Waters
Annual Report 2019

Plain-text annual report

ANNUAL REPORT 2019 Waterco pioneers reliable solutions for healthy, safe water environments 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. Contents Company Profile Group Consolidated Financial Highlights Chief Executive Officer’s Review of Operations 4 6 7 12 Board of Directors 14 Statement of Corporate Governance Practices 22 Directors’ Report 32 33 Auditor’s Independence Declaration Consolidated Financial Report 80 Shareholder Information 81 Corporate Directory 1 WATERCO LIMITED ANNUAL REPORT 2019Company Profile CANADA Boucherville USA Augusta UK Kent CHINA Guangzhou MALAYSIA Kuala Lumpur SINGAPORE INDONESIA Jakarta AUSTRALIA Sydney, Brisbane, Melbourne, Adelaide, Perth NEW ZEALAND Auckland Waterco pioneers reliable solutions for healthy, safe water environments, which are used in residential, commercial and industrial applications in over 40 countries. Established in 1981, it has since become a global brand recognised for designing and manufacturing filtration and sanitisation innovations for the swimming pool, spa, aquaculture, and water purification sectors. 4 4 Manufacturing Power House Waterco’s research & development team has created an innovative range of award winning products. Waterco delivers high quality products at exceptional value with its efficient manufacturing procedures, advanced fibreglass winding and pioneering plastic moulding. Swimart is a market leading brand in the Pool care industry across Australia and New Zealand with over 36 years experience. Swimart is focussed on making Pool Care Easy, with 69 retail stores and 5 mobile franchises across Australia and New Zealand. Swimart provides its customers a great range, service and advice through its highly trained and experienced technicians focussed on their Pool care needs through its fleet of over 250 Swimart service vans. Zane Solar Systems consists of a 31-strong dealer network throughout Australia. These highly skilled and trained professionals install solar, heat pump and gas pool heating systems for both domestic and commercial applications using Zane’s Gulfstream and Gulfpanel solar absorber, Electroheat pool heat pumps and Turbotemp gas pool heaters. In certain regions of Malaysia, residents experience water discolouration caused by rust from unlined galvanised pipes. To service this market Waterco has set up a dealer network of 15 Watershoppes selling Waterco’s range of water filters and drinking water purifiers. 5 WATERCO LIMITED ANNUAL REPORT 2019Group Consolidated Financial Highlights Financial Year Ended 2019 2018 2017 2016 2015 Operating revenue ($ million) 90.86 87.83 85.21 83.97 88.17 Sales revenue ($ million) 89.62 86.26 82.51 81.72 80.89 Earnings Before Interest and Tax (EBIT) ($ million) 4.42 6.73 6.21 5.01 4.56 EBIT / Sales Revenue 4.9% 7.8% 7.5% 6.1% 5.6% Profit before income tax ($ million) 3.31 5.72 5.33 3.82 3.05 Net profit after tax ($ million) 2.28 3.95 3.71 2.85 1.55 Total assets ($ million) 116.83 116.59 100.78 92.39 97.28 Equity ($ million) 75.83 74.17 64.38 59.31 56.05 Basic Earnings per share 6.1 cents 10.3 cents 9.7 cents 7.6 cents 4.1 cents Dividends per share (Interim and Final) 5.0 cents 5.0 cents 5.0 cents 5.0 cents 5.0 cents Net Tangible Assets per share $2.06 $1.99 $1.71 $1.57 $1.54 Year-end share price $1.61 $2.05 $1.70 $1.28 $1.00 6 6 Chief Executive Officer’s Review Of Operations SOON SINN GOH Chairman/Group CEO REVENUE AND PROFITABILITY The Group reports a fall in Net Profit After Tax (NPAT) and Earnings Before Interest and Tax (EBIT). NPAT fell by 42% to $2.28 million, while EBIT fell by 34% to $4.42 million. NPAT was slightly above (4%) the revised market guidance of $2.20 million, announced in April this year. The main reasons were increased costs brought about by a depreciation in all exchange rates against the $US dollar, and a significant slowdown in China’s Economic Conditions resulting in losses in our entity in China. Despite this, the Group was able to achieve a 4% increase in sales. The Australia and New Zealand Division, which accounts for a major portion of the Group’s profitability and sales, registered a reduction in EBIT of 39%. This is mainly due to increased costs affected by an 8% depreciation against the US Dollar during the year and realised foreign exchange losses on trading stock. During the year, additional provisions for warranty expenses were provided to comply with Accounting Standards. Swimart Division did not meet expectations due to an increase in company operated stores in the second half resulting in higher operating expenses, which adversely impacted its contribution for the year. The North America and Europe Division continues to undergo restructuring. EBIT losses were cut by 84%, due to improved financial results in USA and Canada. DIVISIONAL EBIT PERFORMANCE The breakdown of EBIT contribution by division is as follows: FY19 ($000) FY18 ($000) % Change Australia and New Zealand 2,970 4,851 North America and Europe (39) (239) Asia 1,485 Consolidated Reported EBIT 4,416 2,094 6,730 (39%) 84% (29%) (34%) 7 WATERCO LIMITED ANNUAL REPORT 2019Swimart has unveiled its new logo and a three-year rebrand strategy, heralding an exciting phase for one of Australasia’s biggest pool and spa networks. AUSTRALIA AND NEW ZEALAND (ANZ) The Australia and New Zealand Division derives its revenue predominantly from the domestic swimming pool industry. In this market, Waterco offers a wide range of products, including chemicals for swimming pool water treatment. Waterco also owns the Swimart franchise, which features 69 pool stores in Australia and New Zealand. The success of these stores is built on more than three decades of experience, during which Waterco has developed an extremely good understanding of the factors that drive consumer demand in the after-market. Franchisees benefit from a programme that has been developed and improved on in- house since 1983, when a company-owned pool shop was opened in Sydney. This has since grown into the Swimart franchising retail system. Steady market share in the domestic pool sector has underpinned the Division’s performance. Despite a difficult year in the ANZ Market, Waterco was able to achieve a 2.4% increase in sales on the previous year. NORTH AMERICA AND EUROPE Waterco North America and Europe comprises the Group’s MultiCyclone success in USA sales In 2018, Waterco USA initiated a sales strategy focused on increasing awareness and of Waterco’s patented MultiCyclone centrifugal filtration system. MultiCyclone’s ability to dramatically reduce filter maintenance, captured the interest of the US market. This initiative has helped lift Waterco USA’s sales over the past 2 years. operations in the USA, Canada, UK and France. Waterco USA (WUSA) The US market is the largest in the world. Waterco has invested significantly in this market, through start-up operations, as well as a substantial acquisition of Baker Hydro in March 2005. Our operations in Augusta, Georgia, now distribute a wide range of filters and assemble commercial pumps. This entity has experienced another significant sales growth (36%) during the year under review and is expected to further improve revenue in the ensuing year. 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 Ease filter workload 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. The manufacturing operations have since been transferred to other manufacturing entities and WCI is now a trading entity with heat pumps as their key product. One of MultiCyclone’s key selling points is its ability to pre-filter up to 80% of the filter’s incoming dirt load easing the workload of the pool filter. As it intercepts more and more dirt, the flow rate remains unchanged. WCI continued the restructure of its operations during the year leading to improved financial results on the previous year. The entity will continue the restructure process in the new year, and is expecting further improved financial results. 8 Pool heat pump manufacturing and R&D Greater interest in environmentally friendly and cost-effective pool heating has seen an increase in the use of heat pumps to efficiently heat pools. Waterco manufacturers a comprehensive range of swimming pool heat pumps ranging from 9kW to 44kW. Alongside its heat pump assembly line, it has set up a heat pump laboratory for R&D and heat pump performance testing. Waterco Europe (WEL) Waterco started operations in the UK in 1999 and subsequently acquired the business of Lacron Ltd in 2003. This Entity, therefore, 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 Waterco’s established progressive manufacturing techniques, this has enabled WEL to bring to the market filters of quality at acceptable prices. Today, both the Lacron and the Waterco brands are well-recognised as quality products in Europe. This recognition continues, even after the manufacturing operations had been transferred to Malaysia and China, because the same high standards have been maintained. Waterco Europe achieved a 9.2% increase in sales during the year despite the challenges in the European Market (including Brexit). This Entity had consolidated its operations during the economically difficult years in the region and has benefitted from this in the last three years, when sales growth has been significant. This Entity continues to reinforce its interest in commercial filters of high pressure ratings developed for water treatment, in particular, as pre-filtration for seawater desalination. The Group’s ability to manufacture filters of such pressure ratings from composites provides an opportunity to enhance our presence into a market that has traditionally used steel to cope with such pressures. Waterco Europe’s high- profile commercial projects Waterco Europe’s reputation has helped the company secure more high-profile commercial projects. Con- sequently, its commercial pump and filter sales have increased as a result of in customer’s confidence product quality and impec- cable after-sales service. Nirvana Spa (Berkshire, UK) Langley Park Hotel (Buckinghamshire, UK) Nirvana Spa is one of only three resorts in the UK with its own underground reservoir of mineral rich spring water. The luxurious facility boasts the country’s largest, fully tiled flotation pool. 17th Century Langley Park House is a historic Palladian mansion – and former third Duke of country estate of Marlborough. It was recently transformed into the 5 Star Langley Park Hotel. the the installation of Waterco’s After SMDT1200 split-tank filters, water quality has improved for the guests and reduced backwashing for the maintenance staff. The £30 million landmark development features a full-service spa and swimming pool facility fitted with Waterco’s world- class commercial filtration solutions. 9 WATERCO LIMITED ANNUAL REPORT 2019Waterco’s Malaysian manufacturing facility in Kuala Lumpur Waterco’s high-tech facility takes up 6.3 hectares and has a total work force of 450 staff. The Malaysian facility manufactures an extensive range of fibreglass filters, from 400mm to 3000mm diameter vertical filters and 860mm diameter to 2200mm diameter horizontal filters. ASIA Waterco Far East in Malaysia (WFE) This Entity 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. 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 posted a 12% growth, in spite of soft economic conditions and political uncertainty. Increased volume, particularly in labour-intensive large commercial filters, has resulted in an increase in wages above expectation, with more overtime worked. The Entity’s capacity has been increased in the new financial year to address this and this is expected to lead to an improvement in financial performance. Waterco China This Entity commenced operations in 2000, delivering advantages of low operational costs and a foothold into the huge China market. The manufacturing of filters primarily for the European and the Australian markets has been relocated to Malaysia, leaving this entity to focus on development of commercial heat pumps and to improve marketing of pool equipment to the commercial pool market in China. External sales fell by 39% during the year (after a record year in FY2018) due to a significant slow- down in China’s Economic Conditions. Waterco International in Singapore (WI) This Entity 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. Performance during the year was steady. Waterco’s Micron commercial fibreglass filters are made from continuous strands of high-quality fiberglass filament wound under controlled to create a seamless, impervious vessel. tension 10 PRODUCT DEVELOPMENT AND WATER TREATMENT The Group continues to invest in Research and Development in order to be at the forefront of the industry. Product innovation and research and development in the water- treatment subsector are considered to be critical to 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 technology advances and 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. Waterco’s quality control procedures ensure that the structural requisites of the product are achieved at every stage of production. This results in 100% compliance of the end product with the specifications. Wangaratta water treatment plant DIVIDEND AND OUTLOOK To deliver high-quality filtered drinking water free from unwanted taste and odours, Filtec installed Waterco’s Micron MPD10000 commercial Nozzle Plate Media Filter (10m² filter area and 1200mm bed depth) – the largest filter to date to receive AS/NZS 4020:2005 Certification from the Australian Water Quality Centre. The results (Net Profit After Tax of $2.28m), are slightly above the profit guidance revision of $2.2m released to the market on 17 April 2019. While Australia/New Zealand and Asia's reported EBIT fell from last year, EBIT for North America and Europe showed a further improvement on the previous year.This is especially pleasing, as losses in the US and Canadian entities (in the North America and Europe Division) are not tax-effected, accentuating their impact. The Board will provide a profit guidance at a later stage for the financial year ending 30 June 2020, as more information becomes available during the year. Waterco declares a final dividend payment of 3 cents per share, payable to shareholders on 16 December 2019. With an interim dividend of 2 cents per share, declared after the announcement of the Half-Year results, this maintains the total dividend for the year at 5 cents per share. 11 WATERCO LIMITED ANNUAL REPORT 2019Board of Directors 12 SOON SINN GOH - B COM FCPA Chairman/Group 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 a Chartered 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. Mr Norman will be retiring as a director on 25 October 2019 after the conclusion of the Annual General Meeting of the Company. 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 Chartered Accountants Australia and New Zealand and the Malaysian Institute of Accountants. He has experience in total logistics and corporate finance in capital markets. Mr. Ling is currently a Non-Executive Director of Tiong Nam Logistics Holdings Berhad, a public company listed on Bursa Malaysia (Malaysian Stock Exchange). He is a member of the Remuneration and Nomination Committee and Chairman of the Audit Committee of Tiong Nam Logistics Holdings Berhad. 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. 13 WATERCO LIMITED ANNUAL REPORT 2019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 2019 (Reporting Period). The Company will comply with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations – 4th Edition, published February 2019 for the financial year ended 30 June 2021. 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 2019. 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 Charter sets out the roles and responsibilities of the Board. The Board is ultimately responsible for the growth, strategic direction and success of the Company and has set out specific matters reserved for its decision and matters delegated to the management. 1.2 Information regarding election and re-election of director candidates The Company has in place a policy for nomination and appointment of directors. 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; • whether the appointment or re-appointment will contribute positively to the skill set and diversity of the Board as a whole; and • gender diversity policy of the Company. 14 1.3 Written appointment 1.4 Company Secretary 1.5 Diversity In addition to being set out in the Board Charter, the letters of appointment executed with all directors describe the key duties and responsibilities of each member of Board, and further include the terms of appointment, remuneration, time commitment envisaged, expectations regarding committee work, the requirement to disclose directors’ interests and confidentiality obligations. Mr Soon Sinn Goh has an employment agreement with the Company as the Group Chief Executive Officer. As Mr Goh spends a majority of his time developing and enhancing manufacturing capabilities in Malaysia and sales in various entities other than Australia and New Zealand, he also has a letter of employment with Waterco (Far East) Sdn Bhd setting out his role in Malaysia and a letter of employment with Waterco International Pte Ltd for his role in Singapore. Key Management Personnel have written employment agreements setting out a description of key duties and responsibilities, reporting lines, remuneration and termination rights. 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 explicitly reflect this delegation by the Board to the Company Secretary. The Board recognises diversity and equity as strengths and adopted a Diversity & Equity Policy for the Company which includes an express requirement for the Board to set measurable objectives for achieving gender diversity. The 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 (excluding Board Members) Women employees in the company Measurable objective % 0% 25% 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. As at 31 March 2019, women represented 26.17% of the overall workforce. Women made up 33.33% 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. 15 WATERCO LIMITED ANNUAL REPORT 2019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 mind set 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 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 Group 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. 2.1 Nominations committee 16 2.2 Board skills matrix 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 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 Leadership Strategic thinking Industry experience Governance Governance committee Risk management Ethical and fiduciary duties Environment and sustainability Technical Diversity Legal Financial Engineering Human resources Female Male Different ethnicities and cultures Languages other than English 2.3 Disclose independence and length of service 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 The roles of Chairperson and Group 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 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. 2.6 Induction and professional development 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. 17 WATERCO LIMITED ANNUAL REPORT 2019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. 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. 4.2 CEO and CFO certification of financial statements The Board has received a written statement from its Group 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 • the opinion has been formed on the basis of a system of risk management and internal control adopted by the Board, and that this system is operating efficiently 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. 18 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 ASX Listing Rules and promote factual and timely disclosure of all material matters concerning the Company. 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 on 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 the predominant sources for investors to engage with the Company 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 which 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. Shareholders have 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 preferences. The share registry can also be contacted via email or telephone. Contact details can be found on the Company’s website. 19 WATERCO LIMITED ANNUAL REPORT 2019Principle 7: Recognise and manage risk RECOMMENDATION WATERCO’S COMPLIANCE WITH ASX RECOMMENDATIONS 7.1 Risk committee The Company has not established a Risk Committee. The functions of the Risk Committee are performed by the Audit Committee who reports to the Board on the effectiveness of the risk management and internal control processes of the Company regularly by circulation 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. 7.2 Annual risk review 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. 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 in response to Recommendation 4.1. 7.4 Sustainability risks The Board considers that the Company is not materially exposed to economic, environmental and social sustainability risks. 20 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. 8.3 Policy on hedging equity incentive schemes The Company did not offer an equity-based remuneration scheme during the Reporting Period. 21 WATERCO LIMITED ANNUAL REPORT 2019Directors' Report Your directors present their report on the Company and its controlled entities for the financial year ended 30 June 2019. 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 JP Mr Doumit was appointed Company Secretary on 22 July 1991. He has been employed by Waterco since January 1987 as an Accountant and is currently Chief Financial Officer (CFO) and 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. Consolidated Results The consolidated profit of the Group after providing for income tax and eliminating non controlling interests amounted to $2.242 million. 22 Dividends Dividends paid or declared for payment are as follows: • Final ordinary dividend of 3 cents per share paid on 14 December 2018 as recommended in last year’s report - $1.108 million • Interim dividend of 2 cents per share paid on 14 June 2019 as declared in the half yearly report - $0.733m • Final ordinary dividend of 3 cents per share declared by the directors to be paid on 16 December 2019 - $1.099 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 $1.66 million from $74.17 million in June 2018 to $75.83 million in June 2019. The change has largely resulted from: • Net increase in the asset revaluation reserve of group companies of $0.59 million; • Upward movement in profits less dividends paid of $0.24 million; • Net increase in non-controlling Interests of $0.04 million and • Foreign currency translation gain of $1.7 million; and offset by a decrease in: • the share capital of $0.91 million from the Waterco Share Buy-Back. The Group’s working capital being current assets less current liabilities increased from $30.11 million in 2018 to $30.62 million in 2019. 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 3 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. 23 WATERCO LIMITED ANNUAL REPORT 2019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. 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 5 5 5 5 5 5 5 5 5 5 - - 5 5 5 - - 5 5 5 - - 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. 24 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. iii. Management fee charged to Mint Holdings Pty Ltd for rent, administration and secretarial services. 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. 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 2019 has been received and is included in the directors’ report. ASIC Corporations (rounding in Financial/Directors Reports) Instruments 2016/191 The amounts in the financial reports and directors’ report have been rounded to the nearest thousand dollars in accordance with ASIC Corporations Instruments 2016/191. 25 WATERCO LIMITED ANNUAL REPORT 2019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. 2019 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. 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 Group CEO. The Committee then recommends the fixed remuneration and annual incentive payment of the Group CEO for approval by the Board. The Group CEO recommends Key Management Personnel’s fixed remuneration and annual incentive payments 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 $300,000. This was approved by shareholders at the Annual General Meeting held on 26 October 2018. There has been an increase of 3% in the Non-Executive Director fees for the 2019/2020 financial year. The total fees are now at an aggregate of $184,964 plus Superannuation Guarantee Charge. The Remuneration Committee seeks independent external advice when required. 26 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 Group CEO, the Remuneration Committee sets the performance requirements; in the case of other Key Management Personnel, the Group 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. Performance criteria are tabulated below Key Management Personnel with annual incentives Summary of Performance Condition FY 19 Why Chosen Soon Sinn Goh – Group CEO Budgeted NPAT for the Waterco Group. Key Management Personnel Budgeted NPAT for the Waterco Group. Encourage Group 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 2019. 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 Sales Revenue ($million) NPBT ($million) EPS (cents) Dividends per share paid (cents) Year end share price ($) NPAT ($million) June 19 June 18 June 17 June 16 June 15 89.62 3.31 6.1 5.0 1.61 2.28 86.26 5.72 10.3 5.0 2.05 3.95 82.51 5.33 9.7 5.0 1.70 3.71 81.72 3.82 7.6 5.0 1.28 2.85 80.89 3.05 4.1 5.0 1.00 1.55 Please see commentary on performance on page 22. 27 WATERCO LIMITED ANNUAL REPORT 2019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 2019 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 & Group 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 2 months' notice by either party G Norman 1) Director - Non-Executive B Hunt Director - Non-Executive R Ling Director - Non-Executive S T Lim 2) Chief Financial Officer B H Leo Company Secretary No fixed term, 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, but subject to member confirmation every 3 years after AGM when first appointed. No fixed term, may be terminated on 2 months’ notice by either party No fixed term, may be terminated on 2 months’ notice by either party G Doumit 2) Chief Financial Officer/ Company Secretary No fixed term, may be terminated on 2 months’ notice by either party - - - - - - - - - - - - - - - - - - - - - - - - 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 1) On 25th July 2019, Mr Garry Norman submitted his letter of resignation as a Director of Waterco Ltd. This will take effect from 25th October 2019. 2) On 23rd July 2019,Mr Sze Tin Lim retired as Chief Financial Officer of Waterco Ltd (Mr Gerard Doumit was appointed as Chief Financial Officer of Waterco Ltd on 26th June 2019) 28 There have been no other changes in Directors and Key Management Personnel subsequent to year-end. Key Management Personnel Shareholding Number of Shares held by Key Management Personnel 2019 Key Management Personnel Balance 1.7.2018 Received as Remuneration Net Change Other Balance 30.6.2019 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 2018 21,721,853 540,121 155,114 370,223 - 102,817 6,000 71,300 - - - - - - - - - 21,721,853 - - (200,000) - - (6,000) - 540,121 155,114 170,223 - 102,817 - 71,300 Key Management Personnel Balance 1.7.2017 Received as Remuneration Net Change Other Balance 30.6.2018 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 21,705,978 540,121 155,114 370,223 - 102,817 6,000 71,300 - - - - - - - - 15,875 21,721,853 - - - - - - - 540,121 155,114 370,223 - 102,817 6,000 71,300 29 WATERCO LIMITED ANNUAL REPORT 2019Remuneration Details The following table provides remuneration details for the 2019 and 2018 financial years for Key Management Personnel. Short-term benefits Post- employment benefits Long-term benefits Renumeration incl Salary, fees and leave Profit share and bonus (3) Non- monetary (2) Pension and super- annuation $ $ $ $ LSL $ Total $ Key Management Personnel Soon Sinn Goh(1) Bryan Goh Garry Norman Ben Hunt Richard Ling Sze Tin Lim Bee Hong Leo Gerard Doumit 2019 416,420 2018 404,564 2019 232,269 2018 229,522 2019 2018 2019 2018 2019 2018 59,859 58,115 59,859 58,115 59,859 58,115 2019 228,455 2018 234,424 2019 201,715 2018 195,840 2019 178,045 2018 172,859 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,401 14,001 20,531 20,049 5,686 5,521 5,686 5,521 5,686 5,521 20,531 20,049 19,136 19,436 3,127 2,967 7,723 6,546 - - - - - - 4,348 7,882 7,728 7,399 431,948 421,532 260,523 256,117 65,545 63,636 65,545 63,636 65,545 63,636 253,334 262,355 228,579 222,675 22,944 16,914 18,835 236,738 22,349 17,013 6,055 218,276 (1) S S Goh’s Remuneration of $431,948 is made up of $146,068 paid/payable by Waterco Ltd, $142,940 paid by Waterco (Far East) Sdn Bhd (a subsidiary) and $142,940 paid by Waterco International Pte Ltd (a subsidiary). (2) Non-monetary benefits are made up of Company vehicle benefits. 30 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 2019 financial year. Maximum cash incentives expressed as a percentage of fixed remuneration and the maximum value that could have been earned in 2018/2019 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 Group CEO, Waterco Limited Group Marketing Director, Waterco Limited CFO, Waterco Limited Company Secretary, Waterco Limited Chief Financial Officer / Company Secretary, Waterco Limited 23% 19% 20% 15% 15% $100,000 $50,000 $50,000 $35,000 $35,000 The percentage of cash incentives payable and forfeited for the year to key management personnel. Key Management Personnel Short term incentive in respect of 2019 financial year Payable % 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 12 September 2019 31 WATERCO LIMITED ANNUAL REPORT 2019Auditor’s Independence Declaration 32 Consolidated Financial Report for the year ended 30 June 2019 Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements 34 35 36 37 38 76 Directors’ Declaration 77 Independent Auditor's Report 33 33 WATERCO LIMITED ANNUAL REPORT 2019Consolidated Statement of Profit or Loss and other Comprehensive Income For The Year Ended 30 June 2019 Consolidated Group 2019 $000 90,863 (2,579) (42,658) (19,740) (1,749) (1,138) (2,084) (252) (2,097) (2,826) (1,490) (957) (242) (942) (348) (8,448) 3,313 (1,031) 2,282 591 1,697 2,288 4,570 2,242 40 2,282 4,530 40 4,570 6.1 6.1 Note No. 3 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 Research and development Insurance – general Contracted staff expense Warranty expense Commission expense 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 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 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 2018 $000 87,832 (5,784) (37,368) (18,607) (1,577) (1,000) (1,706) (145) (1,576) (2,662) (1,582) (798) (234) (706) (260) (8,106) 5,721 (1,771) 3,950 5,096 3,348 8,444 12,394 3,846 104 3,950 12,290 104 12,394 10.3 10.3 Consolidated Statement of Financial Position As At 30 June 2019 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Inventories 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 11 13 14 17 15 16 17 18 19 17 20 21 22 23 The accompanying notes form part of these financial statements. 2019 $000 5,310 12,120 36,189 829 54,448 61,459 432 487 62,378 Consolidated Group 2018 $000 4,291 12,636 37,590 832 55,349 60,696 189 352 61,237 116,826 116,586 11,159 11,268 (407) 1,811 23,831 11,094 5,869 202 17,165 40,996 75,830 37,676 23,224 14,191 75,091 739 75,830 10,040 12,786 277 2,132 25,235 11,039 5,932 211 17,182 42,417 74,169 38,590 20,936 13,944 73,470 699 74,169 35 WATERCO LIMITED ANNUAL REPORT 2019Consolidated Statement of Changes in Equity For the year ended 30 June 2019 Ordinary Shares Retained Earnings Capital Profits Reserve Asset Revaluation Reserve Foreign Currency Translation Reserve Non- Controlling Interests Total Consolidated Group Note No. $000 $000 $000 $000 $000 $000 $000 Cancellation of shares under Waterco Share Buyback Dividends paid 28 (743) - - (1,861) Balance at 30/6/17 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 Total transactions with owners and other transfers Balance at 30/6/18 Adjustment for change in accounting policy (note 1) Restated Balance at 30/6/18 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 Cancellation of shares under Waterco Share Buyback Dividends paid Total transactions with owners and other transfers 39,333 11,959 211 19,547 (7,266) 595 64,379 - - - 3,846 - 3,846 (743) (1,861) - - - - - - - - 104 3,950 5,096 3,348 - 8,444 5,096 3,348 104 12,394 - - - - - - - - - (743) (1,861) (2,604) 38,590 13,944 - 38,590 (154) 13,790 211 - 211 24,643 (3,918) 699 74,169 - 24,643 - (3,918) - 699 (154) 74,015 - - - 2,242 - 2,242 28 (914) - - (1,841) (914) (1,841) - - - - - - - 591 591 - - - - 40 2,282 1,697 1,697 - 2,288 40 4,570 - - - - - - (914) (1,841) (2,755) Balance at 30/6/19 37,676 14,191 211 25,234 (2,221) 739 75,830 The accompanying notes form part of these financial statements. 36 Consolidated Statement of Cash Flows For the year ended 30 June 2019 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/(used in) operating activities (note 32) Cash Flows from Investing Activities Dividend received Payment for property, plant & equipment Payment for intangibles Proceeds from sale of property, plant & equipment Net cash (used in) investing activities Cash Flows from Financing Activities Proceeds from bank borrowings Repayment of bank borrowings Proceeds from issue of shares (to outside interests) Share buyback Payment of hire purchase creditors Payment of lease liabilities Dividends paid Dividends paid-outside interests Net cash (used in) / provided by financing activities Net (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) The accompanying notes form part of these financial statements. 2019 $000 95,207 (86,897) 35 1,210 (1,138) (1,848) 6,569 1 (2,154) (237) 51 (2,339) - (1,688) 30 (914) - (245) (1,841) (29) (4,687) (457) 3,419 1,204 4,166 Consolidated Group 2018 $000 92,478 (94,276) 22 1,544 (1,000) (1,808) (3,040) 1 (3,410) - 138 (3,271) 9,595 (4,763) - (743) (114) (305) (1,861) - 1,809 (4,502) 4,634 3,287 3,419 37 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 1: Statement of Significant Accounting Policies These consolidated financial statements and notes represent those of Waterco Limited and controlled entities, (“Group”). Waterco Limited (a for-profit entity) is a listed public company, incorporated and domiciled in Australia. 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 12 September 2019. Basis of Preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative 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. New or amended Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. AASB 9 Financial Instruments The consolidated entity has adopted AASB 9 from 1 July 2018. The standard introduced new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows which 38 arise on specified dates and that are solely principal and interest. A debt investment shall be measured at fair value through other comprehensive income if it is held within a business model whose objective is to both hold assets in order to collect contractual cash flows which arise on specified dates that are solely principal and interest as well as selling the asset on the basis of its fair value. All other financial assets are classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading or contingent consideration recognised in a business combination) in other comprehensive income ('OCI'). Despite these requirements, a financial asset may be irrevocably designated as measured at fair value through profit or loss to reduce the effect of, or eliminate, an accounting mismatch. For financial liabilities designated at fair value through profit or loss, the standard requires the portion of the change in fair value that relates to the entity's own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment is measured using a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available. AASB 15 Revenue from Contracts with Customers The consolidated entity has adopted AASB 15 from 1 July 2018. The standard provides a single comprehensive model for revenue recognition. The core principle of the standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduced a new contract-based revenue recognition model with a measurement approach that is based on an allocation of the transaction price. This is described further in the accounting policies below. Credit risk is presented separately as an expense rather than adjusted against revenue. Contracts with customers are presented in an entity's statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity's performance and the customer's payment. Customer acquisition costs and costs to fulfil a contract can, subject to certain criteria, be capitalised as an asset and amortised over the contract period. Notes To The Financial Statements For the year ended 30 June 2019 Impact of adoption AASB 9 and AASB 15 were adopted using the modified retrospective approach and as such comparatives have not been restated. The impact of adoption on opening retained profits as at 1 July 2018 was a reduction in retained profits of $153,769. The impact on the current year result is the recognition of a contract liability of $343,454 and reduction in revenue of $123,784. The expected Credit Loss Model has not resulted in a material change. Revenue recognition Revenue from contracts with customers 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. Interest revenue is recognised using the effective interest rate method. 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. Initial franchise fees and franchise renewal fees are recognised over the period of the franchise agreement. information, for cash flow the financial Except 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 30 June financial year end except for Waterco Guangzhou Ltd, Waterco (C) Ltd, and PT Waterco Indonesia which have a 31 December financial year end. The reason for this is local company regulation. 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. Intercompany 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. 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 interests 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. 39 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 1: Statement of Significant Accounting Policies (continued) Business combinations (continued) All transaction costs incurred in relation to the business the statement of combination are expensed comprehensive income. to The acquisition of a business may result in the recognition of goodwill or a gain from a bargain purchase. 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 40 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. e. Income Tax The income tax expense/(income) 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. Notes To The Financial Statements For the year ended 30 June 2019 Note 1: Statement of Significant Accounting Policies (continued) e. Income Tax (continued) 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 tax assets relating to 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. 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 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 in equity, otherwise the exchange recognised the statement of is recognised difference comprehensive income. in 41 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 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 recognised in the statement of comprehensive 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 18) 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. 42 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. 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 buildings owned by the consolidated group are based on the following independent valuations: Land & Buildings Rydalmere NSW Date of Valuation Amount 27 April 2018 AUD 21,700,000 Malaysia 13 April 2017 China 8 June 2018 USA 7 March 2019 AUD 18,165,854 (MYR 60,000,000) AUD 9,621,952 (RMB 47,039,800) AUD 2,426,979 (USD 1,720,000) Notes To The Financial Statements For the year ended 30 June 2019 Note 1: Statement of Significant Accounting Policies (continued) j. Property, Plant and Equipment (continued) Property (continued) Increases (net of deferred taxes) 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. 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. On 7 March 2019, Waterco USA Inc revalued its property resulting in an increase in the value of the property from $US1,650,000 ($A2,145,086) to $US1,720,000 ($A2,426,979). The above valuation was performed by an independent valuer. 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(m) 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. 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% Hire Purchase Assets 10.00% - 20.00% 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 is greater than its estimated recoverable amount. 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 recognised in the profit and loss in the period in which they arise. 43 WATERCO LIMITED ANNUAL REPORT 2019 Notes To The Financial Statements For the year ended 30 June 2019 Note 1: Statement of Significant Accounting Policies (continued) k. Revenue and Other Income Revenue recognition The consolidated entity recognises revenue as follows: Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which the consolidated entity is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the consolidated entity: identifies the the contract with a customer; performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. identifies Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the 'expected value' or 'most likely amount' method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability. 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. Interest revenue is recognised using the effective interest rate method. 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. l. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office. In these circumstances the GST is recognised as part of the cost of 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. 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. n. Trade and Other Receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. The consolidated entity has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. All revenue is stated net of the amount of goods and Other receivables are recognised at amortised cost, services tax (GST). 44 less any allowance for expected credit losses. Notes To The Financial Statements For the year ended 30 June 2019 Note 1: Statement of Significant Accounting Policies (continued) o. Trade and Other Payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. 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. Borrowings and Borrowing Costs Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. to Borrowing costs directly attributable 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. Investments and Other Financial Assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. Such assets are subsequently measured at either amortised cost or fair value depending on is determined their classification. Classification based on both the business model within which such assets are held and the contractual cash flow characteristics of the financial asset unless, an accounting mismatch is being avoided. Financial assets are derecognised when the rights to receive cash flows have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership. When there is no reasonable expectation of recovering part or all of a financial asset, it's carrying value is written off. Financial assets at fair value through profit or loss Financial assets not measured at amortised cost or at fair value through other comprehensive income are classified as financial assets at fair value through profit or loss. Typically, such financial assets will be either: (i) held for trading, where they are acquired for the purpose of selling in the short-term with an intention of making a profit, or a derivative; or (ii) designated as such upon initial recognition where permitted. Fair value movements are recognised in profit or loss. Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income include equity investments which the consolidated entity intends to hold for the foreseeable future and has irrevocably elected to classify them as such upon initial recognition. Impairment of financial assets The consolidated entity recognises a loss allowance for expected credit losses on financial assets which are either measured at amortised cost or fair value through other comprehensive income. The measurement of the loss allowance depends upon the consolidated entity's assessment at the end of each reporting period as to whether the financial instrument's credit risk has increased significantly since initial recognition, based on reasonable and supportable information that is available, without undue cost or effort to obtain. Where there has not been a significant increase in exposure to credit risk since initial recognition, a 12-month expected credit loss allowance is estimated. This represents a portion of the asset's lifetime expected credit losses that is attributable to a default event that is possible within the next 12 months. Where a financial asset has become credit impaired or where it is determined that credit risk has increased significantly, the loss allowance is based on the asset's lifetime expected credit losses. The amount of expected credit loss recognised is measured on the basis of the probability weighted present value of anticipated cash shortfalls over the life of the instrument discounted at the original effective interest rate. 45 WATERCO LIMITED ANNUAL REPORT 2019 Notes To The Financial Statements For the year ended 30 June 2019 Note 1: Statement of Significant Accounting Policies (continued) s. Investments and Other Financial Assets (continued) Impairment of financial assets (continued) For financial assets measured at fair value through other comprehensive income, the loss allowance is recognised within other comprehensive income. In all other cases, the loss allowance is recognised in profit or loss. t. Current and Non-Current Classifications Assets and liabilities are presented the statement of financial position based on current and non-current classification. in An asset is classified as current when: i. it is either expected to be realised or intended to be sold or consumed in the consolidated entity's normal operating cycle; ii. it is held primarily for the purpose of trading; iii. it is expected to be realised within 12 months after the end of the reporting period; or iv. the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: i. it is either expected to be settled in the consolidated entity's normal operating cycle; ii. it is held primarily for the purpose of trading; iii. it is due to be settled within 12 months after the end of the reporting period; or iv. there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. u. Rounding of Amounts The amounts in the financial statements and directors’ report have been rounded off to the nearest $1,000 in accordance with ASIC Corporations (Rounding in Financial/Directors Reports) Instrument 2016/191. 46 v. 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 of slow-moving items. Obsolete items are 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. (iv) Allowance for expected credit losses The allowance for expected credit losses assessment requires a degree of estimation and judgement. It is based on the lifetime expected credit loss, grouped based on days overdue, and makes assumptions to allocate an overall expected credit loss rate for each group. These assumptions include recent sales experience and historical collection rates. Notes To The Financial Statements For the year ended 30 June 2019 Note 1: Statement of Significant Accounting Policies (continued) w. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2019. The consolidated entity's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, are set out below. AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. The standard replaces AASB 117 'Leases' and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a 'right- of-use' asset will be capitalised in the statement of financial position, measured at the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short- term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a 'right-of-use' asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight- line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) component. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The consolidated entity has substantially completed its implementation assessment of the new standard, however certain technical and judgemental aspects of the revised accounting policy remain open, the determination of lease terms for leases with options, which could have a material impact on the outcome under the new standard. The consolidated entity will adopt this standard from 1 July 2019 and its impact on adoption is estimated to result in total assets increasing by $14,053,299, total liabilities increasing by $14,133,455 and net assets decreasing by $80,156. including x. Comparative Figures Where required by Accounting Standards comparative figures have been adjusted to conform with changes in presentation for the current financial year. 47 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 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 LIABILITIES Current Liabilities TOTAL LIABILITIES EQUITY Issued capital Capital profits reserve Asset revaluation reserve Retained earnings TOTAL EQUITY 2019 $000 19,746 82,326 17,989 30,122 37,676 180 11,132 3,215 52,204 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Total profit after tax Total comprehensive income 2019 $000 2,953 2,953 2018 $000 19,698 84,848 20,473 32,688 38,590 180 11,132 2,258 52,160 2018 $000 3,779 8,054 Guarantees At 30th June 2019, Waterco Ltd has provided guarantees up to RM11,150,000 and USD1,000,000 (AUD5,265,323) (2018: RM11,150,000 and USD1,000,000 (AUD5,089,968) to two Malaysian Banks for loans provided to a subsidiary, Waterco (Far East) Sdn Bhd. Contingent Liabilities At 30th June 2019, Waterco Ltd has provided guarantees of $5,771,779 (2018: $6,464,995) to landlords for leases of premises subleased to its Swimart Franchisees. Contractual Commitments At 30th June 2019, Waterco Ltd has not entered any material contractual commitments for the acquisition of any property, plant and equipment. (2018: nil). 48 Notes To The Financial Statements For the year ended 30 June 2019 Note 3: Revenue and Other Income Revenue from Continuing Operations Sales revenue • Sale of goods Other revenue • Interest received 3(a) • Rent • Other Total Revenue (a) Interest received or receivable from • Other persons Total interest revenue Other Income Net gain on disposal of non-current assets • Property, plant and equipment Consolidated Group 2019 $000 2018 $000 89,617 86,265 35 229 982 90,863 35 35 7 22 223 1,322 87,832 22 22 19 49 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 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 • Goodwill on acquisition • Expenditure carried forward Total depreciation and amortisation Bad and doubtful debts • Trade debtors Rental expense on Operating leases • Minimum lease payments Note 5: Auditors’ Remuneration Remuneration of the auditor of the parent entity for: • Audit or reviewing the financial report Remuneration of other auditors of subsidiaries for: • Auditing or reviewing the financial report of subsidiaries 50 Consolidated Group 2019 $000 2018 $000 45,789 44,026 1,111 - 27 1,138 637 908 - 171 1,716 17 4 12 33 1,749 140 2,826 152 191 968 2 30 1,000 527 824 45 161 1,557 16 4 - 20 1,577 115 2,662 168 133 Notes To The Financial Statements For the year ended 30 June 2019 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% (2018: 30%) Add Tax effect of: • Depreciation of buildings • Foreign controlled entities tax losses not tax effected • Unrealised foreign exchange losses • Non deductible expenses • Other Less Tax effect of: • Research and development • Effects of lower rates in overseas countries • Unrealised foreign exchange gains • Exempt income • Overprovision for tax in prior years • Reinvestment allowance • Other Income tax expense attributable to entity The applicable weighted average effective tax rates are as follows: 2019 $000 1,177 (105) (41) 1,031 3,313 994 77 530 68 - 14 119 270 - 29 171 63 1,031 31% Consolidated Group 2018 $000 1,557 275 (61) 1,771 5,721 1,716 52 487 8 76 27 140 286 - 73 88 - 8 1,771 31% 51 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 7: Key Management Personnel Compensation (a) Key Management Personnel (KMP) Compensation The total 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 2019 $000 1,459 107 42 1,608 Consolidated Group 2018 $000 1,434 107 31 1,572 Refer to the remuneration report contained in the directors’ report for remuneration paid or payable to each KMP for the year ended 30 June 2019 (b) 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; 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. 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 by shareholders. 52 Notes To The Financial Statements For the year ended 30 June 2019 CURRENT ASSETS Note 8: Cash and cash equivalents Cash at bank and in hand (1) 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) (1) Includes $554,575 (2018:$962,499) in advertising levies held by Waterco Ltd in its capacity as the franchisor of the Swimart network and included in other creditors (see note 15). Amounts are held in a separate bank account at year end and are subject to restrictions in accordance with the franchise agreement and are therefore not available for general use by Waterco Ltd. Note 9: Trade and other receivables Trade receivables Less: allowance for expected credit loss (2018:provision for impairment of receivables) Other receivables Sundry receivables 2019 $000 5,310 5,310 (1,144) 4,166 11,389 (524) 10,865 1,255 1,255 12,120 Consolidated Group 2018 $000 4,291 4,291 (872) 3,419 11,285 (431) 10,854 1,782 1,782 12,636 53 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 9: Trade and other receivables (continued) Movements in the allowance of expected credit loss of receivables are as follows: Opening Balance 1.7.2017 $000 422 Opening Balance 1.7.2018 $000 431 Charge for the Year Amounts Written Off $000 115 $000 (106) Charge for the Year Amounts Written Off $000 233 $000 (140) Closing Balance 30.6.2018 $000 431 Closing Balance 30.6.2019 $000 524 Consolidated Group Current trade receivables Consolidated Group Current trade receivables There are $2,903,000 (2018: $2,370,000) 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 Within initial trade terms $000 > 90 $000 Consolidated Group 2019 Trade and term receivables Other receivables Total 2018 Trade and term receivables Other receivables Total 11,389 1,255 12,644 11,285 1,783 13,068 524 - 524 431 - 431 1,129 - 1,129 948 - 948 473 - 473 528 - 528 137 - 137 196 - 196 1,164 - 1,164 698 - 698 7,962 1,255 9,217 8,484 1,783 10,267 The Group does not hold any financial assets with terms that have been renegotiated, but which would otherwise be past due or impaired. 54 Notes To The Financial Statements For the year ended 30 June 2019 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 Ezera Systems Pty Ltd* Waterco USA Inc Waterco Engineering Sdn Bhd Waterco (Far East) Sdn Bhd Watershoppe (M) Sdn Bhd Baker Hydro (Far East) Sdn Bhd Solar-Mate 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 Medipool Pte Ltd**** Waterco France Beijing Waterco Trading Co Ltd Guangzhou Waterco Trading Co Ltd Shanghai Waterco Trading Co Ltd 2019 $000 7,300 5,675 23,915 1,591 (2,292) 36,189 829 829 Consolidated Group 2018 $000 11,280 3,080 23,381 1,726 (1,877) 37,590 832 832 Country of incorporation Carries on business in % owned 2019 2018 Australia Australia - - Australia Australia Australia Australia USA Malaysia Malaysia Malaysia Malaysia Malaysia New Zealand New Zealand China China United Kingdom Canada Indonesia Singapore Singapore France China China China Australia Australia Australia Australia USA Malaysia Malaysia Malaysia Malaysia Malaysia New Zealand New Zealand China China United Kingdom Canada Indonesia Singapore Singapore France China China China 100 100 100 60 100 100 100 100 100 100 100 100 100 100 100 100 51 100 60 100 100 100 100 100 100 100 - 100 100 100 100 100 - 100 100 100 100 100 100 51 100 - 100 100 100 100 * Ezera Systems Pty Ltd was incorporated on 18 February 2019 and issued 6 $1.00 shares to Waterco Ltd and 4 $1.00 shares to minority interests. ** On 31 December 2018, Baker Hydro (Far East) Sdn Bhd acquired 100% of shares of Solar-Mate Sdn Bhd for net purchase price of RM60,364($A20,663) *** On 7 March 2019,Waterco Indonesia issued 27.54 shares at Rup 10m ($A992.37) per share to Waterco Ltd and 26.46 shares at Rup 10m($A992.37) per share to minority interests. **** Medipool Pte Ltd was incorporated on 21 May 2019 and issued 6,000 $SGD1.00 ($A1.05)shares to Waterco International Pte Ltd and 4,000 $SGD 1.00($A1.05) shares to minority interests. 55 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 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 Leased plant & equipment at cost Less: accumulated depreciation Total written down value Movements in Carrying Amounts 2019 Consolidated Group: Balance at the beginning of year Effects of exchange rate changes Additions Revaluation Disposals Depreciation expense* Carrying amount at the end of year 2019 $000 17,763 5,077 (98) 4,979 32,036 (1,274) 30,762 32,613 (25,302) 7,311 877 (233) 644 61,459 Consolidated Group 2018 $000 17,442 5,004 (81) 4,923 31,378 (791) 30,587 30,048 (22,970) 7,078 855 (189) 666 60,696 Freehold Land Buildings $000 $000 Land use $000 Plant & Equipment $000 Leased Plant $000 Total $000 17,442 308 - 13 - - 17,763 30,587 344 134 339 - (643) 30,761 4,923 57 - - - - 4,980 7,078 36 2,020 - (52) (1,771) 7,311 3 666 60,696 748 199 2,353 352 - (105) (53) (171) (2,585) 644 61,459 *Depreciation expense that is absorbed into the cost of manufactured inventory is $872,299 2018 Freehold Land Buildings $000 $000 Land use $000 Plant & Equipment $000 Leased Plant $000 Hire Purchase Plant & Equipment $000 Total $000 Consolidated Group: Balance at the beginning of year Effects of exchange rate changes Additions Revaluation Disposals Depreciation expense* Carrying amount at the end of year 17,442 14,987 1,045 1,410 25,761 1,136 15 4,222 4,288 43 - 642 (547) 30,587 (50) 4,923 6,430 349 1,997 - (130) (1,568) 7,078 593 (6) 348 - (109) (160) 666 285 52,344 - 2,567 - 2,360 - 6,274 (479) (2,370) - 60,696 (240) (45) *Depreciation expense that is absorbed into the cost of manufactured inventory is $739,334. 56 Notes To The Financial Statements For the year ended 30 June 2019 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 2019 $000 2018 $000 29,022 (6,629) 22,393 28,367 (6,091) 22,276 The Group’s 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 their market value. Note 14: Intangible assets Goodwill Less: accumulated impairment Goodwill on consolidation Less: accumulated impairment Product development costs less: accumulated amortisation 81 (8) 73 249 (12) 237 122 - 122 432 Movements in Carrying Amounts Consolidated Group: Balance at the beginning of year Additions Disposals Effects of exchange rate changes Impairment/amortisation expense Carrying amount at the end of year Goodwill on consolidation $000 Goodwill $000 Deferred expenditure $000 - 249 - - (12) 237 74 - - 7 (8) 73 115 7 - - - 122 78 (4) 74 - - - 115 - 115 189 Total $000 189 256 - 7 (20) 432 57 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 CURRENT LIABILITIES Note 15: Trade and other payables - unsecured Trade creditors Sundry creditors and accrued expenses (1) (1) Included in sundry creditors are advertising levies collected of $554,575 (2018:$962,499) and held by Waterco Ltd in its capacity as the franchisor of the Swimart network. These amounts are held in a separate bank account at year end (see Note 8). Note 16: Borrowings Bank loans - secured (refer Note 19) Bank trade bills Bank overdraft Lease liability 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 58 Consolidated Group 2019 $000 2018 $000 6,569 4,590 11,159 6,381 3,659 10,040 8,048 1,796 1,144 280 11,268 11,691 - 872 223 12,786 - 1,428 5,706 (745) 6,389 (520) 5,869 407 899 - (232) 340 1,007 (520) 487 277 1,172 5,525 (245) 6,452 (520) 5,932 - 742 - (217) 347 872 (520) 352 Notes To The Financial Statements For the year ended 30 June 2019 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 to 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 asset 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 Consolidated Group 2019 $000 2018 $000 (5,579) 131 66 (5,382) 1,172 256 1,428 5,525 181 - 5,706 (245) (500) (745) 742 157 899 - - - - - - - (217) - (15) (232) 347 (7) 340 (3,373) (70) (2,136) (5,579) 1,036 - 136 1,172 3,647 1,878 - 5,525 (295) 50 (245) 828 (86) 742 - - - - 18 (18) - (186) - (31) (217) 353 (6) 347 59 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 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 - secured (1) Bank overdraft Lease liability Consolidated Group 2019 $000 2018 $000 6,101 6,101 5,338 5,338 2,132 762 (1,083) 1,811 10,842 - 252 11,094 2,120 1,171 (1,159) 2,132 10,683 - 356 11,039 (1) Bank facilities of the group are secured by a first ranking general security interest over all the assets and undertakings of the parent entity (including a first registered mortgage over the Rydalmere Property), and corporate guarantees from the parent entity to the banks of an overseas subsidiary. That part of the facilities that are payable or subject to an annual review within 12 months are classified as current. Bank loan amount of AUD11,500,000 relates to the parent entity and bears interest at 1.99%- 2.25% repayable by quarterly instalments with a maturity date of 27 November 2021. Bank loan amount of AUD7,390,000 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 60 211 11 (20) 202 2,013 682 200 11 - 211 2,343 661 Notes To The Financial Statements For the year ended 30 June 2019 Note 21: Issued capital Ordinary shares are classified as equity. 37,083,405 ordinary shares fully paid at beginning of the year (2018: 37,494,704) 38,590 39,333 Consolidated Group 2019 $000 2018 $000 On 31 July 2018, 30,177 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme On 31 August 2018, 51,230 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme On 30 September 2018, 39,972 shares were purchased at $2.06 and cancelled under Waterco Ltd Share-buyback Scheme On 31 October 2018, 15,789 shares were purchased at $2.10 and cancelled under Waterco Ltd Share-buyback Scheme On 30 November 2018, 61,385 shares were purchased at $2.12 and cancelled under Waterco Ltd Share-buyback Scheme On 31 January 2019, 9,025 shares were purchased at $2.10 and cancelled under Waterco Ltd Share-buyback Scheme On 28 February 2019, 17,372 shares were purchased at $2.12 and cancelled under Waterco Ltd Share-buyback Scheme On 31 March 2019, 209,424 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme On 30 April 2019, 11,769 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme On 31 May 2019, 3,611 shares were purchased at $1.59 and cancelled under Waterco Ltd Share-buyback Scheme On 30 June 2019, 1,000 shares were purchased at $1.60 and cancelled under Waterco Ltd Share-buyback Scheme On 31 July 2017, 112,117 shares were purchased at $1.70 and cancelled under Waterco Ltd Share-buyback Scheme On 31 August 2017, 35,679 shares were purchased at $1.70 and cancelled under Waterco Ltd Share-buyback Scheme On 30 September 2017, 9,535 shares were purchased at $1.64 and cancelled under Waterco Ltd Share-buyback Scheme On 31 October 2017, 18,459 shares were purchased at $1.64 and cancelled under Waterco Ltd Share-buyback Scheme On 30 November 2017, 151,105 shares were purchased at $1.84 and cancelled under Waterco Ltd Share-buyback Scheme On 31 December 2017, 19,850 shares were purchased at $1.96 and cancelled under Waterco Ltd Share-buyback Scheme On 31 January 2018, 15,164 shares were purchased at $1.99 and cancelled under Waterco Ltd Share-buyback Scheme On 28 February 2018, 21,642 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme On 31 March 2018, 7,135 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme On 30 April 2018, 5,661 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme On 31 May 2018, 10,012 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme On 30 June 2018, 4,940 shares were purchased at $2.00 and cancelled under Waterco Ltd Share-buyback Scheme 36,632,651 ordinary shares fully paid at the end of the year (2018: 37,083,405) (60) (102) (83) (33) (130) (19) (37) (419) (23) (6) (2) - - - - - - - - - - - - - - - - - - - - - - - (191) (61) (16) (30) (278) (39) (30) (43) (14) (11) (20) (10) 37,676 38,590 61 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 21: Issued Capital (continued) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands, every member present at a meeting in person or by proxy shall have one vote and, upon a poll, each share shall have one vote. Share buy-back On 21 April 2017, the company announced a second share buyback of $2,000,000 worth of shares (approximately 1,234,567 shares) commencing on 24 April 2017 and ending on 23 April 2018 (or earlier if the $2,000,000 is purchased before then). During the previous year (2018), the company purchased and cancelled 396,347(2017:88,430) shares costing $712,978 (2017:$147,284). This Share buyback expired on 23 April 2018. On 23 April 2018, the company announced a third share buyback of $2,500,000 worth of shares (approximately 1,250,000 shares) commencing on 24 April 2018 and ending on 23 April 2019 (or earlier if the $2,500,000 is purchased before then). During the current year, the company purchased and cancelled 446,143 (2018:15,952) shares costing $906,514 (2018:$29,904). This Share buyback expired on 23 April 2019. On 10 May 2019, the company announced a fourth share buyback of $2,500,000 worth of shares (approximately 1,666,666 shares) commencing on 13 May 2019 and ending on 12 May 2020 (or earlier if the $2,500,000 is purchased before then). During the current year, the company purchased and cancelled 4,611 shares costing $7,324. 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 ratios for the year ended 30 June 2019 and 30 June 2018 are as follows: Total borrowings Less cash and cash equivalents Net debt Total equity Total capital Gearing ratio 62 2019 $000 22,362 (5,310) 17,052 75,830 92,882 22% Consolidated Group 2018 $000 23,825 (4,291) 19,534 74,169 93,703 26% Notes To The Financial Statements For the year ended 30 June 2019 Note No. 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 Property revaluation increment (net of tax and reinstatement) Effect of foreign exchange changes on translation Balance at the end of the year The asset revaluation reserve records the revaluation of non-current assets Consolidated Group 2018 $000 211 2019 $000 211 (2,221) (3,918) 24,643 352 239 25,234 19,547 5,096 - 24,643 23,224 20,936 Note 23: Retained earnings Opening retained earnings Adjustment to retained profits for unearned income (AASB15) Net profit attributable to the members of the parent entity Dividends paid Closing retained earnings 28 13,944 (154) 2,242 (1,841) 14,191 11,959 - 3,846 (1,861) 13,944 63 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 24: Lease 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 Note No. 16 19 Consolidated Group 2018 $000 246 371 617 (38) 579 223 356 579 2019 $000 300 261 561 (29) 532 280 252 532 Finance leases 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. 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 Guarantees provided to banks on behalf of a subsidiary Guarantees of leases of premises subleased to franchisees Note 26: Related Parties 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 (iii) Management fee charged to Mint Holdings Pty Ltd for administration and secretarial services. 2,348 3,328 5,676 5,977 10,003 15,980 155 657 38 1,894 4,063 5,957 5,090 10,465 15,555 153 645 57 Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. 64 Notes To The Financial Statements For the year ended 30 June 2019 Note 27: Operating Segments 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 to reporting segments based on the services provided to those reporting segments. 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. 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 65 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 27: Operating Segments (continued) Geographical Segments AUSTRALIA & NEW ZEALAND $000 59,539 821 60,360 ASIA $000 13,152 26,332 39,484 2019 NORTH AMERICA & EUROPE $000 CONSOLIDATED GROUP $000 16,926 759 17,685 89,617 27,912 117,529 1,246 (27,912) 90,863 3,206 1,248 105 4,559 (1,246) 3,313 86,698 61,383 (12,802) 135,279 644 32,284 1,656 29,348 52 7,761 (18,453) 116,826 2,352 69,393 (28,397) 40,996 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/(loss) 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 Notes To The Financial Statements For the year ended 30 June 2019 Note 27: Operating Segments (continued) Geographical Segments 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/(loss) 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 AUSTRALIA & NEW ZEALAND $000 58,165 1,384 59,549 ASIA $000 14,073 27,125 41,198 2018 NORTH AMERICA & EUROPE $000 CONSOLIDATED GROUP $000 14,027 935 14,962 86,265 29,444 115,709 1,567 (29,444) 87,832 5,553 1,907 (172) 7,288 (1,567) 5,721 89,227 62,616 (12,263) 139,580 1,147 35,121 1,132 31,390 81 7,040 (22,994) 116,586 2,360 73,551 (31,134) 42,417 67 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 28: Dividends Paid or Proposed Dividends are recognised when declared during the financial year and no longer at the discretion of the company. Final fully franked ordinary dividend of 3c per share (2018:3c) franked at the tax rate of 30% paid Interim fully franked ordinary dividend of 2c per share (2018:2c) franked at the tax rate of 30% paid Proposed final fully franked ordinary dividend of 3 per share (2018: 3c) franked at the tax rate of 30% 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 Note 29: Earnings Per Share Basic earnings per share Basic earnings per share is calculated by dividing the profit (after tax) attributable to members of Waterco Ltd by the weighted average number of ordinary shares outstanding during the financial year adjusted for any share issues and share buybacks that have taken place during the year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the calculation of the basic earnings per share after income tax effect of interest and other financing costs associated with the dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. 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. 68 Consolidated Group 2019 $000 2018 $000 1,108 733 1,841 1,099 1,119 742 1,861 1,113 5,623 5,667 2,281 40 2,241 2,241 3,950 104 3,846 3,846 36,872 37,227 36,872 37,227 Notes To The Financial Statements For the year ended 30 June 2019 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. 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. 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. Credit risk is managed through maintenance of procedures in relation to approval, granting and renewal of credit limits, regular monitoring of The following table summarises the notional amounts of the Group (and parent entity) commitments in relation to forward exchange contracts. Notional Amounts 2019 $000 2018 $000 Average Exchange Rate 2018 $000 2019 $000 Consolidated Group (and Parent Entity) Buy USD/Sell AUD - Less than 6 months - 4,470 - 0.8052 69 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 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 2019 $000 2018 $000 2019 $000 2018 $000 2019 $000 2018 $000 2019 $000 2018 $000 Financial Assets Cash Receivables Total anticipated inflows Financial Liabilities Bank overdraft Bank loans Trade and other payable Lease Liabilities Total contractual outflows Less bank overdrafts Total expected 5,310 12,120 4,291 12,636 17,430 16,927 - - - - - - 1,144 9,844 872 11,691 - 10,842 - 10,683 11,159 280 10,040 223 - 253 - 356 22,427 1,144 22,826 872 11,095 - 11,039 - outflows 21,283 21,954 11,095 11,039 Net (outflow)/ inflow on financial instruments (3,853) (5,027) (11,095) (11,039) - - - - - - - - - - - - - - - - - - - - - - 5,310 12,120 4,291 12,636 17,430 16,927 1,144 20,686 872 22,374 11,159 533 10,040 579 33,522 1,144 33,865 872 32,378 32,993 (14,948) (16,066) 70 Notes To The Financial Statements For the year ended 30 June 2019 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 Assets Cash at bank and in hand Receivables Financial Liabilities Bank overdraft Bank loans Lease liabilities 2019 2018 Carrying Amount $000 Net Fair Value $000 Carrying Amount $000 Net Fair Value $000 5,310 12,120 17,430 1,144 20,686 532 22,362 5,310 12,120 17,430 1,155 20,893 559 22,607 4,291 12,636 16,927 872 22,374 579 23,825 4,291 12,636 16,927 881 22,598 608 24,087 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 2019 +/- 2% in interest rates +/- 5% in $A/$US Year ended 30 June 2018 +/- 2% in interest rates +/- 5% in $A/$US Consolidated Group Profit $000 Equity $000 +/-473 +/-1,055 +/-473 +/-1,055 +/-500 +/-999 +/-500 +/-999 71 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 32: 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 and amortisation (Profit) on sale of non current assets 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 (used in) /provided by operations Consolidated Group 2019 $000 2018 $000 2,281 2,588 33 1 (104) 93 527 1,401 3 (70) (7) 188 712 (330) (684) (62) (1) 6,569 3,950 2,251 20 (7) 542 9 (326) (7,815) (165) 143 (61) (664) (758) 22 (412) 232 (1) (3,040) b) Non Cash Financial and investment activities 1) Property, Plant and Equipment During the year, the consolidated group acquired plant and equipment with an aggregate fair value of $198,553 (2018:$347,782) by means of finance leases. 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 31,624 1,795 33,419 18,731 14,688 29,735 1,844 31,579 19,585 11,994 The Fully Drawn Advance Facilities of the parent entity are due to expire on 27 November 2021 (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. 72 Notes To The Financial Statements For the year ended 30 June 2019 Note 33: 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. They can be categorised 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. 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 techniques that convert estimated future cash flows or income and expenses into a single discounted present value. – 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, including assumptions about risks. A change in those inputs might result in a significantly higher or lower fair value measurement. When 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 the best information available about such assumptions are considered unobservable. 73 WATERCO LIMITED ANNUAL REPORT 2019Notes To The Financial Statements For the year ended 30 June 2019 Note 33: 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 13 13 Note No 13 13 Recurring fair value measurements 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 Recurring fair value measurements 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 Level 1 $000 30 June 2019 Level 2 $000 Level 3 $000 Total $000 - - - - - - - - 17,763 30,762 17,763 30,762 48,525 48,525 48,525 48,525 Level 1 $000 30 June 2018 Level 2 $000 Level 3 $000 Total $000 - - - - - - - - 17,442 30,587 17,442 30,587 48,029 48,029 48,029 48,029 b. Valuation Techniques and Inputs Used to Measure Level 3 Fair Values Description Fair Value at 30 June 2019 $000 Non-financial assets Freehold land(i) 17,763 Freehold buildings(i) 30,762 48,525 Valuation Technique(s) Inputs Used 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 Price per hectare; market borrowing rate Price per square metre; market borrowing rate (i) The fair value of freehold land and buildings is determined at least every three years based on valuations from independent valuers. 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/or discounted cash flow methodologies. There were no changes during the period in the valuation techniques used by the Group to determine Level 3 fair values. 74 Notes To The Financial Statements For the year ended 30 June 2019 Note 33: Fair Value Measurements (continued) 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; 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 Note Fair Value Hierarchy Level Valuation Technique(s) Inputs Used Liabilities Lease liability Bank debt 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 34: Company Details The registered office of the company is: Waterco Limited 36 South Street Rydalmere NSW 2116 75 WATERCO LIMITED ANNUAL REPORT 2019 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 75 are in accordance with the Corporations Act 2001 and: a. comply with Australian Accounting Standards, which, as stated in accounting policy Note 1 to the financial statements, constitutes compliance with International Financial Reporting Standards (IFRS); b. give a true and fair view of the financial position as at 30 June 2019 and of the performance for the year ended on that date of the consolidated group; and c. that the opinion has been formed on the basis of a sound system of risk management and internal control adopted by the Board, and that this system is operating efficiently; 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 12 September 2019 76 Independent Auditor's Report to the members of Waterco Ltd 77 WATERCO LIMITED ANNUAL REPORT 2019Independent Auditor's Report to the members of Waterco Ltd 78 Independent Auditor's Report to the members of Waterco Ltd 79 WATERCO LIMITED ANNUAL REPORT 2019Shareholder Information For the year ended 30 June 2019 (a) Distribution of Shareholders as at 22 August 2019 1 1,001 5,001 10,001 100,001 Range - - - - - 1,000 5,000 10,000 100,000 and over Total Holders 229 184 64 72 28 577 Options - - - - - (b) Marketable Parcel 35 shareholders hold less than a marketable parcel. (c) Substantial Shareholders The following information is extracted from the company’s register as at 22 August 2019 Name S S Goh Group Redbrook Nominees Pty Ltd Acres Holdings Pty Ltd (d) Voting Rights Number of shares 21,721,853 3,114,529 2,964,883 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 90.08% of the total shares issued. Name Number of shares Leitch Pty Ltd (Leitch Super Fund A/C) Deuteronomy Pty Ltd (Dennis Hambleton SF 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 Mrs Janet Swee Nyet Goh 9 10 Mr Chu Shien Chang 11 GWK Corporation Pty Ltd 12 13 GSS Holdings Sdn Bhd 14 15 16 Mr Tiow Lip Lee 17 Ms May-Yin Goh 18 Mr Bryan Weng Keong Goh 19 Mr Shane Goh 20 Mr Khoon Ping Kuok Brazil Enterprises Pty Ltd S G Corporation Pty Limited TOTAL (f) Stock Exchange Listing 18,921,853 3,112,943 2,978,064 2,500,000 681,384 562,717 500,000 447,112 381,153 340,281 334,387 310,530 300,000 295,173 281,739 245,386 225,267 205,734 188,607 173,000 32,985,330 % 51.67 8.50 8.13 6.83 1.86 1.54 1.37 1.22 1.04 0.93 0.91 0.85 0.82 0.81 0.77 0.67 0.62 0.56 0.52 0.47 90.08 The shares of Waterco Limited are listed on the Australian Stock Exchange under the trade symbol WAT. 80 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 Limited GPO Box 2975, Melbourne VIC 3001 Tel: 1300 850 505 Offices – Australia NSW 36 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 Australia Partners Level 13, 60 Castlereagh St Sydney, NSW 2000 Banker Commonwealth Bank of Australia 9-11 Betty Cuthbert Ave Ermington NSW 2115 Offices – International Canada 6185-118 boul. Taschereau, suite 389 Brossard, QC J4Z 0E4 Tel: + 1 450 748-1421 China No.132 Buling Road, Yonghe District, GETDD Guangzhou 511356, PR China Tel: + 86 20 3222 2180 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 and France Radfield, London Road, Teynham Sittingbourne Kent, ME9 9PS, UK Tel: + 44 1795 521733 United States Of America 1812 Tobacco Rd Augusta, GA 30906, USA Tel: + 1 706 793 7291 81 WATERCO LIMITED ANNUAL REPORT 2019WATERCO LIMITED ABN 62 002 070 733 Registered Office 36 South Street, Rydalmere NSW 2116 T: +61 2 9898 8600 W: www.waterco.com.au E: administration@waterco.com F: +61 2 9898 1877 

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