Waters
Annual Report 2015

Plain-text annual report

ANNUAL REPORT 2 0 1 5 ANNUAL REPORT 2015 > 1 This annual report is printed on Maine recycled silk paper which comprises 60% recycled paper & FSC®certified pulp. This paper meets ISO 14001 Environmental Accreditation standards. Waterco Limited is pursuing reduction of its carbon footprint and embraces the new technologies which make recycled paper available. 2 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities ANNUAL REPORT 2015 > 3 4 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities ANNUAL REPORT 2015 > 5 Group Consolidated Financial Highlights Financial Year Ended 2015 $ 2014 $ 2013 $ 2012 $ 2011 $ Operating revenue ($ million) 88.17 77.97 68.80 66.56 68.20 Sales revenue ($ million) 80.89 77.12 68.21 66.14 67.74 Earnings Before Interest and Tax (EBIT) ($ million) 4.56 3.43 4.62 4.54 6.07 EBIT / Sales Revenue 5.6% 4.4% 6.7% 6.9% 9.0% Profit before income tax ($ million) 3.05 1.93 3.19 2.90 4.48 Net profit after tax ($ million) 1.55 0.97 1.72 2.09 3.18 Total assets ($ million) 97.28 92.98 85.75 74.15 72.50 Equity ($ million) 56.05 50.60 46.05 41.82 40.11 Basic Earnings per share 4.1 cents 2.6 cents 4.9 cents 6.1 cents 9.8 cents Dividend per share paid 3.0 cents 7.0 cents 7.0 cents 8.0 cents 9.0 cents Net Tangible Assets per share $1.54 $1.41 $1.33 $1.23 $1.21 6< WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities 6 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Chief Executive Officer’s Review Of Operations some degree by a favourable that the operations of this division adjustment in the Malaysian are fundamentally sound, despite entity, for deferred taxation the fire in our Head Office in accumulated from prior years. Sydney that affected operations In addition, the Canadian entity, in January 2015. in accordance with accounting principles, wrote off a deferred tax asset taken up in previous years. These adjustments are one-off and not related to the current year’s operations and resulted in a higher than normal tax incidence. Earnings Before Interest and Tax (EBIT) for the year increased by 33% to $4.56 million from $3.43 million, through Sales Revenue growth of 5% to $80.89 million SOON SINN GOH Chairman/CEO REVENUE AND PROFITABILITY from $77.12 million. The North America and Europe Division has reduced the level of its EBIT losses by 51%. Although this performance is a marked improvement over PCP, it was still below expectation. This is mainly because Canada registered a loss of $0.67 million against a small projected profit, as a result of pricing commitments made the previous year to the Canadian market when the Canadian Dollar was approximately 93 cents to The Group reported a Net Profit Activities in the Australian and the US Dollar. The subsequent After Tax (NPAT) of $1.55 million, New Zealand Division account increase in cost to Waterco registering an increase of 60% on for a major portion of the Group’s Canada, as a result of the weaker the previous corresponding period profitability and sales. The EBIT of Canadian dollar against the US (PCP) but coming in below the this Division came in above that dollar, is estimated to be $0.56 profit guidance provided at the last of the PCP, and we are confident million. Annual General Meeting. Losses in North America and Europe DIVISIONAL EBIT PERFORMANCE entities were not tax-effected, accentuating their impact on the Group’s profitability. The Australian and Malaysian entities carried out a review of the deferred tax assets and liabilities. This resulted in an adverse adjustment in the Australian entity, off-set to The breakdown of EBIT contributions by division is as follows: FY15 ($000) FY14 ($000) Australia and New Zealand 3,830 3,231 North America and Europe (988) (2,007) Asia Consolidated Reported EBIT 1,714 4,556 2,209 3,433 % Change + 19% + 51% – 22% + 33% ANNUAL REPORT 2015 > 7 AUSTRALIA AND NEW ZEALAND (ANZ) The Australia and New Zealand Division derives its revenue predominantly from the domestic swimming pool industry. Apart from selling a wide range of products, including chemicals for swimming pool water treatment, Waterco is also the franchisor of the Swimart chain of pool stores. Through more than three decades of experience, Waterco has acquired an extremely good understanding of the factors that drive consumer demand in the after-market. The franchise programme has been developed and improved on in-house since 1984, with the opening of a company- owned pool shop in Sydney. This shop was subsequently franchised and developed into the Swimart Pool and Spa franchising retail system. This solid foundation has enabled this Division to maintain an acceptable level of profitability through the challenging times in the last few years, during which the industry underwent consolidation and transformation. Steady market share in the domestic pool sector has underpinned the Division’s performance. The Division’s introduction of a range of energy and water saving swimming pool products generated sales growth, affirming Waterco’s expectation of the market’s appetite for environmentally friendly products, such as Waterco’s Hydrostorm ECO pump and Glass Pearls for improved filtration performance and reduced water usage from shorter backwash cycle. This was instrumental in enabling the company to retain market share. Another product, using hydrogen peroxide and ozone as sanitisers, has been launched in recent years and is expected to gain further traction as implementation of marketing strategies progress. The product enables swimming pools to be totally chlorine-free and enriched with oxygen and benefits swimmers who suffer from eczema or allergies. Unfortunately, a fire in Head Office in Sydney disrupted sales operations throughout Australia and New Zealand (ANZ), just as we were experiencing a pleasing sales trend going into the summer. Our main computer server was out of service for the most part of January, traditionally one of the peak months in our season. We estimate that the loss in Sales Revenue clearly exceeded $1 million. Fortunately, the Group is well-insured and the loss in gross profit is now in the process of being assessed, in conjunction with our Insurer. Expenses that are recoverable from insurance are taken up as an asset in the balance sheet, while those that are not subject to insurance claims have been written off during the year. 8 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Swimart’s successful business model continues to provide the company and its franchisees with consistent and sustainable growth. This has resulted in a first class business and long-term franchisee relationships; indeed, many franchisees have been with Swimart in excess of 20 years. One of the attractions of the Swimart franchise is its low fees. As Waterco makes its profit from sales of product directly to the franchisee, this allows it to keep franchise fees low and franchisee profits robust. Another factor attracting new franchisees to the Waterco group is the variety of work opportunities and income streams. These range from retail sales through stores, in-home pool servicing, to light commercial pool servicing. Swimming pool energy efficiency is now being factored into installations – both new build and retrospective – with a key focus on variable speed pumps. Waterco has long been addressing this through our R&D activities and continuous development of energy efficient pumps. Waterco’s Hydrostorm ECO-V variable-speed pool pump is a case in point. It allows the pool owner to achieve the ideal filtration flow rate with the least amount of energy consumption. This product is noticeably quieter, requires less maintenance, lasts longer and, through slower water filtration rates, allows for better and more effective purification of pool water. Hydrostorm ECO-V is equipped with a variable speed motor that also allows pool owners to set the pump at a low, energy saving flow rate for every day filtration. The pump uses over 80% less electricity than a regular pool pump. Glass Pearls offer considerably finer filtration than other filter media on the market and are therefore capable of providing outstanding water purity and clarity. They also require 20% less water for backwashing when compared to sand. Whereas other filter media may contain different contaminants, Waterco's Glass Pearls are chemically inert for the ultimate water purity. Glass Pearls have become the filter media of choice in commercial installations around the world, including Leicester General Hospital’s Hydrotherapy Pool in the United Kingdom. Waterco's EnviroPro Eco range consists of a select number of Waterco’s high quality, energy efficient and award-winning water saving products. This popular range includes: Hydrostorm ECO pump, BriteStream Multicoloured LED lights, Admiral robotic pool cleaners, MultiCyclone pre-filter, MultiCyclone Ultra, Opal XL cartridge filter, Micron ECO granular filter, Glass beads, Zane Solar Gulfpanel and Electroheat heat pumps. NORTH AMERICA AND EUROPE Waterco North America and Europe comprises the Group’s operations in the USA, Canada, UK and France. Waterco USA (WUSA) The US market is the largest in the world and Waterco USA had enhanced its presence there through a substantial investment in its acquisition of Baker Hydro in March 2005. Our operations in Augusta, Georgia manufacture larger filters and assemble commercial pumps. In the United States, the closure of the heat pump manufacturing operations, now relocated to Waterco Far East in Malaysia, resulted in write-down in inventory and production wastage, totalling $0.46 million, which accounted for a majority of the losses during the year. Following this change, a smaller production team will focus on manufacturing of larger filters, whilst the management of WUSA will channel its efforts into marketing our products more effectively. Sales of commercial and industrial filters underpinned Sales revenue in WUSA, and better results are expected for future years. Waterco Canada (WCI) This Entity was the Group’s original centre for the manufacture of heat pumps. Its expertise, developed over more than two decades, with assistance from our Research and Development division in Sydney, has improved performance of our products in both quality and cost. This continues to benefit the Group and enables other manufacturing entities in the Group to produce heat pumps of quality. WCI is now a trading entity with heat pumps as their key product, having transferred the manufacturing operations to Malaysia. WCI registered an EBIT loss of $0.67 million, a major factor for this being the weakening of the Canadian Dollar. With most of the imports of heat pumps into Canada sourced in US Dollar, margins were significantly adversely affected, as selling prices could not be increased in the middle of the season. ANNUAL REPORT 2015 > 9 Waterco Europe (WEL), combining an entity set up in 2003 and the acquisition of Lacron in 2004, enjoys a continuous and successful history of almost 40 years in the manufacture of fibreglass filters. The renowned “Lacron” name is synonymous with quality filters and coupled with progressive manufacturing techniques – which were introduced after the acquisition – it has enabled WEL to bring to the market filters of quality at acceptable prices. As a result, both the Lacron and the Waterco brands are now well-recognised as quality products in Europe. This recognition continues, even after the manufacturing operations were transferred to Malaysia and China, because the same high standards have been maintained. Economic conditions in the UK improved considerably with sales revenue improving strongly. Margins recovered as a result of a stronger British Pound although negated to some degree by a weaker Euro. For this financial year, WEL returned record sales revenue and profit. Waterco France (WFR) was set up as the thrust into Europe, with UK as the base. France is one of the largest markets in Europe. However, with the business environment in Europe remaining unchanged during the financial year, this Entity continued to consolidate its operations, in preparation for a higher level of activity, when the business environment improves. ASIA Waterco Far East in Malaysia (WFE) was borne out of Waterco’s familiarity with the Southeast Asian market. WFE was initially a sales operation designed to service Waterco Australia’s Southeast Asian customer base. In 1991 WFE added manufacturing operations to our undertakings in Kuala Lumpur, Malaysia. As well as bringing the Group closer to our markets in Southeast Asia, this also gave cost- efficiency in our manufacturing operations. Since then, WFE has become the principal manufacturing facility for pumps and filters for the Waterco Group. WFE continues to deliver new products to give the Group an edge in our marketing activities. 10 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Setting new global benchmarks in durability, versatility, reliability and longevity, Waterco’s Micron fibreglass filters are the preferred choice for commercial and industrial operations. Manufactured from the highest grade of non-corrosive materials, Micron fibreglass filters are ideal for harsh environments including seawater applications. Available in top mount, side mount and horizontal configurations, Waterco has the capability of adapting its fibreglass filters to meet customer specifications. Purpose-built for aquatic facilities, water parks and large commercial swimming pools. Hydrostar Plus pumps are high performance corrosion resistant thermoplastic pumps. The unique construction of the Hydrostar Plus offers several advantages in comparison with traditional steel or cast iron commercial pumps. Its glass reinforced thermoplastic body possesses superior mechanical and chemical resistance compared to steel and is able to withstand damage from many types of water treatment chemicals. Currently there are 7.5Hp and 10Hp sized thermoplastic commercial pumps, with Waterco working to increase this range. Established in 1971, Lacron Ltd. is Britain’s largest and most progressive manufacturer of pressure sand filters. Approximately 80% of Lacron’s entire production is exported to established companies in over 40 countries. Renowned for its superior British engineering excellence, Lacron’s reputation for quality and durability is unequalled throughout Europe and across the world. Internationally, Lacron Commercial Fibreglass Filters are the preferred choice for more intense commercial installations such as large-scale spas and heavy-use pools. WFE has achieved ISO9001:2008 certification, the internationally recognised standard for the quality management of businesses, and demonstrates the existence of an effective and well-designed quality management system, which stands up to the rigours of an independent external audit. A key criterion of this standard is that the management system can provide confidence in creating products that meet expectations and requirements. Local sales in Malaysia improved significantly, in spite of weaker economic conditions. Increased production volume with the addition of heat pumps production line has improved overall efficiency. Waterco China This entity commenced operations in 2000, delivering advantages of low operational costs and a foothold into the huge China market. Today, these operations manufacture filters primarily for the European and the Australian markets. High manufacturing standards have been maintained, enabling the acceptance of filters made by Waterco China, with the Waterco brand, in these markets. Waterco China has also achieved an internationally recognised quality assurance certificate. This Entity performed below expectation during the year, as a result of a slow-down in the housing market in China. Waterco International in Singapore (WI) focuses on sales in Asian countries, other than Malaysia and China, where we have our own trading entities. WI also provides technical assistance to our Indonesian entity and has been able to contribute to the growth of the latter. WI has improved on its performance over PCP. Reliable, highly efficient and economical to run, Waterco’s Electroheat heat pumps extract heat from the air (similar to a reverse cycle air conditioner), and use that heat to produce hot water. Compared to gas and electric, heat pumps use just a fraction of the energy to generate the same amount of heat. Although initially heat pumps take longer than gas heaters to warm up the pool or spa water, they are much more economical and will then maintain the heating as well as gas heaters. As a guide, you can save up to 80% over LPG and 50% over natural gas fuelled heaters. Waterco’s Far East manufacturing plant spans more than 22,500 square metres, employs 300 people, and provides for global manufacturing, design and product development, and R&D operations conveniently and cost-effectively under one roof. Current ISO 9001:2008 Quality Management Systems certification ensures that Waterco’s manufacturing facilities meet and consistently provides products that “meet customer and applicable statutory and regulatory requirements”. The plant also includes a chemical blending and packing facility, and laboratory. international benchmarks, Waterco’s heat pump assembly line not only conforms to ISO 9001:2008 requirements and global regulatory standards but is now equipped with heat pump lab testing capability. ANNUAL REPORT 2015 > 11 PRODUCT DEVELOPMENT AND WATER TREATMENT The Group continues to invest in Research and Development in order to be at the forefront of the industry. The number of patents that the Group has secured or are in the process of applying for continues to increase. Product innovation and research and development in the water- treatment subsector are considered to be critical in Waterco staying at the forefront of the industry. Waterco considers water-treatment products and systems to be a key revenue driver for the Group. As such, ensuring that our products and systems are appropriately protected is of value and importance. The array of patents will improve Waterco’s position in the servicing of swimming pool markets globally and are expected to improve the appeal of the Swimart franchise, as well as that of other pool shops which market the products. Waterco’s key products for the future continue to be the Hydroxypure range of products. The system uses two disinfectants (ozone and hydrogen peroxide) that actively work in harmony to increase active oxygen in the water. The synergy of the two disinfectants ensures the water environment is safe, without the creation of harmful chemical by-products. The end result is a swimming pool that is totally chlorine-free and enriched with oxygen. Hydroxypure is good news for those with eczema and allergies. It is the only such sanitisation system to receive a tick of approval from the National Asthma Council Australia. Waterco sees a bright future for this range of products, as this chlorine-free range of products will be increasingly popular, as users become more conscious of the ecology. Waterco’s Micron Commercial Fibreglass Filters are made from continuous strands of high quality fibreglass filament wound under controlled tension to create a seamless, impervious vessel. This produces a filter that is free from welds or seams, or special tank linings that typically corrode or electrolyse. Waterco’s revolutionary winding technology further strengthens the fibreglass structure so it can withstand a working pressure of up to 1,000 kPa (150psi). Waterco has well and truly transcended its role as an Australian pool product manufacturer into one of the world's true pioneers of healthy water systems. By simplifying advanced drinking water treatment technology, it has successfully applied it to treating swimming pool and spa water with its successful Hydroxypure system, a chlorine-free sanitisation system. Considered the most significant breakthrough in pool treatment in 20 years, this naturally formulated system is catering to the widespread movement away from chlorinated water. Hydroxypure is being used to purify water in some really interesting and unique applications, including water features, council pools and a private pool in Dubai that is exclusively used by a herd of reindeer. 12 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities DIVIDEND AND OUTLOOK The results, from the NPAT headline figure, is significantly below expectation. However, the underlying profitability is better than that, as tax adjustments stated earlier in this report has impacted the tax charge for the year. If we set aside the tax adjustments and look at the Profit Before Tax, the results are less than 10% below expectations and forecast. Further improvements in North American entities in the new Financial Year are expected with manufacturing activities now reduced to a minimal level. The Board will provide a profit guidance at a later stage for the financial year ending 30 June 2016, as more information becomes available during the year. Waterco declares a final dividend payment of 5 cents per share, payable to shareholders on 14 December 2015. With no dividend declared at the Half Yearly Report, this dividend of 5 cents is the total dividend for the year, a satisfactory outcome in an environment of poor global economic conditions. A unique program in New Zealand is literally taking pools to schools – and Waterco is playing a vital role with the provision of the Hydroxypure sanitisation system. The Pools iN SchoolZ program aims to ensure lower- decile school children aren’t prevented from learning water safety and swimming skills by the lack of access to private or public pools. Each pool in the Pools iN SchoolZ program is used by up to 200 students a day, so it was crucial to create an inviting aquatic environment to maximise the opportunity for these kids to become proficient swimmers. Hydroxypure sanitisation system is ideal for anyone with respiratory problems or skin allergies like asthma or eczema. This was especially important with the increasing number of children who have a reaction to chlorine. Hydroxypure is endorsed by the National Asthma its Sensitive Council Australia and approved by Choice® program. More than 7 million Australians suffer from allergies and more than 2 million suffer from asthma. The Sensitive Choice® blue butterfly symbol is a way of recognising products and services from companies that support asthma and allergy care. The Sensitive Choice program is a partnership between the Asthma and Respiratory Foundation of New Zealand and the National Asthma Council Australia and includes over 200 products and services certified as being better choices for asthma and allergy sufferers. ANNUAL REPORT 2015 > 13 Board of Directors SOON SINN GOH - B COM FCPA Chairman/CEO Mr. Goh is the founder of Waterco Limited. He has been a member of the Board since the Company’s incorporation in February 1981. Prior to the inception of Waterco, he was the Managing Director of a company specialising in the construction of water and sewage treatment facilities. His extensive experience in the water treatment industry is instrumental to the success of Waterco. He held no other listed company directorships during the past three financial years. BRYAN GOH - B ECON Group Marketing Director Mr. Goh was appointed to the Board in June 2010. As the Group Marketing Director, Mr. Goh has overall responsibility for business and product development in Australia and oversees the marketing activities of Waterco’s overseas subsidiaries. Mr. Goh was on the board of directors of The Swimming Pool & Spa Association of New South Wales Ltd (from February 2005 to February 2009), a non-profit organisation dedicated to maintaining and improving standards within the industry for the betterment of consumers, pool builders and suppliers. He held no other listed company directorships during the past three financial years. GARRY NORMAN - B COM CA Non-Executive Director Mr. Norman was appointed to the Board as a Non-Executive Director in October 1993. He has been in public practice as an accountant since 1990, having been previously employed by Duesburys Chartered Accountants (now Deloitte) for fourteen years before leaving to establish his own Chartered Accounting firm - G R Norman & Co. He has an extensive background in accounting and taxation matters, having been involved with a wide range of clients in both city and suburban practices – previously in his role as a manager of the Business Services Division of Duesburys and currently in his role as principal of a suburban practice. Mr. Norman is the Chairman of the Audit Committee and a member of the Remuneration Committee. He held no other listed company directorships during the past three financial years. 14 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities BEN HUNT - PHD (ANU) Non-Executive Director Dr. Hunt was appointed to the Board as a Non-Executive Director in June 1998. He has held academic appointments as the Head of the Graduate School of Business, Associate Dean of the Faculty of Business and Associate Professor of Finance at the University of Technology, Sydney (UTS). He has a doctorate from the Australian National University. Although Dr Hunt has written extensively on Australian financial markets (he is the co-author of the text Australian Institutions and Markets, 7th Ed.), his knowledge extends to the South East Asian region. He is a regular presenter of financial seminars in Hong Kong and Singapore for the UK publishing and training company Euromoney. Dr Hunt is the Chairman of the Remuneration Committee and a member of the Audit Committee. He held no other listed company directorships during the past three financial years. RICHARD CHENG FAH LING - B COM CA Non-Executive Director Mr. Ling was appointed to the Board as a Non-Executive Director in May 2009. He holds a Bachelor of Commerce degree from the University of Newcastle, Australia. He is a member of the Institute of Chartered Accountants in Australia and the Malaysian Institute of Accountants. He has worked in companies based in Australia as Financial Controller, Company Secretary and Senior Manager from 1980 to 1989. In 1992, Mr. Ling was appointed Group General Manager of Tiong Nam Logistics Holdings Berhad, a public company listed on the Main Board of Bursa Malaysia (Malaysian Stock Exchange). The company has operations in Malaysia, Singapore and Thailand. In 2001, Mr. Ling joined the Board of Tiong Nam Logistics Holdings Berhad as Executive Director. Since 2009 he has been a Non- Executive Director. Mr. Ling is a member of the Remuneration and Nomination Committee and the Chairman of the Audit Committee of Tiong Nam Logistics Holdings Berhad. Mr. Ling has a good understanding of corporate finance, with experience in raising funds for companies in Australia and Malaysia, via the capital markets in Asia. Mr. Ling is a member of the Audit Committee and the Remuneration Committee of Waterco Limited. He held no other listed company directorships during the past three financial years. ANNUAL REPORT 2015 > 15 Statement of Corporate Governance Practices This statement explains how Waterco Limited ACN 002 070 733 (Waterco or Company) has complied with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations – 3rd Edition, published 27 March 2014 (ASX Recommendations), during the financial year ended 30 June 2015 (Reporting Period). All Waterco charter, codes and policy documents referred to in this statement are available in the Corporate Governance section of the Company’s website, www.waterco.com. This statement has been adopted by the Board as current as of 26 August 2015. Principle 1: Lay solid foundations for management and oversight RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 1.1 Role of Board and management The Board has established the functions and responsibilities reserved for the Board. The Board Charter was updated during the Reporting Period to update the matters delegated to management and those matters reserved for the Board. Before the Board resolved to update the Board Charter at its meeting on 23 June 2015, the matters reserved to the Board were not explicitly stated in the Board Charter. 1.2 Information regarding election and re-election of director candidates The Company has in place a policy for nomination and appointment of directors and this policy was updated during the Reporting Period. Before appointing a director, the Company will undertake appropriate checks on a candidate for directorship and will provide all material information in its possession to its shareholders to make a decision on whether or not to elect or re-elect a director. When considering the re-election of an incumbent director or election of a new director, the Board takes into account the following: • business experience, particularly in respect of the industries in which the company operates; • standing in the community; • educational qualifications; • checks against the person’s character, criminal record and bankruptcy history; • availability and other directorships; • the possession of particular skills such as finance, marketing or risk management; and • whether the appointment or re-appointment will contribute positively to the skill set and diversity of the Board as a whole. 16 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities 1.3 Written appointment 1.4 Company Secretary Diversity In addition to being set out in the Board Charter, it is intended that letters of appointment will be executed with all directors to describe the key duties and responsibilities of each member of Board, and that the letters will further include the terms of appointment, remuneration, time commitment envisaged, expectations regarding committee work, the requirement to disclose directors’ interests and confidentiality obligations. While the Board currently predominantly relies on the Board Charter and formal letters have not been yet put in place for all directors, each director is aware of their role and responsibilities and formal letters have been issued to two Non-Executive directors on 26 August 2015. Key management personnel will generally have written employment agreements setting out a description of key duties and responsibilities, reporting lines, remuneration and termination rights. These have been updated to reflect current responsibilities in the period between the reporting period and the date of this statement. The Company Secretary is appointed by and accountable to the Board and has particular responsibility for: • advising the board and its committees on governance matters; • monitoring whether board and committee policy and procedure are being followed; • coordinating timely completion of board and committee papers; • ensuring that business conducted at board and committee meetings are accurately recorded in the minutes; and • helping to organise the induction and professional development of directors. The Board Charter was updated by resolution of the Board on 23 June 2015 to explicitly reflect this delegation by the Board to the company secretary. The Board recognises diversity and equity as strengths and as a result of identifying non compliance with ASX Recommendation 1.5(a), resolved to adopt an updated Diversity & Equity Policy for the Company which includes an express requirement for the Board to set measurable objectives for achieving gender diversity (whereas the previous policy simply required a review of objectives by the Remuneration Committee of the Board on the assumption that they would be set in the first place). The updated Diversity & Equity Policy is available in the Corporate Governance section of the Company’s website, www.waterco.com. In accordance with the Diversity & Equity Policy, the Board set objectives for achieving gender diversity across its organisation. The objectives for the Reporting Period were: Women on the Board Women in senior executive positions Women employees in the company 2015 % 0% 15% 25% 2016 % 0% 15% 25% The Board assessed the progress towards these objectives during the Reporting Period by reviewing the relative proportion or women and men in the Company’s workforce at all levels. At the end of the Reporting Period women represented 29% of the overall workforce. Women made up 20% of senior executives (defined by the company as the Key Management Personnel). At the Board level, there were no female directors. However gender diversity will be considered at any time of Board renewal or additions. ANNUAL REPORT 2015 > 17 1.6 Board reviews The Board is committed to an ongoing internal process of performance evaluation of the Board, its committees and individual directors to ensure the diligent and effective discharge of responsibilities and a consistent mindset in improving corporate governance practices. The Board has undertaken an evaluation on the performance of the Board, its committees and individual directors for the Reporting Period. 1.7 Management reviews The Company is committed to an ongoing internal process of performance evaluation of key management personnel to ensure the diligent and effective discharge of their responsibilities The CEO has undertaken a performance evaluation review of key management personnel for the Reporting Period. Principle 2: Structure the Board to add value RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 2.1 Nominations committee 2.2 Board skills matrix The Company has not established a nomination committee. The ASX Recommendations acknowledge that such committees may not be required for smaller boards. The Board is of the opinion that it is appropriate for a company the size of Waterco for matters that come under the purview of a nomination committee to be undertaken by the Board through the Remuneration Committee. Furthermore, the Board has established processes in place to raise and address issues that would otherwise be considered by a nomination committee. The Board comprises an executive Chairman who is also the Chief Executive Officer (CEO), an executive director and three Non-Executive directors. The Board views each of the three Non-Executive directors as being independent. The Board’s membership is reviewed periodically to ensure that it maintains an appropriate mix of skills, qualifications and experience. In particular the Board has identified skills and experience in corporate finance, international trade and international business environment, marketing and accounting and technical and industry knowledge in the water treatment and pool industries to be important. Although currently all male, the Board composition represents diversity in age, ethnicity and background. At each Annual General Meeting (AGM), one third of the directors (excluding the CEO) and any director appointed to fill a casual vacancy since the previous AGM must retire but may stand for re-election. The Company achieved its preferred Board composition of at least five directors during the Reporting Period, with a majority of Non-Executive (and, where possible, independent) directors. Below is the matrix of skills and attributes that Waterco is aiming to achieve across its Board membership. This matrix was adopted by the Board on 23 June 2015. The Board had therefore not finalised or adopted the matrix during the reporting period prior to 23 June 2015. The Board is conscious of the need to improve in some areas, such as legal and engineering experience and female representation, and is considering addressing these shortcomings by attracting new candidates. General Executive and non-executive experience Governance committee experience Leadership Strategic thinking Industry experience Risk management Ethical and fiduciary duties Environment and sustainability Governance 18 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities 2.3 Disclose independence and length of service Technical Legal Financial Engineering Human resources Diversity Female Male Different ethnicities and cultures Languages other than English The names of the independent directors in office during the Reporting Period are: • Garry Norman; • Ben Hunt; and • Richard Ling. The Company’s assessment of the materiality of a director’s interest is considered on a case by case basis by the Board. Where an entity associated with a Director provides services to the Company, the Board uses a threshold of $100,000 in fees in a financial year as a guideline. However the Board does not follow an inflexible set of criteria but considers whether the relationship in question is reasonably likely to interfere with that Director’s independent judgement. Further details of the directors’ skills, experience, expertise and lengths of service are set out in the Board of Directors' section of the Company’s Annual Report. 2.4 Majority of directors independent A majority of the Board - Garry Norman, Ben Hunt and Richard Ling are independent directors, taking into account the factors relevant to "independence" under the ASX guidelines. 2.5 Independent chair 2.6 Induction and professional development The roles of Chairperson and CEO are both held by Mr Soon Sinn Goh. The Board believes that Mr Goh brings a vital level of industry experience to the operations of the Company. Also, as the major shareholder of the Company, Mr Goh’s commitment to the success of the Company is unquestionable. Therefore, it is the Board’s opinion that it is appropriate in the Company’s circumstances that the two roles be combined. With the majority of the Board’s Directors being independent, and with Independent Directors chairing the Audit and the Remuneration Committees, the Board is also of the opinion that it is not necessary that the office of Chairperson be held by an Independent Director. All new directors undergo an induction to familiarise them with the business of the Company, the Company’s internal control and risk management practices and policies and procedures. The Company also seeks to provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively. Principle 3: Act ethically and responsibly RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 3.1 Code of conduct The board has established a Code of Conduct for directors, key management personnel and employees. ANNUAL REPORT 2015 > 19 Principle 4: Safeguard integrity in corporate reporting RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 4.1 Audit committee The Audit Committee operates under the Audit Committee Charter. The role of the Audit Committee is to assist the Board with its oversight of the integrity of the financial statements, including overseeing the existence and maintenance of internal controls, accounting systems, and the financial reporting process. The Committee also nominates external auditors, reviews existing audit arrangements and co-ordinates external and internal auditing functions. In addition, the Audit Committee examines any other matters referred to it by the Board. Throughout the Reporting Period the Audit Committee consisted of 3 Independent Non-Executive directors and was headed by an Independent Chairperson not holding the position of Chairperson of the Board. The members of the Audit Committee during the Reporting Period were: • Garry Norman - Chairman; • Ben Hunt; and • Richard Ling. The number of Audit Committee meetings and details of Committee members’ attendance are included in the Directors’ Report section of the Company’s Annual Report. The Board has received a written statement from its CEO and Chief Financial Officer (CFO) which includes a declaration under section 295A of the Corporations Act 2001 (Cth) advising that: • in their opinion the Company’s financial reports have been properly maintained and have complied with the appropriate accounting standards and give a true and fair view of the Company’s financial position and performance; and • their opinion were founded on a system of risk management and internal compliance and control which implements the policies adopted by the Board, and that this system is operating efficiently and effectively in all material respects. 4.2 CEO and CFO certification of financial statements 4.3 External auditor at AGM The external auditor attends the AGM for the purpose of answering shareholder questions regarding the conduct of the audit and the preparation and content of the audit report. Principle 5: Make timely and balanced disclosure RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 5.1 Disclosure and Communications Policy The Company’s Continuous Disclosure Policy sets out the rules and responsibilities for Waterco’s officers and employees to ensure compliance with the ASX Listing Rules and promote factual and timely disclosure of all material matters concerning the Company. 20 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Principle 6: Respect the rights of security holders RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 6.1 Information on website Waterco keeps investors informed by publishing information in the Company’s website. All disclosures made to the ASX and all information provided to analysts or the media during briefings are promptly posted on the Company’s website after they have been released to the ASX. 6.2 Investor relations programs The Company’s Shareholder Communication Policy details the mechanisms put in place to ensure that the rights of shareholders are respected and to facilitate the effective exercise of those rights. The Shareholder Communication Policy contains information on persons whom shareholders can contact in relation to procedures at shareholders meetings, matters being considered at shareholders meetings and other issues. It also indicates that the predominant sources for investors to engage with the Company are at general meetings of the Company. 6.3 Facilitate participation at meetings of security holders Shareholders who are unable to attend any of the Company’s meetings are encouraged to vote on the proposed motions by appointing a proxy. Proxy forms are included with meeting notices that also provides details on how proxy forms should be completed and submitted. 6.4 Facilitate electronic communications The Company recognises the benefits of the use of electronic communications and is working towards allowing shareholders the option of selecting to receive the following information electronically from the share registry: dividend statements; annual reports; notices of meetings and proxy forms and the ability to vote online; and other general company communications. With this in place, shareholders can log into their account to make changes to their communication preference. The share registry can also be contacted via email or telephone. Contact details can be found on the Company’s website. Principle 7: Recognise and manage risk RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 7.1 Risk committee 7.2 Annual risk review The Audit Committee reports to the Board on the effectiveness of the risk management and internal control processes of the Company regularly by way of Minutes of Meetings to the directors and through other means of formal and informal reporting. Further details regarding the Audit Committee, its membership and the number of meetings held during the Reporting Period are set out in response to Recommendation 4.1. The Board reviews the risk management framework of the Company periodically as and when necessary to meet the operational requirements of the Company and changes in the law through the Audit Committee. The Board has performed the review for the Reporting Period. ANNUAL REPORT 2015 > 21 Principle 7: Recognise and manage risk RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 7.3 Internal audit The Company reviews and continually improves the effectiveness of its risk management and internal control processes. Further details regarding audit functions are set out Recommendation 4.1. in response to 7.4 Sustainability risks The Board considers that the Company is not materially exposed to economic, environmental and social sustainability risks. Principle 8: Remunerate fairly and responsibly RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 8.1 Remuneration committee The Remuneration Committee is responsible for making recommendations to the Board on remuneration packages and policies for the executive directors and the key management personnel. The Remuneration Committee Charter is published on the Company’s website. During the Reporting Period, the Remuneration Committee consisted of three independent Non-Executive directors and was headed by an independent Chairperson not holding the position of Chairperson of the Board. The members of the Remuneration Committee during the year were: • Ben Hunt – Chairman; • Garry Norman; and • Richard Ling. The number of Remuneration Committee meetings and details of Committee members’ attendance during the Reporting Period are set out in the Directors’ Report section of the Company's Annual Report. 8.2 Disclosure of Executive and Non- Executive Director remuneration policy Remuneration of the Company’s non-executive directors operates on different principles to the remuneration of executive directors. Non-executive directors receive fixed fees, and are not entitled to any retirement benefits other than statutory superannuation. The Remuneration Report at the Directors’ Report section of the Annual Report sets out: • information about the Remuneration Policy developed by the Remuneration Committee and adopted by the Board; and • details of remuneration of the directors (executive and non-executive) and key management personnel. The Company did not offer an equity-based remuneration scheme during the Reporting Period. 8.3 Policy on hedging equity incentive schemes 22 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Directors' Report Your directors present their report on the Company and its controlled entities for the financial year ended 30 June 2015. Directors The names of directors in office during and since the end of the financial year are: • Soon Sinn Goh • Bryan Goh • Garry Norman • Ben Hunt • Richard Ling All directors have been in office since the start of the financial year. For details of the directors’ qualifications and experience, refer to the section titled “Board of Directors” which is to be read as part of this report. Company Secretaries The following persons held the position of joint company secretary throughout the financial year: • Bee Hong Leo Mrs Leo was appointed Company Secretary on 3 March 1983. She has been employed by Waterco since March 1981 performing management roles in the administration and legal divisions. • Gerard Doumit FCPA Mr Doumit was appointed Joint Company Secretary on 22 July 1991. He has been employed by Waterco since January 1987 as an Accountant and is currently Chief Accountant and Joint Company Secretary. Principal Activities The principal activities of the consolidated Group during the financial year were: • wholesale, export and manufacture of equipment and accessories in the swimming pool, spa pool, spa bath, rural pump and water treatment industries; • manufacture and sale of solar heating systems for swimming pools and pre-heat industrial solar systems; • franchise of retail outlets for swimming pool equipment and accessories; and • formulating, packing and distribution of swimming pool chemicals to independent pool stores and stores in its Swimart franchise network. There were no significant changes in the nature of the consolidated Group’s principal activities during the financial year. ANNUAL REPORT 2015 > 23 Consolidated Results The consolidated profit of the Group after providing for income tax and eliminating non controlling interests amounted to $1.485 million. Dividends Dividends paid or declared for payment are as follows: • Final ordinary dividend of 3 cents per share paid on 15 December 2014 as recommended in last year’s report - $1.069 million • Final ordinary dividend of 5 cents per share declared by the directors to be paid on 14 December 2015 - $1.813 million. All dividends paid or declared since the end of the previous financial year were fully franked. Review of Operations A review of operations of the consolidated Group during the financial year and of the results of those operations together with likely developments in the operations of the consolidated Group and the expected results of those operations are set out in the Chief Executive Officer’s Review of Operations. Financial Position The net assets of the consolidated Group have increased by $5.45 million from $50.60 million in June 2014 to $56.05 million in June 2015. The change has largely resulted from: • Increase in the share capital from the Waterco Dividend Reinvestment Plan of $0.71 million; • Upward movement in foreign currency translation of $5.28 million; • Upward movement in profits less dividends paid of $0.42 million; • Net decrease in the asset revaluation reserve of group companies of $1.00 million; and • Net increase in non-controlling Interests of $0.07 million. The Group’s working capital being current assets less current liabilities decreased from $30.64 million in 2014 to $25.83 million in 2015. The directors believe that the Group is in a strong and stable financial position. Significant Changes in State of Affairs The directors are not aware of any significant changes in the state of affairs of the consolidated Group that occurred during the financial year which have not been covered elsewhere in this report. After Balance Date Events Since the end of the reporting period, the Board resolved to pay a final dividend of 5 cents per share fully franked. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated Group, the results of those operations, or the state of affairs of the consolidated Group in future financial years. Future Developments, Prospects and Business Strategies Information as to future developments, prospects and business strategies in the operations of the consolidated Group are included in the Chief Executive Officer’s Review of Operations. Other possible developments have not been included in this report as such inclusions would, in the opinion of the directors, prejudice the interests of the consolidated Group. 24 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Environmental Issues The consolidated Group’s operations are subject to some environmental regulations, particularly with regard to the storage of chemicals and waste management. The consolidated Group has adequate systems in place for the management of its environmental requirements. The directors are not aware of any breaches of the environmental regulations during the financial year. Directors’ Shareholdings Details of the directors’ shareholdings are contained in Note 7 to the Financial Statements. Meetings of Directors During the financial year, 12 meetings of directors (including Audit and Remuneration Committees) were held. Attendances are set out below: Director Directors’ Meeting Audit Committee Meeting Remuneration Committee Meeting Number Eligible To Attend Number Attended Number Eligible To Attend Number Attended Number Eligible To Attend Number Attended Soon Sinn Goh Bryan Goh Garry Norman Ben Hunt Richard Ling 6 6 6 6 6 6 6 6 6 6 - - 4 4 4 - - 4 4 4 - - 2 2 2 - - 2 2 2 Indemnifying Officers or Auditor During and since the financial year, the Company has paid premiums to insure all directors and officers against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity as director or officer of the Company, other than conduct involving a wilful breach of duty in relation to the Company. In accordance with common commercial practice, the insurance policy prohibits disclosure of the nature of the liability insured against and the amount of the premium. The Company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the Company or any related body corporate against a liability incurred by such an officer or auditor. Directors’ Benefits No director has received or become entitled to receive, during or since the financial year, a benefit arising from a contract made by the parent entity, or a related body corporate with a director, a firm of which a director is a member or a director or an entity in which a director has a substantial financial interest other than: i. Sales made by a controlled entity to Asiapools (M) Sdn Bhd of which Mr Soon Sinn Goh is a director and shareholder. ii. Payments made for rental of warehouses and offices to Mint Holdings Pty Ltd of which Mr Soon Sinn Goh is a director and shareholder. This statement excludes a benefit included in the aggregate amount of emoluments received or due and receivable by directors and shown in the Company’s accounts or the fixed salary of a full time employee of the parent entity, controlled entity or related body corporate. ANNUAL REPORT 2015 > 25 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 The Board of Directors, in accordance with advice from the Audit Committee, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed below did not compromise the external auditor’s independence for the following reasons: • all non-audit services are reviewed and approved by the Audit Committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and • the nature of the services provided do not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. Auditor’s Independence Declaration The lead auditor’s independence declaration for the year ended 30 June 2015 has been received and is included in the directors’ report. ASIC Class Order 98/100 Rounding of Amounts The Company is an entity to which ASIC Class Order 98/100 applies and, accordingly, amounts in the financial statement and directors’ report have been rounded to the nearest thousand dollars. Your directors present their report on the Company and its controlled entities for the financial year ended 30 June 2015. Remuneration Report Introduction This report provides remuneration policy and payment details applying in the financial year for persons who were members of Key Management Personnel of the Company. 2015 Remuneration Policy The Remuneration Committee governs the Company’s Remuneration Policy. The Committee comprises Independent Non-Executive Directors. It has the following objectives: • attract, retain and motivate management of the appropriate calibre to further the success of the business; • align management reward with shareholder value; • ensure that total remuneration is reasonable and comparable with market standards; • ensure that remuneration should realistically reflect the responsibilities of the executives; • ensure that incentive schemes reward superior company performance and be clearly linked to appropriate performance benchmarks based on improved company performance; and • ensure that the remuneration costs are disclosed in accordance with the requirements of law and relevant accounting standards. 26 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities The remuneration structure for Key Management Personnel of the Waterco Group comprises: • Fixed remuneration. This consists of base salary and the full costs of other benefits; and • Incentives. The level varies with performance. It consists of an annual incentive plan. The Remuneration Committee reviews market data and the performance of the CEO. The Committee then recommends the fixed remuneration and annual incentive payment of the CEO for approval by the Board. The CEO recommends Key Management Personnel’s fixed remuneration to the Remuneration Committee. Fixed remuneration for Key Management Personnel is reviewed annually and determined by reference to appropriate benchmark information of comparable companies, taking into account their responsibility, performance, qualifications, experience and potential. Adjustments are made only if there is the prospect of fixed remuneration levels falling behind market levels. The remuneration of Non-Executive Directors is fixed and does not change according to the performance of the company. They do not participate in any incentive plans available to managers. Non-Executive Directors are paid fees based on the nature of their work and their responsibilities. The Company makes superannuation guarantee (SG) payments, in addition to those fees. The level and structure of fees is based upon the need for the Company to be able to attract and retain Non-Executive Directors of an appropriate calibre, the demands of the role and prevailing market conditions. The maximum aggregate amount of fees that can be paid to Non-Executive Directors is subject to approval by shareholders at the Annual General Meeting. There has been an increase of 3% in the Non-Executive Director fees for the 2015/2016 financial year. The total fees are now at an aggregate of $164,338 plus superannuation guarantee. The Remuneration Committee seeks independent external advice when required. Performance–based Remuneration policy, and its relationship with Company performance There is an annual incentive plan in place for all Key Management Personnel. This is a payment that varies with performance measured over a twelve-month period. There have been no changes in performance based remuneration policy compared with the prior reporting period. Maximum payments are capped. In the case of the CEO, the Remuneration Committee sets the performance requirements; in the case of other Key Management Personnel, the CEO recommends performance requirements for consideration by the Remuneration Committee. The annual incentive performance criteria relate to the employee’s responsibilities. If requirements are achieved, there will be an improvement in shareholder value. The key performance requirements for an incentive payment are Net Profit After Tax (NPAT). This provides a clear alignment between the interests of shareholders and the level of reward for eligible employees. ANNUAL REPORT 2015 > 27 Performance criteria are tabulated below: Key Management Personnel with annual incentives Summary of Performance Condition FY 15 Why Chosen Soon Sinn Goh – CEO Budgeted NPAT for the Waterco Group. Key Management Personnel Budgeted NPAT for the Waterco Group. Encourage CEO to improve the performance levels of the Group as a whole and thereby increase shareholder wealth. The performance of other key management personnel can have a Group impact, so targets are based on Group performance. The satisfaction of the performance conditions of the annual incentive is based on a review of the audited financial statements of the Group. If the Group’s performance, as a whole does not reach the relevant target levels, then no annual incentive payments are made. None of the Company’s Key Management Personnel achieved their performance targets in the year-ended 30 June 2015. Therefore, they will not receive an annual incentive payment for the financial year just ended. The following table shows the Sales Revenue, Net Profit Before Tax (NPBT), Net Profit After Tax (NPAT), Earnings Per Share (EPS), dividends and year-end share price in the financial year just ended and the previous four financial years for the consolidated Group. Year ended June 15 June 14 June 13 June 12 June 11 Sales Revenue ($million) NPBT ($million) EPS (cents) Dividends per share paid (cents) Year end share price ($) NPAT ($million) 80.89 3.05 4.1 3.0 1.00 1.55 77.12 1.93 2.6 7.0 1.15 0.97 68.21 3.19 4.9 7.0 1.00 1.72 66.14 2.9 6.1 8.0 0.88 2.09 67.74 4.48 9.8 9.0 1.06 3.18 28 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Employment Details of Key Management Personnel The following table provides employment details for the financial year for Key Management Personnel. The table also illustrates the proportion of remuneration that was performance and non-performance based. Proportions of elements of remuneration related to performance Proportions of elements of remuneration not related to performance Position held as at 30 June 2015 and any change during the year Contract details (duration & termination) Non- salary cash-based incentives % Shares/ Units % Options/ Rights % Fixed Salary/ Fees % Total % Key Management Personnel S S Goh Chairman & CEO No fixed term; may be terminated on 6 months’ notice by either party B Goh Group Marketing Director - Executive No fixed term; may be terminated on 1 months' notice by either party G Norman Director - Non-Executive B Hunt Director - Non-Executive R Ling Director - Non-Executive Chief Financial Officer Joint Company Secretary S T Lim B H Leo G Doumit No formal contract, but subject to member confirmation every 3 years after AGM when first appointed No formal contract, but subject to member confirmation every 3 years after AGM when first appointed No fixed term, but subject to member confirmation every 3 years after AGM when first appointed No fixed term, may be terminated on 1 months’ notice by either party No fixed term, may be terminated on 1 months’ notice by either party Chief Accountant/ Joint Company Secretary No written contract - - - - - - - - - - - - - - - - - - - - - - - - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Changes in Directors and Key Management Personnel Subsequent to Year-end There have been no changes in Directors and Key Management Personnel subsequent to year-end. ANNUAL REPORT 2015 > 29 The following table provides remuneration details for the 2015 and 2014 financial years for Key Management Personnel. Short-term benefits Post- employment benefits Long-term benefits Equity-settled share-based payments Salary, fees and leave $ Profit share and bonus $ Non- monetary (3) $ Pension and super- annuation $ Incentive plans (2) $ Share / Units $ Option / Rights $ Total $ LSL $ Key Management Personnel Soon Sinn Goh(1) Bryan Goh Garry Norman Ben Hunt Richard Ling Sze Tin Lim Ben Hong Leo Gerard Doumit 2015 369,984 2014 359,465 2015 204,781 2014 186,800 2015 53,184 2014 51,635 2015 53,184 2014 51,635 2015 53,184 2014 51,635 2015 206,769 2014 192,260 2015 183,969 2014 163,963 2015 174,848 2014 153,583 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 11,018 10,440 18,783 18,470 5,052 4,776 5,052 4,776 5,052 4,776 - - - - - - - - - - - - 1,587 13,557 - - - - - - 18,783 718 9,076 18,470 1,649 16,022 17,793 616 5,514 16,095 1,413 10,038 20,473 16,256 616 20,578 14,206 1,413 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 381,002 369,905 225,151 218,827 58,236 56,411 58,236 56,411 58,236 56,411 235,346 228,401 207,892 191,509 212,193 189,780 (1) S S Goh’s Base Salary of $369,984 is made up of $115,983 paid by Waterco Ltd, $86,895 paid by Waterco (Far East) Sdn Bhd (a subsidiary) and $167,106 paid by Waterco International Pte Ltd (a subsidiary). (2) These represent the benefits from the Legacy Non-recourse Loan Employee Share Plan. (3) Non monetary benefits are made up of Company vehicle benefits. 30 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Securities Received that are not Performance Related No Key Management Personnel are entitled to receive securities which are not performance based as part of their remuneration package. Cash incentives, Performance-related Bonus and Share-based Payments No options or other share based payments were granted in the 2015 financial year. Maximum cash incentives expressed as a percentage of fixed remuneration and the maximum value that could have been earned in 2014/2015 if stretch performance targets were achieved are tabulated below: Position Maximum possible incentive as a percentage of fixed pay Maximum possible incentive $ Key Management Personnel CEO, Waterco Limited Group Marketing Director, Waterco Limited CFO, Waterco Limited Company Secretary, Waterco Limited Chief Accountant/Joint Company Secretary, Waterco Limited 26% 18% 17% 12% 12% $100,000 $40,000 $40,000 $25,000 $25,000 The percentage of cash incentives paid and forfeited during the year to key management personnel. Key Management Personnel Short term incentive in respect of 2015 financial year Paid % Forfeited % S S Goh B Goh S T Lim B H Leo G Doumit 0 0 0 0 0 100 100 100 100 100 This Report of the Directors, incorporating the Remuneration Report, is signed in accordance with a resolution of the Board of Directors: Soon Sinn Goh Chairman Dated at Sydney this 21 September 2015 ANNUAL REPORT 2015 > 31 Auditor’s Independence Declaration 32 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Consolidated Financial Report for the year ended 30 June 2015 Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration > 34 > 35 > 36 > 37 > 38 > 78 Independent Auditor's Report > 79 Shareholder Information Corporate Directory > 81 > 82 ANNUAL REPORT 2015 > 33 Consolidated Statement of Profit or Loss and other Comprehensive Income For The Year Ended 30 June 2015 Consolidated Group 2015 $000 88,171 (874) (44,833) (15,730) (1,155) (1,541) (1,579) (97) (1,806) (2,545) (278) (361) (397) (3,753) (1,224) (8,951) 3,047 (1,495) 1,552 (1,002) 5,261 4,259 5,811 1,485 67 1,552 5,744 67 5,811 4.1 4.1 Note No. 3 4 4 4 4 6 Revenues Changes in inventories of finished goods and work in progress Raw materials and consumables used Employee benefits expense Depreciation and amortisation expense Finance costs Advertising expense Discounts allowed Outward freight expense Rent expense Contracted staff expense Warranty expense Commission expense Impairment loss of building and plant and equipment Increased cost of working – Rydalmere fire Other expenses Profit before income tax expense Income tax expense Profit for the year Other comprehensive income Items that will not be classified subsequently to profit or loss Property revaluation (decrement)/ increment (net of tax) Items that maybe reclassified to profit or loss Exchange translation differences Other comprehensive income for the year Total comprehensive income for the year Profit attributable to : Members of the parent entity Non-controlling interest Total comprehensive income for the year attributable to: Members of the parent entity Non-controlling interest Total comprehensive income for the year Earnings per share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 29 29 The accompanying notes form part of these financial statements. 34 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities 2014 $000 77,971 (1,309) (40,771) (15,153) (1,310) (1,529) (1,797) (9) (1,801) (2,480) (375) (457) (416) - - (8,636) 1,928 (954) 974 5,251 (283) 4,968 5,942 907 67 974 5,875 67 5,942 2.6 2.6 Consolidated Statement of Financial Position As At 30 June 2015 Consolidated Group ASSETS Current Assets Cash and cash equivalents Trade and other receivables Inventories Current tax assets Other current assets Total Current Assets Non-Current Assets Property, plant & equipment Intangible assets Deferred tax assets Total Non-Current Assets Total Assets LIABILITIES Current Liabilities Trade and other payables Borrowings Current tax liabilities Short term provisions Total Current Liabilities Non-Current Liabilities Borrowings Deferred tax liabilities Long-term provisions Total Non-Current Liabilities Total Liabilities Net Assets EQUITY Issued capital Reserves Retained earnings Parent interest Non-controlling interest Total Equity Note No. 8 9 10 17 11 13 14 17 15 16 17 18 19 17 20 21 22 23 2015 $000 3,771 16,735 33,970 - 843 55,319 41,325 322 311 41,958 97,277 12,139 15,418 279 1,658 29,494 10,211 1,341 178 11,730 41,224 56,053 38,142 7,505 9,949 55,596 457 56,053 2014 $000 1,588 11,816 33,827 65 724 48,020 43,987 355 614 44,956 92,976 11,512 4,380 - 1,492 17,384 23,280 1,524 189 24,993 42,377 50,599 37,430 3,246 9,533 50,209 390 50,599 The accompanying notes form part of these financial statements. ANNUAL REPORT 2015 > 35 Statement of Changes in Equity For the year ended 30 June 2015 Ordinary Shares Retained Earnings Capital Profits Reserve Asset Revaluation Reserve Foreign Currency Translation Reserve Share Options Reserve Non- Controling Interests Total Consolidated Group Note No. $000 $000 $000 $000 $000 $000 $000 $000 Balance at 30/6/13 Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners, in their capacity as owners and other transfers Issue of shares under Waterco DRP Employee share loans Dividends paid Total transactions with owners and other transfers Balance at 30/6/14 Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners, in their capacity as owners and other transfers Issue of shares under Waterco DRP Employee share loans Dividends paid Total transactions with owners and other transfers 36,380 11,067 211 6,834 (8,787) 20 323 46,048 - - - 907 - 907 1,042 8 - - - (2,441) 28 1,050 (2,441) - - - - - - - - - 5,251 (283) 5,251 (283) - - - - - - - - - - - - - - - 67 974 - 4,968 67 5,942 - - - - 1,042 8 (2,441) (1,391) 37,430 9,533 211 12,085 (9,070) 20 390 50,599 - - - 1,485 - 1,485 659 53 - - - (1,069) 28 712 (1,069) - - - - - - - - - (1,002) 5,261 (1,002) 5,261 - - - - - - - - - - - - - - - 67 1,552 - 4,259 67 5,811 - - - - 659 53 (1,069) (357) Balance at 30/6/15 38,142 9,949 211 11,083 (3,809) 20 457 56,053 The accompanying notes form part of these financial statements. 36 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Statement Of Cash Flows For The Year Ended 30 June 2015 Cash Flows from Operating Activities Receipts from customers Payments to suppliers and employees Interest received Other Income Finance costs Income tax paid Net cash provided by operating activities (note 33) Cash Flows from Investing Activities Payment for property, plant & equipment Proceeds from sale of property, plant & equipment Net cash (used in) investing activities Cash Flows from Financing Activities Proceeds from borrowings Proceeds from issue of shares Payment of hire purchase creditors Payment of lease liabilities Dividends paid Employee share plan repayments Net cash (used in) financing activities Net increase/(decrease) in cash held Cash at beginning of the year Effects of exchange rate changes on balance of cash held in foreign currencies Cash and cash equivalents the end of the year (Note 8) Consolidated Group 2015 $000 84,638 (78,812) 33 3,788 (1,541) (602) 7,504 (3,007) 168 (2,839) (1,210) 659 (49) (176) (1,069) 53 (1,792) 2,873 (68) 459 3,264 2014 $000 81,845 (79,204) 24 828 (1,529) (1,238) 726 (1,603) 155 (1,448) (382) 1,042 - (238) (2,441) 8 (2,011) (2,733) 1,939 726 (68) The accompanying notes form part of these financial statements. ANNUAL REPORT 2015 > 37 Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies These consolidated financial statements and notes represent those of Waterco Limited and controlled entities, (“Group”). Waterco Limited incorporated and domiciled in Australia. is a listed public company, The separate financial statements of the parent entity, Waterco Limited have not been presented within this financial report as permitted by the Corporations Act 2001. The financial statements were authorised for issue on 21 September 2015. Basis of Preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting authoritative Interpretations, other pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in financial statements containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards as issued by the IASB. Material accounting policies adopted in the preparation of these financial statements are presented below and have been consistently applied unless otherwise stated. Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. a. Principles of Consolidation The consolidated financial statements incorporate all of the assets, liabilities and results of the parent (Waterco Limited) and all of the subsidiaries (including any structured entities). Subsidiaries are entities the parent controls. The parent 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 those returns through its power over the entity. A list of the subsidiaries is provided in Note 12. All subsidiaries have a June financial year end except for Waterco Guangzhou Ltd, Waterco (C) Ltd, and PT Waterco Indonesia all of which have a December financial year end. 38 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities The assets, liabilities and results of all subsidiaries are fully consolidated into the financial statements of the Group from the date on which control is obtained by the Group. The consolidation of a subsidiary is discontinued from the date that control ceases. transactions, balances and unrealised gains or losses on transactions between group entities are fully eliminated on consolidation. Accounting policies of subsidiaries have been changed and adjustments made where necessary to ensure uniformity of the accounting policies adopted by the Group. Intercompany interests Equity interests in a subsidiary not attributable, directly or indirectly, to the Group are presented as “non-controlling interests”. The Group initially recognises non-controlling that are present ownership interests in subsidiaries and are entitled to a proportionate share of the subsidiary’s net assets on liquidation at either fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net assets. Subsequent to initial recognition, non-controlling interests are attributed their share of profit or loss and each component of other comprehensive income. Non-controlling interests are shown separately within the equity section of the statement of financial position and statement of comprehensive income. Business combinations Business combinations occur where an acquirer obtains control over one or more businesses. A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The business combination will be accounted for from the date that control is attained, whereby the fair value of the identifiable assets acquired and liabilities (including contingent liabilities) assumed is recognised (subject to certain limited exemptions). When measuring the consideration transferred in the business combination, any asset or liability resulting from a contingent consideration arrangement is also included. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability is remeasured each reporting period to fair value, recognising any change to fair value in profit or loss, unless the change in value can be identified as existing at acquisition date. All transaction costs incurred in relation to the business combination are expensed to the statement of comprehensive income. The acquisition of a business may result in the recognition of goodwill or a gain from a bargain purchase. Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) b. Fair Value of Assets and Liabilities The Group measures some of its assets and liabilities at fair value on either a recurring or non- recurring basis, depending on the requirements of the applicable Accounting Standard. Fair value is the price the Group would receive to sell an asset or would have to pay to transfer a liability in an orderly (ie unforced) transaction between independent, knowledgeable and willing market participants at the measurement date. As fair value is a market-based measure, the closest equivalent observable market pricing information is used to determine fair value. Adjustments to market values may be made having regard to the characteristics of the specific asset or liability. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. To the extent possible, market information is extracted from either the principal market for the asset or liability (ie the market with the greatest volume and level of activity for the asset or liability) or, in the absence of such a market, the most advantageous market available to the entity at the end of the reporting period (ie the market that maximises the receipts from the sale of the asset or minimises the payments made to transfer the liability, after taking into account transaction costs and transport costs). For non-financial assets, the fair value measurement also takes into account a market participant’s ability to use the asset in its highest and best use or to sell it to another market participant that would use the asset in its highest and best use. The fair value of liabilities and the entity’s own equity instruments (excluding those related to share-based payment arrangements) may be valued, where there is no observable market price in relation to the transfer of such financial instrument, by reference to observable market information where such instruments are held as assets. Where this information is not available, other valuation techniques are adopted and, where significant, are detailed in the respective note to the financial statements. c. Leases Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership that is transferred to entities in the consolidated group, are classified as finance leases. Finance leases are capitalised by recognising an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term. Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are recognised as expenses in the periods in which they are incurred. Lease incentives under operating leases are recognised as a liability and amortised on a straight- line basis over the lease term. d. Inventories Inventories are measured at the lower of cost and net realisable value. Cost is determined on a standard cost basis. The cost of manufactured products includes direct materials, direct labour and an appropriate portion of variable and fixed overheads. Overheads are applied on the basis of normal operating capacity. Net realisable value is determined as the estimated selling price less costs to sell. ANNUAL REPORT 2015 > 39 Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) e. Income Tax The income tax expense (revenue) for the year comprises current income tax expense (income) and deferred tax expense (income). Current income tax expense charged to profit or loss is the tax payable on taxable income. Current tax liabilities (assets) are measured at the amounts expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well unused tax losses. Current and deferred income tax expense (income) is charged or credited outside profit or loss when the tax relates to items that are recognised outside profit or loss. Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred relating tax assets temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. to Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (a) a legally enforceable right of set-off exists; and (b) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous 40 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Waterco Limited and its wholly-owned Australian Subsidiaries have formed a consolidated group for the purposes of the tax consolidation provisions of the Income Tax Assessment Act 1997. Each entity in the group recognises its own current and deferred tax assets and liabilities. Such taxes are measured using the “stand-alone taxpayer” approach to allocation. All of the deferred tax assets and liabilities of the subsidiary members have become part of the deferred assets and liabilities of Waterco Ltd. Each company in the group contributes to the income tax payable in proportion to their contribution to the net profit before tax of the consolidated group. The group notified the ATO on 20 January 2005 that it had formed an income tax consolidated group to apply from 1 July 2003. f. Foreign Currency Transactions and Balances Functional and presentation currency The functional currency of each of the group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency. Transaction and balances Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. Exchange differences arising on the translation of monetary items are recognised in the statement of comprehensive income, except where deferred in equity as a qualifying cash flow or net investment hedge. Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the statement of comprehensive income. Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) f. Foreign Currency Transactions and Balances (continued) Group companies The financial results and position of foreign operations whose functional currency is different from the group’s presentation currency are translated as follows: • assets and liabilities are translated at year-end exchange rates prevailing at that reporting date; • income and expenses are translated at average exchange rates for the period; and • retained earnings are translated at the exchange rates prevailing at the date of the transaction. Exchange differences arising on translation of foreign operations are transferred directly to the Group’s foreign currency translation reserve in the statement of comprehensive income. These differences are in the statement of comprehensive recognised income in the period in which the operation is disposed. g. Employee Benefits Provision for employee benefits, which include long service leave, and annual leave are computed to cover expected benefits at balance date. Employee benefits expected to be settled within one year together with benefits arising from wages and salaries, annual leave and sick leave which will be settled after one year, have been measured at the amounts expected to be paid when the liability is settled plus related on-costs. (see note 19) Employee benefits (long service leave) payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. In determining the liability , consideration is given to employee wage increases and the probability that the employee may satisfy any vesting requirements. Those cash flows are discounted using market yields on national government bonds with terms to maturity that match the expected timing of cash flows attributable to employee benefits. Contributions are made by the consolidated group to an employee superannuation fund and are charged as expenses when incurred. The consolidated group has no legal obligation to cover any shortfall in the funds obligations to provide benefits to employees on retirement. Equity-settled compensation The group operates equity-settled share-based payment employee share and option schemes. The fair value of the equity to which employees become entitled is measured at grant date and recognised as an expense over the vesting period, with a corresponding increase to an equity account. The fair value of shares is ascertained as the market bid price. The fair value of options is ascertained using a Black–Scholes pricing model which incorporates all market vesting conditions. The number of shares and options expected to vest is reviewed and adjusted at each reporting date such that the amount recognised for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest. h. Deferred Expenditure Expenditure during the research phase of a project is recognised as an expense when incurred. Development costs are capitalised only when technical feasibility studies identify that the project will deliver future economic benefits and these benefits can be measured reliably. Development costs have a finite life and are amortised on a systematic basis matched to the future economic benefits over the useful life of the project. i. Acquisition of Assets The cost method of accounting has been used for acquisition of all assets (including shares). Cost is defined as the fair value of the assets given up at the date of acquisition plus costs incidental to acquisition. Where goodwill arises it is brought to account. ANNUAL REPORT 2015 > 41 Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) j. Property, Plant and Equipment Each class of property, plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation. Property Land and buildings are measured on a fair value basis being the amount for which an asset could be exchanged between knowledgeable willing parties in an arms length transaction. The value of the land and building owned by the consolidated group is based on the following independent valuations: Land & Buildings Date of Valuation Amount Rydalmere NSW 15 June 2012 AUD 9,750,000 Malaysia 30 April 2014 China 18 June 2012 USA 17 June 2013 AUD 18,935,482 (MYR 55,000,000) AUD 8,847,905 (CNY 42,170,000) AUD 2,606,651 (USD 1,995,000) Valuations were made on the basis of open value. The revaluation surplus net of applicable deferred capital gains taxes was credited to an asset revaluation reserve in shareholders’ equity. Increases in the carrying amount arising on revaluation of land and buildings are credited to a revaluation surplus in equity. Decreases that offset previous increases of the same asset are charged against fair value reserves directly in equity; all other decreases are charged to the statement of comprehensive income. Each year the difference between depreciation based on the revalued carrying amount of the asset charged to the statement of comprehensive income and depreciation based on the asset’s original cost is transferred from the revaluation surplus to retained earnings. Due to the fire at the Rydalmere NSW Premises on 7 January 2015, our valuation shows the value as if completed basis of $11,300,000 and on an “as is” or Uncompleted” basis of $7,000,000. No adjustment has been done to revalue the Rydalmere Building since it has not been reinstated as at 30th June 2015. The value of the property has been written down to reflect the damage caused by the fire. 42 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Plant and equipment Plant and equipment are measured on the cost basis and therefore carried at cost less accumulated depreciation and any accumulated impairment. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised either in profit or loss or as a revaluation decrease if the impairment losses relate to a revalued asset. A formal assessment of recoverable amount is made when impairment indicators are present (refer to Note 1(n) for details of impairment). The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. The cost of fixed assets constructed within the consolidated group includes the cost of materials, direct labour, borrowing costs and an appropriate proportion of fixed and variable overheads. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial period in which they are incurred. Depreciation The depreciable amount of all fixed assets including building and capitalised leased assets, but excluding freehold land, is depreciated over their useful lives commencing from the time the asset is ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The gain or loss on disposal of all fixed assets is determined as the difference between the carrying amount of the asset at the time of disposal and the proceeds of disposal, and is included in operating profit before income tax of the consolidated group in the year of disposal. Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) Interest revenue is recognised using the effective interest rate method. j. Property, Plant and Equipment (continued) Depreciation (continued) Depreciation where applicable has been charged in the accounts so as to write off each asset over the estimated useful life of the asset concerned. Either the diminishing value or straight line method, as considered appropriate, is used. The depreciation rates used for each class of depreciable assets are: Class of Fixed Assets Depreciation Rate Buildings 1.50% - 2.50% Plant and equipment 6.00% - 33.33% Leased plant and equipment 13.00% - 20.00% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount its estimated recoverable amount. is greater than Gains and losses on disposals are determined by comparing the proceeds with the carrying amount. These gains and losses are included in the statement of comprehensive income. When revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings. k. Revenue and Other Income Revenue is measured at the fair value of the consideration received or receivable after taking into account any trade discounts and volume rebates allowed. When the inflow of consideration is deferred, it is treated as the provision of financing and is discounted at a rate of interest that is generally accepted in the market for similar arrangements. The difference between the amount initially recognised and the amount ultimately received is interest revenue. Revenue from the sale of goods is recognised at the point of delivery as this corresponds to the transfer of significant risks and rewards of ownership of the goods and the cessation of all involvement in those goods. Dividend revenue is recognised when the right to receive a dividend has been established. Franchise fee income is invoiced and recognised as revenue on a monthly basis. All revenue is stated net of the amount of goods and services tax (GST). l. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST is not recoverable from the Australian Taxation Office. In these circumstances the GST is recognised as part of the cost acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. incurred Cashflows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. m. Impairment of Assets At the end of each reporting period, the Group assesses whether there is any indication that an asset may be impaired. The assessment will include the consideration of external and internal sources of information including dividends received from subsidiaries, associates or jointly controlled entities deemed to be out of pre-acquisition profits. If such an indication exists, an impairment test is carried out on the asset by comparing the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, to the asset’s carrying amount. Any excess of the asset’s carrying amount over its recoverable amount is recognised immediately in profit or loss, unless the asset is carried at a revalued amount in accordance with another Standard (eg in accordance with the revaluation model in AASB 116). Any impairment loss of a revalued asset is treated as a revaluation decrease in accordance with that other Standard. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Impairment testing is performed annually for goodwill and intangible assets with indefinite lives. ANNUAL REPORT 2015 > 43 Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) n. Trade and Other Receivables Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinary course of business. Receivables expected to be collected within twelve months at the end of the reporting period are classified as current assets. All other receivables are classified as non-current assets. Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method less any provision for impairment (see 1 n.) o. Trade and Other Payables Trade and other payables represent the liability outstanding at the end of the reporting period for goods and services received by the Group during the reporting period which remains unpaid. The balance is recognised as a current liability with the amount being normally paid within 30 days of recognition of the liability. p. Provisions Provisions are recognised when the group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. q. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities in the statement of financial position. r. Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in income in the period in which they are incurred. s. Financial Instruments Recognition and Initial Measurement instruments, Financial incorporating financial assets and financial liabilities, are recognised when the entity becomes a party to the contractual 44 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities provisions of the instrument. Trade date accounting is adopted for financial assets that are delivered within timeframes established by marketplace convention. Financial instruments are initially measured at fair value plus transactions costs where the instrument is not classified as at fair value through profit or loss. Transaction costs related to instruments classified as at fair value through profit or loss are expensed to profit or loss immediately. Financial instruments are classified and measured as set out below. Derecognition Financial assets are derecognised where the contractual rights to receipt of cash flows expires or the asset is transferred to another party whereby the entity is no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are derecognised where the related obligations are either discharged, cancelled or expire. The difference between the carrying value of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of non-cash assets or liabilities assumed, is recognised in profit or loss. Classification and Subsequent Measurement Finance instruments are subsequently measured at fair value, amortised cost using the effective interest rate method, or cost. Amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition less principal repayments and any reduction for impairment, and adjusted for any cumulative amortisation of the difference between that initial amount and the maturity amount calculated using the effective interest method. Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models. The effective interest method is used to allocate interest income or interest expense over the relevant period and is equivalent to the rate that discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) through the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying value with a consequential recognition of an income or expense item in profit or loss. Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) s. Financial Instruments (continued) Classification and Subsequent Measurement (continued) The Group does not designate any interests in subsidiaries, associates or joint venture entities as being subject to the requirements of Accounting Standards specifically applicable to financial instruments. (i) Financial assets at fair value through profit or loss Financial assets are classified at “fair value through profit or loss” when they are held for trading for the purpose of short-term profit taking, derivatives not held for hedging purposes, or when they are designated as such to avoid an accounting mismatch or to enable performance evaluation where a Group of financial assets is managed by key management personnel on a fair value basis in accordance with a documented risk management or investment strategy. Such assets are subsequently measured at fair value with changes in carrying value being included in profit or loss. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Loans and receivables are included in current assets, where they are expected to mature within 12 months after the end of the reporting period. (iii) Financial liabilities Non-derivative financial liabilities (excluding subsequently are financial measured at amortised cost. guarantees) Impairment At the end of each reporting period, the Group assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available-for-sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in profit or loss. Also, any cumulative decline in fair value previously recognised is in other comprehensive reclassified to profit or loss at this point. income t. Rounding of Amounts The parent entity has applied the relief available to it under ASIC Class Order 98/100. Accordingly, amounts in the financial statements and directors’ report have been rounded off to the nearest $1,000, unless specified otherwise. u. Critical Accounting Estimates and Judgements The directors evaluate estimates and judgements incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the group. Key Estimates (i) Inventory Classification Included in inventory are certain inventory items held to service existing products and various components used in the manufacturing process. The nature of these items may require them to be included in inventory for more than one year. Management have evaluated these inventory items and do not consider the carrying value of these items as material. All inventory items have therefore been classified as current. (ii) Inventory Obsolescence Management review inventory reports on a regular basis to determine slow-moving or obsolescence. Appropriate provisions are carried for impairment items are items. Obsolete of slow-moving disposed of as and when identified. (iii) Impairment-General The Group assesses impairment at the end of each reporting period by evaluating conditions and events specific to the Group that may be indicative of impairment triggers. Recoverable amounts of relevant assets are reassessed using value-in- use calculations which incorporate various key assumptions. ANNUAL REPORT 2015 > 45 Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) v. New and Amended Accounting Policies Adopted by the Group The below table shows the new and revised accounting standards (including amending standards) and interpretations that are mandatory for the year ended 30 June 2015. AASB 10 Consolidated Financial Statements 1 January 2014 Mandatory AASB 11 Joint Arrangements 1 January 2014 Mandatory AASB 12 Disclosure of Interests in Other Entities 1 January 2014 Mandatory AASB 127 Separate Financial 1 January 2014 Mandatory AASB 128 Investments in Associates and Joint Ventures 1 January 2014 Mandatory w. New Accounting Standards for Application in Future Periods New standards and interpretations issued but not yet effective At the date of this financial report the following standards and interpretations, which may impact the entity in the period of initial application, have been issued but are not yet effective: Reference Title Summary AASB 2015-3 Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality The Standard completes the AASB’s project to remove Australian guidance on materiality from Australian Accounting Standards. AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation AASB 2014-6 Amendments to Australian Accounting Standards – Agriculture: Bearer Plants This Standard amends AASB 116 and AASB 138 to establish the principle for the basis of depreciation and amortisation as being the expected pattern of consumption of the future economic benefits of an asset, and to clarify that revenue is generally presumed to be an inappropriate basis for that purpose. This amending standard defines bearer plants, and requires bearer plants to be accounted for as property, plant and equipment within the scope of AASB 116 Property, Plant and Equipment. Application date (financial years beginning) Expected Impact 1 July 2015 No expected impact 1 January 2016 No material impact 1 January 2016 No material impact 46 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 1: Statement of Significant Accounting Policies (continued) w. New Accounting Standards for Application in Future Periods (continued) New standards and interpretations issued but not yet effective (continued) Reference Title Summary AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012-2014 Cycle The Standard makes amendments to various Australian Accounting Standards arising from the IASB’s Annual Improvements process, and editorial corrections. Application date (financial years beginning) Expected Impact 1 January 2016 No material impact AASB 2015-2 Amendments to Australian Accounting Standards –Disclosure Initiative: Amendments to AASB 101 The Standard makes amendments to AASB 101 Presentation of Financial Statements arising from the IASB’s Disclosure Initiative project. 1 January 2016 Disclosures Only AASB 9 Financial Instruments AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) This Standard supersedes both AASB 9 (December 2010) and AASB 9 (December 2009) when applied. It introduces a “fair value through other comprehensive income” category for debt instruments, contains requirements for impairment of financial assets, etc. 1 January 2018 No material impact Consequential amendments arising from the issuance of AASB 9 1 January 2018 No material impact x. Comparative Figures Where required by Accounting Standards comparative figures have been adjusted to conform with changes in presentation for the current financial year. ANNUAL REPORT 2015 > 47 Notes To The Financial Statements For the year ended 30 June 2015 Note 2: Parent Information The following information has been extracted from the books and records of the parent and has been prepared in accordance with accounting standards. STATEMENT OF FINANCIAL POSITION ASSETS Current Assets TOTAL ASSETS (i) LIABILITIES Current Liabilities TOTAL LIABILITIES EQUITY Issued capital Capital profits reserve Asset revaluation reserve Share options reserve Retained earnings TOTAL EQUITY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Total profit after tax Total comprehensive income 2015 $000 22,614 67,640 22,290 24,033 38,142 180 1,227 - 4,058 43,607 2015 $000 2,791 1,789 2014 $000 18,836 67,349 5,214 25,155 37,430 180 2,229 20 2,336 42,195 2014 $000 1,243 1,243 Guarantees At 30th June 2015, Waterco Ltd has provided a guarantees of RM11,150,000 and $US1,000,000 (A$5,145,330 (2014: RM11,150,000 and $US1,000,000 (A$4,752,164)) to AM Bank Sdn Bhd for loans provided to a subsidiary, Waterco (Far East) Sdn Bhd. Contingent Liabilities At 30th June 2015, Waterco Ltd has provided guarantees of $5,344,509 (2014: $5,428,897) to landlords for leases of premises subleased to its Swimart Franchisees. Cotractual Commitments At 30th June 2015, Waterco Ltd has not entered any contractual commitments for the acquisition of any property, plant and equipment. (2014: nil). 48 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 3: Revenue and Other Income Revenue from Continuing Operations Sales revenue • Sale of goods Other revenue • Interest received 3(a) • Rent • Insurance income • Other Total Revenue (a) Interest received or receivable from • Other persons Total interest revenue Other Income Net gain/(loss) on disposal off of non-current assets • Property, plant and equipment Insurance Income Consolidated Group 2015 $000 2014 $000 80,886 33 194 6,414 644 88,171 33 33 34 77,118 24 210 - 619 77,971 24 24 (85) As a result of the fire at its Rydalmere Head Office on 7 January 2015, Waterco Ltd has lodged a claim with its insurance company for compensation for losses resulting from the fire. As at 30 June 2015, the amount of income arising from the claim comprises: Building Plant & Equipment Inventory destroyed Increased cost of working Loss of Profits Insurance Income Less: Insurance receipts Insurance receivable (see note 9) 3,254 499 1,016 1,114 531 6,414 2,516 3,898 ANNUAL REPORT 2015 > 49 Notes To The Financial Statements For the year ended 30 June 2015 Note 4: Profit for the Year Profit for the year has been determined after: (a) Expenses: Cost of Sales Finance costs: • Borrowings • Hire purchase expense • Finance charges on finance leases Depreciation of non-current assets : • Buildings • Plant & equipment • Hire purchase assets • Capitalised leased assets Amortisation of non-current assets: • Land use rights • Leasehold land • Goodwill on acquisition • Expenditure carried forward Total depreciation and amortisation Bad and doubtful debts • Trade debtors Rental expense on Operating leases • Minimum lease payments Research & development Impairment loss on non-current assets at Rydalmere destroyed in the fire • Building • Plant and equipment 50 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Consolidated Group 2015 $000 2014 $000 46,509 42,249 1,519 5 17 1,541 342 634 26 118 1,120 16 - 6 13 35 1,155 9 2,545 1,100 3,254 499 3,753 1,503 - 26 1,529 222 868 - 179 1,269 15 13 6 7 41 1,310 4 2,480 1,063 - - Notes To The Financial Statements For the year ended 30 June 2015 Note 4: Profit for the Year (continued) Profit for the year has been determined after: (a) Expenses: Rydalmere Fire Consolidated Group 2015 $000 2014 $000 On 7 January 2015, a fire broke out at the head office of Waterco Ltd located in Rydalmere NSW. The front of the complex which houses the offices,warehouse No 1 along and the adjacent covered breezeway was destroyed in the fire. The written down value of the property and plant and equipment destroyed in the fire amounted to $5,185,000 The net movement of ($1,002,000) in the asset revaluation reserve (note 22) is made up of the reversal of prior year revaluation upward of the Rydalmere Building of ($1,432,000) less the tax effect of $430,000. Property Asset revaluation reserve Loss on write off of property Plant & equipment Net loss on write off of plant and equipment Total property, plant & equipment Note 5: Auditors’ Remuneration Remuneration of the auditor of the parent entity for: • Audit or reviewing the financial report • Non audit fees for agreed upon procedures Remuneration of other auditors of subsidiaries for: • Auditing or reviewing the financial report of subsidiaries 1,432 3,254 4,686 499 5,185 197 - 127 - - - - - 169 - 107 ANNUAL REPORT 2015 > 51 Notes To The Financial Statements For the year ended 30 June 2015 Consolidated Group Note 6: Income Tax Expense (a) The components of tax expense comprise: • Current tax • Deferred tax • Recoupment of prior year tax losses (b) The prima facie tax on profit before income tax is reconciled to the income tax as follows: Profit before income tax Prima facie tax payable on profit before income tax at 30% (2014 30%) Add Tax effect of: • Depreciation of buildings • Entertainment • Amortisation – Goodwill • Amortisation – Land use rights • Prior period deferred tax adjustment • Foreign controlled entities tax losses not tax effected Less Tax effect of: • Research and development • Special building write off • Effects of lower rates in overseas countries • Unrealised foreign exchange losses/(gains) • Overprovision/(under) for tax in prior years • Reinvestment allowance • Other Income tax expense attributable to entity The applicable weighted average effective tax rates are as follows: 2015 $000 1,411 (347) 431 1,495 3,047 914 8 2 2 5 377 765 88 - 156 48 107 82 97 1,495 49% 2014 $000 800 54 100 954 1,928 578 12 2 2 4 - 565 67 6 127 (57) 57 - 9 954 49% 52 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 7: Key Management Personnel Compensation (a) Key Management Personnel (“KMP”) Compensation The totals of remuneration paid to KMP of the company and the Group during the year are as follows: Short-term employee benefits Post-employment benefits Other long term benefits Share-based payments Consolidated Group 2015 $000 1,320 98 16 2 1,436 2014 $000 1,232 92 40 4 1,368 Refer to the remuneration report contained in the directors’ report for remuneration paid or payable to each member of the groups KMP for the year ended 30 June 2015. (b) Shareholdings Number of Shares held by key Management Personnel 2015 Key Management Personnel Balance 1.7.2014 Received as Remuneration Net Change Other Mr S S Goh Mr B Goh Mr G Norman Mr B Hunt Mr R Ling Mr S T Lim Mrs B H Leo Mr G Doumit 2014 19,307,203 539,837 149,284 330,117 - 120,317 81,361 86,300 - - - - - - - - 739,407 67 1,429 9,432 - (17,500) (15,000) (15,000) Key Management Personnel Balance 1.7.13 Received as Remuneration Net Change Other Mr S S Goh Mr B Goh Mr G Norman Mr B Hunt Mr R Ling Mr S T Lim Mrs B H Leo Mr G Doumit 18,716,514 539,703 146,287 311,191 - 120,317 81,361 86,300 - - - - - - - - 590,689 134 2,997 18,926 - - - - Balance 30.6.2015 20,046,610 539,904 150,713 339,549 - 102,817 66,361 71,300 Balance 30.6.14 19,307,203 539,837 149,284 330,117 - 120,317 81,361 86,300 ANNUAL REPORT 2015 > 53 Notes To The Financial Statements For the year ended 30 June 2015 Note 7: Key Management Personnel Compensation (continued) (c) Compensation Practices In constructing, reviewing and determining the remuneration policy for Executive Directors and the senior executive team, the Board and Remuneration Committee have considered a number of factors including: • the importance of attracting, retaining and motivating management of the appropriate calibre to further the • success of the business; and linking pay to performance by rewarding effective individual achievement as well as business performance; and • the mix within the package which is designed to align personal reward with enhanced shareholder value over both the short and long-term. The Executive Directors’ and the senior executive team’s package consists of two general components: • fixed remuneration component consisting of base salary which executives may “salary sacrifice” and other benefits; and • variable or “at risk” component consisting of an annual short term incentive plan for executives and a long term incentive plan for the CEO. Remuneration of the company’s Non-Executive Directors is determined by the Board, based on the nature of their work, responsibilities and market comparisons. The maximum aggregate amount of fees that can be paid to Non-Executive Directors is subject to approval shareholders. CURRENT ASSETS Note 8: Cash and cash equivalents Cash at bank and in hand Reconciliation of cash Cash at the end of the year as shown in the statement of cash flows is reconciled to the related items in the balance sheet as follows: Cash and cash equivalents Bank overdraft (note 16) Note 9: Trade and other receivables Trade receivables Less: provision for impairment of receivables Other receivables Insurance receivable Sundry receivables Consolidated Group 2014 $000 1,588 1,588 (1,656) (68) Consolidated Group 2014 $000 10,603 (186) 10,417 - 1,399 1,399 11,816 2015 $000 3,771 3,771 (507) 3,264 2015 $000 11,843 (211) 11,632 3,898 1,205 5,103 16,735 Provision For Impairment of Receivables Current trade and term receivables are non-interest bearing loans and generally on 30-day terms. Non-current trade and term receivables are assessed for recoverability based on the underlying terms of the contract. A provision for impairment is recognised when there is objective evidence that an individual trade or term receivable is impaired. These amounts have been included in the other expenses item. 54 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 9: Trade and other receivables (continued) Movement in the provision for impairment of receivables is as follows: Opening Balance 1.7.2013 $000 Charge for the Year $000 Amounts Written Off $000 Closing Balance 30.6.2014 $000 Consolidated Group Current trade receivables 242 (52) (4) 186 Opening Balance 1.7.2014 $000 Charge for the Year $000 Amounts Written Off $000 Closing Balance 30.6.2015 $000 Consolidated Group Current trade receivables 186 34 (9) 211 There are $3,482,000 (2014: $2,713,000) within trade and other receivables that are not impaired and are past due. It is expected these balances will be received in full. Impaired receivables are provided for in full. The following table details the Group’s trade and other receivables exposed to credit risk (prior to collateral and other credit enhancements) with ageing analysis and impairment provided for thereon. Amounts are considered as ‘past due’ when the debt has not been settled, with the terms and conditions agreed between the Group and the customer or counter party to the transaction. Receivables that are past due are assessed for impairment by ascertaining solvency of the debtors and are provided for where there are specific circumstances indicating that the debt may not be fully repaid to the Group. The balances of receivables that remain within initial trade terms (as detailed in the table) are considered to be of high credit quality. Gross amount Past due and impaired $000 $000 Past due but not impaired (days overdue) < 30 $000 31–60 $000 61–90 $000 > 90 $000 Within initial trade terms $000 Consolidated Group 2015 Trade and term receivables Other receivables Total 2014 Trade and term receivables Other receivables Total 11,843 5,103 16,946 10,603 1,399 12,002 211 - 211 186 - 186 1,310 - 1,310 1,425 - 1,425 766 - 766 455 - 455 1,406 - 1,406 833 - 833 - - - - - - 8,150 5,103 13,253 7,704 1,399 9,103 The Group does not hold any financial assets with terms that have been renegotiated, but which would otherwise be past due or impaired. ANNUAL REPORT 2015 > 55 Notes To The Financial Statements For the year ended 30 June 2015 Note 10: Inventories Raw materials and stores at cost Work in progress at cost Finished goods at cost Goods in transit at cost Provision for inventory write-down Note 11: Other current assets Prepayments NON CURRENT ASSETS Note 12: Interests in Subsidiaries Parent Entity Waterco Limited Controlled Entities of Waterco Limited: Swimart Pty Ltd Zane Solar Systems Australia Pty Ltd Swimart Network Pty Ltd Waterco USA Inc Waterco Engineering Sdn Bhd Waterco (Far East) Sdn Bhd Watershoppe (M) Sdn Bhd Baker Hydro (Far East) Sdn Bhd Waterco Engineering Services Sdn Bhd Waterco (NZ) Ltd Swimart (NZ) Ltd Waterco (Guangzhou) Ltd Waterco (C) Ltd Waterco (Europe) Ltd Waterco Canada Inc PT Waterco Indonesia Waterco International Pte Ltd Waterco France Consolidated Group 2015 $000 9,841 850 21,493 2,774 (988) 33,970 843 843 2014 $000 10,572 1,144 20,910 2,230 (1,029) 33,827 724 724 Country of incorporation Carries on business in 2015 % owned 2014 Australia Australia Australia Australia Australia USA Malaysia Malaysia Malaysia Malaysia Malaysia New Zealand New Zealand China China United Kingdom Canada Indonesia Singapore France Australia Australia Australia USA Malaysia Malaysia Malaysia Malaysia Malaysia New Zealand New Zealand China China United Kingdom Canada Indonesia Singapore France - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 56 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 13: Property, plant & equipment Freehold land at independent valuation Land use rights Less: accumulated amortisation Freehold buildings at independent valuation Less: accumulated depreciation Plant & equipment at cost Less: accumulated depreciation Hire purchase assets Less: accumulated depreciation Leased plant & equipment at cost Less: accumulated depreciation Total written down value Movements in Carrying Amounts Consolidated Group 2015 $000 13,834 3,981 (30) 3,951 17,700 (1,373) 16,327 26,794 (20,433) 6,361 432 (26) 406 688 (242) 446 41,325 2014 $000 13,327 3,246 (15) 3,231 21,015 (976) 20,039 26,076 (19,189) 6,887 - - - 668 (165) 503 43,987 2015 Freehold Land $000 Buildings $000 Land use rights $000 Leasehold Land $000 Plant & Equipment $000 Leased Plant & Equipment $000 Hire Purchase Plant & Equipment $000 Total $000 Consolidated Group: Balance at the beginning of year Foreign exchange translation Additions Revaluation Impairment Disposals Depreciation expense* Carrying amount at the end of year 13,327 507 - - - - - 20,039 1,506 14 - (4,686) - (546) 3,231 750 - - - - (30) 13,834 16,327 3,951 - - 6,887 - 1,830 - (499) (134) (1,723) 6,361 503 - 78 - (17) (118) 446 - - 432 - - (26) 43,987 2,763 2,354 - (5,185) (151) (2,443) 406 41,325 *Depreciation expense that is absorbed into the cost of manufactured inventory is $1,294,000 (2014: $1,131,000). Movements in Carrying Amounts 2014 Freehold Land $000 Buildings $000 Land use rights $000 Leasehold Land $000 Plant & Equipment $000 Leased Plant & Equipment $000 Hire Purchase Plant & Equipment $000 Total $000 Consolidated Group: Balance at the beginning of year Foreign exchange translation Additions Revaluation Disposals Depreciation expense* Carrying amount at the end of year 8,278 (5) - 5,054 20,461 (257) - 367 3,330 (84) - 13 - - (532) (15) (13) 7,471 - 1,413 (308) (1,689) 13,327 20,039 3,231 - 6,887 562 - 190 (100) (149) 503 - - - - - 40,115 (346) 1,603 5,421 (408) (2,398) 43,987 *Depreciation expense that is absorbed into the cost of manufactured inventory is $1,131,000 (2013: $938,000). ANNUAL REPORT 2015 > 57 Notes To The Financial Statements For the year ended 30 June 2015 Note 13: Property, Plant & Equipment (continued) If Land & Buildings were stated at historic cost, amounts would be as follows: Cost Less: Accumulated depreciation Net book value Consolidated Group 2015 $000 2014 $000 24,835 (4,006) 20,829 28,106 (4,077) 24,029 The groups land and buildings were revalued as per the disclosures in note 1(j). The directors consider the carrying value of the land and buildings to be a fair reflection of the market value. Note 14: Intangible assets Goodwill Less: accumulated amortisation Preliminary expenses Product development costs less: accumulated amortisation 280 (274) 6 1 501 (186) 315 322 Movements in Carrying Amounts Consolidated Group: Balance at the beginning of year Additions Disposals Amortisation expense Carrying amount at the end of year Preliminary Expense $000 Goodwill $000 Deferred expenditure $000 1 - - - 1 18 - - 6 12 342 - 13 14 315 280 (268) 12 1 414 (72) 342 355 Total $000 355 - 13 20 322 58 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 CURRENT LIABILITIES Note 15: Trade and other payables - unsecured Trade creditors Sundry creditors and accrued expenses Note 16: Borrowings Bank loans Bank overdraft Hire purchase creditors Unexpired interest Lease liability Consolidated Group 2015 $000 2014 $000 8,301 3,838 12,139 14,538 507 169 (17) 221 15,418 8,219 3,293 11,512 2,556 1,656 - - 168 4,380 Bank facilities of the group are secured by a first ranking and registered fixed and floating debenture charge over the assets of the parent entity, and registered mortgages over freehold land and buildings and guarantees and indemnities from subsidiaries. That part of the facilities that are payable within 12 months are classified as current. Bank loans of $14,537,500 have a maturity date for the parent entity is 31 July 2016 and bears variable interest at 5.12% payable monthly .This loan has been classified as current due to a breach of the interest cover covenant (calculated quarterly on a rolling 12 months basis) due to non-recurring factors at 31st December 2014. The interest cover covenant has been met at 31st March 2015 and 30th June 2015. Management expects an agreement will be reached with the bank for the interest cover breach to be remedied and the loan facility to be extended prior to maturity. Note 17: Taxes a) Liabilities Current Income Tax Non Current Deferred tax liability comprises: Tax allowances relating to property, plant & equipment Revaluation adjustments taken direct to equity Other Parent entity DTA netted off against DTL Consolidated DTL b) Assets Current Income Tax Deferred tax assets comprises: Provisions Attributable to tax losses Tax allowances relating to property, plant & equipment Other Parent entity DTA netted off against DTL Consolidated DTA 279 1,852 924 (147) 2,629 (1,288) 1,341 - 747 77 705 70 1,599 (1,288) 311 - 1,466 674 2 2,142 (618) 1,524 65 722 418 8 84 1,232 (618) 614 ANNUAL REPORT 2015 > 59 Notes To The Financial Statements For the year ended 30 June 2015 Note 17: Taxes (continued) c) Reconciliations i. Gross Movements The overall movement in the deferred tax account is as follows: Opening balance Credit/(Charge) to statement of comprehensive income Credit/(Charge) to equity Closing Balance ii. Deferred Tax Liability The movement in deferred tax liability for each temporary difference during the year is as follows: Tax allowances relating to property, plant & equipment Opening balance Transfer to deferred tax asset Credit/(Charge) to statement of comprehensive income Closing balance Property revaluation adjustments taken direct to equity Opening balance Net revaluations during current period taken direct equity Net revaluation during current period charged to statement of comprehensive income Closing balance Other Opening balance Credit/(charge) to statement of comprehensive income Closing balance iii. Deferred Tax Assets The movement in deferred tax liability for each temporary difference during the year is as follows: Provisions Opening balance Credit/(Charge) to statement of comprehensive income Closing balance Income tax losses Opening balance Credit/(Charge) to statement of comprehensive income Credit/(Charge) to equity Closing balance Capital tax losses Opening balance Credit/(charge) to statement of comprehensive income Closing balance Tax allowances relating to Property plant & equipment Opening balance Transfer from deferred tax liability Credit/(Charge) to statement of comprehensive income Closing balance Other Opening balance Credit/(charge) to statement of comprehensive income Closing balance 60 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Consolidated Group 2015 $000 2014 $000 (910) (560) 440 (1,030) 1,466 (38) 424 1,852 674 250 - 924 2 (149) (147) 722 25 747 400 (351) 10 59 18 - 18 8 38 659 705 84 (14) 70 (361) (443) (106) (910) 1,071 - 395 1,466 578 96 - 674 2 - 2 723 (1) 722 454 (43) (11) 400 18 - 18 13 - (5) 8 81 3 84 Notes To The Financial Statements For the year ended 30 June 2015 Note 17: Taxes (continued) d) Deferred tax assets not brought to account the benefits of which can only be realised in if the conditions for deductibility set out in note 1e occur - tax losses - Operating losses Note 18: Short-term provisions Employee Benefits (see note 1g) Opening Balance Additional provisions Amounts used Closing Balance NON-CURRENT LIABILITIES Note 19: Borrowings Bank loans Hire purchase creditors Unexpired interest Lease liability Consolidated Group 2015 $000 2014 $000 6,400 6,400 1,492 880 (714) 1,658 9,816 285 (12) 122 10,211 5,930 5,930 1,510 778 (796) 1,492 23,008 - - 272 23,280 Bank loans of the group are secured by a first ranking and registered fixed and floating debenture charge over the assets of the parent entity, and registered mortgages over freehold land and buildings and guarantees and indemnities from subsidiaries. Bank loan amount of $9,816,000 relates to a subsidiary and bears interest at 4.80%-5.10% repayable by monthly instalments with maturity dates of December 2021 and June 2031. Note 20: Long-term provisions Employee Benefits (see note 1g) Opening balance Additional provisions Amounts used Closing balance a) Aggregate employee entitlement liability b) Number of employees at year end 189 (11) - 178 1,836 566 165 24 - 189 1,681 532 ANNUAL REPORT 2015 > 61 Notes To The Financial Statements For the year ended 30 June 2015 Note 21: Issued capital 35,631,113 ordinary shares fully paid at beginning of the year (2014: 34,731,886) On 15 December 2014, 627,977 shares were issued at $1.05 each under the Waterco Ltd DRP On 16 December 2013, 337,412 shares were issued at $1.19 each under the Waterco Ltd DRP On 16 June 2014, 561,815 shares were issued at $1.14 each under the Waterco Ltd DRP Employee Share Plans loan repayments [see note 36(1)] 36,259,090 ordinary shares fully paid at the end of the year (2014: 35,631,113) Consolidated Group 2015 $000 2014 $000 37,430 36,380 659 - - 53 - 402 640 8 38,142 37,430 The company has authorised share capital amounting to 200,000,000 ordinary shares of 50 cents each. Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At the shareholders meetings, each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. Capital Management Management controls the capital of the group in order to maintain a good debt to equity ratio, provide the shareholders with adequate returns and ensure that the group can fund its operations and continue as a going concern. The group’s debt and capital includes ordinary share capital and financial liabilities supported by financial assets. There are no externally imposed capital requirements. Management effectively manages the group’s capital by assessing the group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues. There have been no changes in the strategy adopted by management to control the capital of the group since the prior year. This strategy is to ensure that the group’s gearing ratio remains between 30% and 70%. The gearing ratio’s for the year ended 30 June 2015 and 30 June 2014 are as follows: Consolidated Group 2015 $000 25,629 (3,771) 21,858 56,053 77,911 39% 2014 $000 27,661 (1,588) 26,073 50,599 76,672 52% Total borrowings Less cash and cash equivalents Net debt Total equity Total capital Gearing ratio 62 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 22: Reserves a) Capital profits The capital profits reserve relates to non taxable profits on sale of property. b) Foreign currency translation The foreign currency translation reserve records exchange differences on translation of foreign controlled subsidiaries c) Asset revaluation reserve Balance at the beginning of the year Net revaluation (decrement)/ increment on revaluation of land and buildings Balance at the end of the year The asset revaluation reserve records the revaluation of non-current assets d) Share options reserve Balance at the beginning of the year Share option increment Balance at the end of the year The share options reserve records the cost of the share option plan Note 23: Retained earnings Opening retained earnings Net profit attributable to the members of the parent entity Dividends paid Closing retained earnings Note 24: Lease and hire purchase commitments Finance leases Lease expenditure contracted and provided for: not later than one year later than one year but not later than five years Total minimum lease commitments Less: future finance charges Lease liability Current portion Non-current portion Hire Purchase commitments HP Expenditure contracted and provided for: not later than one year later than one year but not later than five years Total minimum hp commitments Future interest charges Hire purchase creditors Current portion Non-current portion Note No 28 16 19 16 19 Consolidated Group 2015 $000 211 2014 $000 211 (3,809) (9,070) 12,085 (1,002) 11,083 20 - 20 7,505 9,533 1,485 (1,069) 9,949 231 125 356 (13) 343 221 122 343 169 285 454 (29) 425 152 273 425 6,834 5,251 12,085 20 - 20 3,246 11,067 907 (2,441) 9,533 182 281 463 (23) 440 168 272 440 - - - - - - - Finance leases and hire purchase agreements of 3 or 4 years are taken out on motor vehicles, forklifts and IT equipment with an option to purchase the asset at the end of the lease term at a residual of 30% to 45% depending on the asset. ANNUAL REPORT 2015 > 63 Notes To The Financial Statements For the year ended 30 June 2015 Consolidated Group Note 24: Lease commitments (continued) Operating lease payable: Non-cancellable operating leases contracted but not capitalised in the financial statements not later than one year later than one year but not later than five years Note 25: Contingent Liabilities Estimate of the maximum amount of contingent liabilities that may become payable Guarantee provided to a bank on behalf of a subsidiary Guarantees of leases of premises subleased to franchisees Note 26: Related Parties (A) Transactions with director related parties (i) Sales made to Asiapools (M) Sdn Bhd. Mr S S Goh, a shareholder has significant influence over Asiapools(M)Sdn Bhd. (ii) Payments made to Mint Holdings Pty Ltd for rental of warehouses and offices. Mr S S Goh is a director and shareholder of Mint Holdings Pty Ltd. 2015 $000 2,110 1,292 3,402 3,220 5,187 8,407 197 712 2014 $000 2,052 3,103 5,155 3,195 5,514 8,709 174 688 64 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 27: Operating Segments Segment assets Where an asset is used across multiple segments, the asset is allocated to the segment that receives the majority of the economic value from the asset. In the majority of instances, segment assets are clearly identifiable on the basis of their nature and physical location. Segment liabilities Liabilities are allocated to segments where is a direct nexus between the incurrence of the liability and the operations of the segment. Unallocated items The following items of revenue, expenses, assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment: – other revenues Segment Information Identification of reportable segments The group has identified its operating segments based on the internal reports that are reviewed and used by the board of directors (chief operating decision makers) in assessing performance and determining the allocation of resources. The group is managed primarily on the basis of location since the group’s operations have similar risk profiles and performance criteria. Operating segments are therefore determined on the same basis. The group operates predominantly in one industry being the manufacture and wholesale of swimming pool chemicals, accessories and equipment, manufacture and sale of solar pool heating systems and as a franchisor of swimming pool outlets retailing swimming pool accessories and equipment. Basis of accounting for the purposes of reporting by operating segments Accounting Policies Adopted Unless stated otherwise, all amounts reported to the Board of Directors as the chief decision maker with respect to operating segments are determined in accordance with accounting policies that are consistent to those adopted in the annual financial statements of the Group. Inter-segment transactions An internally determined transfer price is set for all inter-entity sales. The price is reviewed annually (unless special circumstances arise) and is based on what would be realised in the event the sale was made to an external party at arm’s length under the same terms and conditions. All such transactions are eliminated on consolidation for the Group’s financial statements. Corporate charges are allocated reporting segments based on the services provided to those reporting segments. to Inter-segment loans payable and receivable are initially recognised at the consideration received net of transaction costs. If inter-segment loans receivable and payable are not on commercial terms, these are not adjusted to fair valued based on market interest rates. ANNUAL REPORT 2015 > 65 Notes To The Financial Statements For the year ended 30 June 2015 Note 27: Operating Segments (continued) Geographical Segments AUSTRALIA & NEW ZEALAND $000 52,565 1,213 53,778 2015 ASIA $000 10,773 25,948 36,721 NORTH AMERICA & EUROPE CONSOLIDATED GROUP $000 $000 17,548 4,269 21,817 80,886 31,430 112,316 7,285 (31,430) 88,171 10,212 1,112 (992) 10,332 (7,285) 3,047 72,473 50,495 (10,313) 112,655 806 26,501 1,224 24,410 325 6,552 (15,378) 97,277 2,355 57,463 (16,239) 41,224 REVENUE Sales to customers outside the consolidated group Intersegment sales Total segment revenue Reconciliation of segment revenue to group revenue Other revenue Intersegment elimination Total group revenue Segment net profit/(loss) from continuing operations before tax Reconciliation of segment result to group net profit/loss before tax Unallocated items - other Net profit before tax from continuing operations Segment assets Segment asset increases for the period Reconciliation of segment assets to group assets Intersegment eliminations Total group assets Capital expenditure Segment liabilities Reconciliation of segment liabilities to group liabilities Intersegment eliminations Total group liabilities 66 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 27: Operating Segments (continued) Geographical Segments AUSTRALIA & NEW ZEALAND $000 51,528 1,229 52,757 2014 ASIA $000 9,708 21,954 31,662 NORTH AMERICA & EUROPE CONSOLIDATED GROUP $000 $000 15,882 8,049 23,931 77,118 31,232 108,350 853 (31,232) 77,971 2,942 1,747 (1,908) 2,781 (853) 1,928 72,106 43,494 (11,317) 104,283 441 27,645 662 22,308 155 2,032 (11,307) 92,976 1,258 51,985 (9,608) 42,377 REVENUE Sales to customers outside the consolidated group Intersegment sales Total segment revenue Reconciliation of segment revenue to group revenue Other revenue Intersegment elimination Total group revenue Segment net profit/(loss) from continuing operations before tax Reconciliation of segment result to group net profit/loss before tax Unallocated items - other Net profit before tax from continuing operations Segment assets Segment asset increases for the period Reconciliation of segment assets to group assets Intersegment eliminations Total group assets Capital expenditure Segment liabilities Reconciliation of segment liabilities to group liabilities Intersegment eliminations Total group liabilities ANNUAL REPORT 2015 > 67 Notes To The Financial Statements For the year ended 30 June 2015 Note 28: Dividends Paid or Proposed Final fully franked ordinary dividend of 3c per share (2014:4c) franked at the tax rate of 30% paid Interim fully franked ordinary dividend of nil per share (2014:3c) franked at the tax rate of 30% paid Proposed final fully franked ordinary dividend of 5c per share (2014 3c) franked at the tax rate of 30% Consolidated Group 2015 $000 1,069 - 1,069 1,813 2014 $000 1,389 1,052 2,441 1,069 Balance of franking account at year end adjusted for franking credits arising from payment of income tax payable, payment of proposed dividends and franking credits not available for distribution. 3,241 1,878 Note 29: Earnings Per Share Reconciliation of Earnings to Net Profit Net Profit Net Profit attributable to outside equity interest Earnings used in the calculation of basic EPS Earnings used in the calculation of diluted EPS a) Weighted average number of ordinary shares outstanding during the year used in calculation of basic EPS b) Weighted average number of ordinary shares outstanding during the year used in calculation of diluted EPS Note 30: Events Subsequent to Reporting Date There were no reportable events subsequent to balance date. 1,552 67 1,485 1,485 35,972 35,972 974 67 907 907 34,937 34,937 68 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 31: Financial Risk Management The Audit Committee (AC) has been delegated responsibility by the Board of Directors for, amongst other issues, monitoring and managing financial risk exposures of the Group. The AC monitors the Group’s financial risk management policies and exposures and approves financial transactions within the scope of its authority. It also reviews the effectiveness of internal controls relating to commodity price risk, counter party credit risk, currency risk, financing risk and interest rate risk. The AC meets on a bi-monthly basis and minutes of the AC are reviewed by the Board. The AC’s overall risk management strategy seeks to assist the consolidated group in meeting its financial targets, while minimising potential adverse effects on financial performance. Its functions include the review of the use of hedging derivative instruments, credit risk policies and future cash flow requirements. The main risks the group is exposed to through its financial instruments are interest rate risk, credit risk, foreign currency risk, liquidity risk and price risk. (a) Interest Rate Risk The consolidated group’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as a result of changes in market interest rates and the effective weighted average interest rates on classes of financial assets and liabilities. (b) Credit Risk The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount, net of any provisions for doubtful debts, as disclosed in the statement of financial position and notes to the financial statements. Credit risk is managed through maintenance of procedures in relation to approval, granting and renewal of credit limits, regular monitoring of exposures against such limits and the monitoring of the financial stability of significant customers. Such monitoring is used in assessing receivables for impairment. Depending on the subsidiary, credit terms are generally 30 days from invoice month. Credit risk for derivative financial instruments arises from the potential failure by counter parties to the contract to meet their obligations. The credit risk exposure to forward exchange contracts and interest rate swaps is the net fair value of these contracts as disclosed in (c). The Group has no single concentration of credit risk with any single debtor or group of debtors. However, on a geographical basis, the group has significant credit exposure to Australia/ New Zealand and Canada given the substantial operations in those regions. Trade and other receivables that are neither past due or impaired are considered to be of high credit quality. Aggregates of such amounts are as detailed in Note 9. (c) Foreign Currency Risk The parent entity is exposed to fluctuations in foreign currencies arising from the sale and purchase of goods in currencies other than the group’s measurement currency. The parent entity has forward contracts in place at balance date relating to highly probable forecast transactions. There are no forward contracts taken out by any other member in the group These contracts commit the group to buy and sell specified amounts of foreign currencies in the future at specified exchange rates. Contracts are taken out with terms that reflect the underlying settlement terms of the commitment to the maximum extent possible so that hedge ineffectiveness is minimised. The following table summarises the notional (and parent entity) amounts of commitments in relation to forward exchange contracts. the Group Notional Amounts 2015 $000 2014 $000 Average Exchange Rate 2014 2015 $000 $000 Consolidated Group (and Parent Entity) Buy USD/Sell AUD - Less than 6 months 1,800 1,000 0.79414 0.92215 ANNUAL REPORT 2015 > 69 Notes To The Financial Statements For the year ended 30 June 2015 Note 31: Financial Risk Management (continued) d) Liquidity Risk The group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate unutilised borrowing facilities are maintained. Financial liability and financial asset maturity analysis Consolidated Group Within 1 Year 1 to 5 Years Over 5 years Total 2015 $000 2014 $000 2015 $000 2014 $000 2015 $000 2014 $000 2015 $000 2014 $000 Financial Assets Cash Receivables Total anticipated inflows Financial Liabilities Bank overdraft Bank loans Trade and other payable Hire purchase creditors Lease Liabilities Total contractual outflows Less bank overdrafts Total expected outflows Net (outflow) on financial instruments 3,771 16,735 1,588 11,816 20,506 13,404 - - - - - - - 14,538 - 2,556 507 9,816 1,656 23,008 12,139 11,347 152 221 - 168 - 273 122 - - 272 27,050 - 14,071 - 10,718 (507) 24,936 (1,656) 27,050 14,071 10,211 23,280 - - - - - - - - - - - - - - - - - - - - - - 3,771 16,735 1,588 11,816 20,506 13,404 507 24,354 1,656 25,564 12,139 11,347 425 343 - 440 37,768 (507) 39,007 (1,656) 37,261 37,351 (6,544) (667) (10,211) (23,280) - - (16,755) (23,947) 70 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 31: Financial Risk Management (continued) e) Price Risk Price risk relates to the risk that the fair value or future cashflows of a financial instrument will fluctuate because of changes in market prices largely due to demand and supply factors for commodities. Net Fair Values The net fair value of bank overdrafts, bank loans and lease liabilities is determined by discounting the cash flows, at market interest rates of similar borrowings, to their present value. Their net fair value is adjusted for any costs involved in settling the instrument. Financial Liabilities Bank overdraft Bank loans Hire purchase creditors Lease liabilities 2015 2014 Carrying Amount $000 Net Fair Value $000 Carrying Amount $000 Net Fair Value $000 507 24,354 425 343 25,629 512 24,598 447 360 25,917 1,656 25,564 - 440 27,660 1,672 25,820 - 463 27,955 For financial assets and other liabilities, the net fair value approximates their carrying value. Financial assets where the carrying amount exceeds the net fair values have not been written down as the consolidated group intends to hold these assets to maturity. Sensitivity Analysis The following table illustrates sensitivities to the Group’s exposures to changes in interest rates and exchange rates. The table indicates the impact on how profit and equity values reported at balance date would have been affected by changes in the relevant risk variable that management considers to be reasonably possible. The sensitivity assumes the movement in a particular variable is independent to other variables. Year ended 30 June 2015 +/- 2% in interest rates +/- 5% in $A/$US Year ended 30 June 2014 +/- 2% in interest rates +/- 5% in $A/$US Consolidated Group Profit $000 +/-614 +/-1,037 Equity $000 +/-614 +/-1,037 +/-520 +/-751 +/-520 +/-751 ANNUAL REPORT 2015 > 71  Any ordinary shares issued during the year under this plan are shown in the statement of financial position as issued capital. Any residual loan amounts written off are expensed during the year. During the year no shares were issued under this plan while debts of $52,685 (2014: $7,848) were repaid. At reporting date, the balance of the debt receivable is nil (2014:$52,685). The closing share market price of an ordinary share of Waterco Limited on the Australian Stock Exchange at 30 June 2015 was $1.00 (30 June 2014 $1.15). Notes To The Financial Statements For the year ended 30 June 2015 Note 32: Employee Benefits Employee Share Plans The following is a summary of the existing employee share plans. 1) Waterco Employee Share Plan The plan was approved by shareholders at the 1996 Annual General Meeting. Its objective is to encourage full-time and part- time employees of the Waterco Group to acquire ordinary shares in the company in order to promote the long term success of the company as a goal shared by the employees. All full-time and part-time employees are invited by the Board to subscribe for ordinary shares in the company at the market price at the time of invitation (being the weighted average price over the 3 preceding trading days on ASX subject to adjustment by the board if it believes the price is distorted) but not less than twenty cents The company may extend an interest free loan to acquire the shares which is repayable within ten years or immediately if the employee leaves the company. The security given for the loan is the pledge of the shares and a charge over any benefits generated by those shares including dividends and bonus shares etc. The proceeds of these benefits are used to reduce the borrower’s indebtedness to the company. The loans are limited recourse loans meaning that if the shares are sold and the proceeds are not sufficient to meet the loan balance outstanding, the company cannot recover the difference from the borrower. During the year, $nil (2014: $nil) in loan balances were written off. 72 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 33: Cash Flow Information a) Reconciliation of cash flows from operations with profit after income tax. Profit after income tax Non-cash flows in profit Depreciation Impairment/Amortisation (Profit)/Loss on sale of non current assets Impairment loss Changes in Assets and Liabilities:- Trade debtors Provision for doubtful debts Other debtors Inventories Prepayments Deferred tax assets Expenditure carried forward Trade creditors Other creditors Provision for employee benefits Provision for tax Provision for deferred tax Cashflow – Non Operating Activities: Dividends Received Cash Flows provided by operations b) Non Cash Financial and investment activities Consolidated Group 2015 $000 2014 $000 1,552 2,414 22 (34) 3,753 (1,240) 24 (470) (143) (119) (367) 27 82 588 155 344 916 0 7,504 974 2,399 19 2 - (1,326) (56) (584) (2,456) 135 58 61 1,363 472 6 (427) 86 0 726 1) Property, Plant and Equipment During the year, the consolidated group acquired plant and equipment with an aggregate fair value of $78,213 (2014:$190,752) by means of finance leases and $431,430 by means of hire purchase agreements. These acquisitions are not reflected in the statement of cash flows. c) Financing Facilities The following lines of credit were available at balance date: Fully Drawn Advance Facilities Master lease facilities Amount utilised Amount unutilised 34,233 582 34,815 24,963 9,852 32,863 826 33,689 (27,665) 6,024 The Fully Drawn Advance Facilities of the parent entity are due to expire on 31 July 2016 (refer to note 16). The parent entity expects to renew these facilities on expiry date. The Fully Drawn Advance Facilities of the controlled entity are due to expire on 31 December 2021 and 30 June 2031.The controlled entity expects to renew these facilities on expiry date. ANNUAL REPORT 2015 > 73 Valuation techniques The Group selects a valuation technique that is appropriate in the circumstances and for which sufficient data is available to measure fair value. The availability of sufficient and relevant data primarily depends on the specific characteristics of the asset or liability being measured.The evaluation techniques selected by the Group are consistent with one or more of the following valuation approaches: – Market approach: valuation techniques that use prices and other relevant information generated by market transactions for identical or similar assets or liabilities. – Income approach: valuation that convert estimated future cash flows or income and expenses into a single discounted present value. techniques – Cost approach: valuation techniques that reflect the current replacement cost of an asset at its current service capacity. Each valuation technique requires inputs that reflect the assumptions that buyers and sellers would use when pricing the asset or liability, risks. When including assumptions about selecting a valuation technique, the Group gives priority to those techniques that maximise the use of observable inputs and minimise the use of unobservable inputs. Inputs that are developed using market data (such as publicly available information on actual transactions) and reflect the assumptions that buyers and sellers would generally use when pricing the asset or liability are considered observable, whereas inputs for which market data is not available and therefore are developed using information available about such assumptions are considered unobservable. the best Notes To The Financial Statements For the year ended 30 June 2015 Note 34: Fair Value Measurements The Group measures and recognises the following assets and liabilities at fair value on a recurring basis after initial recognition: – derivative financial instruments; – freehold land and buildings; The Group subsequently measures some items of freehold land and buildings at fair value on a non recurring basis. The Group does not subsequently measure any liabilities at fair value on a non-recurring basis. a) Fair Value Hierarchy AASB 13: Fair Value Measurement requires the disclosure of fair value information by level of the fair value hierarchy, which categorises fair value measurements into one of three possible levels based on the lowest level that an input that is significant to the measurement can be categorised into as follows: Level 1 Level 2 Level 3 Measurements based on unobservable inputs for the asset or liability. Measurements based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. If all significant inputs required to measure fair value are observable, the asset or liability is included in Level 2. If one or more significant inputs are not based on observable market data, the asset or liability is included in Level 3. 74 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 34: Fair Value Measurements (continued) The following tables provide the fair values of the Group’s assets and liabilities measured and recognised on a recurring basis after initial recognition and their categorisation within the fair value hierarchy: Note No Level 1 $000 30 June 2015 Level 2 $000 Level 3 $000 Total $000 Recurring fair value measurements Financial assets Derivatives held for hedging: – forward exchange contracts Total financial assets recognised at fair value on a recurring basis Non-financial assets Freehold land Freehold buildings Total non-financial assets recognised at fair value on a recurring basis Total non-financial assets recognised at fair value 31 13 13 - - - - - - 2,267 2,267 13,834 16,327 30,161 30,161 - - - - - - 2,267 2,267 13,834 16,327 30,161 30,161 Note Level 1 $000 30 June 2014 Level 2 $000 Level 3 $000 Total $000 Recurring fair value measurements Financial assets Derivatives held for hedging: – forward exchange contracts Financial assets at fair value through profit or loss: Total financial assets recognised at fair value Non-financial assets Freehold land Freehold buildings Total non-financial assets recognised at fair value 31 13 13 - - - - - 1,084 1,084 13,327 20,039 33,366 - - - - - 1,084 1,084 13,327 20,039 33,366 ANNUAL REPORT 2015 > 75 Notes To The Financial Statements For the year ended 30 June 2015 Note 34: Fair Value Measurements (continued) b. Valuation Techniques and Inputs Used to Measure Level 2 Fair Values Description Fair Value at 30 June 2015 Valuation Technique(s) Inputs Used Financial assets Forward exchange contracts Non-financial assets Freehold land(i) $000 2,267 2,267 13,834 Freehold buildings(i) 16,327 30,161 Income approach using discounted cash flow methodology Current forward exchange rates applicable to remaining life of contract Price per hectare; market borrowing rate Price per square metre; market borrowing rate Market approach using recent observable market data for similar properties; income approach using discounted cash flow methodology Market approach using recent observable market data for similar properties; income approach using discounted cash flow methodology (i) The fair value of freehold land and buildings is determined at least every three years based on valuations by an independent valuer. At the end of each intervening period, the directors review the independent valuation and, when appropriate, update the fair value measurement to reflect current market conditions using a range of valuation techniques, including recent observable market data and discounted cash flow methodologies. There were no changes during the period in the valuation techniques used by the Group to determine Level 2 fair values. c. Disclosed Fair Value Measurements The following assets and liabilities are not measured at fair value in the statement of financial position, but their fair values are disclosed in the notes: – lease liability; – bank debt; 76 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Notes To The Financial Statements For the year ended 30 June 2015 Note 34: Fair Value Measurements (continued) The following table provides the level of the fair value hierarchy within which the disclosed fair value measurements are categorised in their entirety and a description of the valuation technique(s) and inputs used: Description Assets Liabilities Lease liability Bank debt Note Fair Value Hierarchy Level Valuation Technique(s) Inputs Used 31 31 2 2 Income approach using discounted cash flow methodology Current commercial borrowing rates for similar instruments Income approach using discounted cash flow methodology Current commercial borrowing rates for similar instruments There has been no change in the valuation technique(s) used to calculate the fair values disclosed in the notes to the financial statements. Note 35: Company Details The registered office of the company is: Waterco Limited 36 South Street Rydalmere NSW 2116 ANNUAL REPORT 2015 > 77 Directors' Declaration In accordance with a resolution of the directors of Waterco Limited, the directors of the company declare that: 1. the financial statements and notes, as set out on pages 34 to 77 are in accordance with the Corporations Act 2001 and: Australian Accounting a. comply with Standards, which, as stated in accounting policy Note 1 to the financial statements, constitutes compliance with International Financial Reporting Standards (IFRS); and b. give a true and fair view of the financial position as at 30 June 2015 and of the performance for the year ended on that date of the consolidated group; 2. in the directors’ opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and 3. the directors have been given the declarations required by s295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer. Soon Sinn Goh Chief Executive Officer Dated at Sydney this 21 September 2015 78 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Independent Auditor's Report to the members of Waterco Ltd ANNUAL REPORT 2015 > 79 Independent Auditor's Report to the members of Waterco Ltd 80 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities Shareholder Information For the year ended 30 June 2015 (a) Distribution of Shareholders as at 14 September 2015 Range - - - - - 1,000 5,000 10,000 100,000 and over 1 1,001 5,001 10,001 100,001 Total Holders 263 267 88 110 32 760 Options - - - - - (b) Marketable Parcel 49 shareholders hold less than a marketable parcel. (c) Substantial Shareholders The following information is extracted from the company’s register as at 21 September 2015: Name S S Goh Group Redbrook Nominees Pty Ltd Acres Holdings Pty Ltd (d) Voting Rights Number of shares 20,046,612 2,763,631 2,114,136 For all shares, voting rights are one vote per member on a show of hands and one vote per share on a poll. (e) Twenty Largest Shareholders The twenty largest shareholders hold 85.24% of the total shares issued. Name Leitch Pty Ltd (Leitch Super Fund A/C) Redbrook Nominees Pty Ltd Acres Holdings Pty Ltd Goh Lai Huat & Sons Sdn Bhd 1 Mr Soon Sinn Goh 2 3 4 5 Mr Soon Leong Goh 6 Mr Swee Kheong Goon 7 Mrs Christine Goh 8 9 Mrs Janet Swee Nyet Goh 10 Mr Chu Shien Chang 11 Mr Benjamin Francis Hunt (B F Hunt Super Fund A/C) 12 13 14 15 16 17 Mr Tiow Lip Lee 18 Ms May-Yin Goh 19 Mr Bryan Weng Keong Goh 20 Mr Shane Goh TOTAL GWK Corporation Pty Ltd Deuteronomy Pty Ltd (Dennis Hambleton SF A/C) GSS Holdings Sdn Bhd Brazil Enterprises Pty Ltd S G Corporation Pty Limited Number of shares 17,357,008 2,772,349 2,646,983 2,500,000 577,022 562,717 500,000 483,001 447,112 340,281 339,549 334,170 310,070 300,000 295,173 281,739 245,386 225,267 200,734 188,607 30,907,168 % 47.87 7.65 7.30 6.89 1.59 1.55 1.38 1.33 1.23 0.94 0.94 0.92 0.86 0.83 0.81 0.78 0.68 0.62 0.55 0.52 85.24 (f) Stock Exchange Listing The shares of Waterco Limited are listed on the Australian Stock Exchange under the trade symbol WAT. ANNUAL REPORT 2015 > 81 Corporate Directory Directors Soon Sinn Goh Bryan Goh Garry Norman Ben Hunt Richard Ling Secretaries Bee Hong Leo Gerard Doumit Registered office 36 South Street, Rydalmere NSW 2116 Tel: + 61 2 9898 8600 Fax: + 61 2 9898 1877 Website: www.waterco.com E-mail: administration@waterco.com Share Registry Computershare Investor Services Pty Ltd GPO Box 2975, Melbourne VIC 3000 Tel: 1300 85 05 05 Offices – Australia NSW 36 South Street, Rydalmere NSW 2116 Unit 7, 2-8 South Street, Rydalmere NSW 2116 Tel: + 61 2 9898 8600 QLD 77 Nealdon Drive, Meadowbrook QLD 4131 Postal Address: PO Box 606 Springwood QLD 4127 Tel: + 61 7 3299 9999 VIC Unit 1, 6 Samantha Court, Knoxfield Vic 3180 Tel: + 61 3 9764 1211 WA 2 Stretton Place, Balcatta WA 6021 Tel: + 61 8 9273 1900 SA 580 Torrens Road, Woodville North SA 5012 Tel: + 61 8 8244 6000 Auditors RSM Bird Cameron Partners Level 12, 60 Castlereagh St Sydney, NSW 2000 Banker HSBC Bank Australia Limited HSBC Centre 580 George St Sydney, NSW 2000 Offices – International Canada 2645 East, Jacques-Cartier Blvd., Longueuil, Qc, Canada, J4N 1L7 Tel: +1 450 748 1421 China No.132 Buling Road, Yonghe District, GETDD Guangzhou 511356, PR China Tel: + 86 20 3222 2180 France Parc d’Activite Entrimmo 3 Rue Paul Rieupeyroux 69800 Saint Priest, France Tel: + 33 4 72 79 33 31 Indonesia Inkopal Plaza Kelapa Gading Blok B No. 31-32 Jl. Raya Boulevard Barat Jakarta 14240, Indonesia Tel: + 62 21 45851481 Malaysia Lot 832, Jalan Kusta Kawasan Perindustrian SB Jaya 47000 Sungai Buloh, Selangor Darul Ehsan Tel: + 60 3 6145 6000 New Zealand 7 Industry Road, Penrose, 1061 Auckland, New Zealand Tel: + 64 9 525 7570 Singapore 24 Peck Seah Street #05-02/04 Nehsons Building Singapore 079314 Tel: + 65 6344 2378 United Kingdom Radfield, London Road, Teynham Sittingbourne, Kent, ME9 9PS, UK Tel: + 44 1795 521733 United States Of America 1864 Tobacco Rd Augusta, GA 30906, USA Tel: + 1 706 793 7291 82 < WATERCO LIMITED ABN 62 002 070 733 And Controlled Entities ANNUAL REPORT 2015 > 83 WATERCO LIMITED ABN 62 002 070 733 Registered Office: 36 South Street, Rydalmere NSW 2116. Tel Fax Website : www.waterco.com Email : +61 2 9898 8600 : +61 2 9898 1877 : administration@waterco.com 84 < 

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