Canadian Manufacturing

SNC-Lavalin disbands special committee on spinoffs, but ‘all options’ still open

The company has been working to set a new strategic direction in recent months, pivoting away from big, fixed-price construction contracts

February 28, 2020  The Canadian Press

MONTREAL — SNC-Lavalin Group Inc. has disbanded the special committee it quietly launched in December 2018 to explore strategic options that included spinning off chunks of the engineering giant when it was confronting criminal charges.

“The committee was very useful to me in the first half of last year in getting to the point where we defined the new strategic direction,” said CEO Ian Edwards. “But I think we’ve got to a point where we’ve defined what the future of the company is.”

Divesting assets such as SNC’s struggling resources division, which lost $51.2 million before interest and taxes last quarter, “absolutely” remains a possibility with “all options” on the table, Edwards said Feb. 28.

SNC-Lavalin formed the special committee after failing to convince federal prosecutors to drop fraud and corruption charges in the fall of 2018, presenting them with a possible plan to split the company in two and move its offices to the United States if it didn’t get a deal to avoid criminal prosecution, according to documents obtained by The Canadian Press in March.

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SNC settled those criminal charges last December as its construction subsidiary pleaded guilty to a single count of fraud related to projects in Libya, tying off a long-standing scandal that tarnished the firm’s reputation and ensnared the highest office of the Canadian government.

“2019 was a challenging year for us in many ways. We were tested as a company and went through some very difficult times, but I am very proud to say that we took decisive action and are stronger for it,” Edwards said.

The company has been working to set a new strategic direction in recent months, pivoting away from big, fixed-price construction contracts — where the bidder shoulders any cost overruns — toward a more stable business model that revolves around engineering services. The beleaguered firm has also added several new senior executives and board members.

Edwards confirmed on a conference call with analysts Feb. 28 that he would consult the board before any major asset sales.

“You’re now looking at less drastic-type measures,” analyst Chris Murray of AltaCorp Capital said in a phone interview.

“With the resources business, there’ll be lines of business that maybe make sense to be run as part of the company on a go-forward basis. There’ll be other parts that might be better served held by different owners,” he said.

“They feel like they’ve achieved the major restructuring that they wanted to, and now it’s a matter of…the execution phase of this plan.”

Despite a rout on North American stock markets Feb. 28, SNC-Lavalin shares rose 8.5% or $2.39 to $30.51 in mid-afternoon trading on the Toronto Stock Exchange following the release of quarterly results.

The company has banned work-related travel to mainland China due to the novel coronavirus outbreak, Edwards said. Employees at its offices in Beijing, Shanghai and Hong Kong are now working remotely.

“The impact is not very significant from those businesses right now,” Edwards said.

The offices account for 2.6% of revenue, he said. Edwards declined to speculate on the broader impact throughout 2020.

SNC forecasted that revenue from engineering services, which took in nearly two-thirds of revenue last quarter, will grow by a low single-digit percentage this year.

The company reduced its backlog of so-called lump-sum, turnkey projects in resources and infrastructure to $3 billion from $3.2 billion in the fourth quarter.

The vast majority of resources contracts — which lose money but make up only about 14% of the backlog — are expected to reach completion by year’s end, marking an end to oil and gas projects in the Middle East and North America.

The company’s four main remaining infrastructure projects comprise three light-rail transit contracts — the Eglinton Crosstown LRT in Toronto, Montreal’s REM and Ottawa’s Trillium line extension — as well as a support structure for Husky Energy’s West White Rose oil rig off the coast of Newfoundland.

The company reported a fourth-quarter loss of $292.9 million as the company recorded a charge related to a $280-million fine it agreed to pay after its construction subsidiary’s guilty plea on Dec. 18. for actions taken in Libya between 2001 and 2011. SNC also opted to shut down its Valerus oil and gas facility in Houston and absorbed a $72-million restructuring charge.

The loss amounted to $1.67 per diluted share for the quarter compared with a loss of $1.6 billion or $9.11 per diluted share in the same quarter a year earlier when it recorded a $1.2-billion goodwill impairment charge.

Revenue totalled $2.44 billion, down from $2.56 billion in the fourth quarter of 2018, the company said.

Adjusted earnings per share amounted to 56 cents per share for the quarter ended Dec. 31 including 45 cents from its engineering and construction business. The result compared with an adjusted loss of $1.31 per diluted share in the last three months of 2018 when the engineering and construction business had an adjusted loss of $1.62 per diluted share.

Full-year net income rose to $328.2 million or $1.87 per diluted share from a loss of $1.32 billion or $7.50 per diluted share in 2018, while revenue fell to $9.52 billion from $10.08 billion the year before.