LAM.L Regulatory News (LAM)

13 May 2020

LAMPRELL PLC("Lamprell" and with its subsidiaries the "Group")

2019 FINANCIAL RESULTS

Financial results negatively impacted by low revenues, impairment charges and one-off events

Moray East project progressing well, as planned

Robust start to 2020 with award for new build rigs and major operational restructuring

Financial results

· Modest year-on-year revenue growth to USD 260.4 million (2018: USD 234.1 million)

· Net losses of USD 183.5 million (2018: losses of USD 70.7 million) driven by low revenue levels, final settlement on the East Anglia One project and charges associated with operational restructuring and non-cash impairment to PP&E and intangibles

· Non-cash impairment charges of USD 79.3 million a significant contributor to losses in the year

· Backlog of USD 470.1 million at year-end (2018: USD 540.0 million)

· Year-end net cash position of USD 42.5 million (31 December 2018: USD 80.0 million)

· Debt-free as of 11 March 2020; actively pursuing future funding arrangements

· As at 30 April 2020, net unrestricted cash was USD 31.6 million. As announced previously, as at 31 March 2020 the Group's cash balances stood at USD 77 million, of which USD 35 million was restricted. Cost cutting and restructuring measures implemented to navigate current challenging market and socio-economic conditions.

· As noted in the financial review section and as further detailed below, material uncertainties relating to the going concern assumption have been identified.

Operational highlights

· Excellent safety performance with total recordable incident rate of 0.19 for the year

· Moray East project progressing:

o Major efficiencies achieved through incremental infrastructure investment in Hamriyah yard

o Personnel upskilling focus translated into robust operational performance and additional efficiencies

o A total of 24 jackets already upended

o Batches 1 and 2 delivered to the client at the quayside in Hamriyah on time

o Remaining deliveries continuing through to Q3 2020, adding to our strong track record and paving the way for future project wins in the fast-growing offshore windfarm market

· East Anglia One offshore windfarm contract close-out completed in April 2020:

o All jackets delivered and installed by client, with many already in operation

o Total project loss of USD 118.2 million

o Liquidated damages waived; contractual warranty period has commenced

o Final contract payment of USD 18.9 million received in May 2020

· Strong flow of rig refurbishment work totalling 13 rig projects in 2019

· Work in our yards continues with moderate impact on productivity and cost due to COVID-19

Corporate and business development

· Deferred release of our results following FCA request to Lamprell and other companies, due to the ongoing impacts of COVID-19

· Progress with IMI joint venture:

o Formal contract award for two new build jackup rigs with a total value of circa USD 350 million

o Both rigs to be built at Lamprell's facilities with final commissioning taking place in Saudi Arabia

o Rigs will use jacking kits held in inventory, converting approximately USD 70 million into cash over project duration

o Down payment of USD 87.9 million from IMI received in January 2020

o Discussions to defer 2020 IMI investment of USD 25.6 million commenced

· Bidding on Saudi Aramco's LTA continues

· Progressing a number of active bids in renewables market - Lamprell is well positioned to win further work in this fast-growing market

· Several regional partnerships agreed, to progress the digital strategy aimed at delivering value and efficiencies whilst creating additional revenue streams in future

Overhead reduction programme

· Major overhead reduction programme commenced in early 2020 as part of strategy to protect the Company's liquidity and to ensure that our organisation is fit for purpose 

· Cost saving measures implemented, resulting in at least 20% reduction in overhead in 2020:

o Significant headcount reductions implemented in Q1 2020

o Operations being consolidated within one yard (Jebel Ali facility mothballed in Q1 2020, Sharjah facility to be exited after completion of Moray East project)

o Spending and allowance cuts took effect from January 2020

· Retained core operational and bidding capacity to deliver on strategy

COVID-19 impact

· Numerous steps taken to protect health and wellbeing of our employees in light of the ongoing threat from COVID-19, including testing, contact tracing for confirmed cases, isolation procedures and close cooperation with local UAE authorities

· Yards are open and operations continue with moderate impact on productivity and cost

· Bidding work continues, albeit with delays in award schedules

· Additional temporary cost reduction measures implemented to respond to COVID-19 threat achieving a USD 10 million saving in 2020:

o Salary and Director fee reductions of 25% for 6 months

o Reduced working hours

o Redundancies

Outlook

· Strategy remains unchanged

· Balance sheet will support current project work

· Regional credit market, the global health crisis and the oil price volatility make conventional term debt challenging; discussions around alternative funding options ongoing

· High quality bid pipeline at USD 6.2 billion (2018: USD 6.4 billion) although turmoil in oil & gas market and impact of COVID-19 are likely to cause further delays to new major contract awards

· Lamprell will continue to implement protocols to mitigate risks arising from impact of COVID-19 on ongoing projects in line with WHO and UAE governmental guidance

· FY 2020 revenue guidance withdrawn, with USD 275 million currently secured in backlog for the year

Material uncertainty relating to the going concern

· Material uncertainties in respect of going concern and the risk that the Group will not be able to realise assets and discharge liabilities in the normal course of business have been identified by the Group's Directors.

· The key assumptions made in reaching the going concern conclusion include that both a major contract win and refinancing will be secured by the Group within the coming 12 months. Should these not crystallise, significant cost cutting and restructuring measures will be required to maintain liquidity.

· Further assumptions and detail regarding the Group's liquidity position and going concern assumption are provided in the financial review section.

2019 FINANCIAL RESULTS

*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:

"As the world, and our industry in particular, grapple with the effects of the COVID-19 crisis, we take heart in reporting good progress against our strategy and robust operational performance on our ongoing projects. We remain committed to our goals and are particularly encouraged by the growth forecasts in the renewables industry. In these uncertain times and given that the Company's financial position remains very challenging, our immediate goal is to protect our net cash position and improve liquidity for the Group, to ensure the future of the business."

Christopher McDonald, Chief Executive Officer for Lamprell, said:

"2019 was another challenging year for the industry, impacting our financial performance through low revenues and one-off losses. It is nonetheless a year in which Lamprell continued to demonstrate its resilience as we adapted to the changing energy landscape by rapidly developing expertise in the renewables industry and pursuing new solutions in the digital space, as well as making progress with contracts in our traditional areas of expertise. Ensuring a sustainable future for the business is our absolute priority and we have taken a number of significant steps and self-help measures to reduce our cost base as the business addresses significant liquidity pressures. The unpredictability and outlook challenges in the global energy market are well documented, but Lamprell is strategically well positioned, with well-established local operations in the Middle East and a growing track record in renewables. We are focused on converting the opportunities in our pipeline."

Full year results presentation

The management team will hold a presentation on 13 May 2020 at 9.00 am (UK time). Due to the ongoing global health crisis and the wide-spread travel restrictions and prevention measures in place, we will be holding the presentation in Dubai and it can be accessed via a live webcast on our Company's website, at www.lamprell.com or on the following link:  

https://webcasting.brrmedia.co.uk/broadcast/5ea82d9831da814c9fc6caf0

Phone dial-in details are:

UK: +44 20 3695 9267

UK: 0800 408 7373

Dial-in code: 1739

The Company is planning to hold its 2020 annual general meeting on 25 June 2020 in the United Arab Emirates. The Company's 2019 annual report and accounts, as well as the notice of the 2020 annual general meeting, will be published later this month.

- Ends -

Enquiries:

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, in the UAE. Combined, the Group's facilities cover approximately 800,000m2 with over 1.5 km of quayside. In addition, the Group has facilities in Saudi Arabia (through a joint venture agreement).

Lamprell is listed on the London Stock Exchange (symbol "LAM").

Statement from our Chairman

In 2019, we saw progress in delivering our strategy in another challenging year for the business. With COVID-19 also contributing to our tight financial position, we are focussing heavily on preserving and improving liquidity to ensure the future of the business.

Operationally, last year the Moray East project progressed as planned, paving the way for further work in the renewables space. Financially however, the continuing lack of project awards, as well as the impact of a significant impairment of our assets and the close-out of the EA1 project, resulted in a disappointing set of financial results. As the world, and our industry in particular, now grapple with the combined effects of the COVID-19 crisis and the global economic fallout, our immediate goal is to improve liquidity for the Group, through conserving cash and arranging new financing (see the going concern statement below for more details) and to improve our backlog through delivery of our strategy and successful operational performance. Our business is learning and adapting to the new reality of the energy industry, expanding our capabilities and pivoting towards new opportunities.

However, progress with awards has been and continues to be slow in our end markets. In 2019 we invested in developing our capabilities and, having secured a major contract win in early 2020, we are targeting revenue growth. Creating value for our shareholders is a key priority as we look ahead. To achieve this in the context of our near-term workflow and the impact of COVID-19, in 1H 2020 we have taken significant steps to cut our overhead costs. These decisions are never easy as they often affect those who have made Lamprell what it is but, in order to ensure a long-term future for the Company and deliver value for all our stakeholders, the Board remains committed to acting firmly and fast. I would like to thank our employees for their efforts, dedication and commitment to our values as we tackle these issues head on.

John Malcolm

Chairman

Report from our Chief Executive

Adapting our business to a changing world

2019 was another challenging year for Lamprell financially, mirroring the continuing turmoil in the oil & gas industry. But we gained further traction in the offshore renewables industry reflecting the global energy transition away from fossil fuels.

Continued delays in awards, increased competition, the commercial close-out of the EA1 project, as well as a significant non-cash asset impairment, all impacted negatively on our financial results. However, I am pleased that last year's progress in our strategic objectives has resulted in the formal award of the two rigs from IMI in early 2020 and multiple bidding opportunities in our target markets. We are also implementing a series of self-help measures which aim to improve our financial position, respond to the threat of the ongoing global pandemic and lead Lamprell back towards profitability in the coming years.

Operational update

We have had another year of excellent safety performance. At 0.19 our TRIR remains highly competitive with global best practice. It is particularly encouraging to see stability in our performance given that activity levels in the yards ramped up quickly through the year.

In 2019 our operations focused heavily on the renewables segment. This included completion of fabrication and assembly for the jackets and foundations on the EA1 project. In April 2020, we agreed the commercial close-out of the difficult and lossmaking project, which allows us to focus our energy on new opportunities in this growing market. Closing terms removed the risk of liquidated damages and materially improved the Group's liquidity position. All of the jackets have been installed by the client and some of them are operating already as the windfarm has started to produce power.

We also commenced fabrication on our second offshore windfarm project, Moray East. The experience on EA1 has allowed us to assess, plan and execute this project to high standards and, having made some incremental but essential investments in our infrastructure, we are pleased with the newly achieved efficiencies. Although the project has experienced some impact as a result of COVID-19, the process of handover of the jackets to our client at our deepwater quayside in Hamriyah started from March 2020.

Our rig refurbishment segment continues to deliver commendable results with a steady flow of projects: in 2019 we completed refurbishment works on 13 rigs and we have received as many new orders in the sector.

Strategic progress continues

We started 2019 with the hope of seeing the early shoots of recovery in the conventional energy markets. Instead, we witnessed a change in attitudes as market sentiment is now driving a transition towards cleaner energy supply and away from our traditional oil & gas market.

Our highest priority for 2019 was to sign the contract for the first two new build jackup rigs from IMI, which occurred shortly after year-end. We have now commenced early works on the project which has great strategic significance to Lamprell and IMI. We will perform the majority of the fabrication works at our UAE facilities, training IMI personnel to become rig experts, before we commission the rigs together in 2022 at the Saudi facility. Against the backdrop of a depressed oil & gas sector, this project strengthens our position as a leading fabricator of new build jackup rigs and allows us to monetise our spare rig kits. To date we have invested USD 59 million in equity and we are in discussions to defer further contributions until mid-2021 as we look to preserve liquidity in our business.

2019 was our first full year on the Saudi Aramco LTA programme. We were not fortunate to secure an LTA contract as all awards went to incumbent LTA contractors. However, via the intensive bidding process we have gained significant capabilities and valuable insight into the programme which will help on future bids. The volume of bidding in this segment continues to be high, with multiple bids in preparation at any given time. We continue our focus on the LTA and aim to convert some into successes during 2020.

Our third major goal was to expand our footprint in the renewables industry. We have been successful in progressing this goal as operations on the Moray East project draw to a close in 2020. We are actively engaged with multiple clients for new windfarm projects where we are well positioned to win future work. The industry continues to develop rapidly, with some forecasts predicting a fifteenfold increase in new windfarm installations by 2040. Our cost-effective labour, production-line set up yard improvements and recent experience position us well to win new work.

Our digital strategy has become a larger part of our future planning and we are excited about the major opportunities open to us. We are exploring innovative solutions, which would provide both improvements in project execution and also potential new revenue streams for the Group. In 2019 we partnered with Injazat, the region's leading digital developer backed by Mubadala Investment Company, to progress a portfolio of digital ventures that would enhance fabrication efficiencies in our core markets, with limited investment at this stage. These ventures will ensure we remain competitive and capable of addressing our clients' expectations.

Outlook for 2020

In early 2020, international businesses such as Lamprell were faced with the dual impact of the COVID-19 virus and a plunging oil price. The health and wellbeing of our employees are key for us and we have taken major 'self-help' steps to protect our workforce and the business against these threats. While many functions have been working remotely, our yard activities have continued to operate in accordance with the UAE regulations, including measures such as testing, contact tracing and isolation facilities. The impact of the virus has affected our productivity to some extent and increased our costs. In response, we have temporarily reduced salaries, placed some staff on reduced working hours or released them to cut costs.

Bidding activity continues in both of our end markets of oil & gas and renewables but we are seeing signs of deceleration and some delays in awards. We are well positioned for new projects but, faced with a new reality in 2020 of the epidemic and deterioration in the global economic situation, the Group's financial position remains very challenging, driving the urgent need to conserve cash (see assumptions in the going concern statement below) and take further 'self-help' measures to ensure that our organisation is fit for purpose. Crucially we are also actively pursuing future funding arrangements to improve the liquidity position facing the business. The steps will allow us to implement our strategy and convert the available opportunities in our pipeline.

Christopher McDonald

Chief Executive Officer

Review of our finances

Streamlining our operations

Despite strong operational execution and moderate year-on-year revenue growth in 2019, our financial position is currently under severe pressure until we return to revenue levels sufficient to absorb our overheads base.

Operational update

Revenues for the year increased moderately to USD 260.4 million (2018: 234.1 million). Operations in Hamriyah and Sharjah focused heavily on the Moray East project. As such, the EPC(I) segment contributed the majority of revenues for the reporting period - USD 167.2 million.

Having received steel for the 48 Moray East jacket foundations in Q2 2019, the project quickly ramped up through the summer months, with welding well under way by the third quarter of the year. Upending of jackets commenced in early 2020 in time for delivery at the quayside in Hamriyah from March 2020. Our previous experience in renewables allowed us to modify the yard set-up to achieve a robust improvement in our process efficiencies and to reduce operational risk on this and future similar projects. This required an incremental investment in machinery and equipment, as well as our yard layout, which now allows us to process material for renewables projects through the production chain faster.

At USD 24.8 million, revenues in the rig segment were lower than in the prior year (2018: USD 76 million) and relied on walk-in work rather than revenues from major projects, as was the case in previous years. In total, we received 13 new rigs for a variety of upgrade and refurbishment works, some for larger scopes of work, which underpins our view that there are some limited opportunities for disciplined contractors in the offshore oil & gas industry.

Our contracting services division, which includes the O&M and Sunbelt Safety Services businesses, had a stronger year having generated USD 68.5 million, up from USD 58.3 million in the previous year. This was driven primarily by additional work coming from our long-standing clients in the UAE, where there was increased onshore activity.

Business improvements

We continued our efforts in 2019 to embed lessons learned from previous projects and our Six Sigma initiatives as a way to reduce project execution costs and make us more competitive. Given the improved efficiencies and capabilities that we have developed and seen, and the unpredictable market situation, we recently actioned a series of significant 'self-help' measures aimed at reducing our overheads and cost base. The Jebel Ali facility was mothballed in February 2020 and we are planning to exit the Sharjah facility as soon as current works on the Moray East project are complete. The Group has also undertaken a significant headcount reduction in both corporate functions and operations as we consolidate our activities within one yard. Further to this, additional steps were taken in April 2020 in order to conserve cash and protect the business against the threat of COVID-19.

We anticipate that the initial round of measures will translate into an overhead reduction of USD 22.5 million plus a further saving across all cost centres of approximately USD 10.0 million arising from the COVID-19 additional 'self-help' measures for the full year 2020.

Bid pipeline and backlog

Our bid pipeline remains in line with the prior year at USD 6.2 billion (2018: USD 6.4 billion), of which USD 1.4 billion is represented by prospects and bids in the renewables market and USD 4.8 billion for oil & gas projects.

Our backlog was USD 470.1 million as at the period end (2018: USD 540.0 million). This includes the formal award from IMI for the first two rigs, which will be fabricated primarily in our yards in the UAE and are in the backlog with a value of USD 352 million.

Margin performance

We report a gross loss of USD 27.6 million for FY2019, down from prior year (2018: gross losses of USD 9.1 million). The loss is driven by continuing low revenue levels, which were insufficient to recover operational overheads, as well as an additional loss of USD 28.8 million on the EA1 project which reached commercial close-out in April 2020. Group EBITDA from continuing operations in 2019 amounted to USD (64.6) million (2018: USD (35.1) million), with an EBITDA margin of (24.8)% compared to (15.0)% reported in 2018 (comparative EBITDA not adjusted for IFRS 16 effect).

Finance cost and financing activities

By the end of 2019, our debt had reduced to USD 20.1 million, thus also reducing the net finance cost (excluding interest expense on leases) to USD 3.0 million (2018: USD 3.5 million). Gross finance cost (excluding interest expense on leases) reduced to USD 4.0 million (2018: USD 5.7 million). The Group repaid its outstanding debt on 11 March 2020 and is assessing a number of options for future project funding, as a key priority for the Company and wider business.

Net loss

Our loss attributable to equity shareholders for the year ended 31 December 2019 was USD (183.5) million (2018: loss of USD 70.7 million). The losses are driven by a number of factors namely the continuing low revenue levels, a significant non-cash asset impairment of USD 79.3 million (of which USD 66.1 million was based on the year-end review of the business' intangibles and property, plant and equipment plus USD 13.2 million related to Sharjah yard assets as a result of overhead restructuring programme - see Note 35 to the financial statements for more details), the additional cost associated with performing all outstanding works to completion and the increased costs incurred by our subcontractor in Belfast, our share of the IMI losses (amounting to USD 8.4 million), as well as investment in bidding and upskilling our personnel (which was critical to our ability to address the intensive requirements of the Saudi Aramco LTA programme but we have been able to reduce in 2020 as part of our cost-cutting measures).

The fully diluted loss per share for the year was 53.71 US cents (2018: loss per share - 20.67 US cents).

Capital expenditure

Operational capital expenditure increased to USD 20.8 million, compared to USD 10 million in 2018. This mainly derived from the investment required to achieve the abovementioned material throughput efficiencies to deliver projects in the renewables industry. Given the anticipated activity levels in our yards in the medium term and the need to manage cash carefully, we have taken a decision to halt any major operational capital expenditure until our balance sheet returns to strength. There was no investment made in the IMI maritime yard during the year ended 31 December 2019. To date, Lamprell has invested USD 59.0 million of the USD 140 million committed. We have commenced negotiations with the other IMI shareholders regarding the deferral of the next instalment of our strategic capital expenditure in the Saudi maritime yard scheduled for this year.

Cash flow and liquidity

The Group's net cash flow from operating activities for the full year ended 2019 reflected a net outflow of USD 7.8 million (2018: net outflow of USD 125.1 million), which was driven by working capital funding for the EA1, Moray East 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 45.6 million (2018: outflow of USD 28.2 million). Cash and bank, term and margin deposits decreased by USD 37.3 million to USD 62.5 million. Net cash increased shortly after the period end with the receipt of the advance payment on the IMI rigs but has decreased since then due to supply chain commitments.

Balance sheet

Due to commercial close-out of the EA1 project continuing into 2020, our net cash position for the year ended 31 December 2019 was USD 42.5 million (2018: USD 80.0 million). The pace of cash reduction has slowed down due to improved operational performance and we have significantly reduced our capital expenditure budget.

In January 2020, the Group received a major down-payment of USD 87.9 million on the first two rigs subcontracted to Lamprell through the IMI joint venture. The project will utilise the Super 116E rig kits held in inventory at a value of circa USD 69.6 million, which will be converted into cash over the project duration.

Negotiations regarding monetisation of the LAM2K land rig kit, which has a carrying value of USD 12.7 million on the balance sheet, continue with potential clients.

The Group's total current assets at 31 December 2019 were USD 229.7 million (31 December 2018: USD 313.3 million). Trade and other receivables decreased to USD 37.4 million (31 December 2018: USD 68.1 million). Contract assets decreased to USD 40.4 million (31 December 2018: USD 54.9 million). Shareholders' equity reduced to USD 211.4 million (31 December 2018: USD 393.0 million).

Borrowings

In 2019 the Group repaid the outstanding term loan of USD 20.1 million. The USD 30 million debt facility for general working capital purposes was extended on a step-down basis during Q1 2020 but has now been fully repaid, meaning that the Company therefore holds no debt.

Debt refinancing

Our balance sheet has allowed us to win and successfully execute major work in 2019 and support our bid pipeline. However, in order to achieve our strategic objectives, there is a requirement for the Group to improve its financial liquidity and to strengthen our balance sheet.

Our existing debt facility was fully repaid in March 2020 and securing new bank facilities has remained challenging in the credit markets. As a consequence, we are assessing opportunities for alternative sources of debt until the Group returns to a cash generative position. Discussions around alternative financing options are ongoing with various potential sources of finance notwithstanding the impact of COVID-19 and turmoil in oil & gas market further discussed below. The Group remains focused on achieving a level of financial performance which will support an efficient and prudent capital structure.

Going concern

The Group's consolidated financial statements have been prepared on a going concern basis as further discussed in Note 2.1.

In performing their assessment of going concern, the Directors have considered forecast cash flows for the 15 months to July 2021. The key assumptions included in the forecast cash flows over this period are: completion and signing of a refinancing agreement in the fourth quarter of the year (noting conventional debt refinancing remains challenging in the regional credit market and we are assessing opportunities for alternative sources of debt until the Group returns to a cash generative position), a major renewables project award in the first half of the year, as discussed in the CEO's Review and expected receipts therefrom consistent with historical payment terms, receipt of a portion of the restricted cash relating to the EA1 project performance guarantee following the final contract settlement announced on 23 April 2020, execution of existing major projects in accordance with the milestone payments, no further cash investment in IMI in the period to mid-2021, and capex, staff and other overhead reduction as required, and ongoing revenues from contracting services and rig refurbishments in line with that achieved in recent periods.

Consistent with conditions being experienced across the industry, the uncertainty due to turmoil in the oil and gas market worsened by the impact of COVID-19 may materially affect these assumptions, particularly the timing of a refinancing, new major contract awards and/or our ability to meet project milestones in the event of compulsory closure of our yard(s) by the relevant jurisdictional authorities. At the date of approval of these financial statements, our yards continue to operate though these have been moderately affected by lockdown and social distancing measures in the UAE so far. If the pandemic increases in magnitude and duration, the continuation of these circumstances could result in an even broader economic downturn which could have a prolonged negative impact on the Group's financial results. Notwithstanding the measures implemented by the Group to prevent and/or detect the virus, the variety of possible outcomes related to the course of the pandemic and its adverse impact on the regional and global economy represents a material uncertainty.

The Directors believe that the timing and realisation of these assumptions are reasonable and reflect their assessment of the most likely outcome. However, the timing and realisation of these matters are not wholly within management's control and so the Directors have also considered downside sensitivities to the key assumptions which include no new significant contract wins in the going concern period and the inability of the Group to secure a refinancing. The Directors have concluded that, in aggregate, such matters beyond management's control represent a material uncertainty that may cast significant doubt on the entity's ability to continue as a going concern. Significant disruption to the timing or realisation of the anticipated cash flows could result in the business being unable to realise its assets and discharge its liabilities in the normal course of business.

In view of this, the Directors have considered the realistic availability and likely effectiveness of mitigating actions that they could take to avoid or reduce the impact or likelihood of a significant deterioration in the cash flows. These include:

· discussions around alternative financing options with various potential sources of finance;

· negotiations with the other IMI shareholders regarding the deferral of the next instalment of our strategic capital expenditure in the Saudi maritime yard currently scheduled for this year;

· self-help measures including consolidating our operations into a single facility, reduction of salaries and allowances, headcount and other non-staff overheads, use of deferred salary savings scheme and where operationally feasible, placing staff on reduced working hours or unpaid leave;

· reduced level of capital expenditure; and

· sale of non-core businesses or assets.

Following consideration of these actions, the Directors are satisfied they have appropriate available mitigating actions in place to maintain the Group's liquidity in the short term. However, the Directors highlight that current market circumstances influenced by the Covid-19 pandemic and the global oil price crash, together with assumptions in management's forecast which are outside their control, represent material uncertainties that may cast significant doubt on the entity's ability to continue as a going concern.

Dividend

In the context of ongoing market challenges, the low revenue levels in 2019, current balance sheet pressures and the impact of the COVID-19 pandemic, the Directors do not recommend the payment of a dividend for the period in relation to financial year ending 31 December 2019. The Directors will continue to review this position in light of market conditions and Group performance at the relevant time.

Post balance sheet events

See Note 34 to the 2019 financial statements below for events that have taken place post the balance sheet date.

Tony Wright

Chief Financial Officer

Consolidated income statement

*General and administrative expenses include an impairment charge of USD 79.3 million (31 December 2018: nil) recognised in respect of property, plant and equipment and intangible assets due to restructuring USD 13.2 million and year end assessments USD 66.1 million - refer Note 35.

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in equity

Consolidated cash flow statement

Notes to the consolidated financial statements for the year ended 31 December 2019

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 2019 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 2019. The financial information has been extracted from the consolidated financial statements for the year ended 31 December 2019 approved by the Board of Directors on 12 May 2020 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 2019 and 31 December 2018 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 2019 have been prepared in accordance with the Listing Rules of the London Stock Exchange.

Going concern

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 available liquidity which is discussed below.

The Group incurred a loss before tax of USD 183.5 million during the year ended 31 December 2019 (31 December 2018: USD 70.7 million) and was in a net cash position of USD 42.5 million at 31 December 2019 (2018: net cash position of USD 80.0 million). This constitutes a decrease in its financial resources and is mainly attributable to expected cash outflows from operating activities of USD 7.8 million, financing activities of USD 11.0 million and operational capital expenditure of USD 20.8 million.

Of the net cash position at 31 December 2019, USD 36.4 million of the balance was restricted. The level of net unrestricted cash at 31 December 2019 was therefore USD 6.1million. As at 30 April 2020, net unrestricted cash was USD31.6 million.

In respect of the borrowings noted in the table above, this amount was fully repaid in March 2020, at which point access to the term loan facility ceased.

In addition to this borrowing facility, the group has access to separate bilateral facilities for the provision of letters of credit and guarantees (Note 29). Amounts drawn under these facilities are secured on assets of the group including margin deposits under lien shown above (Note 31). These separate bilateral facilities, related to the provision of letters of credit and guarantees, remain available to the Group as at the date of issue of the financial statements.

In performing their assessment of going concern, the Directors have considered forecast cash flows for the 15 months to July 2021. The key assumptions included in the forecast cash flows over this period are:

· the completion and signing of a refinancing agreement in the fourth quarter of the year. Conventional debt refinancing remains challenging in the regional credit market and we are assessing opportunities for alternative sources of debt until the Group returns to a cash generative position. Discussions around alternative financing options are ongoing with various potential sources of finance notwithstanding the impact of COVID-19 and turmoil in oil & gas market discussed further below;

· a major renewables project award in the first half of the year, as discussed in the Chief Executive Officer's review and expected receipts therefrom consistent with historical payment terms:

· the subsequent receipt of a portion of the restricted cash relating to the EA1 project performance guarantee following the final contract settlement announced on 23 April 2020;

· execution of the existing major projects in accordance with the milestones in the contracts and payment receipts in accordance with the contracts;

· no further cash investment in the International Maritime Industries ("IMI") associate in the period as discussed in the Operational and financial review;

· capex, staff and other overhead reduction, notwithstanding the need to retain strategic capacity; and

· ongoing revenues from contracting services and rig refurbishments in line with that achieved in recent periods.

Consistent with conditions being experienced across the industry, the uncertainty due to turmoil in the oil and gas market further worsened by the impact of COVID-19 may materially affect these assumptions, particularly the timing of a refinancing, new major contract awards and/or our ability to meet project milestones in the event of compulsory closure of our yard(s) by the relevant jurisdictional authorities. At the date of approval of these financial statements, our yards continue to operate though these have been moderately affected by lockdown and social distancing measures in the UAE so far. If the pandemic increases in magnitude and duration, the continuation of these circumstances could result in an even broader economic downturn which could have a prolonged negative impact on the Group's financial results. Notwithstanding the measures implemented by the Group to prevent and/or detect the virus, the variety of possible outcomes related to the course of the pandemic and its adverse impact on the regional and global economy represents a material uncertainty.

The Directors believe that the timing and realisation of these assumptions are reasonable and reflect their assessment of the most likely outcome. However, the timing and realisation of these matters are not wholly within management's control and so the Directors have also considered downside sensitivities to the key assumptions which include no new significant contract wins in the going concern period and the inability of the Group to secure a refinancing (also see viability statement). The Directors have concluded that, in aggregate, such matters beyond management's control represent a material uncertainty that may cast significant doubt on the entity's ability to continue as a going concern.

Significant disruption to the timing or realisation of the anticipated cash flows could result in the business being unable to realise its assets and discharge its liabilities in the normal course of business.

In view of this, the Directors have considered the realistic availability and likely effectiveness of mitigating actions that they could take to avoid or reduce the impact or likelihood of a significant deterioration in the cash flows. These include:

· potential alternative financing options with various possible sources of funding;

· negotiations with the other IMI shareholders relating to the deferral of the next instalment of our strategic capital expenditure in the Saudi maritime yard currently scheduled for this year;

· self-help measures including consolidating our operations into a single facility, reduction of salaries and allowances, headcount and other non-staff overheads, use of a deferred salary savings scheme and where operationally feasible, placing staff on reduced working hours or unpaid leave;

· reduced levels of capital expenditure; and

· sale of non-core businesses or assets.

Following consideration of these actions, the Directors are satisfied they have appropriate available mitigating actions in place to maintain the Group's liquidity in the short term. However, the Directors highlight that current market circumstances influenced by the COVID-19 pandemic and the global oil price crash, together with assumptions in management's forecasts which are outside their control, represent material uncertainties that may cast significant doubt on the entity's ability to continue as a going concern.

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 2018 except for the adoption of new standards and interpretations effective 1 January 2019 as stated in the reviewed interim financial information for the period ended 30 June 2019. These financial statements are available on the Company's website, www.lamprell.com.

3.1 Impact of IFRS 16, Leases 

The Group has adopted IFRS 16 with effect from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019. Impact of the adoption of IFRS 16 on the Group's consolidated financial statements is described below.

(a) Impact on accounting policy

At inception of a contract, the Group assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

For a contract that is, or contains, a lease, the Group accounts for each lease component within the contract as a lease separately from non-lease components of the contract. The Group determines the lease term as the non-cancellable period of a lease, together with both:

a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and

b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

The Group as a lessee

For a contract that contains a lease component and one or more additional lease or non-lease components, the Group allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.

The relative stand-alone price of lease and non-lease components is determined on the basis of the price the lessor, or a similar supplier, would charge an entity for that component, or a similar component, separately. If an observable stand-alone price is not readily available, the Group estimates the stand-alone price, maximising the use of observable information. The non-lease components are accounted for in accordance with the Group's policies.

For determination of the lease term, the Group reassesses whether it is reasonably certain to exercise an extension option, or not to exercise a termination option, upon the occurrence of either a significant event or a significant change in circumstances that:

a) is within the control of the Group; and

b) affects whether the Group is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term.

At the commencement date, the Group recognises a right-of-use asset and a lease liability under the lease contract.

Lease liability

Lease liability is initially recognised at the present value of the lease payments that are not paid at the commencement date. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the Group uses its incremental borrowing rate.

After initial recognition, the lease liability is measured by (a) increasing the carrying amount to reflect interest on the lease liability; (b) reducing the carrying amount to reflect the lease payments made; and (c) remeasuring the carrying amount to reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments. Where (a) there is a change in the lease term as a result of reassessment of certainty to exercise an exercise option, or not to exercise a termination option as discussed above; or (b) there is a change in the assessment of an option to purchase the underlying asset, assessed considering the events and circumstances in the context of a purchase option, the Group re-measures the lease liabilities to reflect changes to lease payments by discounting the revised lease payments using a revised discount rate. The Group determines the revised discount rate as the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or its incremental borrowing rate at the date of reassessment, if the interest rate implicit in the lease cannot be readily determined.

Where (a) there is a change in the amounts expected to be payable under a residual value guarantee; or (b) there is a change in future lease payments resulting from a change in an index or a rate used to determine those payments, including a change to reflect changes in market rental rates following a market rent review, the Group re-measures the lease liabilities by discounting the revised lease payments using an unchanged discount rate, unless the change in lease payments results from a change in floating interest rates. In such case, the Group use a revised discount rate that reflects changes in the interest rate.

The Group recognises the amount of the re-measurement of lease liability as an adjustment to the right-of-use asset. Where the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, the Group recognises any remaining amount of the re-measurement in profit or loss.

The Group accounts for a lease modification as a separate lease if both:

a) the modification increases the scope of the lease by adding the right-of-use one or more underlying assets; and

b) the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract.

Lease modifications that are not accounted for as a separate lease, the Group, at the effective date of the lease modification: (a) allocates the consideration in the modified contract; (b) determines the lease term of the modified lease; and (c) re-measures the lease liability by discounting the revised lease payments using a revised discount rate.

The revised discount rate is determined as the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or the lessee's incremental borrowing rate at the effective date of the modification, if the interest rate implicit in the lease cannot be readily determined.

Short-term leases and leases of low-value assets

The Group applies the short-term lease recognition exemption to its short-term leases of property, plant and equipment (i.e. those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of property, plant and equipment that are considered of low value (i.e. below USD5,000). Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term in cost of sales or general and administration expenses line items of the consolidated income statement.

Right-of-use assets

The right-of-use asset is initially recognised at cost comprising:

a) amount of the initial measurement of the lease liability;

b) any lease payments made at or before the commencement date, less any lease incentives received;

c) any initial direct costs incurred by the Group; and

d) an estimate of costs to be incurred by the Group in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease. These costs are recognised as part of the cost of right-of-use asset when the Group incurs an obligation for these costs. The obligation for these costs are incurred either at the commencement date or as a consequence of having used the underlying asset during a particular period.

For assets that meet the definition of property, plant and equipment, right-of-use asset is amortised over the term of the lease.

(b) Financial impact of adoption of IFRS 16

The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 will continue to be applied to those leases entered into or modified before 1 January 2019. The Group also elected to use the following practical expedients on transition as permitted by standard:

· a single discount rate has been applied to portfolios of leases with reasonably similar characteristics;

· the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases; and

· the use of hindsight in determining the lease term.

Set out below are the amounts by which each financial statement line item is affected as a result of the adoption of IFRS 16:

Impact on profit or loss for the year

Impact on assets and liabilities

The total right-of-use assets of USD 57.5 million recognised at 1 January 2019 relate to leases of properties. Additions to right-of-use asset during the year ended 31 December 2019 were USD 0.4 million.

During the year ended 31 December 2019, in relation to leases under IFRS 16 the Group recognised the following expenses in the consolidated income statement:

The cash payments for the principal portion of the lease liabilities during the year ended 31 December 2019 was USD 2.9 million (31 December 2018: nil) and for interest expense USD 4.3 million (31 December 2018: nil), These have been presented under financing activities in cash flow.

The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to lease liabilities recognised at 1 January 2019.

Management has made key judgements in determining the right-of-use asset and liabilities as follows:

(a) Discount rate has been determined as 7.34% as at 1 January 2019 for initial recognition and 9% during the year for lease modifications, based on the Group's incremental borrowing rate; and

(b) Certain long-term leases have escalation clauses which allow for rent reviews every five years. However, in line with IFRS 16, no increments have been included as the rates are not defined.

A change in these assumptions could result in an increase or decrease in the right-of-use assets, liabilities and finance costs recognised in the consolidated financial statements.

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.

In determining the risk of liquidated damages on a project, management applies significant judgement in ascertaining the Group's ability to meet the contractual delivery dates and where a delay is expected against the baseline schedule, the likely success of its mitigation plan in meeting those dates or reducing the extent of the delay.

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 6.8 million (2018: USD 3.0 million) or contract liabilities decreasing by USD 6.8 million (2018: USD 3.0 million).

If the estimated total costs to completion of all outstanding projects were to increase by 10%, contract assets would decrease by USD 5.2 million (2018: USD 3.0 million) or contract liabilities would increase by USD 5.2 million (2018: USD 3.0 million).

4.2.2 Impairment of property, plant and equipment and intangible assets

At the end of the reporting period, where indicators exist, management performs an impairment test which requires 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 ("FVLCD") is estimated. Management performs the review at the cash generating unit ("CGU") relating to an operating segment's assets located in a particular geography - refer Note 35.

Based on this review, an impairment loss of USD 79.3 million (2018: nil) has been recorded during the year. The carrying amount of property, plant and equipment at 31 December 2019 was USD 160.1 million (31 December 2018: USD 159.5 million). The carrying amount of intangible assets at 31 December 2019 was nil (31 December 2018: USD 30.0 million).

If the recoverable values used were to differ by 10% from management's estimates, in isolation, there would be a decrease in the impairment of USD 5.3 million if the fair values were to increase or an increase in the impairment by USD 5.3 million if the fair values were to decrease.

4.2.3 Carrying amount of inventory (Note 17)

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 2.5 million (2018: 3.0 million) 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 1.3 million if the net realisable value was higher or a decrease in inventory by USD 1.3 million if the net realisable value was lower.

5 Segment information

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.

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:

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 258.1 million (2018: USD 230.3 million), and the revenue recognised from other countries is USD 2.3 million (2018: USD 3.8 million).

Certain customers individually accounted for greater than 10% of the Group's revenue and are shown in the table below:

The revenue from these customers is attributable to the EPC(I) and contracting services segment.

The above customers in 2019 are not necessarily the same customers as in 2018.

6 Disaggregation of revenue

There was no revenue recognised at a point in time during the years ended 31 December 2019 and 31 December 2018.

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:

7 Cost of Sales

8 Selling and distribution expenses

9 General and administrative expenses

10 Staff costs

11 Finance costs and income

Finance income

Finance income comprises interest income of USD 1.0 million (2018: USD 2.2 million) from bank deposits.

12 Other gains - net

13 Loss per share

(a) Basic

Loss per share is calculated by dividing the loss 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 (Note 22).

(b) Diluted

Diluted 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.

Assumed vesting of performance and retention share plans amounting to 6,180,302 (2018: 6,700,436) shares and 2,466,979 (2018: 2,481,705) shares respectively have been excluded in the current period as these are anti-dilutive.

14 Property, plant and equipment