Second quarter and half year results July 2018

Transcription

1 Second quarter and half year results July 2018

2 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 KVÆRNER ASA SECOND QUARTER AND HALF YEAR RESULTS 2018 FIRST HALF YEAR HIGHLIGHTS Operations and results on track Contract for Johan Castberg FPSO of NOK 3.8 billion signed in April Investments of NOK 370 million for increased productivity and capacity at the Stord yard Johan Sverdrup drilling platform jacket completed Contract for Johan Sverdrup riser platform modification in JV with Aker Solutions New CEO, Karl-Petter Løken, started in May Fabrication commenced on the Valhall Flank West unmanned platform Subsequent events: o Johan Sverdrup process platform jacket completed FINANCIAL HIGHLIGHTS FIELD DEVELOPMENT SEGMENT 1 Operating revenue EBITDA Order backlog NOK million NOK million NOK million The main differences between the Field Development figures and group figures presented are Kvaerner s share of revenues from jointly controlled entities included in Field Development and unallocated costs deducted 2018 Kværner ASA 1 2 nd quarter and half year 2018 report

3 FIELD DEVELOPMENT SEGMENT 1 FINANCIAL REVIEW Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 Total revenue and other income EBITDA EBITDA margin 6.4 % 11.6 % 8.5 % 8.6 % 11.1 % Net current operating assets (NCOA) (839) (1 342) (839) (1 342) (915) Order intake Order backlog Employees The Field Development segment reporting includes Kvaerner s share (proportionate consolidation) of jointly controlled entities closely related to Kvaerner s operating activities 2 EBITDA definition: Earnings before Interest (net financial items), Taxes, Depreciation, Amortisation and Impairment Operating revenue from the Field Development segment was NOK million in second quarter 2018, compared to NOK million in second quarter The reduction is explained by lower activity within all operational areas. EBITDA amounted to NOK 118 million, resulting in an EBITDA margin for the quarter of 6.4 percent, compared to EBITDA of NOK 230 million and 11.6 percent EBITDA margin in second quarter The reduction in EBITDA and EBITDA margin compared to second quarter 2017 is due to both recently awarded projects in early phase not yet recognising margin and second quarter last year significantly impacted by recognised bonuses and incentives. Quarterly fluctuations in earnings are to be expected due to phasing of projects, project portfolio mix and incentives. NCOA at the end of second quarter 2018 was negative NOK 839 million, a deterioration of NOK 76 million year to date. The disputed Nordsee Ost project is tying up working capital until the arbitration is resolved. Order intake and backlog Order intake in second quarter totalled NOK million, including Kvaerner s scope of work of jointly controlled entities, compared to NOK 370 million in the same quarter last year. Order intake includes Kvaerner s share of contract for Johan Sverdrup phase 2, as well as small orders and growth in existing projects. The contract for Johan Sverdrup phase 2 is a joint venture with Aker Solutions for modifications of the riser platform and the field centre for the Johan Sverdrup development. As of 30 June 2018, order backlog, including Kvaerner s scope of work of jointly controlled entities, amounted to NOK million. Estimated scheduling of the order backlog is approximately 31 percent for execution in 2018, approximately 41 percent for execution in 2019 and remaining 28 percent for execution in 2020 and later Kværner ASA 2 2 nd quarter and half year 2018 report

4 OPERATIONAL REVIEW Health, Safety, Security and Environment (HSSE) Sick leave was 5.5 percent in the second quarter, versus 5.6 percent for the 12 months average numbers. This is above the company s target of 4.8 percent. New improvement programmes have been implemented during second quarter. There has been a negative trend in the total recordable injury frequency (TRIF) during last quarter with too many minor cut injuries. The lost time injury frequency (LTIF) has been slightly declining over the last 12 months period. During second quarter, two persons injured their fingers, of which one seriously. Following three incidents related to falling objects, further improvement actions have been initiated. Operations The activity level in Kvaerner has been high during the first half year. The common denominator is that all current projects are on track. At Stord, the Johan Sverdrup ULQ topside has made significant progress and is nearly complete, on track for delivery early next year. The Njord A semisubmersible platform upgrade is progressing well and the lifting and installation of structures and equipment will start after the summer. At the demolition site, the activity is also high with three parallel projects on-going. Offshore, assistance to Equinor to prepare the Aasta Hansteen platform for production start later this year is on-going at the field. Kvaerner is also working in a joint team with Aker Solutions to prepare the Johan Sverdrup Riser Platform for production start next year. The first work on the new contract for an additional module to be installed on the same Riser Platform in connection with phase 2 of the development has started. The initial work with the Johan Castberg FPSO is progressing well, and will commence with first physical work at Stord during third quarter. At Verdal, the last of the three steel jackets for Johan Sverdup, the process jacket, is being completed. It is scheduled for tow to the field during July. The structure for Repsol s Yme project is under completion and the Valhall Flank West platform has started fabrication work. Internationally, the work for the Nord Stream 2 landfall project has started work at site outside St. Petersburg following a planning period in Kvaerner s Moscow office. In Canada, we are in the early phases for the contract related to marine operations for Husky s new White Rose platform. Competitiveness and market Sick leave TRIF LTIF The results from bid competitions during the last 12 months demonstrate that Kvaerner has continued to strengthen its competitiveness. The recent awards of the Johan Castberg FPSO and Johan Sverdrup Phase 2 contracts are two key examples. Continued strong competition is expected, and the company is already working on the next steps to increase its competitiveness. This includes increased use of digital solutions as well as new low cost delivery models for fabrication. The combination of lower field development costs and higher oil prices has increased the activity levels in the oil and gas sector. This is very evident in the front end market with a high number a studies on-going, and tendering activities have also been high. The market outlook seems to be moving towards larger developments in the Barents Sea and fewer in the North Sea. However, across the various national parts of the North Sea, there is a continued potential for increased numbers of tieback solutions and larger modifications. Internationally, Kvaerner continues to focus on selected prospects. In Kvaerner s growth segments, the 2018 Kværner ASA 3 2 nd quarter and half year 2018 report

5 company is positioning for new contract opportunities within offshore wind, decommissioning, marine operations and modifications. The competition is strong, but Kvaerner has also during the first half of 2018 improved its offering and position within these segments. GROUP FINANCIAL REVIEW Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 Total revenue and other income EBITDA Adjusted EBITDA Adjusted EBITDA margin 5.6 % 14.4 % 7.8 % 10.5 % 12.0 % EBIT Net profit - continuing operations Basic and diluted earnings per share - continuing operations Order intake Order backlog Net current operating assets (NCOA) (703) (1 129) (703) (1 129) (650) Net interest bearing deposits and loans Excluding revenues for scope of work of jointly controlled entities closely related to Kvaerner s operating activities 2 Adjusted EBITDA excludes impact of embedded foreign currency derivatives reported in jointly controlled entities closely related to Kvaerner s operating activities 3 Including Kvaerner s scope of work of jointly controlled entities closely related to Kvaerner s operating activities Income statement Operating revenues in second quarter 2018 amounted to NOK million, compared with NOK million for second quarter Kvaerner reported operating revenues of NOK for the first six months of 2018, compared with NOK million for the same period in Higher revenues reflect lower revenues from joint ventures compared to one year ago. Joint ventures are reported as equity accounted investees at group level. Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) for the quarter were NOK 91 million, compared to NOK 219 million in the same period last year. Adjusted Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) for the quarter were NOK 102 million, compared to NOK 216 million in the same period last year. The lower EBITDA is due to recently awarded projects in early phase not yet recognising margin and second quarter last year significantly impacted by recognised bonuses and incentives. Adjusted EBITDA for the first six months of 2018 was NOK 293 million, compared with NOK 321 million for the equivalent period in Net financial expense for the quarter was NOK 18 million, mainly reflecting loss on embedded derivatives of NOK 16 million. Net financial expense for the same period in 2017 was NOK 1 million. Net financial expense for the first six months of 2018 was NOK 26 million, compared to an income of NOK 3 million in Profit before tax for second quarter 2018 was NOK 45 million compared to NOK 192 million for the same period last year. For the first six months of 2018, profit before tax was NOK 204 million compared to NOK 278 million for the same period in Total income tax expense in the quarter was NOK 11 million compared to NOK 49 million for the same quarter previous year. First half year tax expense amounted to NOK 51 million, compared to NOK 76 million in The tax expense reflects an effective tax rate of 25 percent for first half year 2017 compared to 27 percent in The tax rate is higher than the Norwegian statutory tax rate of 23 percent due to deferred tax assets not recognised on losses in some jurisdictions in which the group operates. Profit from continuing operations was NOK 34 million and NOK 153 million for second quarter and first half year 2018 respectively, compared to NOK 144 million and NOK 202 million in equivalent periods in Basic and 2018 Kværner ASA 4 2 nd quarter and half year 2018 report

6 diluted earnings per share for continuing operations were NOK 0.13 for second quarter 2018 and NOK 0.57 for the first six months of 2018, compared to NOK 0.54 for second quarter 2017 and NOK 0.76 for the first six months of Net profit from discontinued operations was NOK 8 million for second quarter 2018, compared to a loss of NOK 16 million in same period last year. First half year result from discontinued operations was a profit of NOK 4 million compared to a profit of NOK 21 million in The positive quarterly and year to date result for 2018 reflects insurance recovery recognised and received in second quarter The 2017 results were also positively impacted by recognised insurance recovery. Basic and diluted earnings per share for discontinued operations were NOK 0.03 for second quarter 2018 and NOK 0.01 for the first six months of 2018, compared to negative NOK 0.06 for second quarter 2017 and NOK 0.08 for the first six months of Net profit total operations in second quarter 2018 was NOK 42 million compared to NOK 127 million in the corresponding quarter last year. Basic and diluted earnings per share for total operations for second quarter 2018 were NOK 0.16 compared to NOK 0.48 in second quarter Net profit for the first six months of 2018 was NOK 157 million compared to NOK 223 million last year. Basic and diluted earnings per share for total operations for the first half year were NOK 0.59 and NOK 0.84 for 2018 and 2017 respectively. Cash flow Net cash inflow from operating activities was NOK 336 million in second quarter 2018 compared to cash outflow of NOK 34 million in the same period last year. Net cash inflow from operating activities in first half year 2018 was NOK 322 million, compared to cash outflow of NOK 85 million in first half of Net cash outflow from investing activities mainly reflects capital expenditure and was in second quarter 2018 NOK 80 million compared to an outflow of NOK 10 million in the same quarter last year. Year to date cash outflow from investing activities amounted to NOK 106 million compared to NOK 17 million in Capital expenditure mainly relates to Stord yard development, acquisition of decommissioning equipment and digitalisation projects. For the full year, total capex of around NOK 300 million is expected. This includes maintenance capex of NOK 50 million and around NOK 150 million of the NOK 370 million announced to be invested in the new quay facilities at Stord. Further, strategic and capacity investments of up to NOK 100 million at the yards, such as equipment and digitalisation tools, are initiated in Net cash outflow from financing activities was NOK 9 million in the quarter and NOK 11 million year to date, compared with outflows of NOK 4 million and NOK 8 million in the same periods in Outflow in 2018 is mainly related to fees paid and acquisition of treasury shares. Net increase in cash and bank deposits during the quarter amounted to NOK 245 million, resulting in cash and bank deposits at the end of the quarter of NOK million. As of 30 June 2018, the group has not drawn on its credit facilities. Balance sheet Net current operating assets (NCOA) were negative NOK 703 million at 30 June 2018, compared to negative NOK 491 million at the end of previous quarter and negative NOK 650 million at year-end Kvaerner has previously communicated that significant fluctuations in working capital must be expected within the range of negative NOK 500 million to negative NOK 1.5 billion. Movements in working capital will impact cash balances and at the end of second quarter, net cash excluding negative NCOA was NOK million. Equity ratio at 30 June 2018 was 54.2 percent, down from 55.6 percent at 31 March 2018 and 54.5 percent at year-end Transactions in treasury shares In connection with the company s variable pay programme for executives, Kvaerner awarded shares to employees in the quarter. At the end of second quarter Kvaerner owned treasury shares, or 0.41 percent of the shares issued Kværner ASA 5 2 nd quarter and half year 2018 report

7 The Kvaerner share Indexed share price development last 12 months Kværner ASA Oslo Børs Benchmark Index The market capitalisation was NOK 4.6 billion at the end of second quarter 2018 compared to NOK 2.7 billion at the end of second quarter Reporting segments Kvaerner has one reportable segment; Field Development. The segment includes the resource centres and the following operational areas: Process Solutions, Structural Solutions and Concrete & New Solutions. Field Development segment financials and operations are commented at the start of this report. Downstream & Industrials segment (Discontinued operations) Refer to note 9 for Summary of financial data for Discontinued operations. Unallocated costs Unallocated costs, which are net corporate costs not directly attributable to segments, amounted to NOK 15 million in second quarter 2018, same level as in first quarter It is expected that the recurring level of net corporate costs will be approximately NOK million annually. SUBSEQUENT EVENTS Dividend The Board of Directors has resolved no dividend distribution Kværner ASA 6 2 nd quarter and half year 2018 report

8 PRINCIPAL RISKS AND UNCERTAINTIES Operational risk is the ability to deliver existing contracts at the agreed time, quality, functionality and cost. Delivering projects and equipment in accordance with contract terms and anticipated cost framework represents a substantial risk element, and is the most significant factor affecting Kvaerner s financial performance. Results also depend on costs, both Kvaerner s own and those charged by suppliers, and on interest expenses, exchange rates and customers ability to pay. For an overview of major current legal disputes, see note 7 to the interim accounts. Kvaerner has established guidelines and systems to manage its exposure in the financial markets. These systems cover currency, interest rate, counterparty and liquidity risks. Kvaerner works systematically with risk management in all its operations, and has extensive systems and procedures in place. Other relevant risk factors are further described in the annual report for OUTLOOK In Kvaerner s traditional market, there are only some few and thus even more important prospects for Kvaerner to compete for during the next 12 to 18 months. The future activity level will be significantly influenced by the outcome of such key tenders. In the longer term, there is a potential for significant green field projects in the Barents Sea and internationally. In the defined growth segments, Kvaerner expects that a number of smaller and medium sized prospects may be decided within the next 12 to 24 months. Kvaerner maintains the outlook for 2018 with full year gross revenue of more than NOK 7 billion and full year EBITDA margins lower than in Fornebu, 10 July 2018 The Board of Directors and President & CEO of Kværner ASA 2018 Kværner ASA 7 2 nd quarter and half year 2018 report

9 DECLARATION BY THE BOARD OF DIRECTORS AND PRESIDENT & CEO The Board of Directors and the President & CEO of Kværner ASA have today considered and approved the condensed financial statements as at 30 June 2018 and for the six-month period ended 30 June The half year report has been prepared in accordance with IAS 34 Interim Financial Reporting as endorsed by the EU and additional Norwegian regulations. We confirm to the best of our knowledge that: the condensed financial statements for the six months ending 30 June 2018 have been prepared in accordance with applicable financial reporting standards the information provided in the financial statements gives a true and fair view of the group s assets, liabilities, financial position and result for the period the financial review includes a fair review of significant events during the first six months of the year and their impact on the financial statements, any major related party transactions, and a description of the principal risk and uncertainties for the remaining six months of the year Fornebu, 10 July 2018 The Board of Directors and the President & CEO of Kværner ASA Leif-Arne Langøy Chairman Jan Arve Haugan Director Thorhild Widvey Director Lone Fønss Schrøder Director Kjell Inge Røkke Director Rune Rafdal Director Ståle Knoff Johansen Director Bernt Harald Kilnes Director Karl-Petter Løken President & CEO 2018 Kværner ASA 8 2 nd quarter and half year 2018 report

10 FURTHER INFORMATION Investor inquiries: Idar Eikrem, EVP & CFO, Kvaerner, Mob: Media inquiries: Torbjørn Andersen, Head of Communications, Kvaerner, Mob: About Kvaerner: Kvaerner is a leading provider of engineering, procurement and construction (EPC) services, and delivers offshore installations and onshore plants for upstream oil and gas production around the world. Kvaerner ASA, through its subsidiaries and affiliates ( Kvaerner ), is an international contractor and preferred partner for oil and gas operators and other engineering and fabrication contractors. Kvaerner and its approximately HSSEfocused and experienced employees are recognised for delivering some of the world s most amazing and demanding projects. In 2017, Kvaerner s Field Development segment had consolidated annual revenues of NOK 7.6 billion and the company reported an order backlog at 30 June 2018 of NOK 11.2 billion. Kvaerner is publicly listed with the ticker "KVAER" at the Oslo Stock Exchange. For further information, please visit FINANCIAL CALENDAR 2018 Third quarter results October 2018 The dates may be subject to change Kværner ASA 9 2 nd quarter and half year 2018 report

11 FINANCIAL STATEMENTS INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 Total revenue and other income Operating expenses (1 737) (1 282) (3 457) (2 729) (5 737) EBITDA Depreciation and amortisation (27) (26) (53) (52) (106) Operating profit Net financial income/(expense) (18) (1) (26) 3 4 Profit/(loss) before tax Income tax expense (11) (49) (51) (76) (186) Profit/(loss) from continuing operations Profit/(loss) from discontinued operations 8 (16) Net profit/(loss) Attributable to: Equity holders of the parent company - Kværner ASA Earnings per share (NOK) Basic and diluted EPS continuing operations Basic and diluted EPS discontined operations 0.03 (0.06) Basic and diluted EPS total operations Kværner ASA 10 2 nd quarter and half year 2018 report

12 INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 Net profit/(loss) for the period Items that are or may be reclassified to profit or loss in subsequent periods: Cash flow hedges, net of tax - Fair value adjustments recognised in equity (10) (2) (11) (1) (1) - Reclassified to profit or loss (1) - (1) - 0 Translation differences, foreign operations 2 0 (0) (3) (1) Reclassification of translation differences on discontinued operations and international branches (2) 1 0 (0) (8) Items that are or may be reclassified to profit or loss in subsequent periods (10) (1) (11) (5) (10) Items not to be reclassified to profit or loss in subsequent periods: Actuarial gains/(losses) on defined benefit pension plans, net of tax - (0) - (0) (20) Items not to be reclassified to profit or loss in subsequent periods: - (0) - (0) (20) Total other comprehensive income/(loss), net of tax (10) (1) (11) (5) (29) Total comprehensive income/(loss) Attributable to: Equity holders of the parent company - Kværner ASA Kværner ASA 11 2 nd quarter and half year 2018 report

13 INTERIM CONDENSED CONSOLIDATED BALANCE SHEET Amounts in NOK million Assets Non-current assets Property, plant and equipment Intangible assets Investments in associates and jointly controlled entities Other non-current assets Total non-current assets Current assets Trade and other receivables Prepaid company tax 15-6 Total cash and bank Retained assets of business sold Total current assets Total assets Equity and liabilities Equity Share capital Share premium Retained earnings Other reserves (87) (50) (75) Total equity Non-current liabilities Deferred tax liabilities Employee benefit liabilities Total non-current liabilities Current liabilities Trade and other payables Tax liabilities Provisions Retained liabilities of business sold Total current liabilities Total equity and liabilities Kværner ASA 12 2 nd quarter and half year 2018 report

14 INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGE IN EQUITY Amounts in NOK million Total paid in capital Retained earnings Other reserves Total equity Equity as of 31 December (46) Profit for the period 1 January to 30 June Other comprehensive income - - (5) (5) Total comprehensive income (5) 218 Treasury shares Equity as of 30 June (50) Profit for the period 1 July to 31 December Other comprehensive income - - (25) (25) Total comprehensive income (25) 295 Treasury shares Employee share purchase programme - (2) - (2) Equity as of 31 December (75) Profit for the period Other comprehensive income - - (11) (11) Total comprehensive income (11) 146 Treasury shares Equity as of 30 June (87) INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 Profit before tax continuing operations Profit before tax discontinued operations 8 (16) Profit/(loss) before tax total operations Depreciation, amortisation and impairment Taxes (paid)/refund (0) (16) (10) (45) (65) Other cash flow from operating activities 256 (220) 71 (391) (865) Cash flow from operating activities 336 (34) 322 (85) (113) Capital expenditure (73) (10) (100) (17) (91) Other cash flow from investing activities (6) 0 (6) (0) (2) Cash flow from investing activities (80) (10) (106) (17) (93) Other cash flow from financing activities (9) (4) (11) (8) (27) Cash flow from financing activities (9) (4) (11) (8) (27) Translation adjustments (1) 0 (6) (1) (1) Net increase/(decrease) in cash and bank deposits 245 (47) 199 (111) (234) Cash at the beginning of the period Cash at the end of the period Kværner ASA 13 2 nd quarter and half year 2018 report

15 SEGMENT INFORMATION Kvaerner has one reportable segment; Field Development. The segment includes the resource centres and the following operational areas: Process Solutions, Structural Solutions and Concrete & New Solutions. The main differences between the Field Development figures and group figures presented are Kvaerner s share of revenues from jointly controlled entities included in Field Development and unallocated costs deducted. Field Development Group activities and eliminations Consolidated Amounts in NOK million Q Q Q Q Q Q Construction contracts Services revenue Revenue/share of result from joint ventures (195) (667) 3 57 Other income Total external revenue and other income (18) (485) Internal revenue 0 0 (0) (0) - - Total revenue and other income (18) (485) Adjusted EBITDA (15) (14) EBITDA (27) (11) Depreciation and amortisation (27) (26) - - (27) (26) EBIT (27) (11) Field Development Group activities and eliminations Consolidated Amounts in NOK million YTD 2018 YTD 2017 YTD 2018 YTD 2017 YTD 2018 YTD 2017 Construction contracts Services revenue Revenue/share of result from joint ventures (411) (1 279) Other income Total external revenue and other income (49) (972) Internal revenue 0 27 (0) (27) - - Total revenue and other income (49) (999) Adjusted EBITDA (30) (30) EBITDA (40) (23) Depreciation and amortisation (53) (52) - - (53) (52) EBIT (40) (23) Net current operating assets (839) (1 342) (703) (1 129) 2018 Kværner ASA 14 2 nd quarter and half year 2018 report

16 Field Development Group activities and eliminations Consolidated Amounts in NOK million Construction contracts Services revenue Revenue/share of result from joint ventures (1 888) 167 Other income Total external revenue and other income (1 062) Internal revenue 27 (27) - Total revenue and other income (1 089) Adjusted EBITDA (60) 786 EBITDA 846 (48) 799 Depreciation and amortisation (106) - (106) EBIT 741 (48) 693 Net current operating assets (915) 266 (650) 1 Adjusted EBITDA excludes impact of embedded foreign currency derivatives reported in jointly controlled entities closely related to Kvaerner s operating activities FY 2017 FY 2017 FY Kværner ASA 15 2 nd quarter and half year 2018 report

17 NOTES Note 1 Reporting entity Kværner ASA (the company) is a company domiciled in Norway. These condensed consolidated interim financial statements ( interim financial statements ) comprise the company and its subsidiaries. Note 2 Basis of accounting Statement of compliance The condensed consolidated interim financial statements have been prepared in accordance with the International Financing Reporting Standards (IFRS) and IAS 34 Interim Financial Reporting for interim reporting as adopted by the European Union and additional Norwegian regulations. Accounting principles The interim financial statements are condensed and do not include all the information required by IFRS for a complete set of financial statements and should be read in conjunction with the full year consolidated financial statements for Kværner ASA. The consolidated 2017 financial statements for Kvaerner are available upon request at Except as described below, the accounting polices applied in these interim financial statements are the same as those applied in the group s Annual accounts IFRS 9 Financial instruments IFRS 9 was adopted on 1 January 2018 and supersedes IAS 39 Financial Instruments: Recognition and Measurement and addresses classification and measurements of financial instruments, impairment of financial assets and accounting. As indicated in the group s annual accounts 2017, Kvaerner has not had any significant impact of implementing the new standard as from 1 January IFRS 15 Revenue from contracts with customers IFRS 15 was adopted on 1 January 2018 and established a comprehensive framework for determining whether, how much and when revenue is recognised. The new standard has replaced IAS 11 Construction contracts, IAS 18 Revenue and related interpretations. Kvaerner has used the cumulative effect method at the date of application. Accordingly, the information presented for 2017 has not been restated. Following transition to the new standard, there were no transition impacts on equity as of 1 January Please refer to note 2 in the group s 2017 Annual accounts for further assessment of impacts from implementing the new standard and why the impact has been limited. The group's results for the six months ended 30 June 2018 would not have been adjusted if IFRS 15 had not been adopted, i.e. the financial statements would have been the same under IAS 11/18, except for classification of warranty provisions related to on-going projects in the balance sheet. If IFRS 15 had not been implemented, the balance sheet line Provisions would have been NOK 21 million lower at 30 June 2018, with the corresponding increase in Trade and other receivables/payables Kværner ASA 16 2 nd quarter and half year 2018 report

18 The details of the new accounting policies and changes from previous accounting policies for the group s main type of revenue are set out below: Type of revenue/contracts Nature of performance obligations Nature of change in accounting policy Construction contracts/revenue Construction contracts mainly consist of contracts for offshore installations, onshore plants for upstream oil and gas production and decommissioning, with no alternative use for the group. It has been assessed that these contracts normally will be one performance obligation and that revenue can be recognised over time. Under IFRS 15, revenue from the construction performance obligations is recognised in accordance with progress measure. Kvaerner will continue to use cost progress as progress measure; based primarily on contract costs incurred to date compared to estimated total contract costs. Variable consideration (such as bonuses and incentives, liquidated damages and penalties) and change of scope (such as variation orders and amendments) have a higher threshold for revenue recognition under IFRS 15 than under IAS 11. Kvaerner was previously practicing a high threshold for including this type of revenue, also considering that many of Kvaerner s contracts include bonuses and incentives related to key milestones, in particular towards the end of the project. Service contracts/revenue Revenue is recognised over time as services are provided. Any waste cost is excluded from cost progress calculations. Waste costs that would result in change of progress under IFRS 15 have not been identified. Revenue from service contracts are recognised in the period in which the services are rendered or by using the cost progress method. IFRS 15 did not have a significant impact on the group s accounting policies related to service revenues. Financial reporting standards to be implemented - IFRS 16 Leasing IFRS 16, effective for annual reporting periods beginning from 1 January 2019, replaces the existing guidance in IAS 17 Leases. The new standard will significantly change how the company accounts for its lease contracts currently accounted for as operating leases. Under IFRS 16, an on-balance sheet model similar to the current financial leases accounting will be applied to all lease contracts. Only leases for small items such as computers and office equipment will be exempt. Assets and liabilities will increase with the net present value of future lease payments. The group s EBITDA after implementation will increase as the lease payments will be presented as depreciation and finance cost rather than operating expenses. Kvaerner will use the modified retrospective approach at the date of initial application, with no restatement of comparative figures. The interim financial statements have not been subject to audit. The functional currency of the entities within Kvaerner is determined based on the nature of the economic environment in which they operate. The functional currency and presentation currency of Kværner ASA is NOK. Numbers are rounded to the nearest million, unless otherwise stated. As a result of rounding differences, numbers or percentages may not add up to the total. The condensed consolidated interim financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of Kvaerner s management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any subsequent interim period or annual accounts. Note 3 Judgments, estimates and assumptions In preparing these interim financial statements, management has made judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and judgments are continually evaluated and are based on historical experience and 2018 Kværner ASA 17 2 nd quarter and half year 2018 report

19 other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revision to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. In preparing these condensed consolidated interim financial statements, significant judgements made by management in applying the group's accounting policies and key sources of uncertainty in the estimates were consistent with those applied for the period ended 31 December 2017, except for impacts from the new accounting standards. Note 4 Revenue The group s operations and main revenue streams are those described in the last annual financial statements. The group s revenue is derived from contracts with customers. The disaggregation of revenue is shown with the segment reporting in this report. Note 5 Financial items Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 Net interest income/(expense) (1) 2 (0) 3 2 Profit/(loss) on foreign currency contracts (1) (0) (0) (0) (0) Foreign currency embedded derivatives impact (16) (1) (23) 1 (2) Net foreign exchange gain/(loss) (0) (1) (1) 0 6 Other financial items, net (1) (1) (2) (1) (2) Net financial income/(expense) (18) (1) (26) 3 4 Result on foreign currency contracts is related to portfolio of hedging instruments not qualifying for hedge accounting. Foreign currency embedded derivatives impact is reflecting accounting effects of multicurrency contracts, in line with requirements under IFRS. Forward foreign currency contracts The table below presents fair value of the group s derivative financial instruments as of 30 June Amounts in NOK million Assets at fair value Liabilities Net fair value at fair value YTD 2018 Embedded derivatives 3 (20) (17) Not hedge accounted 0-0 Cash flow hedges 18 (27) (9) Total 21 (47) (26) Note 6 Share capital and equity Kværner ASA has shares issued each with a nominal value of NOK Kvaerner currently has no share-based compensation that results in a dilutive effect on earnings per share. Basic and diluted earnings per share have been calculated based on the following number of average shares: Numbers in thousands Q Q YTD 2018 YTD 2017 FY 2017 Shares issued Effect of own shares held (1 807) (3 045) (1 981) (3 358) (2 785) Average number of outstanding shares Kværner ASA 18 2 nd quarter and half year 2018 report

20 Note 7 Contingent events Given the scope of the group s operations, group companies are inevitably involved in legal disputes in the course of their activities. Provisions have been recognised based on expected outcome of any disputes and litigation proceedings in accordance with applicable accounting rules. Such provisions are based on management's best evaluations and estimates of a likely outcome of the dispute. However, the final outcome of such disputes and litigation proceedings will always be subject to uncertainties, and resulting liabilities may exceed recognised provisions. The disputes and litigation proceedings are continuously monitored and reviewed, and recognised provisions are adjusted to reflect management s best assessment of most recent facts and circumstances. Litigation and arbitration costs are recognised as they occur. Significant, current disputes Nordsee Ost project In 2012, arbitration related to the Nordsee Ost project was filed. The last wind jackets for the project were delivered in October The arbitration process for the project will take time due to high complexity. It is currently not possible to estimate when the arbitration will be finalised. There is still substantial uncertainty with respect to the final financial outcome of the Nordsee Ost project, and to avoid prejudicing Kvaerner's position, no estimate of the expected final outcome is disclosed. Note 8 Related parties The largest shareholder of Kværner ASA, Aker Kværner Holding AS, is controlled by Aker ASA (70 percent) which in turn is controlled by Kjell Inge Røkke through The Resource Group TRG AS and subsidiaries. In accordance with IAS 24, all entities controlled by Aker ASA, associated companies and joint ventures of Kvaerner and certain other related parties are reported as related parties to Kvaerner. Kvaerner believes that all transactions with related parties have been based on arm's length terms. The table below gives an overview of aggregated transactions and balances with related parties. Amounts in NOK million YTD 2018 YTD 2017 FY 2017 Revenue Operating expenses (384) (236) (658) Trade and other receivables Trade and other payables Note 9 Discontinued operations summary of financial data The results for the discontinued business are reported separately under the heading Result from discontinued operations in the group s income statement. Results are related to insurance recoveries and associated costs. In the balance sheet, retained assets and liabilities are presented on separate lines. Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 Total revenue and other income Administrative and legal expenses 6 (15) EBIT 6 (14) Net financial income/(expense) 2 (2) (0) (1) (1) Profit/(loss) before tax 8 (16) Income tax income/(expense) (0) (0) 0 (1) 16 Profit/(loss) from discontinued operations 8 (16) Basic and diluted earnings/(losses) per share (NOK) 0.03 (0.06) Net assets (36) (38) (36) (38) (37) The positive year to date result for 2018 reflects insurance settlement related to the Longview Power project in second quarter. The year to date result 2017 was also positively impacted by recognised insurance recovery in first quarter Kværner ASA 19 2 nd quarter and half year 2018 report

21 Cash flows from discontinued operations are as follows: Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 Cash flow from operating activities Cash transferred (to)/from parent 7 (28) 9 (24) (22) Translation adjustments 2 (0) 0 (1) (2) Net increase/(decrease) in cash and bank deposits (14) (3) Cash at the beginning of the period Cash at the end of the period Note 10 Quarterly historical information continuing operations Amounts in NOK million Q Q Q Q Q Q Total revenue and other income Field Development Adjusted EBITDA Field Development Adjusted EBITDA margin 5.6 % 10.0 % 12.2 % 14.6 % 14.4 % 6.8 % Field Development 6.4 % 10.6 % 12.7 % 15.1 % 11.6 % 5.8 % Net profit/(loss) - continuing operations Basic and diluted EPS continuing operations Order intake Field Development Order backlog Field Development NCOA (703) (491) (650) (616) (1 129) (1 413) Field Development (839) (660) (915) (773) (1 342) (1 689) Net interest bearing deposits and loans Including Kvaerner s scope of work of jointly controlled entities closely related to Kvaerner s operating activities. Note 11 Alternative performance measures Kvaerner discloses alternative performance measures as part of its financial reporting as a supplement to the financial statements prepared in accordance with IFRS. Kvaerner believes that the alternative performance measures provide useful supplemental information to management, investors, security analysts and other stakeholders and are meant to provide an enhanced insight into the financial development of Kvaerner s business operations and to improve comparability between periods. Order intake and backlog are indicators of the company s revenues and operations in the future Kværner ASA 20 2 nd quarter and half year 2018 report

22 Profit measures EBITDA is short for Earnings before Interest, Taxes, Depreciation and Amortisation and is term commonly used by analysts and investors Adjusted EBITDA Earnings before Interest, Taxes, Depreciation and Amortisation excluding impact of embedded foreign currency derivatives reported in jointly controlled entities closely related to Kvaerner s operating activities Adjusted EBITDA margin is used to compare relative profit between periods. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by revenue Order intake measures Order intake represents expected revenue from contracts entered into in period or growth in existing contracts Order backlog represents remaining expected revenue from contracts entered into as per reporting date Financing measures Net current operation assets (NCOA) Kvaerner s measure of net working capital, defined as Trade and other receivables less Trade and other payables and Provisions Net interest bearing deposits and loans Kvaerner s measure of net interest bearing debt, defined as interest bearing receivables and cash and bank less interest bearing liabilities Equity ratio is calculated as total equity divided by total assets In the below tables it is shown how certain of the above measures are derived from the IFRS consolidated financial statements: Amounts in NOK million Q Q YTD 2018 YTD 2017 FY 2017 EBITDA Adjustment for equity accounted investees 1 12 (3) 10 (6) (12) Adjusted EBITDA Excluding embedded derivatives' impact reported Amounts in NOK million Trade and other receivables Trade and other payables (2 030) (2 220) (2 032) Provisions (261) (89) (148) Net current operating assets (NCOA) (703) (1 129) (650) Total cash and bank Net interest bearing deposits and loans Kværner ASA 21 2 nd quarter and half year 2018 report

23 Web: Kvaerner All rights reserved Photo: Trønder-Avisa, Marius Langfjord