Interim Financial Results 2016

22 September 2016

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

INTERIM FINANCIAL RESULTS

FOR SIX MONTHS TO 30 JUNE 2016

Resilient underlying performance in a challenging market

Strong balance sheet, cost focus and competitive position

1H 2016 FINANCIAL RESULTS

Financial highlights

· Ensco settlement reduced revenue by USD 25 million and net profit by USD 35 million

· Underlying performance, excluding the settlement with Ensco, is broadly in line with expectations

· Revenues of USD 451.3 million substantially higher than the comparative period last year owing to phasing of construction activity

· Net cash position in line with guidance owing to working capital movements ahead of multiple upcoming rig deliveries; cash position expected to strengthen in the coming months

· Gross margins 6.1% in 1H 2016, impacted by the settlement with Ensco; underlying gross margin margins 13.1% (1H 2015: 11.6%)

· Overhead staff reduced by 10%, as announced in April 2016, resulting in annualised savings of more than USD 5 million

Operational highlights

· Operational performance dominated by technical issues with Cameron jacking equipment on Ensco 140 rig

· Despite these, Ensco 140 rig successfully delivered on 26 August 2016

· 33 modules delivered on UZ750 project to date, with 12 more to be delivered by year-end

· As at 30 June 2016, backlog of USD 297.1 million (31 December 2015: USD 739.7 million) with bid pipeline at approximately USD 3.9 billion (31 December 2015: USD 5.4 billion)

· World class safety record maintained with a current total recordable incident rate of 0.29 (31 December 2015: 0.31)

Strategic and corporate highlights

· Following a Memorandum of Understanding announced in January 2016, a Joint Development Agreement (JDA) was signed with Saudi Aramco, Bahri and Hyundai Heavy Industries for the development of a new major maritime yard in Saudi Arabia

· Christopher McDonald appointed as new CEO from 1 October 2016

· Group is using the flexibility in its cost base to further downsize the organisation in light of the current environment

Current trading and outlook

· Technical solutions to the Cameron jacking equipment issues being implemented; we expect to deliver all remaining rigs over the next eight months

· The Board remains committed to recovering all remedial costs arising from the technical defects from Cameron as well as seeking full compensation

· Ongoing focus on business development with a number of sizeable bids submitted recently, including competitive pricing achieved through cost-cutting whilst maintaining acceptable margins

· Revenue for FY2016 expected to be slightly below current market expectations

· Challenging environment impacting the industry through project delays and cancellations expected to continue through 2017, impacting the Group's order book and next year's top-line performance

· Revenue for FY2017 expected to be in the range of USD 400-500 million depending on the outcome of a number of submitted bids awaiting award

· Further cost-reduction activities being implemented to reflect the reduced revenues

John Kennedy, Executive Chairman for Lamprell, said:

"Lamprell's substantial order intake two years ago meant that the business saw high activity levels and a solid underlying financial performance during the first half of the year although the results were impacted by the delay in delivery of the Ensco 140 rig. In addition, the industry downturn has continued to affect the sector and Lamprell's ability to win new contract awards during the period. However, the Board has full confidence that Christopher McDonald, the incoming Chief Executive, will lead the business through the short and medium term difficulties ahead by maintaining Lamprell's competitive position, converting our bid pipeline and developing strategic partnerships."

James Moffat, Chief Executive Officer for Lamprell, said:

"In this tough market environment, Lamprell is in a solid position, both financially and operationally, as a result of our counter-cyclical investment which created a robust base for the Group to not only ride out the storm, but also to enable long-term growth. In this context, the impact from the Cameron equipment issue has been particularly disappointing, as it has overshadowed our otherwise positive underlying results. As my tenure as Chief Executive comes to an end, I'm confident that Lamprell's new CEO will be able to capitalise and build on the resilience and strong franchise of the business."

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/57ceea91a911746f59ec8dd7.

- 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 7,000 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 1,000,000 m2 with 2 km of quayside.

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

Chairman's Review

In 1H 2016, Lamprell's financial performance was significantly impacted by the delay in delivery of the Ensco 140 rig. This was due to the failure of the Cameron jacking equipment and we are pursuing Cameron for all costs and damages. Apart from this, our underlying financial and operational performance was in line with expectations. The first half of the year has also seen Lamprell's core markets impacted by the ongoing industry downturn. Whilst work secured over the past three years allowed the Group to maintain the high activity levels in the yards during 1H 2016, winning major new awards in the current environment has proved to be challenging. The team's focus therefore remains on protecting Lamprell's competitive position by further reducing costs and converting our bid pipeline.

Market downturn continuing

Lamprell had a sustained successful period for new awards before the industry downturn, with a large number of wins filling the Group's order book for the ensuing years. This allowed Lamprell to maintain high activity and performance levels throughout the first two years of the market downturn. During recent months, the extent and effect of the market downturn have been felt and our management continues to pursue all reasonable avenues. In this context, the Group remains focussed on converting its robust bid pipeline into awards. Throughout the first half of the year, Lamprell has improved the competitiveness of its offering by reducing its cost base. The Board believes that by focussing on factors within its control, the Group will be able to secure awards, maintain margins and remain effective.

In the near-term, Lamprell is well situated with its positive cash position and strong balance sheet. Our commitment to delivering high business performance will continue under the Group's new leadership following the appointment of Christopher McDonald as Lamprell's new CEO starting from 1 October. The Group will benefit from Christopher's proven track record in business development and sales.

The Group signed the JDA with Saudi Aramco, Bahri and Hyundai Heavy Industries towards the end of 1H 2016 for a new major maritime yard in the Kingdom of Saudi Arabia. Under the JDA the partners will assess the project in detail with a view to making a Final Investment Decision in the coming months. This is a major project and it has the potential to have a transformational impact on Lamprell's future.

The Lamprell Board and management team will continue to take all necessary steps to protect the business and maintain its competitiveness in order to ride out the market storm and secure Lamprell's long-term future.

John Kennedy

Executive Chairman

Lamprell plc

Chief Executive Officer's Review

The first half of this year has seen the activity levels in the industry drop significantly as a result of the prolonged downturn. This market weakness has had a dramatic impact on the pace of awards of large projects, affecting Lamprell along with its peers.

Operational performance

Lamprell's operating performance in the period was dominated by the technical issues with the Cameron-provided jacking equipment on the Ensco 140 jackup rig. During commissioning and testing, a technical issue was identified and, despite finding a resolution, there was a substantial delay before successful delivery to Ensco. This resulted in Lamprell reaching a settlement with Ensco for the late delivery including a revenue reduction of USD 25 million. Lamprell is committed to delivering all projects on time and the management is extremely disappointed by the impact of the Cameron equipment's failure on our excellent track record. The Board is determined to recover all remedial costs arising from the technical defects from Cameron as well as seeking full compensation.

Lamprell has worked with Cameron to identify the issues and appropriate technical solutions to these issues are being implemented on the other rigs, taking on board the lessons which have been learned on the Ensco 140 project. The team is now focused on delivering the next two jackup rigs, namely the Shelf 122 and Ensco 141, and all six remaining rigs will be delivered over the course of the coming eight months.

Despite these issues, the Group's Hamriyah yard operations reached record activity levels during 1H with seven rigs being built concurrently for the first time. This was made possible through the recent yard optimisation and process improvements, which allowed Lamprell to accelerate build schedules.

Lamprell's continued focus on costs has allowed the Group to be more competitive in its bidding.

The Jebel Ali yard was close to its full capacity by the construction of modules for Petrofac, with a total of 33 modules delivered successfully to the client for installation offshore Abu Dhabi. The 12 remaining modules are due to be delivered by the end of the year.

Our minor business streams have had good operational performance in the year to date but have also been impacted by the market slowdown in terms of a reduced number of contract awards. The Group continued to assist its past, current and potential clients with cold and warm stacking of jackup rigs in its facilities, with 10 rigs currently being stored. Given clients' keen interest in this stacking service, Lamprell has now set up a separate offshore stacking facility able to accommodate 10 rigs without reducing valuable quayside capacity elsewhere in our facilities.

The Group's high standards of safety continued on its positive trajectory, with our total recordable incident rate maintained at 0.29 in 1H 2016.

With all major projects in our backlog scheduled for delivery by Q2 2017 and low visibility on our future workload, the management team cut headcount by 10% in Q2 2016, resulting in overall annualised savings on overhead costs of more than USD 5 million. Lamprell is using flexibility in its costs base to further downsize the organisation in light of the current environment and in order to reflect the lower revenues.

Market overview, order book and bid pipeline

The market environment has continued to be challenging with further capital expenditure reductions across the board in the industry resulting in project delays and even cancellations. This is expected to extend well into 2017. Lamprell's strong period for new awards prior to the downturn and its construction business phasing mean that the business performed well through the past two years of the downturn and is only now starting to suffer from the impact of the downturn.

The Group's bid pipeline of medium-term projects remains reasonably strong but, as a consequence of the large number of project cancellations and projects being deferred, the pipeline has reduced to USD 3.9 billion. The pipeline is diversified across various regions and types of projects, however it is marked in particular by a current slowdown in the jackup rig market. In this context, the Group is targeting further modular work and is also bidding for projects in the renewables sector. Lamprell continues to believe that Middle East will remain its main source of revenue in the near-term future, with high levels of activity and investment maintained despite a clear slow-down in some areas and notable pricing pressure. The pipeline however also includes projects in the North Sea amongst live bids.

The Group has maintained high levels of bidding throughout the first half of the year, refining its approach to marketing to maximise the efficiency of its business development efforts. The focus has been on targeting only those projects Lamprell believes it has a good chance to win and those that are the most likely to go ahead.

Lamprell's focus on strong relationships as future sources of business has also delivered two potentially important partnerships. The Group agreed to explore joint FPSO opportunities with Dubai Drydocks in March 2016. The second alliance relates to the signing of the JDA with Saudi Aramco, Bahri and Hyundai Heavy Industries for the new major maritime yard in the eastern region of Saudi Arabia. Under the JDA the partners will assess the project in detail with a view to making a Final Investment Decision in the coming months. This is a major project and it has the potential to have a transformational impact on Lamprell's future.

Outlook

The Board's guidance for 2016 remained unchanged until the settlement agreed with Ensco, with over 90% of revenue covered at the time of our preliminary results. As a result of the settlement announced on 26 August relating to the late delivery of Ensco 140, the Group's revenue will be reduced by USD 25 million from previous guidance, with a reduction of around USD 35 million at the bottom line. Total revenue for FY2016 is now expected to be slightly below current market expectations.

Our focus remains firmly on converting the pipeline of potential new contracts, and the Group has recently submitted a number of bids for sizeable projects, mainly in offshore construction. Revenue for 2017 is expected to be in the range of USD 400-500 million depending on the outcome from these bidding activities.

Whilst the near-term challenges are substantial, Lamprell's robust balance sheet and improving competitiveness put it in good stead to recover from the downturn and deliver growth in the future.

James Moffat

Chief Executive Officer

Lamprell plc

Financial Review

The Group's underlying performance was affected by the one-off charge from the settlement with Ensco for all claims arising from the equipment issues. Until the settlement, the Group was performing in line with expectations and underlying performance, excluding the impact of the Ensco settlement, was robust. Whilst this negative impact on revenue and profit is disappointing, Lamprell will look to recover all remedial costs and seek full compensation from Cameron. Despite this impact, the Group retains a robust balance sheet with sufficient cash reserves which will strengthen further as the remaining six rigs are delivered.

Results from operations

The Group's total revenue for the six-month period ended 30 June 2016 was USD 451.3 million, after the USD 25 million impact of the settlement with Ensco, with the underlying revenue in line with expectations (1H 2015: USD 351.4 million). The new build jackup rigs revenue was the single biggest contributor and oil & gas contracting services was responsible for around 9% of revenue.

Gross profit decreased to USD 27.5 million from the USD 40.8 million reported in the corresponding period in 2015 due to the settlement with Ensco. Our gross margin percentage has declined to 6.1% in 1H 2016 from 11.6% in 1H 2015. The decrease is a result of the impact of the settlement with Ensco, whilst our underlying margin before impact from Ensco would have remained at a strong level of 13.1%. The continuing industry challenges also had a negative impact on margins through the revenue mix, whereby we saw lower activity levels in rig refurbishment and offshore/onshore construction. Our cost saving initiatives, including the admin staff reduction announced earlier this year helped offset this effect partly, with an overall cost reduction of more than USD 5 million in annualised savings. We also continue to see a contribution from Project Evolution.

EBITDA, excluding discontinued operations and exceptional items for the period, was USD 10.0 million (1H 2015: USD 31.8 million), or USD 45.0 million adjusted for the impact of the settlement with Ensco. The Group's EBITDA margin decreased from 9.1% in 2015 to 2.2% in 2016 as a result of the Ensco settlement.

Finance costs and financing activities

Net finance costs in the period decreased to USD 5.5 million (1H 2015: USD 7.1 million). Gross finance costs were USD 1.6 million lower due to lower debt levels and reduced costs of our bank guarantees. Finance income has increased by USD 0.4 million.

Net profit/loss after exceptional items and earnings per share

The Group generated an underlying profit, pre-Ensco charge, of USD 30.6 million, however the settlement resulted in a net loss of USD 4.4 million for the six-month period ended 30 June 2016 attributable to the equity holders (1H 2015: net profit of USD 20.3 million). The diluted loss per share for the six-month period ended 30 June 2016 was 1.27 cents (1H 2015: diluted earnings per share of 5.90 cents).

Capital expenditure

The Group's capital expenditure during the six-month period ended 30 June 2016 decreased significantly to USD 15.4 million (1H 2015: USD 44.9 million) as last year was a period of heavy investment during the first phase of Project Evolution. Lamprell continues to retain significant flexibility in its capital expenditure items with further room for reductions.

Cash flow and liquidity

The Group's net cash flow from operating activities for the period ended 30 June 2016 reflected a net outflow of USD 38.1 million (1H 2015: inflow of USD 88.2 million) primarily driven by increased working capital requirements due to project phasing with a number of the jackup rig projects reaching their final stages.

Cash and bank balances decreased by USD 68.8 million to USD 220.8 million during the first half of the year resulting from net cash outflow from operations, repayment of debt and a net cash outflow from investing activities. Net cash is expected to trend slightly upwards by the end of the year before it recovers fully with the final payment milestones being received as the final remaining rigs are delivered next year.

Balance sheet

The Group's total non-current assets at 30 June 2016 were USD 413.0 million (31 December 2015: USD 408.1 million). This increase is mainly attributable to the purchase of Property, Plant and Equipment during the period of USD 13.4 million (31 December 2015: USD 55.5 million) partially offset by depreciation amounting to USD 11.9 million (31 December 2015: USD 19.4 million).

The Group's total current assets at the period-end were USD 651.7 million (31 December 2015: USD 725.3 million). Trade and other receivables decreased slightly to USD 423.3 million (31 December 2015: USD 428.3 million). As at 30 June 2016 the Group had a net cash position of USD 151.5 million (31 December 2015: USD 210.3 million) in line with expectations as a result of a number of rigs entering final stages of completion.

Shareholders' equity remained relatively stable at USD 734.3 million (31 December 2015: USD 737.6 million).

Goodwill

Significant value continues to be attributed to goodwill as a result of the MIS transaction as part of the Group's assets. At 30 June 2016, the goodwill headroom above the carrying value reduced from USD 311.6 million at 31 December 2015 to USD 130.4 million as a result of the weak trading environment and our current activity outlook. The critical assumptions that impact management's assessment of the carrying value of goodwill include the challenging market conditions, the importance of securing new contract awards in 2H 2016 and 2017 and the current low backlog. Management continues to monitor the value of goodwill very closely in light of new awards.

Borrowings

Our borrowings were USD 69.2 million at 30 June 2016 (31 December 2015: USD 79.3 million). The term loan is repaid in equal tranches over a period of five years since the refinancing in 2014, while the additional USD 50 million working capital facility remains in place. The USD 200 million financing facility also remains unused.

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

Given the continuation of market challenges and the impact of the settlement with Ensco, the Directors do not recommend the payment of an interim dividend for the current financial year ending 31 December 2016. The Directors will continue to review this position in light of market conditions at the relevant time.

Principal risks and uncertainties

The directors do not consider that the principal risks and uncertainties have changed since the publication of the Annual Report for the year ended 31 December 2015. For details of the principal risks and uncertainties faced by the Group, please refer to the Notes to Financial Statements in the Company's 2015 Annual Report as well as the Risk Report in the same document.

Tony Wright

Chief Financial Officer

Lamprell plc

Independent review report to Lamprell plc

We have been engaged by the company to review the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2016 which comprises the condensed consolidated interim income statement, the condensed consolidated interim statement of comprehensive income, the condensed consolidated interim balance sheet, the condensed consolidated interim statement of changes in equity, the condensed consolidated interim statement of cash flows and related notes 1 to 29. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of consolidated financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2.1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of consolidated financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of consolidated financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

21 September 2016

Lamprell plc

Condensed consolidated interim income statement

Lamprell plc 

Condensed consolidated interim statement of comprehensive income

Lamprell plc 

Condensed consolidated interim balance sheet

Lamprell plc

Condensed consolidated interim statement of changes in equity

Lamprell plc

Condensed consolidated interim statement of cash flows

Lamprell plc

Notes to the condensed consolidated interim financial information

1 Legal status and activities

Lamprell plc ("the Company"/"the parent company") was incorporated and registered on 4 July 2006 in the Isle of Man as a public company limited by shares under the Isle of Man Companies Acts with the registered number 117101C; and is listed on the London Stock Exchange ("LSE") main market for listed securities. The address of the registered office of the Company is Fort Anne, Douglas, Isle of Man and the Company is managed from the United Arab Emirates ("UAE"). The address of the principal place of the business is PO Box 33455, Dubai, UAE.

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.

This condensed consolidated interim financial information has been reviewed, not audited.

2 Summary of significant accounting policies

2.1 Basis of preparation

The condensed consolidated interim financial information for the six months ended 30 June 2016 have been prepared in accordance with the Disclosure and Transparency Rules ("DTR") of the United Kingdom's Financial Conduct Authority ("FCA") and with International Accounting Standard ("IAS") 34, "Interim Financial Reporting" as adopted by the European Union ("EU"). The consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2015, which have been prepared in accordance with IFRSs as adopted by the EU.

2.2 Accounting policies

The accounting policies applied in the preparation of the condensed consolidated interim financial information are consistent with those of the annual financial statements for the year ended 31 December 2015 except for the adoption of new standards and interpretations effective as of 1 January 2016. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The annual financial statements for the year ended 31 December 2015 are available on the Company's website (www.lamprell.com).

The preparation of consolidated interim financial information 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 are disclosed in Note 4.

(a) New and amended standards adopted by the Group

· Amendments to IFRS 7, 'Financial Instruments: Disclosures';

· Amendments to IAS 1, 'Presentation of Financial Statements'- Disclosure Initiative;

· Amendments to IAS 16, 'Property, Plant and Equipment' and IAS 38, 'Intangible Assets';

· Amendments to IAS 19, 'Employee Benefits'; and

· Amendments to IAS 34, 'Interim Financial Reporting'.

(b) The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 January 2016, but do not have a material impact to the Group or are not currently relevant for the Group.

· Amendments to IFRS 5, 'Non-current Assets Held for Sale and Discontinued Operations';

· Amendments to IFRS 10, 'Consolidated Financial Statements', IFRS 12, 'Disclosure of Interests in Other Entities' and IAS 28, 'Investments in Associates and Joint Ventures';

· New standard IFRS 14, 'Regulatory Deferral Accounts';

· Amendments to IFRS 11, 'Joint Arrangements';

· Amendments to IAS 16, 'Property, Plant and Equipment' and IAS 41, 'Agriculture'; and

· Amendments to IAS 27, 'Separate Financial Statements'.

Exceptional items

Exceptional items are disclosed separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group. They are material items of income or expense that have been shown separately due to the significance of their nature or amount.

3 Financial risk management

3.1 Financial risk factors

The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange and cash flow interest rate risk), credit risk and liquidity risk. These risks are evaluated by management on an ongoing basis to assess and manage critical exposures.

The condensed consolidated interim financial information does not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 31 December 2015. There have been no changes in any risk management policies since the year ended 31 December 2015.

3.2 Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital. There have been no changes in capital risk management policies since the year ended 31 December 2015.

3.3 Fair value estimation

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

a. Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

b. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and

c. Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

There are no assets at 30 June 2016 and 31 December 2015 measured at fair value. The following table presents the Group's liabilities that are measured at fair value at:

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3.

There were no transfers between Level 1, 2 and 3 during the period.

There were no changes in valuation techniques during the periods.

4 Critical accounting estimates and judgements

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2015, except as stated otherwise below.

Settlement of contractual claims

As stated in Note 5 and Note 28, the Group signed a contract settlement agreement for the Ensco 140 rig, which reduced the contract revenue by USD 25 million and increased estimated contract costs by USD 10 million. The additional estimated contract costs have been based on the historical experience for similar modifications and activities based on current working practice.

Revenue recognition

The Group uses the percentage-of-completion method for accounting 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 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. The application of a 10% sensitivity to management estimates of the total costs to completion of all outstanding projects at the period end would result in an increase in revenue and a decrease in loss by USD 18.2 million (H1 2015: increase in revenue and profit by USD 16.0 million) if the total costs to completion are decreased by 10% and a decrease in revenue and an increase in loss by USD 17.2 million (H1 2015: decrease in revenue and profit by USD 13.5 million) if the total costs to completion are increased by 10%.

Estimated impairment of goodwill

The Group tests goodwill for impairment annually or more frequently if events or changes in circumstances indicate a potential impairment. Testing for impairment was performed on 31 December 2015 and is detailed in the annual financial statements for the year ended 31 December 2015.

The Group considers the relationship between its market capitalisation and its book value, among other factors, when reviewing for indicators of impairment. As at 30 June 2016, the market capitalisation of the Group was below the book value of its equity, indicating a potential impairment of goodwill. In addition, the overall decline in oil and gas and related activities due to ongoing market uncertainty, have led to decreased demand in the industry as a whole. As a result, management performed an impairment test as at 30 June 2016 for the "cash generating unit relating to upgrade and refurbishment of offshore jackup rigs, fabrication, assembly and new build construction for the offshore oil and gas and renewables sectors, including FPSO and other offshore and onshore structures, oilfield engineering services, including the upgrade and refurbishment of land rigs" ("CGU1 ").

The Group used the cash-generating unit's value-in-use to determine the recoverable amount, which exceeded the carrying amount. The projected cash flows were updated to reflect the decreased demand for new build rigs and services and a pre-tax discount rate of 11.10% (31 December 2015: 10.42%) was applied. Cash flows beyond the five-year period have been extrapolated using a 3.25% terminal growth rate (31 December 2015: 3.25%). All other assumptions remained consistent with those disclosed in the annual financial statements for the year ended 31 December 2015. The headroom as at 30 June 2016 is USD 130.4 million.

The directors believe that any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount. As a result of this analysis, management did not identify an impairment for this cash generating unit to which goodwill of USD 180.5 million is allocated.

Employees' end of service benefits

The rate used for discounting the employees' post-employment defined benefit obligation should be based on market yields on high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields on government bonds should be used. In the UAE there is no deep market either for corporate or government bonds and therefore, the discount rate has been estimated using the US AA-rated corporate bond market as a proxy. On this basis, the discount rate applied was 3.5% (2015: 3.5%). If the discount rate used were to differ by 0.5 points from management's estimates, the carrying amount of the employees' end of service benefits provision at the balance sheet date would be an estimated USD 1.0 million (H1 2015: USD 1.5 million) lower or USD 1.4 million (H1 2015: USD 1.6 million) higher.

Recoverability of inventory balances

Management has estimated the recoverability of inventory balances and considered the allowance required for any potential write-down to net realisable value based on current economic environment. Estimating the amount of any potential write-down requires significant judgment and the use of estimates which management determines based on past historical experience and third party evidence of net realisable value.

5 Segment information 

The business units are viewed by the chief operating decision-maker as three operating segments - United Arab Emirates "UAE", Qatar "QTR" and Kazakhstan "KZK" - based on common pool of resources and ability to execute the projects on an interchangeable basis.

The chief operating decision-maker has been identified as the Executive Directors who make strategic decisions. The Executive Directors review the Group's internal reporting in order to assess performance and allocate resources.

UAE is reported as a single segment (Segment A). Services provided from QTR and KZK do not meet the quantitative thresholds required by IFRS 8 and the results of these operating segments are included in the "all other segments" column.

There has been no change in the basis of segmentation or basis of measurement of segment profit or loss in the period.

*As a result of late delivery of Ensco 140 rig which were caused by failures in the jacking equipment supplied by the original equipment manufacturer, Cameron LeTourneau ("Cameron") the Group entered into a settlement agreement as referred to in Note 28.

The impact of the settlement agreement was that the Group incurred a write-down of revenue amounting to USD 25 million, which was a deduction from the final 'Ensco 140' rig milestone payment and is likely to incur additional estimated contract costs amounting to USD 10 million as a result of an increase in the contract scope which the Group committed to provide for the 'Ensco 140 and 141' rigs.

Segment comparatives are restated to reflect the organisational changes that have occurred since the prior interim reporting period to present a like-for-like view.

Segment comparatives as previously stated are as below.

The revenue from external parties reported to the Executive Directors is measured in a manner consistent with that in the consolidated income statement.

The Executive Directors assess the performance of the operating segments based on a measure of gross operating 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 reconciliation of the gross operating profit is provided as follows:

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 breakdown of revenue from all services is as follows:

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 Segment A. The above customers in 2016 are not necessarily the same customers in 2015.

6 General and administrative expenses

*Potential partnership expenses pertain to costs incurred on establishing a Maritime Yard, at Ras Al Khair, in eastern Saudi Arabia.

7 Other gains - net

8 (Loss)/earnings per share 

(a) Basic

Basic (loss)/earnings per share is calculated by dividing the (loss)/ profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period excluding ordinary shares purchased by Lamprell plc employee benefit trust ("EBT") and held as treasury shares (Note 17).

(b) Diluted

Diluted (loss)/earnings 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 free 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.

9 Operating profit

Operating profit (from continuing operations) is stated after charging:

10 Property, plant and equipment

The additions of USD 13.4 million during the current period comprise USD 8.8 million of additions to capital work-in-progress, USD 1.8 million of additions to operating equipment, USD 2.4 million of additions to buildings and infrastructure and USD 0.4 million of additions to other fixed assets.

11 Intangible assets

12 Investment accounted for using the equity method

Investment in a joint venture

Details of the Group's joint venture during the period and at the balance sheet date is as follows:

* Production, manufacturing and erection of heat exchangers, pressure vessels, tanks, structural steel, piping and other related activities.

Summarised financial information in respect of the Group's joint venture is set out below:

MISA

MISA is a private company and there is no quoted market price available for its shares.

The Group has the following contingencies and commitments relating to Group's interest in the joint venture.

13 Trade and other receivables

During 2015, the Group paid an amount of USD 8.5 million to the Sharjah Electricity & Water Authority for construction, installation and maintenance of an electric mainline at its Hamriyah facility. The Group has decided to amortise this amount over the remaining period of the leasehold rights for the facility.

As required under our current contracts with Ensco, we note that all related materials and equipment and the vessel itself being constructed under these contracts are the exclusive property of Ensco.

Amounts due from customers on contracts comprise:

14 Cash and bank balances

At 30 June 2016, the cash at bank and term deposits were held with thirteen banks (31 December 2015: thirteen banks). The effective interest rate earned on term deposits was 0.56% (31 December 2015: 0.62%) per annum. Margin and short term deposits of USD 14.5 million (31 December 2015: USD 11.8 million) and deposits with an original maturity of more than 3 months amounting to USD 41.7 million (31 December 2015: USD 43.9 million) are held under lien against guarantees issued by the banks (Note 26).

15 Inventories

16 Related party balances and transactions

Related parties comprise Lamprell Holdings Limited ("LHL") (which owns 33% of the issued share capital of the Company), certain legal shareholders of Group companies, Directors and key management personnel of the Group and entities controlled by Directors and key management personnel. Key management includes directors (executive and non-executive) and members of the executive committee. Other than disclosed elsewhere in the condensed consolidated interim financial information, the Group entered into the following significant transactions during the period with related parties at prices and on terms agreed between the related parties.

Key management compensation comprises:

The terms of the employment contracts of the key management include reciprocal notice periods of between three to twelve months.

17 Share capital

Issued and fully paid ordinary shares

There is no movement in issued and fully paid ordinary shares and share premium for the period ending 30 June 2016 and year ended 31 December 2015. The total authorised number of ordinary shares is 400 million shares (2015: 400 million shares) with a par value of 5 pence per share (2015: 5 pence per share).

During 2016, EBT acquired 321,691 shares (2015: 51 shares) of the Company. The total amount paid to acquire the shares was USD 504,000 (2015: nil) and has been deducted from the consolidated retained earnings. During 2016, 321,691 shares (2015: nil shares) were issued to employees on vesting of the free shares and 16,268 shares (31 December 2015: 16,268 shares) were held as treasury shares at 30 June 2016. The Company has the right to reissue these shares at a later date. These shares will be issued on vesting of free shares/performance shares/share options granted to certain employees of the Group.

18 Other reserves

19 Provision for employees' end of service benefits

In accordance with the provisions of IAS 19, management has carried out an exercise to assess the present value of its obligations, using the projected unit credit method, in respect of employees' end of service benefits payable under the Labour Laws of the countries in which the Group operates. Under this method, an assessment has been made of an employee's expected service life with the Group and the expected basic salary at the date of leaving the service. The obligation for end of service benefit is not funded.

The movement in the employees' end of service benefit liability over the periods is as follows: