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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Lamprell Plc | LSE:LAM | London | Ordinary Share | GB00B1CL5249 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 8.88 | 8.78 | 9.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMLAM
RNS Number : 5542T
Lamprell plc
21 March 2019
21 March 2019
LAMPRELL PLC
("Lamprell" and with its subsidiaries the "Group")
2018 FINANCIAL RESULTS
Major strategic milestones delivered in Saudi Arabia and the renewables market
Financial results reflect low levels of activity and reduced margin contribution
Balance sheet continues to support delivery of strategic initiatives
Financial highlights
-- Net loss of USD 70.7 million (2017: loss of USD 98.1 million) for the Group as a result of lower revenues and loss from East Anglia One project impacting results
-- Revenue of USD 234.1 million (2017: USD 370.4 million) in line with guidance -- Year-end net cash position of USD 80.0 million (2017: USD 257.0 million)
-- Significantly improved backlog of USD 540.0 million at year-end (30 Jun 2018: USD 61.7 million)
Operational highlights
-- Excellent safety performance continues with best-ever total recordable incident rate of 0.15 (31 December 2017: 0.30)
-- Major upgrade project on Master Marine's mobile operating unit "Haven" successfully completed in H1 2018
-- East Anglia One offshore windfarm project summary:
o Project 99% complete
o All 42 jackets and 182 piles fabricated in UAE delivered to client's facility in Vlissingen and undergoing final certification and handover protocols prior to installation
o Belfast-based assembly for remaining 18 jackets by Harland and Wolff continues with Lamprell support
o Project loss increased by USD 9.4 million, primarily reflecting additional cost of supporting Harland and Wolff through its restructuring
o Overall project delivery remains on track to meet client installation campaign in 2019
-- Record year for rig refurbishment segment with 23 rigs passing through the yards in 2018, 11 currently stacked and five refurbishment projects ongoing/commencing shortly
-- Continued to upskill our workforce and bring in experienced personnel to deliver the strategic initiatives
Corporate strategy and business development
-- Major progress on all key strategic objectives
-- Now included on Saudi Aramco's prestigious LTA offshore programme, increasing bid pipeline by USD 3 billion to USD 6.4 billion, with bidding on new LTA projects already under way
-- New circa USD 200 million contract won in the renewables market, to deliver jackets for the Moray East wind farm
o Embedding lessons learnt on the East Anglia One project in pricing against in-depth understanding of the market and in managing project risk profile effectively
o Project on track for first steel cutting in Q2 2019
-- Progress with IMI joint venture:
o Early construction is ongoing, with dredging and reclamation works progressing as planned
o Commissioning of individual yard zones under regular review, with overall yard completion on track for 2022
o LOI signed for the subcontract of the two new build jackup rigs from IMI in December 2018, with the rig design and final contract terms expected to be concluded in Q2 2019
-- Lamprell's new LJ43 proprietary jackup rig design completed in collaboration with MSC Gusto
Outlook
-- FY2019 revenue is expected to be in the range of USD 250-400 million
-- Financial results will remain under pressure at the current revenue levels and cost base requirements for the Group
-- In advanced negotiations with lenders for new debt facilities which are expected to be signed in Q2 2019
-- Once achieved, balance sheet will continue to support strategic initiatives as the business returns to growth
-- Main focus for 2019 will be generation of healthy and sustainable backlog along with continuing discipline around costs and cash management, including monetising the LAM2K land rig and Super 116E rig kits
-- Additional opportunities expected to develop in both oil and gas and renewables markets in H2 2019, supporting underlying strength of bid pipeline and anticipated return to growth
Organisational update
-- Hani El Kurd promoted to the role of Chief Operating Officer for the Group
o Career spans almost 20 years in the industry including 13 years working in the Lamprell group
o Held a number of key operational and management roles, this appointment reflects his broad execution capabilities underpinned by strong commercial acumen and management expertise
2018 FINANCIAL RESULTS
Hot Features
Premium
2018 2017
(USD million, unless stated)
Revenue 234.1 370.4
EBITDA* (35.1) (70.5)
EBITDA margin (%) (15.0) (19.0)
(Loss) from continuing operations after
income tax and exceptional items (70.7) (98.1)
Reported diluted (loss) per share (US cents) (20.7) (28.7)
Net cash as at 31 December 80.0 257.0
Dividend per share (US Cents) Nil Nil
*EBITDA is calculated as profit from continuing operations before tax and exceptional items, net finance costs (finance income and interest on bank borrowings as per note 11 to the financial statements), adjusted to add back share of loss or profit in associates and charges for depreciation and amortisation (as per notes 16, 14 and 15 to the financial statements respectively).
John Malcolm, Non-Executive Chairman for Lamprell, said:
"2018 was marked by further volatility in the oil and gas industry and by the ongoing challenges in the EA1 project, both of which impacted our profitability for the year. Against this backdrop I am pleased to report significant strategic progress for Lamprell, which will help diversify our exposure away from a single source of revenue and secure solid, commercially strong prospects in years to come. As we deliver our strategy, we continue to focus on risk management throughout the business to ensure current and future opportunities help us return to profitability in the medium term."
Christopher McDonald, Chief Executive Officer for Lamprell, said:
"I am pleased to report that the business repositioning we have been working on over the past two years is finally beginning to translate into tangible growth opportunities for Lamprell. Having completed the UAE scope on our two major projects in the first half of 2018, our yard activity levels hit a historic low, however by the end of the year we had achieved three major strategic milestones, which made a significant improvement to both our backlog and bid pipeline.
"Our IMI joint venture has provided us with an LOI for two new build jackup rig orders, the first order globally since 2015. Our investment in new talent since 2017 has helped secure a place on Saudi Aramco's LTA programme and our challenging experience with East Anglia One has ensured we were able to win a new project in the renewables industry with confidence over its commercial viability. Although our current revenue levels will continue to affect profitability in the near term, I strongly believe in the growth prospects for our business"
The management team will hold a presentation on 21 March 2019 at 9.30am at the London Stock Exchange (10 Paternoster Square, London EC4M 7LS). The live webcast will be accessible on our company website, at www.lamprell.com or on the following link:
http://webcasting.brrmedia.co.uk/broadcast/5c6d4222e6e1d92d38f4f4e5
Phone: 0800 358 6377; confirmation code 7135175
The Company is planning to hold its 2019 annual general meeting on Tuesday 21 May 2019 in Dubai, United Arab Emirates.
- Ends -
Enquiries:
Lamprell plc
Maria Babkina, Investor Relations +44 (0) 7852 618 046
Tulchan Communications, London +44 (0) 207 353 4200
Martin Robinson
Martin Pengelley
Harry Cameron
Notes to editors
Lamprell, based in the United Arab Emirates ("UAE") and with over 40 years' experience, is a leading provider of fabrication, engineering and contracting services to the offshore and onshore oil & gas and renewable energy industries. The Group has established leading market positions in the fabrication of shallow-water drilling jackup rigs, liftboats, land rigs, and rig refurbishment projects, and it also has an international reputation for building complex offshore and onshore process modules and fixed platforms.
Lamprell employs more than 4,000 people across multiple facilities, with its primary facilities located in Hamriyah, Sharjah and Jebel Ali, all of which are in the UAE. In addition, the Group has facilities in Saudi Arabia (through a joint venture agreement). Combined, the Group's facilities cover approximately 800,000m2 with over 1.5 km of quayside.
Lamprell is listed on the London Stock Exchange (symbol "LAM").
Statement from our Chairman
The oil & gas industry is now in its fifth year of downturn and instability. We experienced widespread optimism early in the year only to see the oil price slump dramatically late in the year. The current uncertainty affects capital expenditure in the sector, meaning that our traditional sources of revenue remain inaccessible in the near future. We anticipated financial pressure to continue in 2018 as, despite firm fiscal control and responsibility, our current low revenue levels and reduced margin contributions significantly affected our profitability. With that in mind, our goal for 2018 has been to make major advances in delivering against our strategic objectives, taking into account the changing dynamics of the energy industry.
Delivering our strategy
The prolonged downturn in the oil & gas sector has highlighted our over-exposure to a single source of revenue. Our long-term goal is to grow the business' geographical reach, expand the markets and industries we can access as well as move the Company higher up the value chain to access larger, more complex projects.
One of our top priorities for 2018 was to further strengthen our presence in Saudi Arabia, a region with a clear commitment to investment in major oil & gas projects. We are making good progress with our joint venture, the IMI yard, and are pleased to have received a letter of intent for the construction of two jackup rigs at Lamprell's UAE facilities with approximately 15% to be completed in Saudi Arabia. These are the first jackup rigs awarded since 2015 globally - a clear demonstration of growth fundamentals in the region. I am also very pleased to report that following a very rigorous selection process we were able to deliver on our objective of being selected as one of the partners on Saudi Aramco's LTA programme. The LTA covers one of the largest offshore oil & gas capital expenditure programmes in the world, has added over USD 3 billion of opportunities to our bid pipeline and puts Lamprell and its LTA partner Boskalis on a par with other leading EPCI industry players. The programme does not guarantee contracts but I am confident we will soon begin to see the benefit of our efforts to submit an attractive proposition to the client and convert the pipeline into new awards, realising strong revenue opportunities for the Group.
Our third major achievement for the year was the award of a new major contract in the renewables market. Taking into account the challenges we have faced on a similar contract since 2017, the Board considered the commercial and risk profile of the Moray East project very seriously. The role of renewables in the global energy landscape will continue to gain prominence. The pipeline of projects in Europe, presently the largest wind farm market, is growing and large offshore wind farms are gradually spreading across the globe with the US market now also taking a more proactive step towards cleaner energy. Having assessed the growth forecasts for the renewables industry and incorporated the lessons learned from our first project in this industry, I firmly believe in retaining this product offering as one of our strategic focus areas and I have full trust in Lamprell's ability to deliver this new project and regain shareholder confidence.
Culture and core values
This is my sixth year with Lamprell and second year as Chairman. It has not been an easy period for the Group and I am very pleased to note that, despite the pressures resulting from a volatile market, the Company adhered to its most inspiring values: commitment to safety at our sites is unquestionable and without doubt makes us stand out for our prospective clients, fiscal responsibility has provided us with a cash position solid enough to weather the consequences of the market downturn. Lamprell's culture of delivering a product to every client with full accountability and integrity has now opened new opportunities in Saudi Arabia and in the renewables industry and a fresh focus on teamwork is helping us reduce project risk profiles from the early bidding stage. Our core values are fundamental to ensuring that our strategic goals and shareholder value will continue to be delivered in the long term.
Board changes and talent development
I was pleased to note the stability on Lamprell's Board in 2018. Following Ellis Armstrong's planned retirement at the Company Annual General Meeting in May, Debra Valentine assumed the role of Senior Independent Director and James Dewar now chairs the Audit and Risk Committee.
Succession planning and talent development was a stated Board priority last year, not just at the Board level but also within management. The successful delivery of some of our main objectives in 2018 would not have been possible without the highly experienced existing Lamprell team as well as the new talent that we brought on board to deliver our strategic transformation. The focus and dedication that the combined team continues to demonstrate in its effort to turn the page on the challenges of the past years is commendable. The Group will continue its work to enhance the leadership team in 2019 through a series of workshops which will build on the strengths identified in 2018.
Focus for 2019
The outlook for the oil & gas industry, although improving, still shows elements of volatility. I do not expect the global new build jackup rig market to recover in 2019, but our presence in Saudi Arabia has provided us with rare revenue opportunities in this segment. Our focus on the renewables market will continue and, with our traditional sources of revenue expected to resume in the medium term, global fabrication capacity may come under pressure which will improve the market and pricing dynamics throughout the value chain.
Generating a healthy and sustainable backlog, along with cost discipline, will be our main focus in 2019 and, as we convert current significant opportunities into projects, we are striving to become a cash generative business in the medium term. Over the course of 2018 I have seen very clear evidence of a business striving to improve its process and risk assessment as it enters a new era in its history.
John Malcolm
Chairman
Report from our Chief Executive
2018 has been a pivotal year in establishing the building blocks for Lamprell's strategic aspirations, and we are pleased to report significant progress in delivering our strategy. Operationally and financially we are still feeling the effects of the prolonged downturn in the oil & gas industry, which resulted in pressure on our backlog and revenue levels. However, we finished the year with a significant new contract in the renewables industry and a stronger position in Saudi Arabia with a binding Letter of Intent for the major portions of the first two IMI rigs and our entry to the LTA opening up further revenue opportunities in 2019 and beyond.
Health and safety
I am proud to report an exceptional safety performance in 2018. A TRIR of 0.15 for the year is a top-tier result for our industry and is our best result since becoming a publicly listed company. I would like to thank both our health and safety team and all our employees for delivering this result. Safe operations are a cornerstone for the success of our business, which is why our "Safe Start" programme has been developed to involve every employee, with particular focus on safety leadership from the senior management.
Operational update
In the first half of 2018 we completed the UAE-based works on two major projects: the mobile operating unit "Haven" for Jacktel AS, a wholly owned subsidiary of Master Marine AS, and the jacket foundations for East Anglia One on behalf of client, ScottishPower Renewables. The "Haven" upgrade was completed in April on time and on budget with an exceptional safety performance. Over 2.5 million manhours were completed with zero recordable incidents, and the unit is now in operation offshore Norway.
Project execution and control on the East Anglia One project improved during the year, as the project proceeded towards completion. We completed all UAE-based works in H2 2018 and this included fabrication and delivery of 42 jackets to the client in Vlissingen and the delivery of the flat-pack components for 18 jackets to our subcontractor in Belfast. With the project nearing completion, we are supporting Harland & Wolff with their assembly activities and working with the client on the final certification and handover protocols in time for its installation campaign. Final delivery remains on track to meet the campaign requirements although the exposure to liquidated damages will remain unchanged until project completion. The results for the year include an additional loss of USD 9.4 million on the project.
The yard activity levels were at a historical low following the completion of the abovementioned works, but we have seen an increase in rig refurbishment work with a record 23 rigs going through the yards in 2018, with many more in various stages of warm or cold stacking throughout the year.
We continue to build on our traditional areas of expertise in anticipation of their recovery in the medium term. As such, we developed an exclusive jackup rig design in collaboration with GustoMSC and completed the basic design process early in the year. The LJ43 rig utilises a custom-designed hull and living quarters developed by Lamprell along with GustoMSC's leg design. It has been designed to accommodate specific requirements of the Middle Eastern market but Lamprell believes that this state-of-the art design is highly adaptable and capable of being used in a wide array of offshore locations around the world.
Strategic priorities
In 2018 our business has made remarkable progress in advancing its strategic goals. Firstly, we set out to diversify our revenue stream away from jackup rigs by expanding the type and scope of work that we do. In preparation for this transformation we have made a number of changes within the business: we now have a leadership team in place with a significant track record of delivering complex EPCI projects in our key markets; our internal bidding and project execution approach has been upgraded to reinforce controls at every stage, and we are highly selective in developing our bid pipeline.
The effort that we put into transforming Lamprell from within is beginning to show results - firstly, we became one of Saudi Aramco's preferred suppliers on its LTA programme for offshore projects. This is a highly sought-after opportunity in the industry, and I would like to thank the team that worked on this bid over the past 18 months. The Middle East, and Saudi Arabia in particular, will remain our major focus as countries with clear growth projections, and it will be intrinsic to our recovery story.
Local content and in-country spending are rapidly gaining prominence in the Middle East, and we are proud to have established a number of partnerships in both Saudi Arabia and Abu Dhabi to help us address our clients' requirements in an efficient manner while contributing to the development of local economies. By partnering with local companies and committing to the USD 140 million equity investment in the Saudi Maritime yard, we have demonstrated our commitment for this key market and supported our effort to bid for Saudi Aramco's LTA programme. In Abu Dhabi, our long history of working with ADNOC Drilling has established our high levels of in-country performance and we will build on this to realise opportunities for new business there.
Secondly, our effort to build upon our experience and access further projects in the fast-growing renewables industry has resulted in a major project in our backlog. Moray East is one of the most prominent wind farms recently committed for construction, and we are delighted to be part of this large-scale, high profile project. With the knowledge and experience we gained through East Anglia One we have been able to significantly reduce the risk profile on this project, and I am confident we can deliver in a timely and cost effective manner.
Thirdly, we are proud to continue to support the IMI joint venture with a LOI for the award of the first two new build jackup rigs to be substantially built at Lamprell's facility in Hamriyah with approximately 15% to be constructed in Saudi Arabia. These are the first jackup rig orders to be awarded in the last four years. In this way, IMI will build its capabilities in the rig market and Lamprell will cement its relationships with key stakeholders in Saudi Arabia. Lamprell is committed to support the establishment of this new major maritime yard in Saudi Arabia, both directly and indirectly, as it looks to build its expertise and develop its capabilities and personnel within the Kingdom.
We continue to ensure that our operations follow major industry developments and technological advances. As such, we have dedicated a specialist team with a focus on developing digital solutions for both our operations and the products we fabricate. The team is working with industry experts to identify potential opportunities which leverage such solutions into the real working environment. We believe that in this rapidly evolving industry, this will improve our operational efficiency and competitiveness, as well as potentially create new revenue streams for the Company.
Outlook
After two years of no major contract awards, we are finally beginning to see traction in the bid pipeline, although we expect that potential new contracts will be in the EPC(I) side of the business in the near team, rather than in Rigs. We forecast a revenue range of USD 250-400 million for 2019, which will be mainly supported by the Moray East project and walk-in work. With the backlog now returning to growth we have demonstrated our ability to rebound from the operational challenges as well as the longest industry downturn since Lamprell became public. We are well positioned for the anticipated coming upturn.
Christopher McDonald
Chief Executive Officer
Review of our finances
The Group's financial performance in 2018 reflected the ongoing pressure in the oil & gas industry, as well as the impact of a significant part of the Group's revenue making no contribution to the bottom line. Our revenue levels fell to USD 234.1 million from USD 370.4 million reported during the same period in 2017.
During the first half of 2018 Lamprell completed two major projects in its UAE facilities and with no further significant projects booked into backlog until the end of the year, the Group's revenue is biased towards H1 2018.
The award of two new projects in the later part of the year provides improved backlog to deliver revenue growth in 2019.
Within our strategic markets, Renewables generated USD 94.8 million, down from USD 130.7 million in 2017 as the EA1 project reaches its conclusion; and Oil & Gas generated USD 139.3 million, down from USD 239.7 million in 2017 with Master Marine, which completed in H1 2018, being the only major project in the segment.
Our reporting segment for Rigs delivered revenue of USD 76.0 million compared to USD 160.8 million in 2017. EPC(I) revenues were USD 99.8 million, down from USD 154.3 million in 2017. Improved trading in our O&M manpower and siteworks businesses delivered USD 58.3 million of revenue, up from USD 55.4 million in 2017.
Margin performance
The gross loss for the year is USD 9.1 million, an improvement when compared with the gross loss for 2017 of USD 50.2 million. The gross loss in 2018 is driven by a combination of low levels of revenue from our profitable projects which have been insufficient to recover our operational overheads and an increase in the estimated loss on the EA1 project of USD 9.4 million which brings the overall estimated loss for the project to USD 89.4 million. The primary cause for the increase in the loss is the additional cost incurred supporting the Belfast based subcontractor due to their financial difficulties.
We have kept operational overheads under control with the USD 40 million recorded in 2018, in line with 2017. As we signalled in last year's report, our overall overhead has increased to USD 86.4 million from USD 82.4 million in 2017 largely due to strategic upskilling.
Group EBITDA from continuing operations amounted to a loss of USD 35.1 million (2017: loss of USD 70.5 million). EBITDA margin has improved to (15.0)% when compared to (19.0)% reported in 2017.
Finance costs and financing activities
As our levels of debt and committed facilities reduced during 2018, as expected our net finance cost has also reduced to USD 3.5 million (2017: USD 5.1 million). Gross finance costs were USD 5.7 million (2017: USD 9.0 million).
Net loss
Lower revenue levels, as well as a modest deterioration in the margin performance on the East Anglia project in 2018, resulted in a loss attributable to the equity holders of USD 70.7 million (2017: loss of USD 98.1 million). The fully diluted loss per share for the year was 20.67 cents (2017: loss per share - 28.70 cents).
Capital expenditure
The Group's operational capital expenditure for the year ended 31 December 2018 decreased to USD 10.0 million, compared to USD 23.7 million in 2017. As project activity levels remained subdued, capital expenditure focused on bringing the pipe shop to the commissioning phase, essential operating equipment and the development cost of the LJ43 rig.
Strategic capital expenditure of USD 39 million is attributable to the Group's investment in the IMI maritime yard in Saudi Arabia. To date, Lamprell has invested USD 59 million of the USD 140 million committed.
We expect to continue to fund this investment from our balance sheet. We continue to review our capital expenditure very carefully with a focus on initiatives that improve our efficiency and productivity.
Cash flow and liquidity
The Group's net cash flow from operating activities for the full year ended 2018 reflected a net outflow of USD 125.1 million (2017: net inflow of USD 32.4 million), which was driven primarily by payment for rig kit inventory and working capital funding for the EA1 and other projects.
Prior to working capital movements and the payment of employees' end of service benefits, the Group's net cash outflow was USD 28.2 million (2017: inflow of USD 56.3 million).
Cash and bank balances decreased by USD 196.6 million to USD 99.8 million.
Net cash will continue to reduce in 2019 as we continue our strategic initiatives, some targeted capital expenditure and working capital requirements on new projects but we still expect to finish the year in a net cash position.
In 2019 a critical focus will be to monetise the strategic asset inventory (the S116E rig kits and our proprietary LAM2K land rig) and finalise the refinancing.
Balance sheet
Net cash position at the end of the reporting period reduced to USD 80.0 million from USD 257.0 million at 31 December 2017. This reduction has been primarily caused by the anticipated investment made in the IMI maritime yard of USD 39 million as well as payment for rig kit inventory of USD 34.3 million and funding of the EA1 project totalling USD 40.2 million. Although net cash is reducing in line with scheduled investments, the Group's balance sheet remains sufficiently robust to support ongoing projects, strategic investments which have been committed to and immediate opportunities in the pipeline.
The Group's total current assets at 31 December 2018 were USD 313.3 million (31 December 2017: USD 498.9 million). Trade and other receivables decreased to USD 68.1 million (31 December 2017: USD 164.7 million). Contract Assets increased to USD 54.9 million (31 December 2017: nil).
Shareholders' equity reduced to USD 393.0 million (31 December 2017: USD 460.8 million).
Borrowings
Borrowings at 31 December 2018 were USD 19.8 million (31 December 2017: USD 39.5 million). The outstanding debt reflects the final instalment of the Group's term loan which is due for payment in August 2019 when the facility expires. The Group retains a USD 50 million revolving credit facility for general working capital purposes which also expires in August 2019.
The Group's debt to equity ratio at 31 December 2018 was very low at 5.03%.
Debt refinancing
The Group's balance sheet continues to support ongoing project work and the current bidding activity but in anticipation of the market recovery together with implementation of the strategy, the Board believes that maintaining significant liquidity is essential to the Group.
To deliver this, we are in advanced negotiations with our lenders for a new debt facility, additional details of which are set out under the Going Concern section below. We expect to sign the full facility agreement in Q2 2019 with the syndicate of lending banks that will support the Lamprell group as it looks to implement its growth strategy. The final details of the facility, which would comprise a term loan and a revolving credit facility on terms broadly similar to our existing facility, will be available only upon signing of the binding agreement.
Going concern
The Group's consolidated financial statements have been prepared on a going concern basis as further discussed in Note 2.1. The Group has received non-binding indicative term sheets and the legal documentation necessary prior to seeking final approval from certain banking institutions is in progress to replace the existing facility which expires in August 2019. After reviewing its cash flow forecasts for a period of not less than 12 months from the date of signing these financial statements and taking into account other key assumptions which include; the sale of the LAM2K land rig and timing of receipt of the sale proceeds, the cash advances expected to be received from new IMI rigs once a contract is signed and the timing of cash calls forecast for investment in the IMI joint venture in addition to the planned debt refinancing, the Directors have concluded they do not represent a material uncertainty that may cast significant doubt upon the continuing use of the going concern basis of accounting.
Dividend
In the context of ongoing market challenges, the low revenue levels in 2018, the investment for future growth in the IMI, the Directors do not recommend the payment of a dividend for the period in relation to financial year ending 31 December 2018. The Directors will continue to review this position in light of market conditions and Group performance at the relevant time.
Tony Wright
Chief Financial Officer
Consolidated income statement
Year ended 31 December
2018 2017
Notes USD'000 USD'000
Continuing operations
Revenue 6 234,074 370,439
Cost of sales 7 (243,187) (420,605)
-------------------- --------------------
Gross loss (9,113) (50,166)
Selling and distribution expenses 8 (1,144) (717)
General and administrative
expenses 9 (45,171) (40,197)
Other gains - net 12 32 877
-------------------- --------------------
Operating loss (55,396) (90,203)
Finance costs 11 (5,678) (9,019)
Finance income 11 2,165 3,875
-------------------- --------------------
Finance costs - net (3,513) (5,144)
Share of loss of investments
accounted for using the equity
method - net 16 (10,576) (2,559)
-------------------- --------------------
Loss before income tax (69,485) (97,906)
Income tax expense (1,171) (191)
-------------------- --------------------
Loss for the year from continuing
operations (70,656) (98,097)
========= =========
Loss per share attributable
to the equity holders of the
Company during the period 13
Basic (20.67)c (28.70)c
========== ==========
Diluted (20.67)c (28.70)c
========== ==========
Consolidated statement of comprehensive income
2018 2017
Notes USD'000 USD'000
Loss for the year (70,656) (98,097)
Other comprehensive
income:
Items that will not be
reclassified
to profit or
loss:
Remeasurement of
post-employment benefit
obligations 24 851 (829)
Items that may be
reclassified subsequently
to profit or loss:
Currency translation
differences 23 (160) (49)
Net profit on cash flow
hedges 23 - 2,619
--------------------------- ---------------------------
Other comprehensive
income for the
year 691 1,741
---------------------------- ----------------------------
Total comprehensive loss
for the year (69,965) (96,356)
========= ==========
Consolidated balance sheet
As at 31 December
2018 2017
Notes USD'000 USD'000
ASSETS
Non-current assets
Property, plant and equipment 14 159,462 171,725
Intangible assets 15 29,945 31,715
Investments accounted for using
the equity method 16 53,321 25,908
Trade and other receivables 18 - 839
Term and margin deposits 20 333 13,426
Derivative financial instruments 25 - 153
------------------------ ------------------------
Total non-current assets 243,061 243,766
------------------------ ------------------------
Current assets
Inventories 17 90,623 50,509
Trade and other receivables 18 68,050 163,866
Contract assets* 19 54,931 -
Derivative financial instruments 25 218 1,513
Cash and bank balances 20 99,471 283,017
------------------------ ------------------------
Total current assets 313,293 498,905
------------------------ ------------------------
Total assets 556,354 742,671
------------------------ ------------------------
LIABILITIES
Current liabilities
Borrowings 29 (19,768) (39,491)
Trade and other payables 26 (83,892) (200,573)
Contract liabilities* 27 (26,539) -
Provision for warranty cost
and other liabilities 28 - (7,475)
Current tax liabilities (1,114) (191)
------------------------ ------------------------
Total current liabilities (131,313) (247,730)
------------------------ ------------------------
Net current assets 181,980 251,175
------------------------ ------------------------
Non-current liabilities
Provision for employees' end
of service benefits 24 (32,088) (34,129)
------------------------ ------------------------
Total liabilities (163,401) (281,859)
------------------------ ------------------------
Net assets 392,953 460,812
========== ==========
EQUITY
Share capital 22 30,346 30,346
Share premium 22 315,995 315,995
Other reserves 23 (19,643) (18,123)
Retained earnings 66,255 132,594
------------------------ ------------------------
Total equity attributable to
the equity holders of the Company 392,953 460,812
========== ==========
* The Group has initially applied IFRS 15 and IFRS 9 with the cumulative effect of initially applying these standards recognised through retained earnings on the date of the initial application. Under this method, the comparative information is not restated. See Note 3.2 to the consolidated financial statements.
Consolidated statement of changes in equity
Share Share Other Retained
capital premium reserves earnings Total
Notes USD'000 USD'000 USD'000 USD'000 USD'000
At 1 January 2017 30,346 315,995 (20,693) 229,750 555,398
------------------ ------------------ ------------------ ------------------ ------------------
Loss for the year - - - (98,097) (98,097)
Other
comprehensive
income:
Remeasurement of
post-employment
benefit
obligations 24 - - - (829) (829)
Currency
translation
differences 23 - - (49) - (49)
Net gain on cash
flow
hedges 23 - - 2,619 - 2,619
------------------ ------------------ ------------------ ------------------ ------------------
Total
comprehensive
loss
for the year - - 2,570 (98,926) (96,356)
------------------ ------------------ ------------------ ------------------ ------------------
Transactions with
owners:
Share-based
payments:
- value of
services
provided - - - 2,425 2,425
- treasury shares
purchased - - - (655) (655)
------------------ ------------------ ------------------ ------------------ ------------------
Total
transactions
with
owners - - - 1,770 1,770
------------------ ------------------ ------------------ ------------------ ------------------
At 31 December
2017 30,346 315,995 (18,123) 132,594 460,812
------------------ ------------------ ------------------ ------------------ ------------------
Loss for the year - - - (70,656) (70,656)
Other
comprehensive
income:
Remeasurement of
post-employment
benefit
obligations 24 - - - 851 851
Currency
translation
differences 23 - - (160) - (160)
Reclassification
of gain
on cash flow
hedges 23 - - (1,360) - (1,360)
------------------ ------------------ ------------------ ------------------ ------------------
Total
comprehensive
loss
for the year - - (1,520) (69,805) (71,325)
------------------ ------------------ ------------------ ------------------ ------------------
Transactions with
owners:
Share-based
payments:
- value of
services
provided - - - 3,688 3,688
- treasury shares
purchased - - - (222) (222)
----------------- ------------------ ------------------ ------------------ ------------------
Total
transactions
with
owners - - - 3,466 3,466
----------------- ------------------ ------------------ ------------------ ------------------
At 31 December
2018 30,346 315,995 (19,643) 66,255 392,953
======== ======== ======== ======== ========
Consolidated cash flow statement
2018 2017
Notes USD'000 USD'000
Operating activities
Cash (used in)/generated from operating
activities 32 (124,836) 32,619
Tax paid (248) (223)
------------------------ ------------------------
Net cash (used in)/generated from
operating activities (125,084) 32,396
------------------------ ------------------------
Investing activities
Additions to property, plant and
equipment 14 (7,979) (22,060)
Proceeds from sale of property,
plant and equipment 50 288
Additions to intangible assets 15 (2,019) (1,772)
Investment in an associate or joint
venture 16 (39,102) (23,375)
Dividend received from an associate 16 1,113 2,137
Finance income 11 2,165 3,875
Movement in deposit with original
maturity of more
than three months 131,651 (139,660)
Movement in margin deposits under
lien (with original maturity more
than three months) (5,391) (4,840)
Movement in margin deposits under
lien (with original maturity less
than three months) 4,301 41,975
------------------------ ------------------------
Net cash generated/(used in) investing
activities 84,789 (143,432)
------------------------ ------------------------
Financing activities
Treasury shares purchased (222) (655)
Repayments of borrowings (20,000) (20,000)
Finance costs (5,401) (9,012)
------------------------ ------------------------
Net cash used in financing activities (25,623) (29,667)
------------------------ ------------------------
Net decrease in cash and cash equivalents (65,918) (140,703)
Cash and cash equivalents, beginning
of the year 104,762 245,514
Exchange rate translation (160) (49)
------------------------ ------------------------
Cash and cash equivalents, end
of the year from
continuing operations 20 38,684 104,762
========== ==========
Non-cash transaction
Additions to intangible assets in 2017 as disclosed in Note 15 included an amount of USD 8.7 million prepaid to Sharjah Electricity & Water Authority. This was treated as a non-cash item in 2017. Notes to the consolidated financial statements for the year ended 31 December 2018
1 Legal status and activities
The principal activities of the Company and its subsidiaries (together referred to as "the Group") are: assembly and new build construction for the offshore oil and gas and renewable sectors; fabricating packaged, pre-assembled and modularised units; constructing accommodation and complex process modules for onshore downstream projects; construction of complex living quarters, wellhead decks, topsides, jackets and other offshore fixed facilities; rig refurbishment; land rig services; engineering and construction and operations and maintenance.
2 Basis of preparation
The Group is required to present its annual consolidated financial statements for the year ended 31 December 2018 in accordance with EU adopted International Financial Reporting Standards ("IFRS"), International Financial Reporting Interpretations Committee ("IFRIC") interpretations and those parts of the Isle of Man Companies Acts 1931-2004 applicable to companies reporting under IFRS.
This financial information set out in this preliminary announcement does not constitute the Group's statutory accounts for the year ended 31 December 2018. The financial information has been extracted from the consolidated financial statements for the year ended 31 December 2018 approved by the Board of Directors on 20 March 2019 upon which the auditors' opinion is not modified and did not contain a statement under section 15(4) or 15(6) of the Isle of Man Companies Act 1982.
The financial information comprises the Group balance sheets as of 31 December 2018 and 31 December 2017 and related Group income statement, statement of comprehensive income, cash flows, statement of changes in equity and related notes for the twelve months then ended, of Lamprell plc. This financial information has been prepared under the historical cost convention except for the measurement at fair value of share options, financial assets at fair value through profit or loss and derivative financial instruments.
The preliminary results for the year ended 31 December 2018 have been prepared in accordance with the Listing Rules of the London Stock Exchange.
These financial statements have been prepared on a going concern basis which assumes that the Group will continue to have adequate resources to continue in operational existence for the foreseeable future notwithstanding the decrease in cash resources which is discussed below.
The Group incurred a loss before tax of USD 70.6 million during the year ended 31 December 2018 and was in a net cash position of USD 80.0 million at 31 December 2018 (2017: net cash position of USD 257.0 million). This constitutes a significant decrease in its cash resources and is mainly attributable to expected cash outflows from operating activities of USD 125.1 million (2017: inflows of USD 32.4 million). The Group has bank facilities of USD 540.1 million (Note 29) of which a further USD 50 million is available to be drawn as cash under a revolving credit facility. The bank facilities are secured by liens/cash margin over term deposits of USD 50.8 million (Note 24).
The Group's bank facilities are subject to covenant clauses, whereby the Group is required to meet certain key financial ratios. The Group did not fulfil the borrowing to EBITDA financial covenant contained within its facilities at 31 December 2018. Due to this breach of the covenant clause, the banks were entitled to request for immediate repayment of the outstanding loan amount of USD 20 million. A waiver of this covenant was subsequently obtained.
In view of the anticipated cash position and in addition to other planned cash initiatives, the Group has been in discussions with various banking institutions to renegotiate its facilities that are scheduled to expire in August 2019 and these have been positive. At this time management has received non-binding indicative term sheets and the legal documentation necessary prior to seeking final approval from certain of the banking institutions is in progress. Based on this, the Directors have a reasonable expectation that they will be able to complete the debt refinancing and sign the full facility agreement in the near term, which is expected to comprise of a term loan and revolving credit facility to support the business. At the date of approval of these financial statements, the conversion from non-binding term sheets to committed facilities with lenders represents a key assumption in the Group's forecast cash flows. Other key assumptions include:
-- the sale of the LAM2K land rig and timing of receipt of the sale proceeds;
-- the cash advance expected to be received from International Maritime Industries ("IMI") once a contract to construct two new rigs is approved by both parties; and
-- the timing of further cash calls forecast for investment in the IMI joint venture.
After considering the realistic availability and likely effectiveness of actions that the directors could take to avoid, or reduce the impact or likelihood of a significant deterioration in cash flow arising from these matters, the directors have concluded they do not represent a material uncertainty that may cast significant doubt upon the continuing use of the going concern basis of accounting. The financial statements have been prepared under the historical cost convention, except as disclosed in the accounting polices below.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated and parent company financial statements are disclosed in Note 4.
3 Accounting policies
The accounting policies used are consistent with those set out in the audited financial statements for the year ended 31 December 2017 except for the adoption of new standards and interpretations effective 1 January 2018 as stated in the reviewed interim financial information for the period ended 30 June 2018. These financial statements are available on the Company's website, www.lamprell.com.
3.1 Impact of IFRS 9, Financial Instruments
In the current year, the Group has applied IFRS 9, Financial Instruments (as revised in July 2014) and the related consequential amendments to other IFRSs. IFRS 9 introduces new requirements for 1) the classification and measurement of financial assets and financial liabilities, 2) impairment for financial assets and 3) general hedge accounting. The Group applied IFRS 9 prospectively, with an initial application date of 1 January 2018 and has not restated comparative information, which continues to be reported under IAS 39.
The adoption of IFRS 9 has resulted in changes in accounting policies for financial instruments as detailed below:
(a) Financial assets at fair value through profit or loss ("FVTPL")
Financial assets that do not meet the criteria for being measured at amortised cost or FVTOCI are measured at FVTPL.
Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses presented in the consolidated income statement to the extent they are not part of a designated hedging relationship within 'other gains/(losses) - net' in the period in which they arise. Transaction costs directly attributable to the acquisition of financial assets at fair value through profit or loss are recognised immediately in the consolidated income statement.
(b) Financial assets at amortised cost
The Group measures financial assets at amortised cost if both of the following conditions are met:
- The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and
- The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Financial assets at amortised cost are subsequently measured using the effective interest ("EIR") method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
On derecognition of a financial asset measured at amortised cost, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognised in profit or loss.
(c) Impairment of financial assets
In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires the Group and the Company to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition of the financial assets. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised.
In particular, IFRS 9 requires the Group to measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses ("ECL") if the credit risk on that financial instrument has increased significantly since initial recognition, or if the financial instrument is a purchased or originated credit-impaired financial asset. However, if the credit risk on a financial instrument has not increased significantly since initial recognition (except for a purchased or originated credit-impaired financial asset), the Group is required to measure the loss allowance for that financial instrument at an amount equal to 12 months ECL.
Specifically for trade receivables and contract assets, the Group applies a simplified approach in calculating expected credit losses (ECLs). Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The Group considers financial assets to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. In doing so, the Group also takes into account the days the contractual payments are past due.
The Group applied ECL model under IFRS 9 for the first time in the current year which did not have a material impact on the consolidated financial statements of the Group. No additional credit loss allowance as at 1 January 2018 has been recognised against retained earnings nor any loss allowance has been recognised upon the initial application of IFRS 9 as a result from a change in the measurement attribute of the loss allowance relating to each financial asset. As the Group's historical credit loss experience does not show significantly different loss patterns for different customer segments, the provision for loss allowance based on past due status is not further distinguished between the Group's different customer segments.
The Group writes off a trade receivable when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery.
(d) General hedge accounting
The new general hedge accounting requirements retain the three types of hedge accounting. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been replaced with the principle of an 'economic relationship'. Retrospective assessment of hedge effectiveness is also no longer required.
In accordance with IFRS 9's transitional provisions for hedge accounting, the Group has elected to continue applying the hedge accounting requirements of IAS 39 instead of the requirements set out in IFRS 9. This election applies to all of the Group's hedging relationships at 1 January 2018. Therefore this has had no impact on the results and financial position of the Group for the current or prior year.
(e) Credit Risk
The Group assesses internally the credit quality of each customer, taking into account its financial position, past experience and other factors. An impairment analyses is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for grouping of various customer segments. The calculation reflects the probability weighted outcome and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecast of future economic conditions.
To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due with reference to past default experience of the debtor, an analysis of the debtor's current financial position and general current and forecast economic conditions of the industry in which the debtors operate. As the Group's historical credit loss experience does not show significantly different loss patterns for different customer segments, the provision for loss allowance based on past due status is not further distinguished between the Group's different customer segments.
31 December 2018 Contract Current Up to 3 3 to 6 Over 6 Total
assets months months months
USD'000 USD'000 USD'000 USD'000 USD'000 USD'000
Expected credit
loss rate - - - - 48.4%
Gross carrying
amount 54,931 8,789 26,132 3,160 8,656 101,668
Loss allowance - - - - 4,189 4,189
1 January 2018 Contract Current Up to 3 3 to 6 Over 6 Total
assets months months months
USD'000 USD'000 USD'000 USD'000 USD'000 USD'000
Expected credit
loss rate - - - - 69.4%
Gross carrying
amount 102,851 23,379 7,459 757 7,664 142,110
Loss allowance - - - - 5,317 5,317
Balances in over 6 months have objective evidence of impairment and hence have been individually assessed. All other aging categories have been collectively assessed as the expected credit losses are not material.
3.2 Impact of IFRS 15, Revenue from Contracts with Customers (a) Changes in accounting policy
The Group has adopted IFRS 15, Revenue from Contracts with Customers from 1 January 2018. This resulted in changes in its accounting policy for revenue as detailed below:
Contract revenue
The Group reviews lump-sum construction contracts and allocates the revenue to each performance obligation of the contract depending on whether the contract is viewed as containing a single or multiple performance obligations. Revenue from each performance obligation is recognised either over time or at a point in time depending on the nature and timing of when the performance obligation is satisfied.
In the case of a performance obligation satisfied over time, contract revenue is recognised under the input method by measuring the proportion of costs incurred for work performed to total estimated costs.
When the contract is at an early stage and its outcome cannot be reliably estimated, due to their uncommon nature, risk profiling, including first-of-a-kind projects, the Group recognises revenue to the extent of cost incurred up to the year end which are considered recoverable. For these contracts, the Group recognises gross margin only when progress towards complete satisfaction of the performance obligation can be measured reliably. This is mainly the case with respect to fixed price construction contracts with an expected contract duration of 18 months or greater.
Revenue related to variation orders is recognised when it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur and the amount of revenue arising from the variation can be reliably measured. If revenue cannot be reliably measured, the Group defers revenue recognition until the uncertainty is resolved. Such provisions give rise to variable consideration under IFRS 15 and are required to be estimated at contract inception. The estimated variable consideration is however, constrained to prevent over-recognition of revenue. The Group continues to assess individual contracts to determine the estimated variable consideration and related constraint.
Contract modification are accounted for as a separate contract only if the scope of contract changes due to the addition of the promised goods or services that are distinct; and the price of the contract increases by an amount of consideration that reflects a standalone selling price.
Claims are accounted for as variable consideration. They are included in contract revenue using the expected value or most likely amount approach (whichever is more predictive of the amount the entity expects to be entitled to receive) and it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the claim is subsequently resolved.
Losses on contracts are assessed on an individual contract basis and provision is made for the full amount of the anticipated losses, including any losses relating to future work on a contract, in the period in which the loss is first foreseen.
The aggregate of the costs incurred and the profit/loss recognised on each contract is compared against progress billings at each reporting period. Where the sum of the costs incurred and recognised profit or recognised loss exceeds the progress billings, the balance is shown under contract assets as amounts due from customers on contracts. Where the progress billings exceed the sum of costs incurred and recognised profit or recognised loss, the balance is shown under contract liabilities as amounts due to customers on contracts.
In determining contract costs incurred up to the reporting date, any amounts incurred, including advances paid to suppliers and advance billings received from subcontractors relating to future activity on a contract, are excluded and are presented under contract assets as contract work-in-progress.
The incremental costs of obtaining a contract with a customer are recognised as an asset if those costs are expected to be recovered.
Products and services
Revenue from sale of products and services is recognised in the accounting period in which the control is transferred or the service is rendered net of value added tax.
Interest income
Interest income is recognised on a time proportion basis using the effective interest rate method.
Warranty obligations
The Group generally offers a warranty range of one to seven years for defects on work carried out and does not provide extended warranties or maintenance services in its contracts with customers. Management estimates the related provision for future warranty claims based on historical warranty claim information, as well as recent trends that might suggest that past cost information may differ from future claims. For first of a kind projects, estimates are based on market observable trends and complexity of the project. In all cases, the Group mitigates its exposure to warranty claims through back-to-back warranties with the original equipment manufacturers and subcontractors. These costs are included in estimated contract costs. As such, the warranties are assurance-type warranties under IFRS 15, which the Group accounts for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, consistent with its practice prior to the adoption of IFRS 15.
(b) Impact of adoption of IFRS 15
The Group has adopted IFRS 15 from 1 January 2018 and applied the modified retrospective approach permitted by IFRS 15 upon adoption. Following practical expedients available under the modified retrospective approach of IFRS 15 have been adopted by the Group:
-- The requirement of new standard have been applied to contracts that are not completed as at date of initial application (1 January 2018); and
-- The Group has not restated the contracts in accordance with the revenue standard for contract modifications which took place before the date of initial application.
Set out below are the amounts by which each financial statement line item is affected as at 31 December 2018 as a result of the adoption of IFRS 15. The adoption of IFRS 15 did not have an impact on OCI, earning per share or the Group's operating, investing and financing cash flows. The first column shows amounts prepared under IFRS 15 and the second column shows what the amounts would have been had IFRS 15 not been adopted:
As per IFRS As per previous Increase/
31 December 2018 15 IFRS (decrease)
USD'000 USD'000 USD'000
Current assets
Trade and other receivables 68,050 122,981 (54,931)
Contract assets 54,931 - 54,931
Impact on total assets 122,981 122,981 -
Current liabilities
Trade and other payables 83,892 106,265 (22,373)
Provision for warranty costs
and other liabilities - 4,166 (4,166)
Contract liabilities 26,539 - 26,539
Impact on total liabilities 110,431 110,431 -
Variable consideration
The current major contracts were at an advanced stage of negotiation as it was highly probable that significant reversal of revenue will not occur and, therefore, met requirements of the constraint. Based on` this key judgement, no adjustments have been made to revenue previously reported for the year ended 31 December 2017.
Revenue recognition
Management has assessed the construction contracts and considered IFRS 15's guidance on contract combinations, contract modifications arising from variation orders, variable consideration, and the assessment of whether there is a significant financing component in the contracts, particularly taking into account the reason for the difference in timing between the transfer of control of goods and services to the customer and the timing of the related payments. Management has assessed that revenue from these construction contracts should be recognised over time and the percentage of completion method used under IAS 11 to measure the progress towards complete satisfaction of these performance obligations continues to be appropriate under IFRS 15. Based on these key judgements, no adjustments have been made to revenue or cost previously reported for the year ended 31 December 2017.
The Group disaggregated revenue recognised from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Group also disclosed information about the relationship between the disclosure of disaggregated revenue and revenue information disclosed for each reportable segment - refer to Note 5.
4 Critical accounting judgements and key sources of estimation uncertainty
The Group makes judgements, estimates and assumptions concerning the future. These are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
4.1 Critical judgements in applying accounting policies
Apart from those involving estimation (see Note 4.2), the Group has made following critical judgements in applying accounting policies in the process of preparing these consolidated financial statements.
4.1.1 Liquidated damages claims ("LDs")
The Group recognises liquidated damages where there have been significant delays against defined contractual delivery dates or unfulfilled contractual obligations and it is considered probable that the customer will successfully pursue these penalties. This requires management to estimate the amount of liquidated damages payable under the contract based on a combination of an assessment of the contractual terms, the reasons for any delays and evidence of cause of the delays to assess who is liable under the contract for the delays and consequently whether the Group is liable for the liquidated damages or not.
The Group has encountered major operational and commercial challenges on the East Anglia ONE ("EA1") project which resulted in a total forecast loss for the Group at 31 December 2018 of USD 89.4 million (2017: USD 80.0 million).
Due to delays on the project and concerns over technical specifications stipulated in the contract, the client is contractually entitled to claim liquidated damages to a maximum of USD 33.8 million. Management has not recorded an adjustment in relation to the liquidated damages as it believes that based on the recent correspondence with the customer regarding the customer's willingness to enter into a deed of variation to the contract to set a number of milestone dates aligned with the new installation window and include a defined process for acceptance of the jackets to ensure that the project can be completed successfully with minimal impact on either party ("the comfort letter") received from the client, they will not be claimed if the works under the contract are completed in a timely manner which enables the client to install the jackets during an agreed new installation campaign window ("new installation campaign window"), which is due to commitments with other EA1 Contractors which would be impacted if not achieved.
In view of the above, management have made a significant judgement within the forecast loss calculation in ascertaining:
-- The ability of the Group's subcontractor to deliver on time and in accordance with the project's revised delivery dates: The Group is working with Harland & Wolff, its subcontractor in Belfast, to complete the assembly of the outstanding18 jackets for the EA1 project. Given the recent announcement by Harland & Wolff regarding its restructuring, the Group has had to allocate additional resources to Belfast to support and actively manage the assembly of the outstanding 18 jackets to ensure overall project performance stays in line with the new installation campaign window; and
-- The acceptance of the jackets by the client as conforming to the technical specifications stipulated in the contract within the revised dates aligned with the new installation campaign window. In its assessment, management has considered the client's willingness to enter into a deed of variation to the contract that in addition to revised milestone dates would define a process for acceptance of the jackets to ensure the project can be completed successfully with minimal impact on either party.
Based on the discussions to date, management believe the risk of LDs being levied has been mitigated and continue to work with the client and the subcontractors to ensure the installation programme is not compromised due to the effect of operational challenges in meeting certain key dates. The maximum potential exposure to the Group would amount to a reduction in contract revenue by USD 33.8 million and a corresponding reduction to net assets
4.2 Key sources of estimation uncertainty
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that may have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year.
4.2.1 Revenue and margin recognition
The Group uses the input method in accounting for its contract revenue. Use of the input method requires the Group to estimate the stage of completion of the contract to date as a proportion of the total contract work to be performed in accordance with the Group's accounting policy. As a result, the Group is required to estimate the total cost to completion of all outstanding projects at each period end.
If the estimated total costs to completion of all outstanding projects were to decrease by 10%, this would result in contract assets increasing by USD 3.0 million (2017: USD 6.4 million) or contract liabilities decreasing by USD 3.0million (2017: USD 6.4 million).
If the estimated total costs to completion of all outstanding projects were to increase by 10%, contract assets would decrease by USD 3.0 million (2017: USD 19.7 million) or contract liabilities would increase by USD 3.0 million (2017: USD 19.7 million).
4.2.2 Onerous contract provisions
The Group provides for future losses on long-term contracts where it is considered probable that the contract costs are likely to exceed revenues in future years. Estimating these future losses involves a number of assumptions about the achievement of contract performance targets and the likely levels of future cost escalation over time.
The outstanding provision has decreased to USD 9.5 million (31 December 2017: USD 41.7 million) due to utilisation of the onerous contract provision related to the EA1 project as the contract progresses partially offset by an increase in the total loss of the project to USD 89.4 million.
The application of a 10% sensitivity to management estimates of the total costs to completion on this project would result in provision for onerous contract included in other payables decreasing by USD 1.2 million (2017: 4.1 million) if the total costs to complete are decreased by 10% and provision for onerous contract included in other payables increasing by USD 1.2 million (2017: USD 4.1million) if the total costs to completion increased by 10%.
4.2.3 Impairment of property, plant and equipment and intangible assets
The Group determines at the end of the reporting period whether there are indicators of impairment in the carrying amount of its property, plant and equipment, intangible assets and other financial assets. Where indicators exist, an impairment test is undertaken which requires management to estimate the recoverable amount of its assets which is initially based on its value in use. When necessary, fair value less costs of disposal is estimated. Management performs the review at the cash generating unit ("CGU") relating to an operating segment's assets located in a particular geography.
An indicator of impairment exists in that the market downturn and instability in the oil and gas market continues to affect capital expenditure in the sector. This has had an impact on our backlog and utilisation of our assets attributable to the United Arab Emirates CGU albeit an increase in awards and pipeline compared to the prior year. The estimate of future cash flows and terminal value growth rate for the CGU has been affected by the current assumptions relating to market outlook, contract awards and margins.
Determining an estimation of value in use of the CGU requires the estimation of future cash flows expected to arise from the CGU and a suitable discount rate to calculate the present value of expected future cash flows. These calculations use pre-tax cash flow projections based on financial budgets approved by the Board covering a three-year period.
Revenue for the first three-year period and the revenue growth rate beyond the three-year period is determined based upon past performance and management expectations of future market development which includes various assumptions relating to market outlook, contract awards and contract margins. As at 31 December 2018, the Group's pipeline of opportunities amounts to USD 6.4 billion (2017: USD 3.6 billion) - see the Strategic Report, page 6.
The bid pipeline comprises a mixture of opportunities in the renewables and oil and gas market sectors and management have made various assumptions relating to the timing, expected values and the probable outcome of these prospective awards. These assumptions are based on medium-term forecasts for the global energy industry, macro-economic factors, opportunities and market insights obtained from bidding activities. A change in management assumptions relating to the bid pipeline and outlook could result in the property, plant and equipment and/or intangible assets being impaired. Refer to the Strategic Report on page 6 for a detailed discussion of the market pipeline and opportunities.
A discount rate of 9.35% (2017: 10.00%) is used to discount the pre-tax cash flow projections to the present value. In determining the appropriate discount rate, the Group considers the weighted average cost of capital employed, which takes into consideration the risk free rate of US treasury bonds with a long-term maturity period, the UAE inflation rate, the equity risk premium on the entities operating from the UAE, the Group's beta and the cost of Group's debt. The decrease in discount rate is attributable to a decrease in the risk free rate of US treasury bond and levered equity beta. The following are the key assumptions.
[
2018 2017
Revenue growth rate 0% 0%
Discount rate 9.35% 10.00%
Net profit rate 3% 3%
Terminal value growth rate 3% 3%
In determining the terminal value growth rate, the Group considers the long-term average CPI growth rate for the UAE which is estimated to be c.3% by the Economist Intelligence Unit 'EIU'. Although the forecast cash flows are USD based, the terminal value growth rate is within the UAE long-term forecasts and is considered to be more appropriate given the location of the business and factors driving revenue and long-term growth.
As a result of the above, no impairment has been recorded during the year. The carrying amount of property, plant and equipment at 31 December 2018 was USD 159.5 million (31 December 2017: USD 171.7 million). The carrying amount of intangible assets at 31 December 2018 was USD 29.9 million (31 December 2017: USD 31.7 million). The headroom attributable to property, plant and equipment and intangible assets as at 31 December 2018 is USD 151.9 million.
If the discount rate used were to differ by 0.5% from management's estimates, in isolation, there would be a reduction in the headroom of USD 34.8 million if the discount rate was to increase or an increase in the headroom by USD 40.6 million if the discount rate were to decrease.
If the net profit as a percentage of revenue used were to differ by 0.5% from management's estimates, in isolation, there would be an increase of USD 55.3 million in the headroom if the net profit was to increase or there would be a reduction in the headroom of USD 46.5 million if the net profit were to decrease.
If the terminal value growth rate used were to differ by 0.5% from management's estimates, in isolation, there would be a reduction in the headroom of USD 27.5 million if the terminal value growth rate was lower or an increase in the headroom of USD 32.2 million if the terminal value growth rate were higher.
4.2.4 Provision for warranty
Warranty provisions are recognised in respect of assurance warranties provided in the normal course of business relating to contract performance. They are based on previous claims history and it is expected that most of the costs in respect of these provisions will be incurred over the next one to two years. For first-of-a-kind projects, management makes use of a number of assumptions in determining the provision for potential warranty claims based on the scope and nature of work, confidence gathered from inspections and quality control during project execution and previous claim history for projects that closely mirror the type of works involved. The application of a 10% sensitivity to management estimates of the provision for warranty claims would result in an increase in provision for warranty claims by USD 0.4 million or a decrease of USD 0.4 million.
4.2.5 Carrying amount of inventory
Inventories comprise raw materials, finished goods, work-in-progress and consumables which are stated at the lower of cost and estimated net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Determining these estimates involves use of assumptions pertaining to the expected realisable values of inventory in the current market. Based on the review performed, a write down of USD 3.0 million (2017: Nil) has been recognised during the year. The application of a 10% sensitivity to management estimates of the net realisable value of inventory would result in a reversal of the previous write down BY USD 1.5 million if the net realisable value was higher or a decrease in inventory by USD 2.4 million if the net realisable value was lower.
5 Segment information
On 2 February 2018, the Group was structured to approach opportunities by way of our strategic objectives and this constitutes a change in the strategic objectives of the business and how it is reported and viewed by the Executive Directors, the chief operating decision-maker.
The Group is organised into business units, which are the Group's operating segments and are reported to the Executive Directors, the chief operating decision-maker. These operating segments are aggregated into three reportable segments - 'Rigs' and 'Engineering, Procurement, Construction & Installation [EPC(I)]' and 'Contracting Services' based on strategic objectives, similar nature of the products and services, type of customer and economic characteristics.
The Rigs segment contains business from New Build Jack Up rigs, land rigs and refurbishment. The EPCI segment contains business from foundations, process modules, offshore platforms, pressure vessels and engineering and construction (excluding site works). The Contracting Services segment comprises of Site works, Operations and Maintenance, manpower supply and safety services.
Rigs EPC(I) Contracting Total
Services
USD'000 USD'000 USD'000 USD'000
Year ended 31 December 2018
Revenue from external customers 75,957 99,847 58,270 234,074
========= ========= ========= =========
Gross operating profit/(loss)
before absorptions 19,655 (5,453) 26,985 41,187
========= ========= ========= =========
Segment comparatives are restated to reflect the organisational changes that have occurred since the prior reporting period to present a like-for-like view.
Year ended 31 December 2017
(restated)
Revenue from external customers 160,773 154,260 55,406 370,439
========= ========= ========= =========
Gross operating profit/(loss)
before absorptions 54,351 (75,866) 18,012 (3,503)
========= ========= ========= =========
Segment comparatives as previously stated are as below.
Fabrication & Engineering Services Total
USD'000 USD'000 USD'000
Year ended 31 December 2017
Revenue from external customers 324,351 46,088 370,439
========= ========= =========
Gross operating (loss)/profit
before absorptions (19,599) 16,096 (3,503)
========= ========= =========
The Group uses standard costing method for recording labour, project management and equipment cost on project. Standard cost is based on an estimated or predetermined cost rates for performing an operation under normal circumstances. Standard costs are developed from historical data analysis adjusted with expected changes in the future circumstances. The difference between total cost charged to the projects at standard rate and the actual cost incurred are reported as under or over absorption.
The reconciliation of the gross operating profit is provided as follows:
2018 2017
USD'000 USD'000
Gross operating profit for Rigs segment
as reported
to the Executive Directors 19,655 54,351
Gross operating loss for the EPC(I) segments
as
reported to the Executive Directors (5,453) (75,866)
Gross operating profit for the Contracting
services segments as reported to the Executive
Directors 26,985 18,012
-------------- --------------
Gross operating profit/(loss) before absorptions 41,187 (3,503)
-------------- --------------
Under absorbed employee and equipment costs (8,600) (5,483)
Provision for slow moving and obsolete
inventories (1,425) (1,229)
Release of provision for impairment losses
shown as part of operating profit (Note
9) 1,015 (51)
Project related bank guarantee charges
shown as part of operating profit (Note
11) (344) (1,796)
-------------- --------------
Gross operating profit/(loss) 31,833 (12,062)
-------------- --------------
Unallocated:
Unallocated operational overheads (17,108) (12,271)
Repairs and maintenance (3,041) (6,151)
Yard rent and depreciation (14,060) (13,689)
Others (6,066) (7,840)
Add back:
Release of provision for impairment losses
shown as part of G&A (Note 9) (1,015) 51
Project related bank guarantee charges
shown as part of finance costs (Note 11) 344 1,796
----------------- -----------------
Gross loss (9,113) (50,166)
----------------- -----------------
Selling and distribution expenses (Note
8) (1,144) (717)
General and administrative expenses (Note
9) (45,171) (40,197)
Other gains - net (Note 12) 32 877
Finance costs (Note 11) (5,678) (9,019)
Finance income (Note 11) 2,165 3,875
Share of loss of investment accounted for
using the equity method (Note 16) (10,576) (2,559)
------------------- -------------------
Loss before income tax (69,485) (97,906)
======== =======
The breakdown of revenue from all services is as disclosed in Note 6.
Sales between segments are carried out on agreed terms. The revenue from external parties reported to the Executive Directors is measured in a manner consistent with that in the consolidated income statement.
Information about segment assets and liabilities is not reported to or used by the Executive Directors and, accordingly, no measures of segment assets and liabilities are reported.
The Executive Directors assesses the performance of the operating segments based on a measure of gross profit. The labour, project management and equipment costs are measured based on standard cost. The measurement basis excludes the effect of the common expenses for yard rent, repairs and maintenance and other miscellaneous expenses.
The Group's principal place of business is in the UAE. The revenue recognised in the UAE with respect to external customers is USD 233.2 million (2017: USD 366.2 million), and the revenue recognised from other countries is USD 3.8 million (2017: USD 4.2 million).
Certain customers individually accounted for greater than 10% of the Group's revenue and are shown in the table below:
2018 2017
USD'000 USD'000
External customer A 97,052 130,715
External customer B 31,180 65,115
External customer C - 34,170
------------------- -------------------
128,232 230,000
======== ========
The revenue from these customers is attributable to the EPC(I) and contracting services segment. The above customers in 2018 are not necessarily the same customers as in 2017.
6 Disaggregation of revenue
Year ended 31 December Year ended 31 December
2018 2017
Contracting Contracting
Rigs EPC(I) Services Total Rigs EPC(I) Services Total
Strategic markets USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000
- Renewables - 94,753 - 94,753 - 130,715 - 130,715
- Oil and gas 75,957 5,094 58,270 139,321 160,773 23,545 55,406 239,724
75,957 99,847 58,270 234,074 160,773 154,260 55,406 370,439
======== ======== ============ ======== ======== ======== ============ ========
Major value streams
Year ended 31 December Year ended 31 December
2018 2017
Contracting Contracting
Rigs EPC(I) Services Total Rigs EPC(I) Services Total
USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000
New build jackups,
refurbishment
and land rigs 75,957 - - 75,957 160,773 - - 160,773
Process modules - - - - - 2,960 - 2,960
Platforms - 3,268 - 3,268 - 9,938 - 9,938
Foundations - 94,753 - 94,753 - 130,715 - 130,715
Pressure Vessels - 1,826 - 1,826 - 10,647 - 10,647
Operations and
maintenance,
site work and
safety services - - 58,270 58,270 - - 55,406 55,406
75,957 99,847 58,270 234,074 160,773 154,260 55,406 370,439
======== ======== ============ ======== ======== ======== ============ ========
Timing of revenue recognition
Year ended 31 December Year ended 31 December
2018 2017
Contracting Contracting
Rigs EPC(I) Services Total Rigs EPC(I) Services Total
USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000
Recognised
over time 75,957 99,847 58,270 234,074 160,773 154,260 55,406 370,439
======== ======== ============ ======== ======== ======== ============ ========
There was no revenue recognised at a point in time during the years ended 31 December 2018 and 31 December 2017.
The transaction prices allocated to the remaining performance obligations (unsatisfied or partially unsatisfied), to be recognised over time, as at 31 December are, as follows:
Performance Obligations (unsatisfied)
Year ended 31 December Year ended 31 December
2018 2017
Contracting Contracting
Rigs EPC(I) Services Total Rigs EPC(I) Services Total
USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000
Within one
year 35,794 162,272 18,112 216,178 31,022 96,507 10,341 137,870
More than one
year 251,700 72,100 - 323,800 - - - -
======== ======== ============ ======== ======== ======== ============ ========
287,494 234,372 18,112 539,978 31,022 96,507 10,341 137,870
7 Cost of Sales
2018 2017
USD'000 USD'000
Staff costs (Note 10) 90,218 105,549
Subcontract costs 65,313 99,102
Materials and related costs 32,610 135,776
Depreciation (Note 14) 17,563 18,790
Subcontract labour 16,518 28,563
Equipment hire 7,946 10,578
Yard rent 6,680 6,662
Repairs and maintenance 3,069 6,151
Write-down of inventory to net realisable 3,066 -
value (Note 17)
Warranty provision released/utilised (5,921) (1,483)
Others 6,125 10,917
------------------- -------------------
243,187 420,605
======== ========
8 Selling and distribution expenses
2018 2017
USD'000 USD'000
Travel 902 500
Advertising and marketing 134 136
Entertainment 82 75
Others 26 6
--------------- ---------------
1,144 717
====== ======
9 General and administrative expenses
2018 2017
USD'000 USD'000
Staff costs (Note 10) 30,494 22,200
Amortisation of intangible assets (Note
15) 3,789 3,535
Legal, professional and consultancy fees 3,466 3,504
Depreciation (Note 14) 2,656 3,849
Utilities and communication 1,365 1,375
Bank charges 133 137
(Release)/provision for impairment losses,
net
of amounts recovered (1,015) 51
Others 4,283 5,546
_----------------------- _-----------------------
45,171 40,197
========= =========
10 Staff costs
2018 2017
USD'000 USD'000
Wages and salaries 109,329 111,046
Employees' end of service benefits (Note
24) 4,619 5,154
Share-based payments - value of services
provided 3,688 2,425
Other benefits 3,076 9,124
------------------- -------------------
120,712 127,749
======== ========
Staff costs are included in:
Cost of sales (Note 7) 90,218 105,549
General and administrative expenses (Note
9) 30,494 22,200
-------------------- --------------------
120,712 127,749
-------------------- --------------------
Number of employees at 31 December 4,410 5,320
========= ========
Sub-contracted employees at 31 December 205 1,833
========= ========
Total number of employees (staff and subcontracted)
at 31 December 4,615 7,153
========= ========
11 Finance costs and income
2018 2017
USD'000 USD'000
Finance costs
Interest on bank borrowings 2,001 2,587
Others 1,922 2,219
Commitment fees 1,411 2,417
Bank guarantee charges 344 1,796
_----------------- _-----------------
5,678 9,019
======= =======
Finance income
Finance income comprises interest income of USD 2.2 million (2017: USD 3.9 million) from bank deposits.
12 Other gains/(losses) - net
2018 2017
USD'000 USD'000
Exchange (loss)/gain - net (333) 727
(Loss)/gain on derivative financial instruments (29) 89
Profit on disposal of assets 26 263
Others 368 (202)
_---------------- _----------------
32 877
======= ======
13 Earnings per share
(a) Basic
Basic earnings/(loss) per share is calculated by dividing the (loss)/profit attributable to the equity holders of the Company by the weighted average number of ordinary shares in issue during the year excluding ordinary shares purchased by the Company and held as treasury shares.
(b) Diluted
Diluted earnings/(loss) per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. For the retention share awards, options under executive share option plan and performance share plan, a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share awards/options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share awards/options.
2018 2017
USD'000 USD'000
The calculations of loss per share are
based on the following loss and numbers
of shares:
Loss for the year (70,656) (98,097)
------------------------- -------------------------
Weighted average number of shares for
basic loss per share 341,710,302 341,710,302
Adjustments for:
- -
* Assumed vesting of performance share plan
- -
* Assumed vesting of retention share plan
------------------------- -------------------------
Weighted average number of shares for
diluted loss per share 341,710,302 341,710,302
------------------------- -------------------------
Assumed vesting of performance and retention share plans amounting to 6,700,436 (2017: 3,786,640) shares and 2,481,705 (2017: 609,471) shares respectively have been excluded in the current period as these are anti-dilutive.
Loss per share:
Basic (20.67)c (28.70)c
=========== ===========
Diluted (20.67)c (28.70)c
=========== ===========
Loss per share from continuing operations:
Basic (20.67)c (28.70)c
=========== ===========
Diluted (20.67)c (28.70)c
=========== ===========
14 Property, plant and equipment
Fixtures Capital
Buildings
& Operating and office Motor work-in-
infrastructure equipment equipment Vehicles progress Total
USD'000 USD'000 USD'000 USD'000 USD'000 USD'000
Cost
At 1 January
2017 146,123 146,716 16,968 3,441 16,818 330,066
Additions 295 8,011 154 49 13,551 22,060
Disposals - (3,394) - (135) - (3,529)
Transfers 6,798 896 44 112 (7,850) -
------------------- --------------------- ------------------- ------------------- ------------------- -------------------
At 31
December
2017 153,216 152,229 17,166 3,467 22,519 348,597
Additions 388 1,033 836 125 5,597 7,979
Disposals - (892) (48) (262) - (1,202)
Transfers 637 729 487 28 (1,881) -
------------------- ---------------------- ------------------- ------------------- ------------------- -------------------
At 31
December
2018 154,241 153,099 18,441 3,358 26,235 355,374
------------------- ---------------------- ------------------- ------------------- ------------------- -------------------
Depreciation
At 1 January
2017 (50,714) (89,897) (14,992) (2,135) - (157,738)
Charge for
the
year (9,204) (11,750) (1,218) (466) - (22,638)
Disposals - 3,393 - 111 - 3,504
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
At 31
December
2017 (59,918) (98,254) (16,210) (2,490) - (176,872)
Charge for
the
year (8,580) (10,162) (995) (481) - (20,218)
Disposals - 867 48 263 - 1,178
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
At 31
December
2018 (68,498) (107,549) (17,157) (2,708) - (195,912)
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Net book
value
At 31
December
2018 85,743 45,550 1,284 650 26,235 159,462
======== ======== ======== ======== ======== ========
At 31
December
2017 93,298 53,975 956 977 22,519 171,725
======== ======== ======== ======== ======== ========
Buildings have been constructed on land, leased on a renewable basis from various Government Authorities. The remaining lives of the leases range between two to twenty one years. The Group has renewed these land leases upon expiry in the past and its present intention is to continue to use the land and renew these leases for the foreseeable future.
Property, plant and equipment with a carrying amount of USD 95.5 million (2017: USD 104.4 million) are under lien against the bank facilities (Note 29).
A depreciation expense of USD 17.6 million (2017: USD 18.8 million) has been charged to cost of sales; USD 2.6 million (2017: USD 3.8 million) to general and administrative expenses (Notes 7 and 9).
Capital work-in-progress represents the cost incurred towards construction and upgrade of infrastructure and operating equipment.
15 Intangible assets
Leasehold Work-in-
Trade name rights Software progress Total
USD'000 USD'000 USD'000 USD'000 USD'000
Cost
At 1 January
2017 22,335 8,338 14,281 - 44,954
Additions - 8,694 65 1,540 10,299
----------------- ----------------- ----------------- ----------------- -----------------
At 31 December
2017 22,335 17,032 14,346 1,540 55,253
Additions - - 71 1,948 2,019
Transfers - - 1,540 (1,540) -
----------------- ----------------- ----------------- ----------------- -----------------
At 31 December
2018 22,335 17,032 15,957 1,948 57,272
----------------- ----------------- ----------------- ----------------- -----------------
Amortisation
At 1 January
2017 14,143 2,942 2,918 - 20,003
Charge for the
year (Note 9) 1,804 831 900 - 3,535
----------------- ----------------- ----------------- ----------------- -----------------
At 31 December
2017 15,947 3,773 3,818 - 23,538
Charge for the
year (Note 9) 1,804 999 986 - 3,789
----------------- ----------------- ----------------- ----------------- -----------------
At 31 December
2018 17,751 4,772 4,804 - 27,327
======== ======== ======== ======== ========
Net book value
At 31 December
2018 4,584 12,260 11,153 1,948 29,945
======== ======== ======== ======== ========
At 31 December
2017 6,388 13,259 10,528 1,540 31,715
======== ======== ======== ======== ========
Development cost and patent represent the costs incurred on patent fee and in developing the Group's proprietary designs. The economic benefit for these is expected to be derived from use of this intellectual property in our 'Rig' operating segment. As at 31 December 2018, an amount of USD 0.6 million (2017: Nil) related to development costs and patent is included in work in progress.
16 Investment accounted for using the equity method
2018 2017
USD'000 USD'000
At 1 January 25,908 7,229
Dividend received during the year (1,113) (2,137)
Investment in an associate 39,102 23,375
Share of loss of investments accounted
for using the
equity method - net (10,576) (2,559)
_------------- _-------------
At 31 December 53,321 25,908
======== ========
During the year, the Group along with its partner, Mada Al Sharq Company LLC, formed a joint venture - Lamprell Saudi Arabia LLC. The investment has been accounted by the Group as a joint venture.
17 Inventories
2018 2017
USD'000 USD'000
Raw materials, consumables and finished
goods 23,996 26,267
Work in progress 69,343 26,287
Less: Provision for slow moving and obsolete
inventories (2,716) (2,045)
------------------- -------------------
90,623 50,509
======== =========
The cost of inventories recognised as an expense amounts to USD 11.0 million (2017: USD 17.1 million) and this includes USD 3.1 million (2017: Nil) in respect of write-down of inventory to net realisable value.
The work in progress inventories include two rig kits which will be utilised upon award of new contracts.
18 Trade and other receivables
2018 2017
USD'000 USD'000
Trade receivables 46,737 39,259
Other receivables and prepayments 22,217 12,559
Advance to suppliers 2,410 2,402
Receivables from a related party (Note
21) 875 12,951
------------------- -------------------
72,239 67,171
Less: Provision for impairment losses (4,189) (5,317)
_------------------- _-------------------
68,050 61,854
_------------------- _-------------------
Amounts due from customers on contracts - 67,800
Contract work in progress - 35,051
_------------------- _-------------------
68,050 164,705
Non-current portion: ========= =========
Prepayments - 839
------------------ ------------------
Current portion 68,050 163,866
========= =========
Amounts due As per Reclassified As at 31 As at 31
from IAS 18 under IFRS December December
customers 15 2018 2017
on contracts
comprise:
Costs
incurred to
date 951,263 (951,263) - 951,263
Attributable
profits 57,099 (57,099) - 57,099
----------------------- ----------------------- ----------------------- -----------------------
1,008,362 (1,008,362) - 1,008,362
Less:
Progress
billings (940,562) 940,562 - (940,562)
---------------------- ----------------------- ----------------------- -----------------------
67,800 (67,800) - 67,800
=========== =========== =========== ===========
19 Contract Assets
2018
USD'000
Amounts due from customers on contracts 48,081
Contract work in progress 6,850
-----------------
54,931
===========
Amounts due from customers on contracts
comprise:
2018
USD'000
Costs incurred to date 389,326
Attributable (loss)/profit (74,731)
-----------------------
314,595
Less: Progress billings (266,514)
-----------------------
48,081
===========
20 Cash and bank balances
2018 2017
USD'000 USD'000
Cash at bank and on hand 26,557 45,087
Term deposits and margin deposits - Current 72,914 237,930
------------------ ------------------
Cash and bank balances 99,471 283,017
Term deposits and margin deposits - Non-current 333 13,426
Less: Margin deposits - under lien (with
original maturity less than three months) (3,800) (8,101)
Less: Margin deposits - under lien (with
original maturity more than three months) (46,987) (41,596)
Less: Deposits with original maturity
of more than three months (10,333) (141,984)
------------------ ------------------
Cash and cash equivalents (for the purpose
of the cash flow statement) 38,684 104,762
========= =========
21 Related party balances and transactions
Related parties comprise LHL (which owns 33.12% of the issued share capital of the Company), certain legal shareholders of the Group companies, Directors and key management personnel of the Group and entities controlled by Directors and key management personnel. Key management includes the Directors and members of the executive committee. Related parties, for the purpose of the parent company financial statements, also include subsidiaries owned directly or indirectly and joint ventures. Other than those disclosed elsewhere in the financial statements, the Group entered into the following significant transactions during the year with related parties at prices and on terms agreed between the related parties:
2018 2017
USD'000 USD'000
Key management compensation 8,087 6,828
======= =======
Sales to associates 827 427
======= =======
Purchases from associates 395 147
======= =======
Re-chargeable expenses to associates 18,008 12,951
======= =======
Sponsorship fees and commissions paid to
legal
shareholders of subsidiaries 325 308
======= =======
Key management compensation comprises:
2018 2017
USD'000 USD'000
Salaries and other short-term benefits 4,918 5,252
Share-based payments - value of services
provided 2,198 1,335
Short-term incentive plans 772 -
Post-employment benefits 199 241
------------- ------------
8,087 6,828
======= ======
Due from/due to related parties
Due from related parties
2018 2017
USD'000 USD'000
MISA (in respect of sales to associate) 653 -
IMI (In respect of expenses on behalf of
associate) 154 12,951
Mada Al Sharq Company LLC (in respect of
investment in joint venture) 68 -
_______ _______
875 12,951
========= =========
Due to a related party
2018 2017
USD'000 USD'000
MISA (in respect of purchases) (associate) 423 28
========== ==========
22 Share capital and share premium
Issued and fully paid ordinary shares
Share capital Share
Equity premium
Number USD'000 USD'000
At 1 January 2017 and 31 December
2017 341,726,570 30,346 315,995
---------------------------- ----------------- -------------------
At 31 December 2018 341,726,570 30,346 315,995
============= ======== =========
The total authorised number of ordinary shares is 400 million shares (2017: 400 million shares) with a par value of 5 pence per share (2017: 5 pence per share).
23 Other reserves
Group
Legal reserve Merger Hedge Translation Total
reserve reserve reserve
USD'000 USD'000 USD'000 USD'000 USD'000
At 1 January 2017 98 (18,572) (1,259) (960) (20,693)
Currency
translation
differences - - - (49) (49)
Profit on cash
flow
hedges - - 2,619 2,619
------------------ ------------------ ------------------ ------------------ ------------------
At 31 December
2017 98 (18,572) 1,360 (1,009) (18,123)
Currency
translation
differences - - - (160) (160)
Reclassification
of
hedge reserve - - (1,360) - (1,360)
------------------ ------------------ ------------------ ------------------ ------------------
At 31 December
2018 98 (18,572) - (1,169) (19,643)
======== ======== ======== ======== ========
24 Provision for employees' end of service benefits
In accordance with the provisions of IAS 19, management has carried out an exercise to assess the present value of its obligations at 31 December 2018 and 2017, using the projected unit credit method, in respect of employees' end of service benefits payable under the Labour Laws of the countries in which the Group operates. Under this method, an assessment has been made of an employee's expected service life with the Group and the expected basic salary at the date of leaving the service. The obligation for end of service benefit is not funded.
The movement in the employees' end of service benefit liability over the periods is as follows:
2018 2017
USD'000 USD'000
At 1 January 34,129 34,745
Current service cost 3,648 3,414
Interest cost 971 1,740
Remeasurements (851) 829
Benefits paid (5,809) (6,599)
------------------- -------------------
At 31 December 32,088 34,129
========= =========
25 Derivative financial instruments
2018 2017
Notional Notional
contract contract
amount Assets Liabilities amount Assets Liabilities
USD'000 USD'000 USD'000 USD'000 USD'000 USD'000
Forward
contracts - - - 28,950 1,359 -
Interest
rate swaps 20,000 218 - 40,000 307 -
------------------------- ---------------- ------------------ ------------------------- ---------------- ------------------
Total 20,000 218 - 68,950 1,666 -
======== ====== ====== ======== ====== ======
Non-current
portion:
Interest
rate swaps - - - 20,000 153 -
---------------- ------------ ------------ ---------------- ------------ ------------
Current
portion 20,000 218 - 48,950 1,513 -
------------------------- ------------------- ------------------- ----------------------- ------------------ ------------------
The Group has an interest rate swap to switch floating interest rates to fixed interest rates on the Group's borrowings. This derivative did not qualify for hedge accounting and is carried at fair value through profit or loss. The notional principal amount at the date of inception of these contracts was USD 100 million. This contract matures in various instalments within 57 months from the date of inception. The fair value at 31 December 2018 of this derivative was USD 0.2 million (2017: USD 0.3 million).
26 Trade and other payables
2018 2017
USD'000 USD'000
Trade payables 23,572 47,897
Accruals and other payables 59,897 149,833
Payables to a related party (Note 21) 423 28
Amounts due to customers on contracts - 2,815
------------------- -------------------
83,892 200,573
========= =========
As per Reclassified As at 31
Amounts due to customers IAS 18 under IFRS December As at 31 December
on contracts comprise: 15 2018 2017
Progress billings 130,924 (130,924) - 133,597
Less: Cost incurred
to date (89,313) 89,313 - (112,711)
Less: Recognised losses (19,238) 19,238 - (18,071)
------------------- ------------------- ------------------- -------------------
22,373 (22,373) - 2,815
========= ========= ========= =========
Accruals and other payables include a provision of USD 9.5 million (2017: 41.7 million) relating to estimated losses to completion on the EA1 project (Note 4.2.2).
27 Contract Liabilities
2018
USD'000
Provision for warranty cost and other
liabilities (Note 28) 4,166
Amounts due to customers on contracts 22,373
----------------------------------------------------
26,539
=======
Amounts due to customers on contracts
comprise:
Progress billings 130,924
Less: Cost incurred to date (89,313)
Less: Recognised losses (19,238)
-------------------
22,373
=========
28 Provision for warranty costs and other liabilities
Minimum
Warranty purchase
Costs obligations Total
USD'000 USD'000 USD'000
At 1 January 2017 7,724 234 7,958
Charge during the year 1,000 - 1,000
Released/utilised during the
year (1,483) - (1,483)
------------------ ---------------- -------------------
At 31 December 2017 7,241 234 7,475
Charge during the year 2,612 - 2,612
Released/utilised during the
year (5,687) (234) (5,921)
------------------ ---------------- ------------------
At 31 December 2018 4,166 - 4,166
========= ======== ========
Warranty costs charged during the year relates to management's assessment of potential claims under contractual warranty provisions. The charge during the year is included in subcontract cost in Note 7.
29 Borrowings
2018 2017
USD'000 USD'000
Bank term loans 19,768 39,491
========= =========
The bank borrowings are repayable as follows:
Current (less than 1 year) 19,768 39,491
========== ==========
At 31 December 2018, the Group has banking facilities of USD 540.1 million (2017: USD 924 million) with commercial banks. The facilities include bank overdrafts, letters of guarantees, letters of credit and short-term loans. These are summarised below:
31 December 2018 Facility Amount utilised Amount available to
be used
USD'000 USD'000 USD'000
Funded facilities
Term loan 20,000 20,000 -
Revolving credit
facility 50,000 - 50,000
Unfunded facilities
Letters of credit/guarantees 470,100 108,100 362,000
--------------- ---------------- ------------------
Total 540,100 128,100 412,000
======== ======== ========
The facilities available to the Group as at 31 December 2018 that are capable of being drawn as cash amount to USD 50.0 million. Bank facilities are secured by liens over term deposits of USD 50.7 million (2017: USD 49.7 million) (Note 24), the Group's counter indemnities for guarantees issued on their behalf, the Group's corporate guarantees, letter of undertakings, letter of credit payment guarantees, cash margin held against letters of guarantees, shares of certain subsidiaries, certain property, plant and equipment, movable assets, leasehold rights for land and certain contract related receivables. These facilities expire in August 2019.
The Group's debt facilities are subjected to covenant clauses, whereby the Group is required to meet certain key financial ratios. The Group did not fulfil the borrowing to EBITDA financial covenant contained within its debt facilities. Due to this breach of the covenant clause, the banks are contractually entitled to request for immediate repayment of the outstanding loan amount of USD 19.8 million. However, Management are in process of negotiating debt re-financing with the banks and we do not expect it to pay before due date. Subsequent to year end, the Group has received confirmation from its lenders agreeing to waiver this EBITDA financial covenant.
30 Commitments (a) Operating lease commitments
The Group leases land and staff accommodation under various operating lease agreements. The remaining lease terms of the majority of the leases are between four to twenty years and are renewable at mutually agreed terms. The future minimum lease payments payable under operating leases are as follows.
2018 2017
USD'000 USD'000
Not later than one year 5,583 7,943
Later than one year but not later than
five years 23,774 23,982
Later than five years 84,369 77,493
-------------------- --------------------
113,726 109,418
========= =========
(b) International Maritime Industries Commitments
In 2017, the Group has entered into commitments associated with the investment in International Maritime Industries. Under the Shareholders' Agreement, the Group will invest up to a maximum of USD 140.0 million in relation to its commitment over the course of construction of the Maritime Yard between 2017 and 2022 with USD 59.0 million already paid to date. The forecast contributions are as follows:
2018 2017
USD'000 USD'000
Not later than one year 31,456 38,500
Later than one year but not later than
four years 49,510 81,500
------------- -------------
80,966 120,000
====== ======
(c) Other commitments
2018 2017
USD'000 USD'000
Capital commitments for construction of
facilities 1,198 8,937
========= =========
Capital commitments for purchase of operating
equipment
and computer software 3,273 144
========= =========
Purchase commitments for rig kits - 41,199
========= =========
31 Bank guarantees
2018 2017
USD'000 USD'000
Performance/bid bonds 75,269 120,012
Advance payment, labour visa and payment
guarantees 31,905 50,350
-------------------- -------------------
107,174 170,362
========= =========
32 Cash generated from operating activities
Year ended 31 December
2018 2017
Notes USD'000 USD'000
Operating activities
Loss before income tax (69,485) (97,906)
Adjustments for:
Share-based payments - value of services
provided 3,688 2,425
Depreciation 14 20,218 22,638
Amortisation of intangible assets 15 3,789 3,535
Share of loss of investments accounted
for using the equity method - net 16 10,576 2,559
Release for warranty costs and other
liabilities (3,309) (483)
Profit on disposal of property, plant
and equipment (26) (263)
Provision/(release) for slow moving
and obsolete inventories 17 671 (1,529)
Release for impairment of trade receivables,
net of amounts recovered (1,128) (171)
Provision for employees' end of service
benefits 24 4,619 5,154
(Release)/gain on derivative financial
instruments (1,360) 2,619
Finance costs 11 5,678 9,019
Finance income 11 (2,165) (3,875)
--------------- ---------------
Operating cash flows before payment
of employees' end of service benefits
and changes in working capital (28,234) (56,278)
Payment of employees' end of service
benefits (5,809) (6,599)
Changes in working capital:
Inventories before movement in provision/(release) 17 (40,785) (24,565)
Derivative financial instruments 25 1,448 (2,752)
Trade and other receivables before movement
in Provision for impairment losses 18 97,783 102,261
Contract assets 19 (54,931) -
Trade and other payables 26 (116,681) 20,552
Contract liabilities 27 26,539 -
Provision for warranty 28 (4,166) -
--------------- ---------------
Cash (used in)/generated from operating
activities (124,836) 32,619
======= =======
33 Statutory Accounts
This financial information is not the statutory accounts of the Company and the Group, a copy of which is required to be annexed to the Company's annual return to the Companies Registration Office in Isle of Man. A copy of the statutory accounts in respect of the year ended 31 December 2018 will be annexed to the Company's annual return for 2018. Consistent with prior years, the full financial statements for the year ended 31 December 2018 and the audit report thereon will be circulated to shareholders at least 20 working days before the AGM. A copy of the statutory accounts required to be annexed to the Company's annual return to the Companies Registration Office in respect of the year ended 31 December 2017 has been annexed to the Company's annual return for 2017.
34 Directors' responsibilities statement
We confirm that to the best of our knowledge
The financial statements, have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities and financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and, This announcement includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Further information is available on the Company's website, www.lamprell.com.
Additional Information:
EBITDA
In addition to measuring financial performance of the Group based on operating profit, we also measure performance based on EBITDA. EBITDA is defined as the Group (loss)/profit for the year from continuing operation before depreciation, amortisation, net finance expense and taxation.
We consider EBITDA to be useful measures of our operating performance because it approximates the operating cash flow by eliminating depreciation and amortisation. EBITDA is not a direct measure of our liquidity, which is shown by our cash flow statement, and need to be considered in the context of our financial commitments.
Reconciliation from Group (loss)/profit for the year from continuing operation, the most directly comparable IFRS measure, to reported and EBITDA, is set out below:
Year ended 31 December
2018 2017
USD'000 USD'000
--------- ---------
Loss for the year from continuing
operations (70,656) (98,097)
--------- ---------
Depreciation (Note 14) 20,218 22,638
--------- ---------
Amortisation (Note 15) 3,789 3,535
--------- ---------
Interest on bank borrowings (Note
11) 2,001 2,587
--------- ---------
Finance income (Note 11) (2,165) (3,875)
--------- ---------
Tax 1,171 191
--------- ---------
Share of loss of investments accounted
for using the equity method - net
(Note 16) 10,576 2,559
--------- ---------
EBITDA (35,066) (70,462)
--------- ---------
EBITDA margin (15.0%) (19.0%)
--------- ---------
Net cash
Net cash measures financial health after deduction of liabilities such as borrowings. A reconciliation from the cash and cash equivalents per the consolidated cash flow statement, the most directly comparable IFRS measure, to reported net cash, is set out below:
2018 2017
USD'000 USD'000
--------------------------------------------
Cash and cash equivalents (Note 20) 38,684 104,762
---------------------------------------------
Margin deposits - under lien (with
original maturity less than three months)
(Note 20) 3,800 8,101
---------------------------------------------
Margin deposits - under lien (with
original maturity more than three months)
(Note 20) 46,987 41,596
---------------------------------------------
Deposits with original maturity of
more than three months (Note 20) 10,333 141,984
---------------------------------------------
Borrowings (Note 29) (19,768) (39,491)
--------- ----------
Net cash 80,036 256,952
--------- ----------
Overheads
Overheads are costs required to run our business but which cannot be directly attributed to any specific project or service. A reconciliation from unallocated expenses per the segment note in the consolidated financial statements to reported overheads, is set out below:
2018 2017
USD'000 USD'000
-----------------------------------------
General and administrative expenses
(Note 9) 45,171 40,197
------------------------------------------
Selling and distribution expenses (Note
8) 1,144 717
------------------------------------------
Direct overheads included in cost of
sales:
-----------------------------------------
Unallocated operational overheads 17,108 12,271
------------------------------------------
Yard rent and maintenance 14,060 13,689
Repairs and maintenance 3,041 6,151
Other 5,881 9,375
-------- --------
Overheads 86,405 82,400
-------- --------
An analysis of overheads is as follows:
2018 2017
Overhead nature: USD'000 USD'000
------------------
Fixed 29,204 30,403
-------------------
Semi variable 9,579 12,782
-------------------
Variable 47,622 39,215
-------------------
Overheads 86,405 82,400
-------- --------------
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
FR LIFFEVTILFIA
(END) Dow Jones Newswires
March 21, 2019 03:01 ET (07:01 GMT)
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