SNC-Lavalin reaches agreement to sell Resources Oil & Gas business
SNC-Lavalin Group Inc. has entered into a binding agreement to sell its Resources Oil & Gas business, a significant step forward in the company's strategy to reduce its risk profile and accelerate its ongoing transition to becoming a leading provider of professional engineering services and project management solutions.
The company has also completed its previously announced review of legacy Lump-Sum Turnkey (LSTK) litigation matters, which was expanded to include all other significant claims, while concurrently reassessing the costs associated with its three remaining Canadian light rail projects in light of COVID-19. The actions that the Company is taking today resulting from these reviews, together with the sale of the Oil & Gas business, reduce the remaining financial uncertainty associated with SNC-Lavalin's legacy businesses, while allowing the Company to further focus on its strategy of realizing the value and growth potential of Engineering Services business.
- Strategic divestiture of the Resources Oil & Gas business. The Company has entered into a binding agreement to sell its Oil & Gas business, including Services and LSTK, de-risking operations and reducing LSTK delivery and warranty obligations, and accelerating the realization of SNC-Lavalin's strategy. Closing is targeted for Q2 2021, at which time the transaction is expected to generate a gain on sale, as the elimination of foreign exchange cumulative translation adjustments ("CTA") should be greater than the fair value write down taken in Q4 as an "Asset Held for Sale". The net cash impact for the transaction is expected to be minimal.
- A charge of $95 million on the retained Resources business, related to historical legacy positions and one remaining LSTK mining project, will be taken in Q4 2020.
- Review of legacy LSTK litigation matters and commercial claims completed. To ensure a holistic review of legacy risks, taking into account new and updated information, the previously announced risk review was expanded to include all significant litigation matters and commercial claims receivable, resulting in $140 million of provisions and $155 million of commercial claims receivable reduction in Q4 2020, which are largely non-cash in nature. The Company will continue to aggressively pursue all claims receivable, which it believes it is entitled to contractually and will vigorously defend the litigation matters.
- Remaining Canadian LSTK infrastructure projects continue to progress well, costs to complete reassessed in light of COVID-19. Projects continue to be affected by unprecedented COVID-19 challenges, the primary driver in $90 million of charges to be taken in Q4 2020, largely reflecting the decision to delay recognition of any COVID-19 related revenue.
- Previously announced financial outlook for SNCL Engineering Services reconfirmed.
"Over the past 18 months, we have made significant strides in advancing our strategy and de-risking the business. Following the introduction of our new strategy in July 2019, we have significantly improved our operating cash flows and demonstrated that our Engineering Services line of business is resilient and can deliver strong results," said Ian L. Edwards, President and CEO of SNC-Lavalin Group Inc. "The sale of the Oil & Gas business further simplifies and de-risks our business and allows us to enhance our focus on growing our high potential core Engineering Services business. I would like to thank all of our Oil & Gas employees for their contributions over the years and wish them well in the next stage of their journey.
"As previously announced, we have undertaken a rigorous risk review of our legacy LSTK litigation matters, which we expanded to include all other significant current litigation matters and legacy commercial claims receivable. Concurrently, we have also reviewed our remaining Canadian light rail transit LSTK projects to consider, in particular, the significant impact and challenges that COVID-19 has had, and will continue to have, on costs. The objective of this exercise was to further ensure we are taking a prudent and reasonable view of these projects in light of the ongoing COVID-19 situation and further reduce uncertainty on the final financial outcome," added Mr. Edwards.
"Since my appointment in September 2020, the Board has overseen the work of management and external advisors in assessing and reducing the Company's risk areas and quantifying the LSTK financial risks. Our goal is to reduce remaining financial uncertainty of the Company's legacy issues. The sale of the Oil & Gas business allows us to enhance our focus on the future growth potential and profitability in SNC-Lavalin's Engineering Services business. We believe this approach supports our overall objective to unlock and ultimately create long-term shareholder value," said William L. Young, Chair of the Board.
Strategic divestiture of the Resources Oil & Gas business
On February 8, 2021, SNC-Lavalin Group Inc. entered into a binding agreement to sell its Oil & Gas business, including Services and LSTK, to Kentech Corporate Holdings Limited. The transaction is subject to regulatory approvals and satisfaction of customary closing conditions and the closing is targeted for Q2 2021.
In line with the Company's strategy, the sale of the business, which includes all ongoing and recently completed Oil & Gas LSTK projects, is expected to significantly reduce operational and execution risks and will simplify the Company's corporate structure and enable management to dedicate more time, effort and resources to growing the higher margin and more stable Engineering Services business. The transaction is also an important milestone in the Company's journey towards its sustainability business strategy, as highlighted in the Company's 2019 Sustainability Report.
At closing, the transaction is expected to create a gain on sale. The Oil & Gas business will be classified as an "Asset Held for Sale" in Q4 2020 and is expected to result in a fair value write down in the range of $260 to $295 million, which is almost entirely non-cash in nature. At closing, the transaction is expected to generate a gain on the sale in excess of the fair value write down, after accounting for the elimination of foreign exchange CTA included in the historical carrying amounts of the disposed Oil & Gas business.
The remaining Resources business will be mainly comprised of Services projects in the Mining & Metallurgy ("M&M") sector. The remaining Resources project positions, including historical claims and litigation matters, have been reassessed based on the latest information, including ongoing commercial discussions with clients. An updated cost forecast was also completed in Q4 2020 on the one remaining Resources M&M LSTK project, which is expected to be completed in 2021. Based on these actions for the remaining Resources business, a charge of approximately $95 million, for which approximately 30% is non-cash, will be taken in Q4 2020.
Previously announced review of legacy LSTK litigation matters completed, expanded to include all other significant claims
As indicated in the Company's press release dated October 30, 2020, the Company undertook a review of the remaining LSTK legacy litigation matters, taking into account all new and updated information. A decision was also made by management to expand this exercise to include all other significant litigation matters, as well as commercial claims receivable on all legacy and ongoing LSTK projects. This review process was an enhancement of the robust process normally done in connection with the preparation of the annual financial statements. At the same time, the latest commercial discussions with customers, updated cost forecasts, and realized litigation matter outcomes were incorporated into the review process.
The review was performed by senior management utilizing internal and external experts and advisors, and was overseen by a special committee of the Board of Directors. The review is now complete.
Based on the combination of the latest commercial outcomes and the expanded review process, the Company will be recognizing in Q4 2020 additional provisions of approximately $140 million, and a reduction in commercial claims receivable of $155 million. Approximately 75% of the total is non-cash in nature, with the balance impacting cash and spread over a number of future years depending on the eventual timing of litigation outcomes. Notwithstanding these provisions, the Company will continue to aggressively pursue all claims receivable, which it believes it is entitled to contractually and will vigorously defend the litigation matters.
Remaining Canadian LSTK infrastructure projects continue to progress well, costs to complete reassessed in light of COVID-19
Concurrently with the above-mentioned review, the Company has also reviewed its remaining three Canadian LSTK infrastructure projects, taking into consideration the ongoing significant impact and challenges resulting from COVID-19. These projects continue to be materially affected by lower productivity attributable to revised working conditions caused by COVID-19 and supply chain disruptions, creating unprecedented challenges. Following the review of these projects and a cost reassessment based on the latest facts and information, and in light of the ongoing uncertainty on the timing and scope of reimbursement of these COVID-19 incremental costs, no revenue associated with the additional COVID-19 costs has been recognized by the Company for these projects. As a result, the Company expects to take a charge of approximately $90 million in Q4 2020 related to these projects, most of which is due to COVID-19 challenges and the decision to not recognize associated revenue at this time. The Company strongly believes that it is entitled to these revenues, but until greater clarity is forthcoming, it will continue to only recognize COVID-19 expenses on the ongoing LSTK infrastructure projects.
Despite the COVID-19 related challenges, these Canadian infrastructure LSTK projects, which are being built with strong and reputable partners, continue to progress well.
SNCL Engineering Services 2020 Outlook Reconfirmed
As stated in the Company's Q3 2020 results announcement, the Company expects that SNCL Engineering Services revenue for Q4 2020 should decrease by a low to mid single digit percentage, compared to Q4 2019, and that its Segment Adjusted EBIT to revenue ratio(2) should be between 8.5% and 9.5% for the same period.
This outlook is based on the assumptions and methodology described in the Company's Q3 2020 Management's Discussion and Analysis under the heading, "How We Budget and Forecast Our Results" and the "Forward-Looking Statements" section below and is subject to the risks and uncertainties summarized therein and in the Company's 2019 Annual Management's Discussion and Analysis as updated in the Company's interim quarterly Management's Discussion and Analysis throughout 2020, which are more fully described in the Company's public disclosure documents.
Financial Impacts Summary
For ease of reference, the table below summarizes the above-mentioned financial metrics.
Conference Call / Webcast
SNC-Lavalin will hold a conference call today at 8:30 a.m. EST to discuss this announcement. A live audio webcast of the conference call and an accompanying slide presentation will be available at www.investors.snclavalin.com. The call will also be accessible by telephone, please dial toll free at 1 800 319 4610 in North America or dial 1 604 638 5340 outside North America. You can also use the following numbers: 416 915 3239 in Toronto, 514 375 0364 in Montreal, or 080 8101 2791 in the United Kingdom. A recording of the conference call and its transcript will be available on the Company's website within 24 hours following the call.