2017 Financial Results

22 March 2018

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

2017 FINANCIAL RESULTS

Strategic progress despite temporary challenges

First investment made in transformational IMI yard in Saudi Arabia

2017 financials dominated by loss on windfarm project; strong balance sheet maintained

Financial highlights

· Net loss of USD 98.1 million for the Group primarily driven by loss of USD 80 million on East Anglia One project

· Revenue of USD 370.4 million (2016: USD 705.0 million) in line with guidance

· Reductions in the overhead cost base for sixth consecutive year, with a USD 16 million year-on-year decrease in 2017

· Robust balance sheet supported by strong year-end net cash position of USD 257.0 million

· Net cash to reduce in 2018 with key investments in the Saudi Maritime Yard (USD 38 million), payment for Cameron rig kits (USD 41 million) and remaining funding of East Anglia One (USD 30 million)

· Successfully obtained amendment and waivers to banking covenants from lending group

Operational highlights

· Group safety performance remains world-class, outturn total recordable incident rate of 0.30 (31 Dec. 2016: 0.29)

· East Anglia One offshore windfarm project summary:

o Project is currently 73% complete

o Eight jackets and all 182 piles have been delivered to client in Vlissingen

o Group incurred significant additional costs relating to investment in staffing and equipment requirements, as well as significant additional shipping and subcontractor costs

o Constructive discussions with our client are ongoing to meet their expectations around the schedule but, as with any contract, liquidated damages exposure remains in case of delays

o Lessons have been learned and various performance improvement opportunities implemented to mitigate current project costs and to allow us to compete successfully on future projects in this strategically-important growing sector

· Completion of the Master Marine major upgrade project in respect of the mobile operating unit "Haven" expected in April 2018, on schedule

· 1H 2017 saw the completions of several major projects with the delivery of two new build jackup rigs to National Drilling Company and one to Shelf Drilling, buoyancy tanks to HMC Kaombo and the final modules to Petrofac on Abu Dhabi's UZ750 project

· Backlog of USD 137.9 million at year-end (31 Dec. 2016: USD 393 million) primarily as a result of energy market downturn ongoing since mid-2014

Corporate strategy and business development

· Repositioned business to align with strategic initiatives in Saudi Arabia, EPC(I) and renewable markets

· Retained core competencies in rigs and invested in additional resources to strengthen capabilities and partner with other leading contractors as we look to access the EPC(I) sector

· Launched the LJ43, a new proprietary jackup rig design, in collaboration with MSC Gusto, a well-established rig design company

· Good progress for the establishment of the major maritime yard development in Saudi Arabia (IMI)

o Construction process at the site is under way with dredging and associated activities in progress

o Board, management structure and business plan were approved at first board meeting in December 2017

o Lamprell's first tranche of USD 20 million invested in 2017, with second tranche of USD 38 million to be made in 2018 as planned

o All conditions precedent have been met following IMI's signature of USD 1 billion loan agreement with Government lender, Saudi Industrial Development Fund

o Discussions for first two rigs ongoing with IMI and with the ultimate client, ARO Drilling

o ARO Drilling and IMI have selected LJ43 as the base design for the 20 jackup rigs to be constructed at IMI's yard in Saudi Arabia

· Pre-qualification process for Long Term Agreement (LTA) with Saudi Aramco continues with a final decision expected later in 2018

· During 2017 John Malcolm assumed the role of Non-Executive Chairman and two new Non-Executive Directors were appointed

Current trading and outlook

· Bid pipeline has increased to USD 3.6 billion (31 December 2016: USD 2.5 billion), following repositioning of the business towards new strategic initiatives, with prospects starting to flow through to bid pipeline

· In line with industry trends, the Company expects major project awards to be pushed out to late 2018 and only creating revenue growth from 2019

· Revenues for FY2018 now expected to be in the range of USD 225-300 million, reflecting latest views on timing of contract awards and low levels of activity from July 2018 following completion of the East Anglia One and Master Marine major projects in our UAE facilities

· Overhead cost base to be managed tightly but expected to rise in 2018 due to investment in improved bidding process and the hiring of further personnel with specific experience in EPC(I) and specifically LTA projects

· Our strong balance sheet supports investment in strategic initiatives and future growth; the Board is committed to the Saudi Arabian market through significant investment in the IMI maritime yard, which it views as integral to Lamprell's future

2017 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 10 to the financial statements), adjusted to add back share of loss or profit in associates and charges for depreciation and amortisation (as per notes 13, 14 and 26 to the financial statements respectively).

John Malcolm, Non-Executive Chairman for Lamprell, said:

"We experienced significant challenges throughout 2017 and these have had a profound effect on the way that we approach and implement our vision. We streamlined the business over the past two years and we have adapted and added to our resources to support the strategic objectives. We are now entering into a phase of delivering on our goals. The Board is confident that transformational growth and diversification is the right strategy for Lamprell for future success."

Christopher McDonald, Chief Executive Officer for Lamprell, said:

"2017 was my first full year as CEO and it has been a year of repositioning for Lamprell. It has also been dominated by the losses on the East Anglia One project where I am disappointed with our performance. The project involved a steep learning curve and since my arrival we have been implementing steps to transform our processes and increase our rigour in the bidding activities. With this in place, I continue to believe Lamprell is well positioned to be competitive in the future in this strategic sector, one which we believe offers significant long-term potential. Across Lamprell, we have taken concrete actions to adopt the lessons learned and to enhance the business for growth, both in our core rig market, through our investment in Saudi Arabia and the development of a new proprietary jackup rig design, and in new sectors like renewables and EPC(I) where we are investing in additional resources and improved bidding processes to compete successfully in these strategically-important sectors." 

The management team will hold a presentation for research analysts at 9.30am at Holborn Bars (138-142 Holborn, London EC1 2NQ). The live webcast will be accessible on Lamprell's website and on the following link: http://webcasting.brrmedia.co.uk/broadcast/5a940df44b1cdd07522b281a or through conference call dial in: +44 (0)330 336 9105 (UK local), with confirmation code: 9861490.

The Company is planning to hold its 2018 annual general meeting on 23 May 2018 in Dubai, United Arab Emirates.

- 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 5,000 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 828,000m2 with over 1.6 km of quayside.

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

Chairman's statement

Lamprell's operational and financial performance was disappointing in 2017. Lamprell is now entering a critical phase where it must learn from 2017 and deliver the strategic objectives on the path to long-term growth.

We expected 2017 to be the toughest year to date for Lamprell. It was. Unfortunately, in addition to the revenue pressures anticipated by the broader industry, we encountered major operational challenges on the East Anglia One project which resulted in a significant loss for the Group and negatively impacted our financial statements accordingly. The Group's operational and financial performance in 2017 fell well short of our expectations even though we made good progress in delivering our strategic goals.

Clear strategy

It is critical to preserve the long-term perspective amid immediate challenges, and 2017 has been a year of change and strategic repositioning for Lamprell. Our immediate priority was the operational demands of our ongoing projects. In a global energy environment marked by complexity and uncertainty, the Board focused on developing a clear strategy with solid deliverables to ensure Lamprell's future. Despite initial indications of a recovery in the oil & gas industry, we do not expect the new build jackup rig sector to recover in the near to mid-term as capital expenditure amongst oil producers remains restrained and new project awards continue to slip. We therefore are determined to access alternative markets, in particular in the renewables sector, and broaden our service offering by participating in larger and higher value EPC(I) contracts through partnership options.

Another pillar of our strategic vision is gaining access to resilient markets and in particular Saudi Arabia. In spite of being one of the most influential regional players in the Middle East with a 40+ year track record in fabrication, Lamprell has not previously done business with Saudi Aramco, one of the most significant global oil majors. This finally changed in 2017 and we are delighted to have entered into a joint venture agreement with the company along with Bahri and Hyundai Heavy Industries to build a new maritime facility in eastern Saudi Arabia, which will become one of the largest yards in the world. For a company of our size, this is a critical point of entry into a dynamic market committed to ongoing growth and a major stepping stone towards our strategic goals.

Our investment will enable Lamprell to build on its core expertise in jackup rigs and will also provide consistent contributions to our revenue streams. Our commitment to invest in this project has also offered an inroad into one of the most sought-after and selective processes in the industry as Lamprell has pre-qualified for a shortlist of companies being considered for a long-term agreement to deliver EPC(I) projects to Saudi Aramco. Our confidence in the prospects of this partnership was almost unanimously supported by our shareholders when they voted for the final investment decision in June last year. We were pleased to receive full backing of our banking syndicate for this venture as well.

Ability to deliver

We experienced significant challenges on the East Anglia One project. This was a very disappointing outcome for our shareholders which resulted in a total USD 98.1 million loss for the Group. We have undertaken a root cause analysis to determine the factors causing the significant, additional costs on the project which started with insufficient rigour during the bidding phase, compounded by inexperienced project leadership in this new market. With these learnings, we have already implemented many performance improvement initiatives to return to productivity levels close to historic norms and to prevent recurrence. The lessons learned and experiences from this project, although painful, have confirmed our commitment and our ability to deliver to the industry in general. The fundamentals of the renewables market are solid and, backed by European policy, it is anticipated to become a major pillar of global energy supply over the coming years. Therefore, we now view this as an investment in securing Lamprell's position in this emerging industry.

The prudent approach we have taken towards cost management in the past two years has allowed us to preserve the strength of our balance sheet which in turn enables us to focus on delivery of strategic growth amid market and operational challenges. We are being selective in our new business pursuits, targeting only realistic opportunities that fit with our core competencies and our diversification goals while generating robust margins.

This approach has refocused our bid pipeline, and we have upskilled our workforce and invested in additional resources to broaden our in-house expertise and match our capabilities with the strategic goals set for the business.

Addressing new markets is rarely straightforward and often comes at a cost. In its 40+ year growth history, the Group has faced setbacks, most notably as we diversified from rig refurbishment into new build jackup fabrication in the late 1990s. Our efforts and investment proved worthwhile then and I am confident they will do so again.

The lessons we learnt in 2017 are not only applicable to the renewables sector; they have led us to review our overall approach to accessing new opportunities. The Board is now closely involved in senior leadership planning to ensure our in-house expertise matches our strategic objectives and we are capable of delivering not only on quality but also on cost.

Board changes

In September 2017 I replaced John Kennedy as Lamprell's Chairman. John's leadership has taken the Group onto a new strategic path as the industry entered a significant downturn. I thank John for his efforts over the last five years and very much look forward to taking the vision to the next level. In 2017 we welcomed Nick Garrett and James Dewar as new Non-Executive Directors; their collective experience in delivering strategic transformations within major industry players will be highly valuable. Following these appointments, the Board has made a number of changes to the composition of its Committees.

Final dividend

Given the significant challenges the Group encountered in 2017 and the uncertainty in the industry, the Board does not recommend a final dividend for the year. We are grateful for the confidence and support of our shareholders and our lending banks as we work through the near-term issues facing the Group and look to deliver long-term growth.

Looking to the future

We experienced significant challenges throughout 2017 and these have had a profound effect on the way that we approach and implement our vision. We streamlined the business over the past two years and we have adapted and added to our resources to support the strategic objectives. We are now entering into a phase of delivering on our goals. The Board is confident that transformational growth and diversification is the right strategy for Lamprell for future success.

John Malcolm

Non-Executive Chairman

Lamprell plc

Chief Executive's Report

As the downturn in the oil industry continues to affect our traditional sources of revenue, in 2017 we struggled to execute on our entry into the renewable foundations market. This is a major new market for Lamprell which presents both significant opportunities and challenges.

2017 was my first full year as CEO, and it has been a year of repositioning for Lamprell. It has also been dominated by the problems on the East Anglia One project which we have worked hard to overcome, as detailed below. Despite early signs of recovery in the wider oil industry, the global jackup rig market remained dormant. Therefore, building upon our core competencies, Lamprell has adopted a strategy of geographical and sector diversification by addressing opportunities in the renewables sector as well as broadening our expertise and partnership options to access EPC(I) projects. We have also strengthened our position in our core geographic region and the new build jackup rig market by partnering with major energy industry players to establish a large-scale maritime yard in Saudi Arabia. This will broaden our global reach, product expertise, and secure a foothold in one of the few oil & gas markets committed to growth in the current environment. Investing in people will be vital to implement our strategy.

Health and safety

I am pleased to report that we achieved a TRIR of 0.30 for 2017, in line with industry best practice. This achievement is particularly noteworthy given the large numbers of new employees hired during 2017. In May 2017 we appointed a new Vice President of HSESQ who has brought new energy to drive improvement in our safety standards. Although the results of this effort are impressive, we are looking for new ways to improve safety performance as our TRIR statistics should not be allowed to stagnate. An area of specific focus will be safety practices at remote site locations where the risks of an incident can be higher due to reduced oversight. We are striving to provide a best practice safety and wellbeing environment for our employees.

Operational update

2017 saw the completion of three new build jackup rigs, two for NDC (now known as ADNOC Drilling) and one to Shelf Drilling. We also completed the large-scale UZ750 module fabrication project for Petrofac.

With the delivery of the above projects, our operational focus moved onto the execution of the two major projects awarded at the end of 2016: the USD 90 million rig upgrade project for Master Marine and the contract for the fabrication of 60 foundations for the UK's East Anglia One offshore wind farm project. While we made good progress on Master Marine, I am disappointed with the outcome of the East Anglia One project which has resulted in a significant loss for the Company, especially as we successfully delivered five major projects in 1H 2017 including the above three rigs. Renewables is a new sector for us and one which we believe offers significant long-term potential. It turned out that our first project involved a steep learning curve. Having said this, we have learned the hard way how to be competitive in the future in this sector.

Based on our root cause analysis for this project, we did not spend enough time and effort during the bidding stage to develop a robust project execution plan that adequately addressed project risks. We compounded this problem by initially assigning a project leadership team that was experienced in our traditional core competencies but not this new market. We have learned by experience that the risks and challenges associated with constructing and shipping 60 jackets in an assembly line process are very different from constructing multiple rigs concurrently.

We identified a number of performance improvement opportunities, and we have already taken actions to deliver these including the replacement of the project leadership team. As a result, we have seen substantial performance improvement as the project has progressed and we are now delivering overall productivity close to our historical norms, and we can see opportunities to improve this further. With correct project pricing at the beginning of the project and execution at the levels of productivity that we are now seeing towards the end of the project, we would have made a profit in line with our return expectations. This gives me confidence that going forward we can compete successfully in this strategically-important, fast-growing sector.

Our rig refurbishment segment continues to demonstrate solid performance, and we noted a recovery in new orders towards the end of the year, although the scope of work requested remains below historical norms.

In other segments, we reported successful completion of a mid-size project for Schlumberger comprising of two land rigs of their new design. The client is deploying them for operation in the region. This project has reinforced our emerging reputation for constructing high-quality land rigs in a safe and timely manner, and we will be looking to build on this in the coming years.

Implementing the strategic objectives

During 2017, the Group successfully implemented a number of steps towards fulfilment of its strategy as it looked to diversify and de-risk its exposure to oil price volatility and to access revenue generating opportunities in new sectors and geographies.

Our most ambitious step in the journey of transformation was the joint venture in May 2017 to establish a major maritime yard in Saudi Arabia. This was the culmination of many months of negotiation and due diligence, and so it was pleasing not only to sign the agreement with the partners, but also to see such overwhelming support from our shareholders for the project. When fully operational, the yard will provide Lamprell with an unprecedented opportunity to access a major growth market. Construction works have already commenced, and we expect full commissioning of all zones by 2022. Not only has this strengthened our position in new build jackup rigs, it has also led to further regional opportunities which are aligned with our long-term strategy. We prequalified for a long-term agreement with Saudi Aramco which, if successful, would make us one of a limited number of companies bidding for approximately USD 3 billion of offshore EPC(I) contracts each year. To access this opportunity, we are partnering with a renowned offshore installation partner to complement our construction expertise. In addition to the LTA, we are also pursuing EPC(I) work in other regions representing an annual opportunity set of approximately USD 3 billion. We have reinforced our in-house resources to be able to address the bidding and execution to a high standard and have invested in building a team with expertise in the segment, as well as specifically in working within an LTA framework.

Our first win in the renewables sector in 2016 has affirmed our intention to solidify our position in this fast-growing industry and having learned from the substantial project challenges we encountered at the start we remain enthusiastic about future opportunities - around 45% of our current bids are focused on this sector.

Outlook

With many of our strategic opportunities coming into focus, 2018 is set to become a critical year for Lamprell. Our revenue levels will come under further pressure in 2018 in the absence of significant new awards in 2017. That said, we are working to convert some key opportunities during the year: the first two jackup rigs from the Saudi joint venture are expected to be awarded with portions of the work to be subcontracted to our facilities in the UAE, and we will also know the outcome of the highly competitive selection process for the LTA in 2H 2018. In addition, some of the bids in our current pipeline are expected to be awarded towards the end of 2018. We are, however, seeing an increase in activity in our bid pipeline, which stood at USD 3.6 billion at the end of 2017 and are confident that the diversification strategy along with market recovery in the medium term will allow us to deliver on our growth ambition.

Over the years Lamprell has proved time and again its ability to address temporary challenges and to emerge a more resilient and reliable industry player. That was only possible with an exceptionally committed and experienced workforce and I thank the team for their full dedication during these challenging times.

Christopher McDonald

Chief Executive Officer

Lamprell plc

Financial Review

Lower levels of capital expenditure in the oil & gas industry led to a fall in revenues for Lamprell with further margin pressure resulting from operational challenges. We have a strong focus on cash conservation aligned with our strategic investment.

As anticipated, the Group's financial performance came under pressure as the capital expenditure cuts in the oil & gas industry over the last four years affected our levels of new project awards and therefore our revenues. Our revenue for 2017 was USD 370.4 million, a significant but expected reduction on USD 705.0 million reported in the prior year.

The first half of the year showed steady revenue flows with a number of major project completions and the resulting final milestone payments. Second half revenues were driven primarily by the East Anglia One and Master Marine projects, the contract with Schlumberger for the construction of two land rigs and the slow recovery of the rig refurbishment segment where we saw an increase in activity towards the end of the year.

The newbuild jackup rig segment generated USD 49.4 million in revenue during the reporting period, a sharp reduction (2016: USD 567.6 million) driven by the prolonged market downturn. Revenue for oil & gas contracting services, which includes the Master Marine project, increased to USD 131.3 million (2016: USD 47.6 million). Offshore platforms segment, which includes the East Anglia One project, generated USD 140.7 million in revenue (2016: USD 12.8 million).

Modules revenue amounted to USD 3.0 million (2016: USD 40.8 million) and operations, maintenance and manpower supply USD 46.1 million (2016: USD 36.2 million).

Margin performance

Despite strong margin contributions from project completions in the first half of 2017, the Group made a gross loss of USD 50.2 million for the year ended 2017 as a result of reduced revenues as well as the significant losses incurred on the East Anglia One project (2016 gross profit: USD 57.2 million). The negative net margin was thus 13.5%. The Group has delivered a reduction in overheads for the sixth consecutive year, in 2017 our overheads amounted to USD 82.4 million (2016: USD 98.4 million). We will continue to control overheads in line with current market outlook but expect an increase in 2018 as we continue to invest in Lamprell's strategic initiatives.

Group EBITDA from continuing operations amounted to USD (70.5) million (2016: USD 30.6 million). EBITDA margin was (19.0)% compared to 4.3% reported in 2016.

Finance cost and financing activities

In 2017, lower levels of debt, facilities commitment fees and bonding commissions resulted in a reduction in net finance cost to USD 5.1 million (31 December 2016: USD 9.9 million). Gross finance costs were USD 9.0 million (31 December 2016: USD 12.8 million). Our higher levels of cash in 2017 have resulted in our finance income increasing to USD 3.9 million (2016: USD 2.9 million).

Net (loss)/profit before exceptional items

Due to the operational challenges on the East Anglia One project the Group recorded a loss before exceptional items for 2017 attributable to the equity holders of USD 98.1 million (2016: loss of USD 0.4 million). The fully diluted loss per share for the year was 28.70 cents (2016: loss per share of 53.94 cents).

Capital expenditure

The Group's operational capital expenditure for the year ended 31 December 2017 decreased to USD 23.7 million, compared to USD 25.6 million in 2016. Strategic capital expenditure of USD 20 million is attributable to the Group's first instalment of our capital injection into the IMI yard to fund the joint venture formation activities. Over the coming years the Group will be required to make further contributions on an annual basis totalling up to USD 140 million over the five to six year construction period. We expect to fund this project from our balance sheet.

Lamprell retains considerable flexibility in capital expenditure on its existing operations and our current commitments reflect the strength of the balance sheet and our net cash position.

Cash flow and liquidity

The Group's net cash flow from operating activities for the full year ended 2017 reflected a net inflow of USD 32.4 million (2016: net inflow of USD 99.9 million), which was driven primarily by the conversion of working capital into cash on the completion of projects, offset in part by increased working capital on the East Anglia One project. Prior to working capital movements and the payment of employees' end of service benefits, the Group's net cash outflow was USD 56.3 million (2016: inflow of USD 41.1 million). Cash and bank balances decreased by USD 38.2 million to USD 296.4 million.

Throughout 2017 we continued to focus on cash-flow and on preserving our strong cash position. We will diligently protect the cash position of the Group in 2018, but there will be a reduction in our net cash as a result of the funding requirement of USD 30 million on the East Anglia One project, an equity contribution of USD 38 million in the IMI yard and continued investment of USD 10 million in capital expenditure to deliver efficiency improvements in our yard facilities. The final payment of USD 41 million for the two S116E rig kits (which we contracted for in 2015 from Cameron LeTourneau to secure our supply chain) will come due in 2018 in line with the amended delivery schedule. Whilst the cash flows relating to the East Anglia One project will reduce the Group's Tangible Net Worth in 2018, the cash outflows into IMI, the S116E rig kits and the operational Capital Expenditure will increase our tangible asset base. We believe it is important to use our financial strength to make these investments and position the Group to take advantage of future opportunities.

Balance sheet

At USD 257.0 million the Group's net cash was marginally below 2016 levels (31 December 2016: USD 275.2 million). This reflects the initial investment in the Saudi Maritime Yard as well as working capital requirements on our major projects.

The Group's total current assets at 31 December 2017 were USD 498.9 million (31 December 2016: USD 616.8 million). Trade and other receivables decreased to USD 164.7 million (31 December 2016: USD 275.3 million).

Shareholders' equity reduced to USD 460.8 million (31 December 2016: USD 555.4 million).

Borrowings

Borrowings at 31 December 2017 were USD 39.5 million (31 December 2016: USD 59.5 million). The Group's facilities comprised (a) a USD 100 million term loan amortised over five years, of which USD 60 million had been repaid by the end of the reporting period; (b) USD 50 million for general working capital purposes which remained unutilised; and (c) USD 100 million of working capital for project financing (reduced from USD 200 million), also undrawn. In 2017 the USD 150 million committed bonding facility (which reduced from USD 250 million in 2016) to be used in connection with new contract awards funded by the above working capital facility, was reduced by a further USD 100 million to 50 million as it was replaced by lower cost bilateral bonding facilities. The Group's debt to equity ratio at 31 December 2017 was low at 8.6%.

Amendments to debt facility covenants

The Group's balance sheet remains strong. The Board believes that maintaining significant liquidity is beneficial to the Group. As a result, in 2017 the Group obtained debt facility amendments from its lenders in relation to certain of the financial covenants, to provide financial flexibility. These include a waiver of the ratio of EBITDA to Debt Service covenant up to the period ended 31 December 2018 and the ratio of Borrowings to EBITDA covenant for the periods ended 31 December 2017 and 30 June 2018. The tangible net worth covenant was also amended to a level of USD 325 million for the remaining duration of the facility. Securing these waivers further demonstrates the strong, continuing support that the Group receives from its lender group.

Going concern

After reviewing its cash flow forecasts for a period of not less than 12 months from the date of signing these financial statements, the Directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its financial statements.

Dividends

In the context of ongoing market challenges, the low revenue levels in 2017 and the investment for future growth in the Saudi maritime yard, the Directors do not recommend the payment of a dividend for the period in relation to the financial year ended 31 December 2017.

Antony Wright

Chief Financial Officer

Lamprell plc

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in equity

Consolidated cash flow statement

Non-cash transaction

Additions to intangible assets as disclosed in note 14 include an amount of USD 8.7 million prepaid to Sharjah Electricity & Water Authority during the prior year. This has been treated as a non-cash item as the cash outflow was in 2016.

Notes to the consolidated financial statements for the year ended 31 December 2017

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 2017 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 2017. The financial information has been extracted from the consolidated financial statements for the year ended 31 December 2017 approved by the Board of Directors on 21 March 2018 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 2017 and 31 December 2016 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 2017 have been prepared in accordance with the Listing Rules of the London Stock Exchange.

After reviewing its cash flow forecasts for a period of not less than 12 months from the date of signing of these financial statements, the Directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. Therefore, the Group continues to adopt the going concern basis in preparing its financial statements.

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 2016 and reviewed interim financial information for the period ended 30 June 2017, which are available on the Company's website, www.lamprell.com.

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 Provisions for liquidated damages claims (LDs)

The Group provides for liquidated damages where there have been significant delays against defined contractual delivery dates or contractual milestones 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. Furthermore, there is an assessment by management of any liquidated damages which can be recovered against subcontractors or the supply chain due to late delivery against contractual delivery dates or milestones which are the direct cause of the delays under the contract with the customer and which the supply chain are liable for.

The Group experienced significant challenges on the East Anglia ONE ('EA1') project and that caused the Group to incur additional costs as it worked to rectify the shortcomings - see note 4.2.2. While the Group is maintaining an overall delivery schedule for the client, certain key dates have been affected and are subject to ongoing discussions with the client with a view to determining the implications these might have on the overall project master programme.

In view of the above, management have made a significant judgement within the forecast loss calculation in ascertaining the extent to which liquidated damages will arise on the project. In making this judgement, management has considered the following:

· The outcome of ongoing constructive discussions with our client regarding certain key delivery dates and how the delays to the progress of works can be mitigated without impacting any related contractors or any other project activity which minimises the risk of these related contractors pursuing liquidated damages against the client, which the client would in turn seek to recover; and

· The progress of the insurance claim related to the first shipment of the flat packs to our UK subcontractor and the possibility of reimbursement from the insurer.

Based on the discussions to date, management believe the risk of the full extent of LDs being levied has been mitigated and we continue to work with the client and the subcontractors to ensure the overall project master programme is not compromised due to the effect of our 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.

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 recognition

The Group uses the percentage-of-completion method in accounting for its contract revenue. Use of the percentage-of-completion 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 accounting policy set out in Note 3. 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 amounts due from customers on contracts increasing by USD 6.4 million (2016: USD 3.8 million) or amounts due to customers on contract decreasing by USD 6.4 million (2016: USD 3.8 million).

If the estimated total costs to completion of all outstanding projects were to increase by 10%, amounts due from customers on contracts would decrease by USD 19.7 million (2016: USD 6.9 million) or amounts due to customers on contracts would increase by USD 19.7 million (2016: USD 6.9 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.

A provision of USD 41.7 million (2016: Nil) was held at 31 December 2017 relating to estimated losses to completion on the EA1 project. The estimated total losses at completion amount to USD 80.0 million (2016: USD Nil) and the additional costs on the project have been caused by a number of variable factors including investment in further unplanned staffing and equipment requirements, as well as significant additional shipping, subcontractor costs and an assessment by management on the full extent of LDs being levied. See Note 4.1.1 for key judgements on liquidated damages claims.

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 4.1 million (2016: Nil) if the total costs to complete are decreased by 10% and provision for onerous contract included in other payables increasing by USD 4.1 million (2016: USD Nil) 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 segments' assets located in a particular geography.

The market downturn has resulted in a decrease in bidding activities and a reduction in new project awards for the United Arab Emirates CGU. The estimate of future cash flows and terminal value growth rate for the CGU has been significantly affected by the current assumptions relating to market outlook, contract awards and margins.

Determining whether property, plant and equipment and intangible assets are impaired requires an estimation of value in use of the cash-generating unit and fair value of assets. The value in use calculation requires the estimation of future cash flows expected to arise from the cash generating unit and a suitable discount rate to calculate present value of expected future cash flows. These calculations use pre-tax cash flow projections based on financial budgets approved by management 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 2017, the Group's pipeline amounts to USD 3.6 billion (2016: USD 2.5 billion).

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.

A discount rate of 10.00% (2016: 11.54%) 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.

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 approximately 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 and the carrying amount of property, plant and equipment at 31 December 2017 was USD 171.7 million (31 December 2016: USD 172.3 million). The carrying amount of intangible assets at 31 December 2017 was USD 31.7 million (31 December 2016: USD 24.9 million). The headroom attributable to property, plant and equipment and intangible assets as at 31 December 2017 is USD 131.1 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 24.2 million if the discount rate was to increase or an increase in the headroom by USD 27.8 million if the discount rate was 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 48.1 million in the headroom if the net profit was to increase or there would be a reduction in the headroom of USD 48.1 million if the net profit was 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 18.6 million if the terminal value growth rate was lower or an increase in the headroom of USD 21.5 million if the terminal value growth rate was 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 claim would result in an increase in provision for warranty claims by USD 0.7 million or a decrease of USD 0.7 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 at year end, no write down or reversal of previous write downs has been recognised (2016: write down of USD 2.0 million). 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 of USD 2.0 million if the net realisable value was higher or a decrease in inventory by USD 2.6 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 Board of Directors, the chief operating decision maker. These operating segments are aggregated into two reportable segments - 'Fabrication & Engineering' and 'Services' based on similar nature of the products and services, type of customer and economic characteristics.

The Fabrication & Engineering segment contains business from New Build Jack up Rigs ("NBJR"), Modules, ("MOD"), Offshore Platforms ("OP") and Oil and Gas Contracting Services ("OGCS") excluding that from the Operations & Maintenance manpower business. The Services segment contains business from Operations and Maintenance, manpower supply and safety services.

NBJR derives its revenue from assembly and new build construction for the offshore oil and gas and renewables sectors; MOD derives its revenue from fabricating packaged, pre-assembled and modularised units and constructing accommodation and complex process modules for onshore downstream projects; OP derives its revenue from construction of complex living quarters, wellhead decks, topsides, jackets and other offshore fixed facilities; and OGCS derives its revenue from rig refurbishment, land rig services, engineering and construction. Operations and maintenance derives its revenue from manpower supply and ancillary services.

Sales between segments are carried out on agreed terms. The revenue from external parties reported to the Board of Directors is measured in a manner consistent with that in the consolidated income statement.

The reconciliation of the gross operating profit is provided as follows:

The impairment loss of USD 180.5 million recognised during the prior year in respect of goodwill was attributable to the Fabrication & Engineering reportable segment.

Information about segment assets and liabilities is not reported to or used by the Board of Directors and, accordingly, no measures of segment assets and liabilities are reported. The breakdown of revenue from all services is as follows:

The Board of Directors assesses the performance of the operating segments based on a measure of gross profit. The staff, equipment and certain subcontract 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 366.2 million (2016: USD 700.4 million), and the revenue recognised from other countries is USD 4.2 million (2016: USD 4.6 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 Fabrication & Engineering segment. The above customers in 2017 are not necessarily the same customers in 2016.

Subsequent to year end, segmental reporting has changed in line with the Group's strategic objectives. See Note 29 to the "Consolidated Financial Statements".

6 Cost of sales

7 Selling and distribution expenses

8 General and administrative expenses

9 Staff costs

10 Finance costs - net

Finance income

Finance income comprises interest income of USD 3.9 million (2016: USD 2.9 million) from bank deposits.

11 Other gains/(losses) - net

12 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.

Assumed vesting of performance and retention share plans amounting to 3,786,640 (2016: 2,467,849) shares and 609,471 (2016: 700,303) shares respectively have been excluded in the current period as these are anti-dilutive.

13 Property, plant and equipment

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 104.4 million (2016: USD 109.3 million) are under lien against the bank facilities (Note 25).

A depreciation expense of USD 18.8 million (2016: USD 22.1 million) has been charged to cost of sales; USD 3.8 million (2016: USD 3.0 million) to general and administrative expenses (Notes 6 and 8).

Capital work-in-progress represents the cost incurred towards construction and upgrade of infrastructure and operating equipment.

Refer to Note 4 for details of the impairment assessments performed at year end and key assumptions.

14 Intangible assets

During the period, Sharjah Electricity and Water Authority completed the construction and installation of an electric mainline to the Group's Hamriyah facility. The Group has right of use and the cost incurred by the Group of USD 8.7 million has been capitalised as an intangible asset and will be amortised over the remaining period of the leasehold rights of the facility.

The Group carries out an impairment review whenever events or changes in circumstance indicate that the carrying value of intangible assets may not be recoverable. Management performs review at cash generating unit relating to fabrication and engineering segments assets located at United Arab Emirates. As a result of the above, no impairment has been recorded during the year (2016: USD 180.5 million) and the carrying amount of intangible assets at 31 December 2017 was USD 31.7 million (31 December 2016: USD 24.9 million).

15 Inventories