Mr. Ian Edwards reports
SNC-LAVALIN ANNOUNCES AGREEMENT TO SELL RESOURCES OIL & GAS BUSINESS, RESULTS OF LEGACY LSTK LITIGATION MATTERS AND REASSESSMENT OF CANADIAN LSTK INFRASTRUCTURE PROJECTS IN LIGHT OF COVID-19
SNC-Lavalin Group Inc. has entered into a binding agreement to sell its resources oil and gas business, a significant step forward in the company's strategy to reduce its risk profile and accelerate its continuing transition to becoming a leading provider of professional engineering services and project management solutions.
The company has also completed its previously announced review of legacy lump-sum turnkey (LSTK) litigation matters, which was expanded to include all other significant claims, while concurrently reassessing the costs associated with its three remaining Canadian light rail projects in light of COVID-19. The actions that the company is taking today resulting from these reviews, together with the sale of the oil and gas business, reduce the remaining financial uncertainty associated with SNC-Lavalin's legacy businesses, while allowing the company to further focus on its strategy of realizing the value and growth potential of engineering services business.
Strategic divestiture of the resources oil and gas business: The company has entered into a binding agreement to sell its oil and gas business, including services and LSTK, derisking operations, and reducing LSTK delivery and warranty obligations, and accelerating the realization of SNC-Lavalin's strategy. Closing is targeted for Q2 2021, at which time the transaction is expected to generate a gain on sale, as the elimination of foreign exchange cumulative translation adjustments (CTA) should be greater than the fair value writedown taken in Q4 as an asset held for sale. The net cash impact for the transaction is expected to be minimal.
A charge of $95-million on the retained resources business, related to historical legacy positions and one remaining LSTK mining project, will be taken in Q4 2020.
Review of legacy LSTK litigation matters and commercial claims completed: To ensure a holistic review of legacy risks, taking into account new and updated information, the previously announced risk review was expanded to include all significant litigation matters and commercial claims receivable, resulting in $140-million of provisions and $155-million of commercial claims receivable reduction in Q4 2020, which are largely non-cash in nature. The company will continue to aggressively pursue all claims receivable, which it believes it is entitled to contractually and will vigorously defend the litigation matters.
Remaining Canadian LSTK infrastructure projects continue to progress well, costs to complete reassessed in light of COVID-19: Projects continue to be affected by unprecedented COVID-19 challenges, the primary driver in $90-million of charges to be taken in Q4 2020, largely reflecting the decision to delay recognition of any COVID-19-related revenue.
Previously announced financial outlook for SNCL Engineering Services reconfirmed.
"Over the past 18 months, we have made significant strides in advancing our strategy and derisking the business. Following the introduction of our new strategy in July, 2019, we have significantly improved our operating cash flows and demonstrated that our engineering services line of business is resilient and can deliver strong results," said Ian L. Edwards, president and chief executive officer of SNC-Lavalin Group. "The sale of the oil and gas business further simplifies and derisks our business and allows us to enhance our focus on growing our high-potential core engineering services business. I would like to thank all of our oil and gas employees for their contributions over the years and wish them well in the next stage of their journey.
"As previously announced, we have undertaken a rigorous risk review of our legacy LSTK litigation matters, which we expanded to include all other significant current litigation matters and legacy commercial claims receivable. Concurrently, we have also reviewed our remaining Canadian light rail transit LSTK projects to consider, in particular, the significant impact and challenges that COVID-19 has had, and will continue to have, on costs. The objective of this exercise was to further ensure we are taking a prudent and reasonable view of these projects in light of the ongoing COVID-19 situation and further reduce uncertainty on the final financial outcome," added Mr. Edwards.
"Since my appointment in September, 2020, the board has overseen the work of management and external advisers in assessing and reducing the company's risk areas and quantifying the LSTK financial risks. Our goal is to reduce remaining financial uncertainty of the company's legacy issues. The sale of the oil and gas business allows us to enhance our focus on the future growth potential and profitability in SNC-Lavalin's engineering services business. We believe this approach supports our overall objective to unlock and ultimately create long-term shareholder value," said William L. Young, chair of the board.
Strategic divestiture of the resources oil and gas business
On Feb. 8, 2021, SNC-Lavalin Group entered into a binding agreement to sell its oil and gas business, including services and LSTK, to Kentech Corporate Holdings Ltd. The transaction is subject to regulatory approvals and satisfaction of customary closing conditions, and the closing is targeted for Q2 2021.
In line with the company's strategy, the sale of the business, which includes all continuing and recently completed oil and gas LSTK projects, is expected to significantly reduce operational and execution risks and will simplify the company's corporate structure and enable management to dedicate more time, effort and resources to growing the higher margin and more stable engineering services business. The transaction is also an important milestone in the company's journey toward its sustainability business strategy, as highlighted in the company's 2019 sustainability report.
At closing, the transaction is expected to create a gain on sale. The oil and gas business will be classified as an asset held for sale in Q4 2020 and is expected to result in a fair value writedown in the range of $260-million to $295-million, which is almost entirely non-cash in nature. At closing, the transaction is expected to generate a gain on the sale in excess of the fair value write down, after accounting for the elimination of foreign exchange CTA included in the historical carrying amounts of the disposed oil and gas business.
The remaining resources business will be mainly comprise services projects in the mining and metallurgy (M&M) sector. The remaining resources project positions, including historical claims and litigation matters, have been reassessed based on the latest information, including continuing commercial discussions with clients. An updated cost forecast was also completed in Q4 2020 on the one remaining resources M&M LSTK project, which is expected to be completed in 2021. Based on these actions for the remaining resources business, a charge of approximately $95-million, for which approximately 30 per cent is non-cash, will be taken in Q4 2020.
Previously announced review of legacy LSTK litigation matters completed, expanded to include all other significant claims
As indicated in the company's press release dated Oct. 30, 2020, the company undertook a review of the remaining LSTK legacy litigation matters, taking into account all new and updated information. A decision was also made by management to expand this exercise to include all other significant litigation matters, as well as commercial claims receivable on all legacy and continuing LSTK projects. This review process was an enhancement of the robust process normally done in connection with the preparation of the annual financial statements. At the same time, the latest commercial discussions with customers, updated cost forecasts and realized litigation matter outcomes were incorporated into the review process.
The review was performed by senior management utilizing internal and external experts and advisers, and was overseen by a special committee of the board of directors. The review is now complete.
Based on the combination of the latest commercial outcomes and the expanded review process, the company will be recognizing in Q4 2020 additional provisions of approximately $140-million, and a reduction in commercial claims receivable of $155-million. Approximately 75 per cent of the total is non-cash in nature, with the balance impacting cash and spread over a number of future years depending on the eventual timing of litigation outcomes. Notwithstanding these provisions, the company will continue to aggressively pursue all claims receivable, which it believes it is entitled to contractually and will vigorously defend the litigation matters.
Remaining Canadian LSTK infrastructure projects continue to progress well, costs to complete reassessed in light of COVID-19
Concurrently with the above-mentioned review, the company has also reviewed its remaining three Canadian LSTK infrastructure projects, taking into consideration the continuing significant impact and challenges resulting from COVID-19. These projects continue to be materially affected by lower productivity attributable to revised working conditions caused by COVID-19 and supply chain disruptions, creating unprecedented challenges. Following the review of these projects and a cost reassessment based on the latest facts and information, and in light of the continuing uncertainty on the timing and scope of reimbursement of these COVID-19 incremental costs, no revenue associated with the additional COVID-19 costs has been recognized by the company for these projects. As a result, the company expects to take a charge of approximately $90-million in Q4 2020 related to these projects, most of which is due to COVID-19 challenges and the decision to not recognize associated revenue at this time. The company strongly believes that it is entitled to these revenues, but until greater clarity is forthcoming, it will continue to only recognize COVID-19 expenses on the continuing LSTK infrastructure projects.
Despite the COVID-19-related challenges, these Canadian infrastructure LSTK projects, which are being built with strong and reputable partners, continue to progress well.
SNCL engineering services 2020 outlook reconfirmed
As stated in the company's Q3 2020 results announcement, the company expects that SNCL Engineering Services revenue for Q4 2020 should decrease by a low- to mid-single-digit percentage, compared with Q4 2019, and that its segment adjusted EBIT (earnings before interest and taxes) to revenue ratio should be between 8.5 per cent and 9.5 per cent for the same period.
This outlook is based on the assumptions and methodology described in the company's Q3 2020 management's discussion and analysis under the heading, "How we budget and forecast our results."
Financial impacts summary
For ease of reference, the "Financial impacts summary" table summarizes the above-mentioned financial metrics.
FINANCIAL IMPACTS SUMMARY
Amount* ($m) Cash/non-cash Segment Recognized in
Strategic divestiture of the
resources oil and gas business
Fair value writedown of oil ($260 to $295) Largely Discontinued operations Q4 2020
and gas business non-cash
Elimination of foreign exchange Expected to be Non-cash Discontinued operations At closing,
CTA included in the historical greater than above targeting Q2 2021
carrying amount of the disposed FV writedown
oil and gas business
Charge for remaining LSTK M+M -95 ~30% Resources Q4 2020
project and other historical non-cash
claims and litigation matters
in the resources sector
Review of legacy LSTK litigation
matters and all other
Commercial claims receivable -155 ~75% 10% corporate 10% resources Q4 2020
Additional provisions related to -140
legacy litigation matters 80% infrastructure EPC projects
Reassessment of the three
remaining Canadian LSTK
infrastructure projects cost to
Additional charge, mainly due -90 Cash Infrastructure EPC projects Q4 2020
* Amounts are before taxes.
SNC-Lavalin will hold a conference call today at 8:30 a.m. EST to discuss this announcement. A live audio
of the conference call and an accompanying slide presentation will be available at
the company's website. The call will also be accessible by telephone, please dial toll-free at 1-800-319-4610 in North America or dial 1-604-638-5340 outside North America. You can also use the following numbers: 416-915-3239 in Toronto, 514-375-0364 in Montreal or 080-8101-2791 in the United Kingdom. A recording of the conference call and its transcript will be available on the company's website within 24 hours following the call.
About SNC-Lavalin Group Inc.
Founded in 1911, SNC-Lavalin is a fully integrated professional services and project management company with offices around the world. SNC-Lavalin connects people, technology and data to help shape and deliver world-leading concepts and projects, while offering comprehensive innovative solutions across the asset life cycle. The company's expertise is wide ranging -- consulting and advisory, intelligent networks and cybersecurity, design and engineering, procurement, project and construction management, operations and maintenance, decommissioning, and sustaining capital -- and delivered to clients in four strategic sectors: EDPM (engineering, design and project management), infrastructure, nuclear and resources, supported by capital. People. Drive. Results.
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