0.43 0.42 0.40 0.40 0.36 0.36 0.32 0.28 69.16 91 SCEE GROUP ANNUAL REPORT 2021 SCEE GROUP ANNUAL REPORT 2021 92 CORPORATE DIRECTORY Directors Solicitors Derek Parkin Chairman Independent Non-Executive Director K & L Gates Level 32, 44 St Georges Terrace Perth WA 6000 Graeme Dunn CEO and Managing Director Share Registry Simon Buchhorn Independent Non-Executive Director Karl Paganin Independent Non-Executive Director David Hammond Executive Director Paul Chisholm Non-Executive Director Computershare Investor Services Pty Limited Level 11, 172 St Georges Terrace Perth WA 6000 T: 1300 787 272 F: +618 9323 2033 Registered Office Southern Cross Electrical Engineering Limited 41 Macedonia Street Naval Base WA 6165 T: +618 9236 8300 F: +618 9410 2504 Company Secretaries ASX code: SXE Chris Douglass Colin Harper Auditors KPMG 235 St Georges Terrace Perth WA 6000 93 SCEE GROUP ANNUAL REPORT 2021 94 SCEE GROUP ANNUAL REPORT 2021scee.com.au 95 SCEE GROUP ANNUAL REPORT 2021

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