Boart Longyear Group
Annual Report 2017

Plain-text annual report

ANNUAL REPORT 2017 CONTENTS 2017 Overview Chairman’s Report CEO’s Report Financial Report Directors’ Report Review of Operations Remuneration Report Board of Directors Executive Management Team Independent Auditor’s Report Directors’ Declaration Financial Statements 1 2 4 6 7 9 25 59 64 69 75 76 Supplementary Information Corporate Information 131 BC CORPORATE GOVERNANCE STATEMENT Our Corporate Governance Statement may be found at www.boartlongyear.com/corporate-governance WHO WE ARE Established in 1890, Boart Longyear is the world’s leading provider of drilling services, drilling equipment and performance tooling for mining and drilling companies. it also has a substantial presence in aftermarket parts and service, energy, mine dewatering, oil sands exploration, production drilling, and down-hole instrumentation. The Global Drilling Services division operates for a diverse mining customer base spanning a wide range of commodities, including copper, gold, nickel, zinc, uranium, and other metals and minerals. The Global Products division designs, manufactures and sells drilling equipment, performance tooling, down-hole instrumentation and parts and services. Our customers rely on our unique ability to develop, field test and deliver any combination of drilling consumables, capital equipment and expertise worldwide. *EBITDA, Adjusted EBITDA, Adjusted EBIT, and Adjusted NPAT are non IFRS measures and are used internally by management to assess the performance of the business. Cash from Operations excludes interest and tax. ii Boart Longyear 2017 Annual Report Copyright © 2018 Boart Longyear. All rights reserved. Boart Longyear 2017 Annual Report2017 OVERVIEW 2017 OVERVIEW 2017 2016 2015 Revenue US$739m Adjusted Gross Margin US$113m Adjusted EBITDA US$43m Gross Margin US$111m EBITDA US$-37m Adj. Net Profit After Tax US$-58m Net Profit After Tax US$-150m 739 642 735 113 111 89 86 77 -37 43 32 2 0 -115 -150 -58 -157 -108 -132 -326 Cash from Operations US$-40m Number of Employees 4,604 Safety TCIR 1.62 Safety LTIR 0.22 -40 -1 11 4,604 4,337 4,725 1.62 1.41 1.24 0.22 0.11 0.18 Drilling Services Revenue US$501m Drilling Services EBITDA US$69m Products Revenue US$239m Products EBITDA US$11m 501 448 528 69 52 41 239 195 207 11 13 15 Company Revenue (Products and Services) Company Revenue by Region (Products and Services) Drilling Services Revenue by Stage Drilling Services Revenue by Commodity Surface Coring Performance Tooling Rotary/RC Underground Coring Drilling Equipment Production Drilling Other 26% 25% 18% 16% 7% 5% 3% USA Asia Pacific Canada EMEA Latin America 27% 21% 19% 19% 14% Development (Near Mine/Brownfield) Production (In-Pit) 57% 24% Exploration (Greenfield) 10% Non-Mining 9% Gold Copper Nickel Other Energy Iron Non-Mining Water Other Metals 54% 20% 6% 5% 4% 4% 4% 3% 1 CHAIRMAN’S REPORT Dear Shareholders, With the 128 years of Boart Longyear’s existence, the company has experienced many ups and downs due to the cyclical nature of the mining industry. This is to be expected as the company is positioned within the exploration sector where demand for drilling products and services can be greatly affected. Although downturns are anticipated from trends seen in the industry over the last century, the good news for us is, after a five-year period of declining revenues, we saw revenue growth in 2017. All indications are that this growth will continue through at least the next couple of years. The challenge for us is to productively use this improved industry environment to make Boart Longyear a better and stronger company. We see this as having several critical elements: 1. Reduce debt to levels appropriate for a highly cyclical industry. 2. Keep overhead costs at current levels as we grow. 3. Continue to be the company that drills tough holes at low cost. 4. Provide a steady stream of innovative drilling products. 5. Accelerate our transition from not only being a provider of drilling services and products but also being a data provider to our customers. Regarding the last point, people drill holes because they want information. For us, this typically means the location, orientation, and assays of minerals in the subsurface. Boart Longyear’s historical role has been to provide the equipment and services to drill the holes. Third parties would then do the assaying, core logging and survey work. Having our drillers and equipment on standby while other parties complete work on our rig no longer makes sense. Our drill crews are already delivering to customers downhole survey and core orientation results using Boart Longyear equipment at many of our sites. We are trialling with some selected customers our assay-at-site technology— TruScan™—with very good results. 2 Boart Longyear 2017 Annual Report These three products fundamentally alter our service offering. We are now able to deliver the results from our drilling activities to our customer in a fast, low cost and user-friendly format. No extra people are required and the results are immediate. When bundled with the company that already is the best driller in the industry, we believe we have a very compelling and complete offering for our customers. As a final comment, we have already reached the level where our data business is self-funding. Effectively, we are growing a new and highly attractive business within your company without having to come up with additional cash. This is critical as it means that the five objectives outlined above are mutually compatible. During 2017, we also completed a financial restructuring. This transaction bought us the runway to “put our house in order”. While our debt levels remain too high, we have no meaningful debt repayment until 2022. Our objective during the coming three years is to deliver on the five elements noted above. As this occurs, we believe we will be able to offer substantial value growth to our shareholders. Your Board of Directors is overseeing these developments. As part of the recapitalization, the new shareholders nominated several Directors to the Board. This process meant that we said goodbye to a number of Directors who did an excellent job of guiding the company through turbulent times. Your new Directors are: Kyle Cruz, Jason Ireland, James Kern, Robert Smith, Richard Wallman and Eric Waxman. They join continuing directors Jeff Olsen (CEO), Gretchen McClain and myself. As a group, I am confident this Board has the skills and expertise to guide a very strong management team during an exciting time for your company. Yours sincerely, Marcus Randolph Chairman 3 CEO’S REPORT Dear Shareholders, I’m happy to report that since our 2017 Annual General Meeting (AGM), we are seeing a steady recovery of commodity prices and an increased demand for drilling. Estimates show a 15% - 20% increase in exploration spending expected in 2018*. As a result, our customers are enjoying significantly improved equity values and junior mining companies are seeing the strongest levels of capital raisings since 2013. The company has made some great strides forward with a renewed focus on optimizing performance and increasing safety. We ended the year’s performance with improvements in virtually all of our financial and operating metrics in both drilling services and drilling products. We are seeing increased utilisation of our drill fleet and improvement in our product revenues and backlogs. Safety is of the utmost importance as we benefit from this greater utilisation of our people and equipment. We are continually improving our safety efforts and are proud of our safety innovations and certifications as we strive to exceed the expectations of our clients. This all comes on the heels of achieving an important milestone with the completion of our recapitalisation and financial restructuring. Our shareholders overwhelmingly supported the transaction, as did our debt holders. We were able to accomplish our three primary goals of significantly reducing our debt, pushing out our remaining debt maturities to 2022 with reduced interest rates, and gaining increased liquidity in the form of new money. Driven by higher volumes both in the Drilling Services and Products divisions, our full-year revenues for 2017 were up $97 million, 15% higher than 2016. Comparing full-year 2017 to full-year 2016, adjusted EBITDA (excluding restructuring costs) was improved by $11 million, which was an increase of 35%. Significant items for 2017 totalled $80 million, compared to $30 million recorded in 2016. These items primarily related to restructuring charges associated with the recapitalisation program, and 4 Boart Longyear 2017 Annual Report other organisational structural changes associated with operational improvements. We now have a strengthened capital structure and a more secure company as we prepare for a market recovery. We are on track for achieving our business plan targets to ensure continued success and a sustainable future. With the restructuring, we saw some leadership changes in our Executive Team and welcomed Kari Plaster as the Vice President of Human Resources, and Robert Closner as Vice President, General Counsel. We have learned a lot about the business and how to make it better. We are being more deliberate in where we choose to do business with restructuring activities that included exiting some countries in 2017 where our returns were insufficient. In Salt Lake City, we consolidated four separate facilities to reduce overhead and bring together several groups into one Operations Centre that includes our bit plant manufacturing facility, engineering, drilling services, parts and services, IT and technology service groups. A consolidated and focussed approach will reduce costs and allow us to better serve our customers. Boart Longyear has a rich heritage and we continue to lead the market and build on the company’s history of innovation, drilling expertise, and longstanding customer relationships. With placing the customer at the core of our strategic priorities, we can identify, develop and respond rapidly to needs and new opportunities, through improved safety standards, higher productivity, product innovations and new downhole digital tools. We recently launched a versatile new line of Longyear™ diamond coring bits engineered and proven to drill faster, last longer and outperform existing bit technology. We also introduced the Boart Longyear XQ™ Drill Rod. This new rod features an innovative and patented self-aligning thread-start geometry that engages smoothly to keep the rig running with less downtime and quicker attainment of target depths. Through our Drilling Services teams we are adding value to our service offerings by utilising innovative and proprietary TruScan™ technology. Calibrated to the site’s geology, this XRF technology captures accurate, real-time geological data at the exploration site which is much quicker than sending core samples off to assay labs for analysis. These innovations represent steps in executing the company’s strategy to be the drilling partner of choice. We believe our new products and innovations (survey geophysics, logging, core orientation and assay) are technologies that will help move Boart Longyear from being a drilling company that not only provides core, but also to an industry-leading provider of exploration data and analytics. Additional digital technologies, along with new products within our traditional product lines are being developed for introduction in 2018. We learned from our restructuring and recapitalisation. We are better at measuring our activities and are leveraging a healthier business for better results. Our accumulated knowledge, engineering abilities, and focus on safety give us huge competitive advantages in the marketplace and enable us to respond to customers professionally and responsibly. Our Executive Team, Board and Employees are committed to keeping the momentum going for 2018. As we see the gradual but steady recovery in the exploration and mining industry, Boart Longyear is positioned to take advantage of the opportunities on the horizon. We are committed to being the best global drilling services and drilling products company while delivering value to our Customers and to You—our loyal Shareholders. Yours sincerely, Jeff Olsen President and CEO *Source: S&P Global Market Intelligence Report, as of January 31, 2018 5 CONTENTS Directors’ Report Review of Operations Remuneration Report Board of Directors Executive Management Team Auditor’s Independence Declaration Independent Auditor’s Report Directors’ Declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes In Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Supplementary Information Corporate Information 7 9 25 59 64 68 69 75 76 77 78 79 81 131 BC T R O P E R L A C N A N I F I 6 Boart Longyear 2017 Annual Report Annual Financial Report 31 December 2017 DIRECTORS’ REPORT BOART LONGYEAR LIMITED The Directors present their report together with the financial report of Boart Longyear Limited (the “Parent”) and its controlled entities (collectively the “Company”) for the financial year ended 31 December 2017 (the “financial year”) and the Independent Auditor’s Report thereon. Financial results and information contained herein are presented in United States (“US”) dollars unless otherwise noted. DIRECTORS The Directors of the Company (the “Directors”) in office during the financial year and as at the date of this report are set out below. Directors Position Marcus Randolph Kyle Cruz Jason Ireland James Kern Gretchen McClain Jeff Olsen Robert Smith Richard Wallman Eric Waxman Executive Chairman Non-executive Director (appointed effective 1 Septem ber 2017) Non-executive Director (appointed effective 1 Septem ber 2017) Non-executive Director (Appointed effective 20 February 2018) Non-executive Director Executive Director Non-executive Director (appointed effective 1 September 2017) Non-executive Director (appointed effective 1 September 2017) Non-executive Director (appointed effective 29 September 2017) Others who held office as Directors during the financial year were: Directors Position Bret Clayton Peter Day Lawrence First Jonathan Lewinsohn Jeffrey Long Rex McLennan Deborah O'Toole Matthew Sheahan Conor Tochilin Non-executive Director (retired 1 September 2017) Non-executive Director (retired 1 September 2017) Non-executive Director (appointed effective 1 September 2017; retired 20 February 2018) Non-executive Director (retired 20 January 2017) Non-executive Director (retired 1 September 2017) Non-executive Director and Senior Independent Director (retired 1 September 2017) Non-executive Director (retired 1 September 2017) Non-executive Director (appointed effective 1 September 2017; retired 29 September 2017) Non-executive Director (appointed effective 20 January 2017; retired 1 September 2017) For a summary of experience and qualifications for each Director, see the Board of Directors section on page 59 of this Report. COMPANY SECRETARIES • • • Fabrizio Rasetti (through 5 December 2017) Robert Closner (appointed Company Secretary effective 5 December 2017) Philip Mackey __________________________________________________________________________________________ 3 7 Annual Financial Report 31 December 2017 PRINCIPAL ACTIVITIES BOART LONGYEAR LIMITED Boart Longyear is the global leading integrated provider of drilling services, drilling equipment and performance tooling for mining and mineral drilling companies. The Company offers a comprehensive portfolio of technologically advanced and innovative drilling services and products. The Company operates through two divisions -- “Global Drilling Services” and “Global Products” -- and believes that its market-leading positions in the mineral drilling industry are driven by a variety of factors, including the performance, expertise, reliability and high safety standards of Global Drilling Services, the technological innovation, engineering excellence and global manufacturing capabilities of Global Products and the Company’s vertically integrated business model. These factors, combined with the Company’s global footprint, have allowed the Company to establish and maintain long-standing relationships with a diverse and blue-chip customer base worldwide that includes many of the world’s leading mining companies. With more than 125 years of drilling expertise, the Company believes its insignia and brand represent the gold standard in the global mineral drilling industry. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS On 1 September 2017 the Company announced the completion of its recapitalisation, which achieved three primary objectives that include reduced debt, improved liquidity and extended maturities. The $284.0 million outstanding principal amount of the 7% Unsecured Notes due 2021 plus accrued and unpaid interest has been reduced by approximately $196.0 million in exchange for ordinary shares. Interest on all debt facilities may be paid in kind (rather than cash) at the Company’s election until December 2018. Maturities on existing debt have been extended until December 2022. Refer to the loans and borrowings note on page 108 for more information. During 2017 the Company announced substantial changes to its Board of Directors in conjunction with the recapitalisation. In addition, the Board considered the composition of the Board committees and implemented a proposal to reduce the overall number of committees by eliminating the Environment, Health and Safety Committee (“EHS Committee”). Certain EHS Committee duties were transferred to the Audit, Compliance and Risk Committee. Throughout 2017, the Company announced several changes to its senior management team. Robert Closner was appointed VP, General Counsel, and Kari Plaster was appointed to the role of VP, Human Resources. Mr Closner and Ms Plaster commenced their new roles on 16 October 2017 and 30 October 2017, respectively. In addition, the Company announced the departure of Mr Mark Irwin, Chief Commercial Officer; Mr Fabrizio Rasetti, Senior VP, General Counsel and Secretary; and Mr Brad Baker, Senior VP, Human Resources. The role of Chief Commercial Officer was not replaced and the duties of the role were distributed to other senior leaders. EVENTS SUBSEQUENT TO REPORTING DATE On 26 January 2018 the Company announced a new Management Incentive Plan (“MIP”), that has been implemented as of 1 January 2018, subject to shareholder approval. The MIP has been created to give senior leaders an opportunity to share in the growth and value of Boart Longyear’s business success. This plan is replacing the Long Term Incentive Plan (“LTIP”) and the Retention Incentive Grant Agreements (“RIGA”). The new MIP is a private equity based long-term incentive plan, which is similar in design to a stock option plan, in that it allows participants to share in the gain of the Company’s value over time. Specifically, the MIP offers two ways to achieve payment: 1) time vesting and 2) performance thresholds. The time vesting portion represents 33.3% of the plan, spread over a 5-year time window. The performance portion of the MIP is based on the Company’s improvement in Total Enterprise Value (“TEV”). There are two performance vesting criteria; one set at $900 million TEV, representing another 33.3% and the other set at $1.1 billion TEV, the final 33.3%. Awards are denominated in MIP Units, which represent proportional interest in the gain in enterprise value. These units will be shared amongst a pool of the Company’s senior leaders. Vested MIP Units will be paid in either cash or shares at the discretion of the Board of Directors. LTIP accruals of Share Rights and Cash Rights will cease as of 31 December 2017. Therefore, LTIP Share Rights and Cash Rights will be calculated on a pro-rata basis on the applicable grant date through 31 December 2017. The pro-rated LTIP cash and shares will be paid out on the LTIP Vesting Date, in compliance with the continued employment condition provisions and other applicable provisions in the LTIP agreement. Likewise, the Target Retention Grant Value of the RIGA will be calculated on a pro-rata basis on the date of grant through 31 December 2017. The pro-rata amount will be paid out to RIGA holders employed on their Vesting Date set forth in their RIGA agreement (subject to the existing RIGA provisions). DIVIDENDS No dividends have been paid during the financial year. __________________________________________________________________________________________ 4 8 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 REVIEW OF OPERATIONS 1 1. Safety Performance, Market Conditions and Strategies 1.1 Overview BOART LONGYEAR LIMITED Boart Longyear is the world’s leading integrated provider of drilling services, drilling equipment and performance tooling for mining and mineral drilling companies globally. We conduct our business activities through two segments, Global Drilling Services and Global Products. We aim to create value for our customers through a comprehensive portfolio of technologically advanced and innovative drilling services and products. We believe that our market leading positions in the mineral drilling industry are driven by a variety of factors, including the performance, expertise and high safety standards of Global Drilling Services and the innovation, engineering excellence and global manufacturing capabilities of Global Products. Our operating and commercial priorities include solidifying our competitive advantages with sustained investments in safety performance, productivity enhancements and operating improvements in our Global Drilling Services division, while remaining focused on the needs of our customer base. Similarly, technology and product innovation are central to the strength and future growth of our Global Products division, and we continue to pursue incremental product improvements that customers will need at all points in the mining cycle. New product development efforts remain focused on incremental product changes that increase productivity. Launched in the second half of 2017, our patented Longyear™ coloured diamond bits improve productivity by lasting longer and cutting faster. Development of the new XQ™ coring rod continues, featuring a greater depth capacity than RQ™ rod, and faster, easier joint make/breaks for higher productivity. TruCore™ core orientation tools continue to expand geographically and are now available globally. The TruShot™ magnetic survey instrument, the second in a future suite of tools, is now under test with our Global Drilling Services team. Both instruments are part of our strategy to be the global technology leader in providing subsurface resource information to mining companies through our Geological Data Services business. Our capital structure exposes us to a variety of market, operational and liquidity risks. To address these risks, we completed the recapitalisation on 1 September 2017. We continue to be focused on being cash positive in 2018 as a primary goal for the business, which we intend to achieve through continued disciplined expense control and capital management, opportunistic cost reductions and productivity enhancements. 1.2 Safety Performance Central to our success is a clear focus on driving safety improvements. We regard safety as fundamental to our relationships with our employees, customers and all stakeholders. We also consider our safety performance both to be a significant opportunity and a risk, as our customers often look to safety as a basis to differentiate their suppliers. In 2017, the Company reported safety performance, with a Total Case Incident Rate (“TCIR”) of 1.62 and Lost-Time Injury Rate (“LTIR”) of 0.22, compared to corresponding rates of 1.41 and 0.11 for 2016. (Both TCIR and LTIR are rates calculated based on 200,000 hours worked.) While Company performance continues to be solid, we are committed to providing our employees and customers with an injury-free workplace and industry-leading safety performance. During this full-year period, our employees experienced 71 injuries that required some medical treatment and eleven injuries that resulted in lost work time. We believe that significant improvements in our safety record are a moral imperative, and we are pursuing improvements through initiatives focused upon critical risk management, risk-focused field leadership, industry-leading training and competency verification and employee-centric safety messaging initiatives. Four areas of focus for 2017 that will benefit our safety in 2018 are (1) the implementation of the BLY Integrated Training System (BITS); (2) implementation of global incident management training; (3) the implementation and refocus on our global Field Level Risk Assessment (FLRA) process; and (4) EHS Lead Indicator KPI’s which will include: Management Interactions, BITS assigned training modules, In-Vehicle Monitoring System performance scorecard, and Corrective Action closure metrics. (1) The Review of Operations contains information sourced from our audited financial statements as well as additional supplemental information that has not been subject to audit or review. __________________________________________________________________________________________ 5 9 Annual Financial Report 31 December 2017 1.3 Impact of Market Conditions BOART LONGYEAR LIMITED Market conditions in 2017 saw a modest improvement on the lows of 2016 as most of the world’s mining companies increased exploration and capital expenditures. During 2017, drill rig utilisation improved; however, this has not yet translated into increased pricing conditions for our goods and services. Our Products business has historically been a leading indicator of activity in our Drilling Services business, so we see that the improved demand in the Products sector, particularly in the second half of 2017, as a positive sign. This trend is further supported by improved commodity prices and strong equity raisings by junior mining companies. Despite the improving market conditions, the Company reported a statutory loss for the 2017 financial year of $150.0 million, which was an improvement of $6.8 million compared to the prior year (2016: $156.8 million loss). Adjusted net loss after tax for the year (adding back significant items and other non-recurring items) was $57.8 million, compared to an adjusted net loss after tax for 2016 of $108.4 million, an improvement of $50.6 million. See reconciliation in Section 3.3 ‘Significant Items’. Objectives and Strategies In addition to our prime goal of returning our employees home safely each day, we continue to position the business to operate more efficiently across all phases of the mining cycle. Key elements of this strategy include focusing more closely on cash generation, maintaining and improving sustainable operating margins, improving returns through disciplined capital management, and rigorous focus on working capital particularly inventory and accounts receivable. We are committed to driving long-term shareholder value, improved safety, productivity and profitability performance in our Global Drilling Services division, via: 1. 2. 3. 4. focusing on operational efficiencies and productivity at the drill rig; optimising the commercial organisation to drive value through contracting and pricing processes; leveraging the supply chain function across the business; and controlling SG&A and other overhead related costs. We are also pursuing market leadership in providing subsurface resource information to our mining customers in an integrated, real-time and cost-effective manner through our Geological Data Services business. In our Global Products division, we are focused on improving our commercial practices and product development to more closely align with customer priorities and product innovation requirements. Through ongoing technology and manufacturing leadership, we aim to deliver more cost-effective product offerings, with improved productivity and safety features. Ultimately, our goal is operational excellence to help us address the risks and challenges of any mining industry cycle. We will do this by both preserving the significant upside that we can realise in our operations in order to grow with the industry, as well as working on improving our cost structure and operating performance. We also aim to capitalise on longer-term growth opportunities through investment in technologies that will broaden our customer offerings. __________________________________________________________________________________________ 6 10 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 2 Financial and Operating Highlights Key financial data Revenue NPAT(1) Adjusted NPAT(1) EBITDA(2) Adjusted EBITDA(2) Operating Loss Profit/(Loss) from Trading Activities (3) Cash used in operations Net cash flows used in operating activities Capital expenditures (accrual) Capital expenditures (cash) BOART LONGYEAR LIMITED For the year ended 31 December 2017 2016 US$ Millions US$ Millions $ Change % Change - 739.1 (150.0) (57.8) (36.6) 43.1 (87.7) 10.0 (40.4) (54.0) 30.4 28.4 - 642.4 (156.8) (108.4) 1.6 32.0 (60.8) (23.9) (1.4) (50.4) 20.4 22.4 96.7 6.8 50.6 (38.2) 11.1 (26.9) 33.9 (39.0) (3.6) 10.0 6.0 15.1% 4.3% 46.7% -2387.5% 34.7% -44.2% 141.8% -2785.7% -7.1% 49.0% 26.8% 886.1% 90.5% 34.4% -19.0% Weighted Average number of ordinary shares 9,225.9 935.6 8,290.3 Earnings per share (basic and diluted) (1.6) cents (16.8) cents 15.2 cents Average BLY rig utilisation Average Fleet size 43% 720 32% 889 11% (169) (1) NPAT is 'Net profit after tax'. Adjusted NPAT is 'Net profit after tax and before significant and other non-recurring items'. See reconciliation in section 3.3 'Significant Items'. (2) EBITDA is 'Earnings before interest, tax, depreciation and amortisation'. Adjusted EBITDA is 'Earnings before interest, tax, depreciation and amortisation and before significant and other non-recurring items'. See reconciliation in section 3.3 'Significant Items'. (3) Profit/(Loss) from Trading Activities is a non-IFRS measure and is used internally by management to assess the underlying performance of the business and has been derived from the Company’s financial results by eliminating from Operating Loss charges relating to significant and other expense/income items. 3 Discussion and Analysis of Operational Results and the Income Statement 3.1 Revenue Revenue for the year ended 31 December 2017 of $739.1 million increased by 15.1%, or $96.7 million, compared to revenue for the prior year ended 31 December 2016 of $642.4 million. A majority of the revenue for both Global Drilling Services and Global Products is derived from providing drilling services and products to the mining industry and is dependent on mineral exploration, development and production activities. Revenue during 2017, was higher as a result of higher volumes due to strengthening sentiment in the mining industry, resulting in improved spending on exploration and development when compared to the same period in 2016. We continue to face some headwinds from price on revenue but it was less in 2017 than in 2016. __________________________________________________________________________________________ 7 11 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED 3.2 Cost of Goods Sold, Sales and Marketing Expense, and General and Administrative Expense The following pro forma income statement shows the effects of removing significant items from their respective income statement line. The adjusted balances will be used in the following narrative to reflect cost categories after removing the impact of significant items. For the year ended 31 December 2017 As Reported Significant Items Adjusted Balance As Reported 2016 Significant Items Adjusted Balance Continuing operations Revenue Cost of goods sold Gross margin Other income General and administrative expenses Sales and marketing expenses Significant items Other expenses Operating loss 739.1 (628.5) 110.6 6.6 (152.9) (27.4) - (24.7) (87.8) - 2.7 2.7 - 76.5 0.5 (79.7) - - 739.1 (625.8) 113.3 6.6 (76.4) (26.9) (79.7) (24.7) (87.8) 642.4 (556.6) 85.8 8.9 (108.8) (28.4) - (18.3) (60.8) - 3.0 3.0 - 22.1 2.4 (27.5) - - 642.4 (553.6) 88.8 8.9 (86.7) (26.0) (27.5) (18.3) (60.8) Gross margin in 2017 improved to 15.3% compared to 13.8% in 2016. The higher margin is related to cost savings from key improvement initiatives as well as improved margins on fixed costs relative to stronger sales volumes. The total of other income, general and administrative expenses (“G&A”), sales and marketing expenses (“S&M”) and other expenses (adjusted for significant items) of $121.4 million in 2017 was relatively flat compared to 2016 of $122.1 million. Lower G&A costs were offset by higher other expenses, which were driven by foreign currency exchange losses and VAT related items. __________________________________________________________________________________________ 8 12 Boart Longyear 2017 Annual Report Annual Financial Report 31 December 2017 3.3 Significant Items BOART LONGYEAR LIMITED During the years ended 31 December 2017 and 2016, the Company incurred the following restructuring expense, recapitalisation costs and impairment charges: US$ Millions EBITDA(1) NPAT(2) Recapitalisation costs Impairments Property, plant and equipment Intangible assets Employee and related costs Other restructuring expenses Other non-recurring items Tax effect of items and other tax write offs(3) Total of significant and non-recurring items Adjusted EBITDA(1) Adjusted NPAT(2) For the year ended 31 December 2017 2017 2016 2016 US$ Millions US$ Millions US$ Millions US$ Millions (36.6) 50.5 0.1 - 15.1 14.0 - - 79.7 43.1 (150.0) 50.5 0.1 - 15.1 14.0 - 12.5 92.2 1.6 7.5 0.9 1.0 8.0 10.1 2.9 - 30.4 32.0 (156.8) 7.5 0.9 1.0 8.0 10.1 2.9 18.0 48.4 (57.8) (108.4) (1) EBITDA is 'Earnings before interest, tax, depreciation and amortisation'. Adjusted EBITDA is 'Earnings before interest, tax, depreciation and amortisation and before significant and other non-recurring items'. (2) NPAT is 'Net profit after tax'. Adjusted NPAT is 'Net profit after tax and before significant and other non-recurring items'. (3) Includes tax expense on derecognition of deferred tax assets and unrecognised tax losses of $36.3 million. __________________________________________________________________________________________ 9 13 Annual Financial Report 31 December 2017 4 Discussion and Analysis of Cash Flow Cash used in operations Net cash flows used in operating activities Net cash flows used in investing activities Net cash flows provided by financing activities 4.1 Cash Flow used in Operating Activities BOART LONGYEAR LIMITED For the year ended 31 December 2017 2016 US$ Millions US$ Millions $ Change % Change (40.4) (54.0) (15.4) 46.4 (1.4) (50.4) (7.9) 17.5 (39.0) -2785.7% (3.6) (7.5) 28.9 -7.1% -94.9% 165.1% Cash flow from operating activities for the year ended 31 December 2017 was negative $54.0 million, which is slightly lower than 2016 of negative $50.4 million. Cash generated from higher EBITDA was offset by fees related to the recapitalisation. We have invested $25.5 million in capital equipment to support existing operations during 2017, which is higher than the comparable prior period (2016: $19.2 million). Of the 2017 amount, approximately $19.0 million was spent on sustainment activities relating to refurbishing current rigs and other support equipment, $3.0 million was spent on product development activities, including engineering and patent maintenance and the remaining amount related to facilities and other miscellaneous expenditures. 2017 capital expenditures have been partially offset by proceeds from the sale of property, plant and equipment of $13.8 million (2016: $16.4 million). The increase in cash flows provided by financing activities is a direct result of the upsized ABL received as part of the recapitalisation. 5 Discussion of the Balance Sheet The net liabilities of the Company increased by $78.5 million, to negative $259.0 million as at 31 December 2017, compared to negative $337.5 million as at 31 December 2016. This increase results primarily from lower long-term debt from equitising the majority of the 7% Unsecured Notes offset by the loss incurred in the year. There were no significant movements in total assets during 2017. Working capital (assets and inventory) increased as the trading environment improved. This was offset by normal depreciation on property, plant and equipment. Total liabilities decreased by $82.0 million to $932.1 million. This is primarily driven by lower debt as a result of the equitisation of approximately $196.0 million of the 7% Unsecured Notes, which is partly offset by capitalising the accrued interest and debt issuance costs from Term Loans A and B and the 10% Secured notes, combined with $45.0 million of new money from an upsized asset backed loan. __________________________________________________________________________________________ 10 14 Boart Longyear 2017 Annual Report Annual Financial Report 31 December 2017 Liquidity and Debt Facilities The Company’s debt is comprised of the following instruments: BOART LONGYEAR LIMITED Description Principal Outstanding as at 31 December 2017 (millions) Accreted Interest as at 31 December 2017 (millions) Interest Rate Scheduled Maturity Security Senior Secured Notes $217.0 $8.7 12%2 December 2022 Second lien on the accounts receivable, inventories, deposit accounts and cash (“Working Capital Assets”) of the Term Loan B and Senior Secured Notes guarantors that are not ABL or Backstop ABL guarantors, a third lien on the Working Capital Assets of the Term Loan B and Senior Secured Notes issuer and the other Term Loan B and Senior Secured Notes guarantors that are also ABL or Backstop ABL guarantors, and a first lien on substantially all of the other tangible and intangible assets (“Non- Working Capital Assets”) of the Term Loan B and Senior Secured Notes issuer and other guarantors, including equipment, intellectual property, the capital stock of subsidiaries and certain owned real property (in any case, excluding assets of BLY IP, Inc.) Term Loan – Tranche B $105.0 $39.9 10%3 December 2022 Same as Senior Secured Notes ABL $17.0 1 Variable3 23 July 2020 Term Loan – Tranche A $85.0 $34.9 10%3 December 2022 First lien on the Working Capital Assets of the ABL borrower and guarantors and a third lien on substantially all of the Non-Working Capital Assets of the ABL borrower and guarantors, including equipment, intellectual property and the capital stock of subsidiaries (but excluding real property), and in any case excluding assets of BLY IP, Inc., Boart Longyear Suisse Sarl and Boart Longyear S.A.C. First lien on the Working Capital Assets of the Term Loan A guarantors that are not ABL or Backstop ABL guarantors, a second lien on the Working Capital Assets of the Term Loan A issuer and the other Term Loan A guarantors that are also ABL and Backstop ABL guarantors, and a second lien on substantially all of the Non- Working Capital Assets of the Term Loan A issuer and guarantors, including equipment, intellectual property, the capital stock of subsidiaries and certain owned real property (in any case, excluding assets of BLY IP, Inc.) Backstop ABL $45.0 $1.6 11% 23 October 20205 Same as ABL but including any real property required to be pledged as security for the Senior Secured Notes Senior Unsecured Notes $88.9 $0.4 1.5% December 2022 Unsecured (1) $12.0 million in letters of credit were issued in addition to the $17.0 million borrowings that were outstanding. (2) Interest rate payable-in kind at an interest rate of 12% per annum at the Company’s election until December 2018 and thereafter in cash at a reduce interest rate of 10% per annum. Interest is 10% payable-in-kind through December 2018 and 8% payable in-kind thereafter. (3) (4) Based on LIBOR + margin (grid-based margin is currently 3.5%). (5) Maturity Date is 23 October 2020 or 90 days after the ABL due date. __________________________________________________________________________________________ 11 15 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED The Company’s ABL facility provides for a commitment of up to $50.0 million in revolving borrowings and other extensions of credit such as for letters of credit. This facility is a secured loan with a first-priority lien on the issuer’s and guarantors’ accounts receivable, inventories, and cash. Scheduled maturity is 23 July 2020. Pricing for the facility is based on LIBOR plus a grid based spread, which spread currently is 3.5%. The facility does not include ongoing financial maintenance covenants. Certain restrictions under the facility currently limit maximum borrowings to $45.0 million and require $5.0 million in cash to be held in a restricted account with the lender. These restrictions will be lifted if the Company satisfies a 1.1x fixed charge coverage test for four consecutive quarters. __________________________________________________________________________________________ 12 16 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 6 Review of Segment Operations BOART LONGYEAR LIMITED The following table shows our third party revenue and revenue from inter-segment sales by our Global Drilling Services division. Segment profit represents earnings before interest and taxes. 2017 US$ Millions Segment Revenue 2016 Segment Profit 2017 2016 US$ Millions US$ Millions US$ Millions Drilling Services 500.6 447.7 36.4 10.7 Global Products revenue Products third party revenue Products inter-segment revenue (1) Total Global Products Less Global Product sales to Global Drilling Services Total third party revenue Total segment profit 238.5 54.5 194.7 57.7 293.0 (54.5) 739.1 252.4 2.8 4.2 (57.7) 642.4 39.2 14.9 (1) Transactions between segments are carried out at arm’s length and are eliminated on consolidation. (1) Based on percentages of total Company revenue for the year ended 31 December 2017. __________________________________________________________________________________________ 13 17 Annual Financial Report 31 December 2017 6.1 Review of Segment Operations - Global Drilling Services BOART LONGYEAR LIMITED For the year ended 31 December 2017 2016 US$ Millions US$ Millions $ Change % Change 500.6 447.7 52.9 11.8% 398.4 30.2 428.6 85.6% 62.8 12.5% 9.3 21.1 69.1 20.8 308 720 3,320 363.0 38.3 401.3 89.6% 35.6 8.0% 10.7 21.3 51.6 15.0 287 889 3,011 35.4 (8.1) 27.3 -4.0% 27.2 4.5% (1.4) (0.2) 17.5 5.8 21 (169) 309 9.8% -21.1% 6.8% -4.5% 76.4% 56.3% -13.1% -0.9% 33.9% 38.7% 7.3% -19.0% 10.3% Financial Information Third party revenue COGS Materials/labor/overhead/other Depreciation and amortisation Total COGS COGS as a % of Revenue Contribution margin $ Contribution margin % Business unit SG&A Allocated SG&A EBITDA Capital spend (accrual) Other Metrics Average # of Operating Drill Rigs Average # of Drill rigs # of Employees at period-end Safety The Global Drilling Services division’s Total Case Incident Rate (“TCIR”) for the year ended 31 December 2017 was 1.96, compared to 1.43 for 2016. The Lost-Time Incident Rate (“LTIR”) for 2017 was 0.28, compared to 0.10 for 2016. Although the beginning of 2017 was challenging for Global Drilling Services in terms of TCIR performance, strong safety performance in recent months have continued the trend over several years of improving safety performance. We believe this trend supports the effectiveness of the divisions safety initiatives, which include better analysis of high-potential near miss incidents and significant injuries; applying corrective actions globally; increasing management safety interactions at operating locations; increasing supervisory competencies through training; reinforcing hazard assessments; and increasing drill rig inspection frequency. Revenue Consistent with recent commodity trends, mining industry spending on exploration and development and non-mining services increased in 2017 and, as a result, Global Drilling Services’ revenue in 2017 was $500.6 million, up 11.8% from $447.7 million in 2016. The year-over-year revenue increase was driven by $49.4 million and $3.5 million improvements in volume and foreign exchange rates, respectively. Volume increases can be attributed primarily to the increase in Surface Coring and RC/Rotary in the US, and increases in existing customers programs in Latin America and EMEA. Approximately 87% of Global Drilling Services’ revenue for 2017 was derived from major mining companies, with the majority of these customers servicing the copper and gold industries. There was no single customer that contributed more than 10% of the Company’s revenue in 2017. We believe this diversified revenue base provides greater revenue stability. ____________________________________________________________________________________ 14 18 Boart Longyear 2017 Annual Report Annual Financial Report 31 December 2017 Margins BOART LONGYEAR LIMITED With Revenues increasing from $447.7 million in 2016 to $500.6 million in 2017, an 11.8% increase, Global Drilling Services also achieved an increase in Contribution Margin. The 2017 Contribution Margin was $62.8 million compared to $35.6 million in 2016, an increase of 76.4%. The primary drivers for the increase in Contribution Margin were the cost control initiatives undertaken by the business and the productivity and commercial improvements commenced in 2017. The Drilling Services business improved in meters per shift, non-billable hours and revenue per shift while reducing variable and fixed cost to maintain a flat cost structure from a percentage of revenue perspective. EBITDA in 2017 was $69.1 million, up 33.9% from $51.6 million in 2016. The largest improvement was seen in our USA operations; EBITDA in the USA drilling services increased $10.1 million in 2017 primarily driven by an uplift of $24.6 million in revenue. Other regions of the Global Drilling Services business have had varied EBITDA results, but we continue to focus on the cost structure of all our operations and on driving continued improvement in productivity and commercial practices. __________________________________________________________________________________________ 15 19 Annual Financial Report 31 December 2017 6.2 Review of Segment Operations - Global Products BOART LONGYEAR LIMITED Financial Information Third party revenue COGS Materials/labor/overhead/other Inventory obsolescence Depreciation and amortisation Total COGS COGS as a % of Revenue Contribution margin $ Contribution margin % Business unit SG&A Allocated SG&A EBITDA Capital Spend (accrual) Other Metrics Manufacturing plants Average backlog Inventories 1 # of Employees For the year ended 31 December 2017 2016 US$ Millions US$ Millions $ Change % Change 238.5 194.7 43.8 22.5% 189.8 1.4 6.1 197.3 82.7% 20.5 8.6% 21.3 16.0 11.3 1.1 6 25.9 174.4 976 152.4 (6.9) 6.7 152.2 78.2% 22.6 11.6% 20.0 17.0 13.4 1.9 6 14.6 165.0 1,001 37.4 8.3 (0.6) 45.1 4.5% (2.1) -3.0% 1.3 (1.0) (2.1) (0.8) - 11.3 9.4 (25) 24.5% 120.3% -9.0% 29.6% 5.8% -9.3% -25.9% 6.5% -5.9% -15.7% -42.1% 0.0% 77.4% 5.7% -2.5% (1) Represents total Company inventories including Global Services and Global Products. Safety In 2017, the Total Case Incident Rate (“TCIR”) for the Global Products segment was 1.16 recordable incidents per 200,000 hours worked and the Lost-Time Incident Rate (“LTIR”) was 0.00. As with the Global Drilling Services division, these results reflect the Company’s continued focus on programs to reinforce hazard recognition and consistently apply the Company’s EHS management system across all operations. With the release of the Company’s updated EHS management system, redefined and expanded EHS standards will continue to drive continuous improvement with a streamlined and comprehensive approach to best practices in safety. Revenue The year ended 31 December 2017 was significantly improved from prior year for the Global Products division. Revenue for the year was $238.5 million, up 22.5% from $194.7 million in 2016. The primary driver of the increase was coring tools and drill rigs. Margins Although revenue for Global Products increased by 22.5%, EBITDA for the year ended 31 December 2017 was down 15.7% when compared to 2016. The drop in EBITDA was primarily driven by improved trading conditions resulting in higher throughput in the manufacturing plants. __________________________________________________________________________________________ 16 20 Boart Longyear 2017 Annual Report Annual Financial Report 31 December 2017 Backlog BOART LONGYEAR LIMITED At 31 December 2017, Global Products had a backlog of product orders valued at $33.5 million. This compares to $19.0 million at 31 December 2016. Average backlog during the second half of 2017 was $29.1 million compared to $22.7 million during the first half of 2017. The increase in our backlog, which we define as firm product orders, was driven by increase in demand for capital equipment and consumables. It should be noted that an order shipped within the same month the order is received does not reflect in backlog. Also, there is no certainty that orders in our backlog will result in actual sales because customers may have the ability to cancel orders depending on contract terms. Intellectual Property We rely on a combination of patents, trademarks, trade secrets and similar intellectual property rights to protect the proprietary technology and other intellectual property that are instrumental to our Global Products business. As at 31 December 2017, we had 429 issued patents, 608 registered trademarks, 204 pending patent applications and 20 pending trademark applications. We do not consider our Global Products business, or our business as a whole, to be materially dependent upon any particular patent, trademark, trade secret or other intellectual property. Research and Development Our Global Products division employs engineers and technicians to develop, design and test new and improved products. We work closely with our customers, as well as our Global Drilling Services division, to identify opportunities and develop technical solutions for issues that arise on site. We believe that sharing best practices accelerates innovation and increases safety and productivity in the field. This integrated business model provides us with an advantage in product development, and we believe it enables us to bring new technology to the market with speed and quality. Prior to their introduction, new products are subjected to extensive testing in various environments, again with assistance from our Global Drilling Services network around the world. New product development efforts remain focused on incremental product changes that increase productivity so customers are willing to pay for them regardless of the business environment. Launched in the second half of 2017, our patented Longyear™ coloured diamond bits improve productivity by lasting longer and cutting faster. Development of the new XQ™ coring rod continues smoothly, featuring a greater depth capacity than RQ™ rod, and faster, easier joint make/breaks for higher productivity. TruCore™ core orientation tools continue to expand geographically and are now available globally. The TruShot™ magnetic survey instrument, the second in a future suite of tools, is now under test with our Global Drilling Services. Both instruments are part of our strategy to be the global technology leader in providing subsurface resource information to mining companies through our Geological Data Services business. Inventories Cash continued to be generated from inventory in 2017 due to careful management of demand in our supply chain organisation and continuous efforts to reduce excess inventory. While we generated $12.7 million related to third-party sales and consumption in our Global Drilling Services division, this was partially offset by an increase of $6.8 million related to foreign currency translation and $13.9 million related to a net increase in other non-cash items. __________________________________________________________________________________________ 17 21 Annual Financial Report 31 December 2017 7. Outlook 7.1 Our 2018 Priorities BOART LONGYEAR LIMITED Continue to eliminate job related injuries and significant safety risks by maintaining and enhancing our strong safety and compliance record. Safety is critical to the Company, our employees and our customers, both in determining the success of our business and in ensuring the ongoing well-being of our employees and others with whom we come into contact. We are dedicated to providing a safe work environment for every employee and contractor and implementing state- of-the-art safety tools and practices to become the safety leader in our industry. We are particularly focused on significant risks, continually seeking ways to mitigate those risks and ensuring that, when significant injuries or high-potential near-misses occur, we thoroughly investigate the root causes of those incidents and apply the lessons learned from them broadly. We also promote a culture where employees and managers at all levels are actively engaged in promoting safe work practices. Four areas of focus for 2017 that will benefit our safety in 2018 are (1) the implementation of the BLY Integrated Training System (BITS); (2) implementation of global incident management training; (3) the implementation and refocus on our global Field Level Risk Assessment (FLRA) process; and (4) EHS Lead Indicator KPI’s which will include: Management Interactions, BITS assigned training modules, In-Vehicle Monitoring System performance scorecard, and Corrective Action closure metrics. Expand our mining and minerals drilling customer base by focusing on efficiency and productivity. We remain focused on providing our customers with a full range of drilling services offerings. Our commitment is underpinned by initiatives to improve the efficiency and productivity with which we deliver services and information to our customers, combined with enhancements of our commercial practices and capabilities to ensure alignment with our customers’ most important needs. Our goal is to be the driller of choice for our customers and thereby bring value both to the customer and to Boart Longyear. Effectively manage customer relationships, pricing and contract terms. Our Global Drilling Services and Global Products businesses have implemented rigorous internal processes to ensure our products and services reflect the full value delivered to our customers and to solidify and create lasting customer relationships. Create new products and respond to new opportunities within a constrained capital budget. We will continue to pursue disciplined investments in our business to drive returns and capitalise on high-value opportunities in which we can leverage distinctive competencies. We also will continue to pursue strategic technologies and high value-added and more profitable activities, such as expanding our product and services offerings to provide subsurface resource information to our mining customers through our Geological Data Services business. Improve cash generation in 2018, with the goal to continue to be cash positive, through careful management of liquidity and costs. Being cash positive in 2018 is a primary goal for the business, which we intend to achieve through continued disciplined expense and capital management, opportunistic cost reductions and productivity enhancements. For 2018, we will continue to drive business initiatives focused on improving our fixed and variable cost structures in keys areas of the business and we expect these benefits to improve liquidity in 2018 and beyond. Furthermore, we will continue to focus on process improvements, streamlined working capital management and structural changes to improve customer support and responsiveness and drive long-term efficiencies. 7.2 Outlook and Future Developments We are not providing an outlook for 2018 revenue or EBITDA. However, increased drilling activity, in combination with our productivity and commercial initiatives are making a positive impact as demonstrated by the improved underlying 2017 results. We anticipate seeing ongoing gains from those identified initiatives which we continue to actively manage. The mining industry is cyclical. Notwithstanding the reduced activity since 2012, 2016 appeared to have been an inflection point, marking a return to the longer-term growth outlook for the industry, underpinned by: • • • • continued industrialisation and urbanisation of developing economies, which are expected to support structural increases in demand for minerals and metals broadly in line with global GDP; improving commodity prices and corresponding customer margins relative to those of recent years; improving supply/demand fundamentals in key commodities like copper; reduced reserve to production ratios at many gold mines. As a result, we retain confidence in our belief that natural resources companies will continue to produce throughout the cycle. This will continue to drive the need to both replace and supplement ongoing depletion of reserves and resources, driving future investment in exploration, development and capital spending. As the leading global drilling services provider to the mineral __________________________________________________________________________________________ 18 22 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 BOART LONGYEAR LIMITED industry, we continue to drive operational improvements and technological innovation across our global fleet of assets, which we believe will continue to benefit the business through increased market opportunities. We remain focused on our core mining markets and intend to continue to invest in growth opportunities in a selective and disciplined manner. We will continue to invest to develop the next generation of rod-handling solutions across our range of drilling rigs and expand the provision of subsurface resource information to our mining customers through our Geological Data Services business. In addition, we continue to pursue operational enhancements through safety and productivity improvements to deliver value to our customers and improve bottom line operating performance of our business. Further information about likely developments in the operations of the Company in the future years, expected results of those operations, and strategies of the Company and its prospects for future financial years have been omitted from this report because disclosure of the information would be speculative or could be prejudicial to the Company. 7.3 Key Risks The Company maintains an Enterprise Risk Management (“ERM”) system by which we systematically assess the consequences of risk in areas such as market, health and safety, environment, finance, legal compliance, and reputation. We also identify and track appropriate mitigation actions for identified risks. A range of material risks have been identified, as follows, that could adversely affect the Company. These risks are not listed in order of significance. Nor are they all- encompassing. Rather, they reflect the most significant risks identified at a whole-of-entity or consolidated level. Market Risk. The Company’s operating results, financial condition and ability to achieve shareholder returns are directly linked to underlying market demand for drilling services and drilling products. Demand for our drilling services and products depends in significant part upon the level of mineral exploration, production and development activities conducted by mining companies, particularly with respect to gold, copper and other base metals. We have experienced significant declines in our financial performance as a result of the global contraction in exploration and development spending in the commodities sector, and the subsequent impact on our mining customers. Mineral exploration, production and development activities remain uncertain and could remain at depressed levels for an extended period of time or decline even further, resulting in adverse effects on our operating results, liquidity and financial condition. We seek to mitigate the risk associated with volatility and weak demand conditions in our core mining markets by selectively pursuing opportunities in other markets, such as infrastructure and geotechnical applications for our Global Products business, and new technology offerings such as our Geological Data Services business. In addition, our business priorities include ongoing initiatives to further improve the underlying cost structure and simplify the business. We also seek to gain market share and expand our customer base in our core mining market by improving the efficiency and productivity with which we deliver services and information, and improve commercial practices for better alignment with our customers’ needs. Operational Risks. The majority of our drilling contracts are either short-term or may be cancelled upon short notice by our customers, and our products backlog is subject to cancellation. We seek to strengthen customer relationships and lessen retention risks through active customer selection, improved commercial practices and ongoing initiatives targeted at strengthening our operational and safety performance. We also pursue contracting practices to minimise the financial cost associated with the termination or suspension of customer contracts or orders. The degree to which we can allocate termination risks and obligations to our customers remain somewhat limited by industry practice. We have implemented significant cost savings, productivity improvements and efficiencies during the course of the ongoing industry downturn but our future operating results, financial condition and competiveness depend on our ability to sustain previously implemented reductions and realise additional savings and improvements from ongoing and future productivity initiatives. We may not be able to achieve expected cost savings and operational improvements in anticipated amounts or within expected time periods, and, if achieved, we may not be able to sustain them. Accordingly, we have implemented a project management organisation and rigorous monitoring processes around our key operational improvement programmes to track progress against project objectives, quantify results that are being achieved and ensure process improvements are sustainable. Risks Related to Liquidity and Indebtedness. At 31 December 2017, our net debt was $598.9 million, with $642.7 million in gross debt and $43.8 million of cash on hand and availability through our Asset-Based Loan (“ABL”) facility. The instruments comprising the Company’s debt and their terms are set out in detail in Note 21 of the financial statements. As announced on 1 September 2017 the Company successfully completed its recapitalisation, which achieved three primary objectives that reduced debt, improved liquidity and extended maturities. The $284.0 million outstanding principal amount of the 7% Unsecured Notes due 2021 plus accrued and unpaid interest has been reduced by approximately $196.0 million in exchange for ordinary shares. Interest on all debt facilities may be paid in kind (rather than cash) at the Company’s election until December 2018. Maturities on existing debt have been extended until December 2022. __________________________________________________________________________________________ 19 23 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED The annual financial report has been prepared on a going concern basis, which contemplates the realisation of assets and the settlement of liabilities in the ordinary course of business. The Directors reaffirm that current and expected operating cash flow, cash on hand and available drawings under the Company’s asset-based loan facility provide sufficient liquidity to meet its debts as and when they fall due. Tax Risk. As previously disclosed and further detailed in Note 11 of the financial statements, the Company is contesting a series of tax audits performed by the Canada Revenue Agency (“CRA”). We also are responding to audits that are underway or anticipated to be performed by the CRA. The resolution of existing and potential assessments by Canadian tax authorities may adversely affect our liquidity. While the timing and resolution of the Company’s appeals of the CRA’s assessments are uncertain, we are pursuing strategies to mitigate the risks of an adverse outcome with the assistance of our external legal and tax experts. Government and Regulatory Risk. Changes in, or failure to comply with, the laws, regulations, policies or conditions of any jurisdiction in which we conduct our business could have a material adverse effect on our financial condition, liquidity, results of operations and cash flows. Our operations are subject to numerous laws, regulations and guidelines (including anti-bribery, tax, health and safety, and environmental regulations) that could result in material liabilities or increases in our operating costs, or lead to the decline in the demand for our services or products. We therefore carefully monitor, and educate our employees and business partners about, legal requirements and developments to make sure our operations remain aware of applicable laws and regulations at all times. Further, we have implemented various internal and external resources and controls to promptly detect and address any potential non-compliance. 7.4 Forward Looking Statements This report contains forward looking statements, including statements of current intention, opinion and expectation regarding the Company’s present and future operations, possible future events and future financial prospects. While these statements reflect expectations at the date of this report, they are, by their nature, not certain and are susceptible to change. The Company makes no representation, assurance or guarantee as to the accuracy of or likelihood of fulfilling any such forward looking statements (whether express or implied), and, except as required by applicable law or the Australian Securities Exchange Listing Rules, disclaims any obligation or undertaking to publicly update such forward looking statements. __________________________________________________________________________________________ 20 24 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 REMUNERATION REPORT BOART LONGYEAR LIMITED This remuneration report sets out Boart Longyear’s remuneration policies and practices, the rationale underlying them and their outcomes, for the year ended 31 December 2017 in accordance with the requirements of the Corporations Act 2001 (Commonwealth) (the Act) and its regulations. This information has been audited as required by Section 308(3C) of the Act. The Company’s policies have been developed within a framework that seeks to fairly reconcile and balance: - - - the overall objective of attracting, retaining, aligning and motivating management in order to achieve the highest levels of performance from them for the benefit of all shareholders; high standards of fairness, transparency and sound corporate governance principles; and the particular business environment in which Boart Longyear operates, recognising that: o o o o the Company’s business is global and the senior executive team is based and operates primarily outside of Australia and is recruited internationally; the markets in which the Company operates can have strong cyclical characteristics that place equal performance pressures on management in an upswing as in down cycles; and importantly, the Company is incorporated and listed in Australia and complies with local corporate regulatory disclosures and practices. safety is fundamental to relationships with employees, customers and all stakeholders. The Company also considers safety performance to be both a significant opportunity and a risk, as our customers often look to safety as a basis to differentiate their suppliers. The Company continues to be committed to providing our employees and customers with an injury-free workplace and industry-leading safety performance. Changes in 2017 Each of the changes outlined below, were carefully designed to support the key strategic, financial and human resources objectives of the Company. 1. Changes in Executive Leadership – In October 2017, the Company announced that Mr Brad Baker, Senior Vice President of Human Resources, and Mr Fabrizio Rasetti, Senior Vice President and Legal Counsel, would exit the business at the end of October, 2017 and ceased employment as of 31 December 2017. As a result of these changes, Ms Kari Plaster was appointed Vice President of Human Resources, effective 30 October 2017, and Mr Robert Closner was appointed Vice President and General Counsel, effective 16 October 2017. Both Ms Plaster and Mr Closner serve on the Executive Committee and report to Mr Jeffrey Olsen, Chief Executive Officer. Furthermore, Mr Mark Irwin, Chief Commercial Officer (“CCO”), ceased employment as of 30 September 2017. As of 8 September 2017, Mr Robert Closner assumed the interim position of the CCO and duties as assigned. Mr Closner was then appointed Vice President and General Counsel, effective 16 October 2017. The position of CCO was subsequently eliminated and those duties have been divided amongst other senior leaders. 2. Introduction of the Management Incentive Plan (MIP) – Effective 31 December 2017 the Long Term Incentive Plan (“LTIP”) and Retention Incentive Grant Agreement (“RIGA”) programs ceased and are replaced by the new Management Incentive Plan (“MIP”), which is effective 1 January 2018 and subject to shareholder approval. Retention based awards have been calculated on a pro-rata basis as of 31 December 2017 and will be paid on the original payment date for current employees as per the award agreement. Performance based awards and stock option plans are cancelled as of 31 December 2017. The new MIP program will focus on aligning performance objectives to the total enterprise value of the Company. As the markets begin to stabilise, the Board believes that restructuring the incentive plan program provides a balanced long-term focus on both share price appreciation and continued improvement of the underlying operational and financial performance of the Company. The Company continuously monitors its remuneration plans and arrangements to ensure they remain appropriate for executives, Directors and shareholders. Changes to remuneration arrangements are detailed in note 34 and in the 2018 Remuneration Report. __________________________________________________________________________________________ 21 25 Annual Financial Report 31 December 2017 2017 business impacts on incentives BOART LONGYEAR LIMITED The year ended 31 December 2017 showed improvement from 2016 as the mining services market began to stabilise, which has translated into improvement in revenue, marginally higher utilisation of our drill fleet and further improvement in our product backlog compared to 2016. Our Products business has historically been a leading indicator of activity in our Drilling Services business, so we see that the improvement in Products revenues is a positive sign. This trend is further supported by improved commodity prices, increased exploration spend, and strong equity raisings by junior mining companies. These factors contributed to a year-over-year increase in revenue of $96.7 million, or 15.1%. Despite revenue coming in $96.7 million higher than the prior year, EBITDA was lower by $38.2 million and NPAT increased by $6.8 million compared to 2016. The lower EBITDA was primarily related to approximately $60 million of fees and other one-time recapitalisation costs associated with the recapitalisation announced on 1 September 2017. Adjusted EBITDA improved by $11.1 million, or 34.7%, exceeding target in the Short Term Incentive (“STI”) plan, and adjusted NPAT improved by $50.6 million. As markets stabilised during 2017, the Company continued its focus on net cash generation, primarily through increased productivity as part of the Hard Work Cycle initiative and other corporate improvement initiatives. Rig utilisation increased as commodity prices improved and exploration spend increased. As a result, further capital was invested in working capital and other variable costs, such as labour and mobilisation to meet demand. As a result, free cash flow (defined for the purposes of Short Term Incentive (“STI”) calculations in section 3 of the annual report) for the business below target at negative $20.6 million. In addition, some safety metrics were below improvement targets. However, individuals met targets in general. Short- term incentive achievement for the Company’s executive KMP in 2017 was on average 53%. The performance-based LTIP awards granted in 2014 were subject to a three-year Cumulative Net Debt target, adjusted for a Total Shareholder Return (“TSR”) modifier metric. Boart Longyear’s TSR was below that of our peers’ and so this metric was not achieved. Due to challenging market conditions, the 2014 LTIP awards vested on 15 March 2017 at 61.2% of the target. This is derived by the Cumulative Net Debt achievement of 68% of the LTIP target, adjusted by a further 10% modifier as our total shareholder return metric did not meet the target (68% - (68% x 10%) = 61.2%). Changes to the Board of Directors During 2017 the Company announced changes to its Board of Directors in conjunction with the recapitalisation. The majority of Directors resigned from the Board, in or prior to September 2017. In addition, the Board considered the composition of the Board committees and implemented a proposal to reduce the overall number of committees by eliminating the Environment, Health and Safety Committee (“EHS Committee”). Certain EHS Committee duties were transferred to the Audit, Compliance and Risk Committee. __________________________________________________________________________________________ 22 26 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 Report Structure This Remuneration Report (“Report”) is presented in six sections, as follows: BOART LONGYEAR LIMITED 1 2 3 4 5 6 Section 2017 remuneration overview Description of content • Outlines the Company’s remuneration practices and explains how executive remuneration is structured to support the Company’s strategic objectives. Sets out the Directors and senior executives who are covered by this Report. Details the actual remuneration earned by the CEO and other senior executives during the year ended 31 December 2017. • • Remuneration framework and strategy • Sets out the Company’s remuneration governance framework and explains how the Board and its Remuneration and Nominations Committee make remuneration decisions, including the use of external remuneration consultants. • Outlines the Company’s remuneration strategy. Components of executive remuneration • • Provides a breakdown of the various components of executive remuneration. Details the components of executive remuneration that are fixed and therefore not “at- risk.” • Outlines the key features of the short-term incentive plan that applies to the Company’s Performance and risk alignment Executive remuneration in detail Non-executive Director arrangements executives. • Outlines the key features of the long-term incentive plan and option plan that apply to the Company’s executives. • • • • • Explains how executive remuneration is aligned with performance and outlines short- term and long-term performance indicators and outcomes. Explains how executive remuneration is structured to encourage behaviour that supports long-term financial soundness and the Company’s risk management framework. Sets out the total remuneration provided to executives (calculated pursuant to the accounting standards) during the years ended 31 December 2017 and 2016. Provides details of the rights granted to executives during the year ended 31 December 2017 under the long-term incentive plan. Summarises the key terms of executive service contracts (including termination entitlements). • Explains the Non-executive Directors’ (NED) remuneration structure, including the basis on which NED remuneration is set and the components. • Outlines key features of the NED Share Acquisition Plan. • Sets out the NEDs’ remuneration during the years ended 31 December 2017 and 2016. __________________________________________________________________________________________ 23 27 Annual Financial Report 31 December 2017 1. 2017 REMUNERATION OVERVIEW 1.1. EXECUTIVE REMUNERATION STRATEGY BOART LONGYEAR LIMITED The diagram below illustrates the primary objectives of the Company’s executive remuneration strategy and how the components of overall remuneration have been designed to support them: Attract, Retain and Reward Top Talented Executives Alignment between Total Compensation and Delivered Performance Remuneration Strategy Appropriate Mix of Fixed and “At Risk” Remuneration Total Remuneration is Reasonable and Aligned with Shareholder Interests Attract, Retain and Reward Top Talented Executives Appropriate Mix of Fixed and “At Risk” Remuneration Total Remuneration is Reasonable and Aligned wit Shareholder Interests Alignment Between Total Compensation and Delivered Performance  Remuneration levels are competitive with similar roles in the markets in which the Company competes for talent.  Incentive based compensation provides for upside potential with superior performance.  Lont-term incentive compensation provides for a meaningful retention.  There is a significant  The remuneratin committee  amount of total executive remuneration which is at risk and dependent upon achieving challenging performance and safety metrics.  Fixed remuneration is appropriately market competitive and consistently higher performing executives are rewarded through higher base compensation.  Performance management assists in indicating the overall total rewards for each ExCo member. regularly performs executive compensation benchmarking utilising independent compensation consultants.  The long-term incentive component for 2017 remuneration is primarily delivered through equity share rights linked to the Company’s ordinary shares.   Executive and Directors cannot hedge equity share rights that are unvested or subject to restrictions.  In some circumstances the Board may also elect to provide long-term incentives in the form of cash. Incentive based compensation is designed to reward executives for delivered performance against important Company safety, financial and strategic objectives. Incentive plans utilise an appropriate mix of challenging performance measures designed to only deliver value to executives if target performance is achieved over both the short long terms. __________________________________________________________________________________________ 24 28 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 1.2. DIRECTORS AND SENIOR EXECUTIVES BOART LONGYEAR LIMITED This Report sets out the remuneration arrangements in place for the key management personnel (“KMP”) of the Company for the purposes of the Corporations Act and the Accounting Standards, being those persons who have authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including the Non- executive Directors. The KMP for the year ended 31 December 2017 are listed in Table 1.2 below. Unless otherwise indicated, the individuals below were KMP for the entire financial year. Table 1.2: Directors and senior executives who were KMP during the year ended 31 December 2017 Directors Position Marcus Randolph Kyle Cruz Lawrence First Jason Ireland James Kern Gretchen McClain Robert Smith Richard Wallman Eric Waxman Executive Chairman Non-executive Director (appointed effective 1 September 2017) Non-executive Director (appointed effective 1 September 2017) Non-executive Director (appointed effective 1 September 2017) Non-executive Director (Appointed effective 29 September 2017, alternate director to for Mr Lawrence First) Non-executive Director Non-executive Director (appointed effective 1 September 2017) Non-executive Director (appointed effective 1 September 2017) Non-executive Director (appointed effective 29 September 2017) Senior executives Position Jeffrey Olsen Brendan Ryan Robert Closner Fabrizio Rasetti Kari Plaster Brad Baker Denis Despres Mark Irwin Chief Executive Officer Chief Financial Officer Vice President, General Counsel (appointed effective 16 October 2017) Senior Vice President, General Counsel and Secretary (ceased employment 31 December 2017) Vice President, Human Resources (effective 30 October 2017) Senior Vice President, Human Resources (ceased employment 31 December 2017) Chief Operating Officer Chief Commercial Officer (ceased employment 30 September 2017) Others who held office as Directors during the financial year were: Directors Position Bret Clayton Peter Day Lawrence First Jonathan Lewinsohn Jeffrey Long Rex McLennan Deborah O'Toole Matthew Sheahan Conor Tochilin Non-executive Director (retired 1 September 2017) Non-executive Director (retired 1 September 2017) Non-executive Director (appointed effective 1 September 2017; retired 20 February 2018) Non-executive Director (retired 20 January 2017) Non-executive Director (retired 1 September 2017) Non-executive Director and Senior Independent Director (retired 1 September 2017) Non-executive Director (retired 1 September 2017) Non-executive Director (appointed effective 1 September 2017; retired 29 September 2017) Non-executive Director (appointed effective 20 January 2017; retired 1 September 2017) Changes to KMP after 31 December 2017: 1) Lawrence First resigned from the Board effective 20 February 2018. 2) With the resignation of Lawrence First, James Kern was appointed as his replacement effective 20 February 2018. __________________________________________________________________________________________ 25 29 Annual Financial Report 31 December 2017 1.3. REMUNERATION OUTCOMES Actual remuneration BOART LONGYEAR LIMITED Details of CEO and other senior executive remuneration for the year ended 31 December 2017, prepared in accordance with statutory obligations and accounting standards, are contained in Table 5.1 of this Report. The remuneration calculations in Table 5.1 are based on the Accounting Standards principle of “accrual accounting” and, consequently do not necessarily reflect the amount of compensation an executive actually realised in a particular year. To supplement the required disclosure we have included table 1.3, below, which shows the actual compensation realised by the senior executives who were KMP at the end of 2017. Table 1.3 illustrates how the Company’s remuneration strategy for senior executives translates into practice. It is important to note that the STI and LTI amounts are amounts earned on performance during the prior plan year(s) and vested and/or paid in the current year. Table 1.3: Actual remuneration received by senior executives who were KMP on 31 December 2017 Base salary US$ STI 1 US$ LTI 2 US$ LTI (cash) US$ Other 3 US$ Jeffrey Olsen Brendan Ryan Robert Closner 4 Kari Plaster 5 Denis Despres 586,154 400,000 186,800 41,538 400,000 554,400 70,430 70,811 - 72,320 51,067 - 9,277 - - 100,750 - 10,088 - 166,667 6 33,580 59,559 24,237 23,512 30,878 Total US$ 1,325,951 529,989 301,213 65,050 669,865 (1) Represents the cash paid in respect of the executive’s STI award earned for the prior year’s performance, but paid in the current reporting year. For further details of the STI Plan, see section 3.3 of this Report. (2) Represents the value of share rights vested during the year ended 31 December 2017 (based on the market value of shares at the vesting date: A$0.09 on 15 March 2017 and A$0.06 on 3 April 2017). Share Rights granted under the Company’s LTI Plan and options granted under the Company’s option plan during other grant years that have not reached their respective vesting dates do not appear in this table, as they do not vest until the conclusion of the performance period and/or continued service requirement. For further details of the LTI Plan and option plans, see section 3.4 of this Report. (3) Represents benefits such as US 401(k) retirement plan, Company matching and/or profit sharing contributions, car allowance, relocation fees, and tax preparation service reimbursement. Also includes sign-on bonuses and other bonuses granted and paid in 2017. (4) Mr Closner was promoted and became a KMP effective 16 October 2017. His actual base salary reported above represents the combined total amount associated with his former position from January through September and his current position October through December. (5) Ms Plaster was hired on 30 October 2017, as such, her actual remuneration received reflects a partial year of earnings from her date of hire. Ms Plaster was given a $40,000 sign-on bonus that will be paid in two installments of $20,000 each (once upon her joining BLY and again on her first anniversary date). (6) In 2016, Mr Despres was granted a one-time, sign-on cash award of $300,000 and a share award of $200,000 to be paid in equal installments of one-third on each anniversary of his hire date (1 September 2016) beginning with the first anniversary and ending on the third. The shares were to be calculated by dividing one third of the share award by the 5-day volume weighted average share price for the five trading days immediately preceding and including the relevant anniversary date. As of 1 September 2017, $100,000 of the cash award and one-third of the share award vested. Mr Despres opted to receive cash, for the vested share award, instead of Company shares, resulting in a total cash payment of $166,667. 2. REMUNERATION FRAMEWORK AND STRATEGY This section outlines the Company’s remuneration governance framework and strategy and explains how the Board and Remuneration Committee make remuneration decisions that underpin the remuneration arrangements for senior executives, including the use of external remuneration consultants. 2.1. HOW REMUNERATION DECISIONS ARE MADE Board responsibility The Board acknowledges its responsibility for the Company’s remuneration arrangements and ensures that they are equitable and aligned with the long-term interests of the Company and its shareholders. In performing this function and making decisions about executive remuneration, the Board is fully informed and acts independently of management. To assist in making decisions related to remuneration, the Board has established a Remuneration and Nominations Committee. __________________________________________________________________________________________ 26 30 Boart Longyear 2017 Annual Report Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED Remuneration and Nominations Committee (“Remuneration Committee” or “Committee”) The Remuneration Committee has been established to assist the Board with remuneration issues and is responsible for ensuring that the Company compensates appropriately and consistently with market practices. It also seeks to ensure that the Company’s remuneration programs and strategies will attract and retain high-calibre Directors, executives and employees and will motivate them to maximise the Company’s long-term business, create value for shareholders and support the Company’s goals and values. The Remuneration Committee’s responsibilities include: • • • • • • reviewing, monitoring and overseeing the implementation of the executive remuneration policy; reviewing all aspects of remuneration of the CEO and the proposed remuneration of other members of the KMP, including any proposed change to the terms of their employment and any proposed termination payments; reviewing executive incentive plans, including equity-based plans and including a consideration of performance thresholds and regulatory and market requirements; developing performance hurdles for the CEO and reviewing proposed performance hurdles for other KMP; overseeing strategies for recruitment, retention and succession planning for Directors and key executive positions; and reviewing the composition of the Board and monitoring the performance of the Board and the Directors. The charter of the Remuneration Committee is set out in full on the Company’s website at www.boartlongyear.com. The Committee members as at the date of this Report are Ms Gretchen McClain, Chairman, Mr Kyle Cruz, Mr Jason Ireland, and Mr Eric Waxman. The CEO, the Vice President, Human Resources and other members of senior management attend meetings of the Remuneration Committee, as appropriate, to provide information necessary for the Remuneration Committee to discharge its duties. Individual executives do not attend or participate in discussions where recommendations regarding their own circumstances are determined. Use of remuneration consultants and external advisers Where appropriate, the Board seeks and considers advice from independent remuneration consultants and external advisers. Remuneration consultants are engaged by, and report directly to, the Remuneration Committee and support it in assessing market practice so that base salary and targeted short-term and long-term compensation are in line with comparable roles. When remuneration consultants are engaged, the Committee ensures their independence, as necessary, from Company management in accordance with the assignment or advice being sought. Thus, the Committee may determine that complete independence from management is required, or it may direct the consultant to work with Company management to obtain relevant information or input in order to formulate advice or recommendations to the Committee. The Committee has also established a formal Protocol that summarises the policy and procedures the Company has adopted to govern the relationship between the independent remuneration consultant, the Committee and management. The Protocol was developed in compliance with the obligations under Part 2D.8 of the Corporations Act and ensures that the remuneration consultant remains free from any undue influence by any member of the KMP to whom the recommendations relate. All consultant remuneration recommendations are provided directly to the Committee and are accompanied by an undue influence declaration from the consultant. In 2017, the Committee relied on the external review of Mercer subject matter experts as well as key Centerbridge Partners in the creation and administration of the new Management Incentive Plan. In addition, the Committee continued to rely on the independent market review of KMP compensation obtained from Mercer Consulting. 2.2. REMUNERATION POLICY AND STRATEGY The Company’s executive remuneration strategy is designed to attract, motivate and retain high performing individuals and align the interests of executives with shareholders. The Company’s remuneration program has been designed to ensure that the structure, mix of fixed and “at-risk” remuneration and quantum of senior executive remuneration meet the Company’s specific business needs and objectives and are consistent with good market practice. An additional challenge impacting the remuneration program is the need to provide total compensation packages that are competitive in the US market, where remuneration levels and structures materially differ from Australian arrangements. __________________________________________________________________________________________ 27 31 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED Accordingly, the Company’s senior executive remuneration program has been structured so that it: • • • • provides a competitive compensation program to retain, attract, motivate and reward key employees; achieves clear alignment between total remuneration and delivered business and personal performance over the short and long term; is an appropriately balanced mix of fixed and “at-risk” remuneration; and is reasonable in the context of the definition in the Corporations Act 2001. The Company and the Remuneration Committee regularly review all elements of the remuneration program to ensure that it remains appropriate to business strategy, is competitive and is consistent with relevant contemporary market practice. The remuneration initiatives are designed to assist the Company in achieving key business goals and objectives. The diagram below illustrates three primary components of an executive’s total compensation opportunity and how the components are structured to achieve the remuneration strategy and align with shareholder interests: Fixed Remuneration Short-term Incentive (Corporate Bonus Plan) Long-term Incentive • Provides a predictable base level of compensation commensurate with the executive’s scope of responsibilities, leadership skills, values, performance and contribution to the Company. • Generally targeted to be near the median of the competitive talent market using external benchmarking data. Since the majority of the Company’s executives (and all of the executive KMP) are located in the US, the competitive talent market is determined to be the US market. • Variability around the median is based on the experience, performance, skills, position, business unit size and/or complexity and unique market considerations, where necessary. • • • • • • This component of compensation is “at-risk” and earned only if challenging performance metrics are achieved. Key performance metrics for 2017 include free cash flow, adjusted EBITDA, safety performance, and individual strategic goals. These metrics were designed to weight performance on free cash flow, adjusted EBITDA and safety to overall Company performance in order to promote collaboration and to align with shareholder interests. Individual strategic goals can include financial, operational and/or strategic targets. Examples include revenue growth, cost control goals, cash flow generation, geographic expansion, new product/market development and productivity programs. The metrics used for the CBP are reviewed annually to ensure that they continue to support the Company’s business strategy. The STI is awarded in cash and will either be paid all at once, or in a staggered fashion, dependent on key business factors at the discretion of the Board. • • • • • This component of compensation is “at-risk” and earned only if challenging performance metrics are achieved and/or continued service requirements are met over a multi-year performance period. The Board selected cumulative EBITDA as the key measure of performance-based long-term incentive awards in 2017. Performance cash rights are measured against cumulative adjusted EBITDA from fiscal year 2017 through 2019. The hurdles used for the LTI are reviewed annually to achieve outcomes deemed important at that time by the Board. The LTI performance criteria used in 2017 included a minimum threshold performance, below which no value is achieved. The Board believes the 2017 LTI performance criteria provides an appropriate balance for long term shareholder return and underlying financial performance of the company. Long Term Incentive Plan (LTIP) and Retention Incentive Grant Agreement (RIGA) programs will cease and be replaced by the new MIP, which is effective 1 January 2018. Retention based awards have been calculated on a pro-rata basis as of 31 December 2017 and will be paid on the original payment date as per the award agreement. Performance based awards and stock option plans are cancelled as of 31 December 2017. __________________________________________________________________________________________ 28 32 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 3. COMPONENTS OF EXECUTIVE REMUNERATION BOART LONGYEAR LIMITED The remuneration policy and programs set out in this section of the Report apply to all executive KMP and to other members of the Company’s senior management who are not KMP. 3.1. REMUNERATION MIX Total remuneration for the CEO and senior executives is made up of fixed remuneration (consisting primarily of base salary and superannuation contributions (or the foreign equivalent, such as the United States’ 401(k) payments) and variable “at-risk” remuneration. The variable remuneration has two “at-risk” components: • • STI – being an annual bonus granted under the Company’s Corporate Bonus Plan; and LTI – being equity or cash grants tied to vesting conditions, such as performance hurdles and continued employment. The Board notes the Company’s current market capitalisation may cause some shareholders and analysts to consider certain compensation components and/or total remuneration to be higher than market comparison models would suggest. Given the volatility of the Company’s markets and the complexity of operating a global and complex business, the Board believes that maintaining its executive compensation benchmarking at levels that reflect the Company’s size through the middle of the market cycle is a more accurate reflection of the long-term potential and through-the-cycle market capitalisation of the Company and the remuneration levels necessary to attract and retain the calibre of talent required to operate a highly leveraged company in a complex, global and highly cyclical environment. The relevant proportion of fixed to at-risk components for senior executive remuneration during 2017 are shown below in table 3.1. The table illustrates the annualised remuneration mix for executive KMP, including annualised fixed salary, target STI (assuming performance metrics are achieved such that 100% of target bonus is earned) and LTI at the fair value at the date of grant (assuming 100% performance and vesting requirements are achieved). See section 3.4, Long-term Incentive, for further information. Table 3.1: Remuneration mix (1) Mr Closner was not a KMP on the date of the 2017 LTI grant award; therefore, Mr Closner’s “fixed” vs “at-risk” remuneration is not representative of the remuneration mix awarded to KMPs in 2017. (2) Ms Plaster was hired as of 30 October 2017. Due to the changes to the LTI plan that were to be implemented on 31 December 2017 and the implementation of the new MIP on 1 January 2018, Ms Plaster was not given an LTI award upon hire. Ms Plaster will be eligible to participate in the 2018 MIP plan. Her 2017 remuneration mix is skewed due to the lack of an LTI award in 2017 (with the exception of the long-term portion ($20,000) of her awarded sign-on bonus of $40,000). 3.2. FIXED REMUNERATION The fixed component of executive remuneration consists primarily of base salary. Senior executives also receive other benefits, such as a vehicle allowance. In addition, the Company contributes to retirement programs, such as Australia’s compulsory superannuation scheme or the United States’ 401(k) defined contribution retirement plan. __________________________________________________________________________________________ 29 33 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED Base salaries are reviewed annually by the Remuneration Committee (or, for the CEO, by the Board) and may be adjusted as appropriate to maintain market competitiveness and/or to make adjustments based on merit in accordance with the CEO’s recommendation. 3.3. SHORT-TERM INCENTIVE Table 3.3: Summary of the Short Term Incentive program What is the STI program? The Short Term Incentive program, or Corporate Bonus Plan (“CBP”), provides certain employees with the potential to receive an annual bonus if the Company meets annual financial and safety objectives, which are reviewed and approved by the Remuneration Committee. Who participates in the STI program? Why does the Board consider the STI program an appropriate incentive? Potential target incentives under the CBP range between 10% and 100% of an employee’s base salary depending on the employee’s role. The actual bonus that an employee will receive under the CBP (if any) will vary depending on the Company’s and the individual’s performance against established annual objectives and targets, as detailed more fully below. 97 senior employees, including BLY’s senior executive KMP. The CBP and the performance conditions set under the CBP have been designed to: • • • focus eligible employees on maximising Company performance in key financial, safety and operational targets; align individual efforts with Company and shareholder interests; and reward for superior individual and Company performance. By putting a significant proportion of senior executive remuneration at-risk against challenging targets, the CBP aligns executive interests with the Company’s financial and safety performance and with the relevant operational and/or functional objectives. What are the performance conditions? There are three key Company performance components and Individual Strategic Objectives to the CBP that were used in 2017. Each component has a threshold performance level; a target level of performance where 100% of the bonus can be earned; and a maximum stretch level of performance whereby superior results can earn up to 200% of that component of the bonus. The Company’s annual financial target for the purposes of the CBP is reviewed by the Remuneration Committee and approved by the Board. The Remuneration Committee’s philosophy in setting financial and safety targets is to establish threshold targets that represent the desired minimum outcome for each goal (below which no bonus is payable for that goal) and stretch targets that can only be met by the achievement of excellent outcomes. The financial metrics used for the CBP are reviewed annually. The Remuneration Committee also reviews and approves the non-financial targets for senior executives (including the CEO). The CBP performance components for 2017 and their relative weighting are: (1) Corporate Financial Target - Free Cash Flow (FCF) - 35% of the Company’s CBP Metrics opportunity is linked to the Company’s FCF performance. For the purposes of calculating FCF, the statutory FCF is adjusted to eliminate the impact of items such as cash restructuring costs, pension plan pre-funding, interest and income tax receipts or payments, acquisition or disposals of subsidiaries, and cash flows from financing activities, including, but not limited to, proceeds from equity raisings and borrowings. The free cash flow metric was selected to ensure proper alignment and focus on the critical need to generate cash to fund ongoing operations and reduce debt. __________________________________________________________________________________________ 30 34 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 BOART LONGYEAR LIMITED For 2017, the Board approved the following performance payout matrix for the CBP Free Cash Flow component: Free Cash Flow (35%) FCF US$'000 >48,182 24,091 < 6,023 % of Budget >200% 100% 29% Payout % 200% 100% 0% Any actual performance falling between threshold and target, or target and maximum achievement will be calculated linearly. (2) Corporate Financial Target – Adjusted EBITDA - 35% of the Company’s CBP Metrics opportunity is linked to the Company’s Adjusted EBITDA performance. For the purposes of calculating Adjusted EBITDA, Statutory EBITDA plus Restructure Costs = Adjusted EBITDA. For 2017, the Board approved the following performance payout matrix for the CBP Adjusted EBITDA component: Adjusted EBITDA (35%) US$'000 >80,000 40,000 < 10,000 % of Budget >200% 100% 25% Payout % 200% 100% 0% (3) Corporate Non-Financial Target - Safety - 30% of the Company’s CBP Metrics opportunity is dependent upon the Company’s overall safety performance. The Board and management believe that a component of the CBP based on safety results appropriately focuses Company employees on adopting safe work practices, continuously identifying ways to reduce or eliminate hazards or unsafe behaviours and getting employees home safely every day. Further, safety is paramount to the Company’s customers, and the Company’s ability to secure or retain work is impacted by its safety performance. For 2017, the Board agreed, on the recommendation of its Audit, Safety and Risk Committee to use total case incident rates (TCIR), severity, and Critical Risk Incident Correction Action Closure rates as the measurements of safety performance for the CBP with the following performance payout targets: Safety TCIR 1.69 1.24 0.90 Critical Risk Incident Correction Action Closure 93 70 47 Safety Severity Payout % 2.74 1.66 1.20 50% 100% 200% __________________________________________________________________________________________ 31 35 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED The payout is linear between levels for each safety metric, and TCIR and severity are weighted equally at 11% and Critical Risk Incident Correction Action Closure is weighted at 8% of the CBP. In order to receive any accelerated payout above target, the lost time incident rate must be at or below 0.20. (4) Individual Strategic Objectives - 100% of the Individual Strategic Objective CBP opportunity is dependent upon performance against strategic objectives relevant to the employee’s operational or functional responsibility. Examples of strategic objectives may include: operational or functional cost targets, geographic or targeted market segment or customer growth, new product introductions, leadership, talent retention and development, specific project or initiative progress, etc. Strategic objectives are utilised to reinforce continued focus on critical initiatives and operational or functional priorities that have a positive impact on current and/or future business performance. Strategic objectives should be pursued regardless of the business or market pressures impacting the overall corporate financial performance. Stretch performance on strategic objectives can be achieved to a maximum of 200% of the weighting of this component. Depending on the nature of the objective, stretch performance can be defined when the objective is approved at the beginning of the year, or in some circumstances be determined by the CEO and approved by the Board at the end of the year. The Board has discretion to modify the amount of the strategic objective award up or down as appropriate. In addition to the operation of the CBP, as set out above, the Board retains discretion to administer the CBP, including adjusting the bonus a participant receives. How are the performance conditions measured? Performance is assessed against the relevant targets annually based on the Company’s fiscal year. The final determination of the Company’s financial performance is determined after reviewing the Company’s audited financial results for the relevant period. Financial metrics are assessed quantitatively against pre-determined targets. Where possible, non-financial targets are also assessed quantitatively, or otherwise, they are assessed by periodic qualitative performance appraisal. The Remuneration Committee recommends the amount of bonus to be paid to the CEO for Board approval. For senior executives, the Remuneration Committee will evaluate and approve recommendations from the CEO. Sample calculation Following is an example of how a bonus would be calculated, assuming the following: • • • • • Employee earns $150,000 with a 30% target bonus amount Corporate Free Cash Flow of (70% achievement) Adjusted EBITDA of (80% achievement) Safety at target performance (100%) Individual Strategic Objectives of (95% achievement) Free Cash Flow of 70% = 70% component payout (per Free Cash Flow table above)Adjusted Ajdusted EBITDA of 80% = 80% component payout (per Adjusted EBITDA table above) Safety performance at target = 100% component payout Strategic Objectives at target = 95% component payout Calculation: Step 1: Determine Company Metrics achievement Free Cash Flow = (70% x 35% weighting) Safety performance = (100% x 30% weighting) Adjusted EBITDA = (80% x 35% weighting) Company achievement + + = = 25% = 30% = 28% = 80% __________________________________________________________________________________________ 32 36 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 BOART LONGYEAR LIMITED Step 2: Individual Strategic Objectives = 95% Step 3: Calculate Bonus Multiply Company Metrics achievement of 86% and Individual Strategic Objectives achievement of 95% to arrive at totally bonus achievement of 81.7% $150,000 x 30% Target Bonus = $45,000 x 80% Bonus achievement = $36,000 Bonus All bonuses awarded under the CBP are paid in cash. Bonuses earned by the executive KMP under the CBP for the year ended 31 December 2017 are set out in Table 4.1.3 in section 4.1 of this Report. The bonuses will be paid in July 2018. In what form is the STI delivered? What STI awards did senior executives earn in 2017? What if a senior executive ceases employment? A senior executive’s entitlement to a CBP payment ceases on the date that they cease employment, unless the Board determines otherwise. However, where a senior executive’s employment ceases for reasons other than for cause or good reason, any earned bonus will be pro-rated for the amount of time actually worked during the plan year. __________________________________________________________________________________________ 33 37 Annual Financial Report 31 December 2017 3.4. Long-term incentives Table 3.4: Summary of the Long-term Incentive BOART LONGYEAR LIMITED What is the purpose of the LTI? The Company’s LTI arrangements are designed to: • align senior executive rewards with shareholder value; • assist in retaining key executives; • encourage superior performance on a sustained basis; and • provide executives with an opportunity to share in the growth and value of the Company by tying the LTI component of senior executive remuneration to equity awards that rise and fall in value in line with the Company’s share price. Who participates in the LTI? The executives eligible to participate in the LTI are senior management and corporate executives, including the KMP. The target value of annual LTI grants varies depending on the participant’s position, skills and contributions to the Company. The target amounts are generally based on market averages for comparable roles at similar-sized companies. The Company made grants to approximately 76 participants during the year ended 31 December 2017. See Section 4.1 for details on LTI awards made to KMP. What proportion of total remuneration does the LTI program represent? Senior executives are typically offered grants that represent approximately 35% - 45% (54% for the CEO) (this is exclusive of Vice-president, Human Resources and Vice-president, General Counsel; due to timing of LTI awards- see table 3.1) of their total remuneration (on an annualised basis). However, those senior executives and other LTI Plan participants derive no actual value from their LTI grants unless applicable performance hurdles and/or service conditions are satisfied. How is reward delivered under the LTI? Under the LTIP Rules and the Option Plan Rules, the Board has flexibility to offer different types of incentives (e.g., Share Rights, Cash Rights, Options, or a combination of the three) as an executive’s LTI award. The composition of the grants from year-to-year will depend on what, in the Board’s view, will best incentivise and reward executives, having regard to the Company’s circumstances. An Option is an entitlement to purchase a share at a pre-determined share price set at the grant date. A Share Right is an entitlement to receive a fully-paid ordinary share in the Company, and a Cash Right is an entitlement to receive a cash bonus up to a set maximum. Although the Board may elect to grant Cash Rights for any reason, they have the option to supplement Share Rights in order to limit share dilution when the stock price is low at the time of the award. The 2017 LTI Plan awards to the CEO, his direct reports and other senior leaders were comprised of a combination of performance-based Cash Rights and retention-based Cash Rights. The Board considered this to be appropriate for 2017 as it most effectively achieved three key objectives: aligning executives’ interests with shareholders; motivating executives to focus on earnings targets over the longer term; and retaining key executive talent, which is critical to the Company’s long term success. The performance-based Cash Rights were granted on terms and conditions determined by the Board, including vesting conditions linked to service and earnings achievement over a specified period (in this case three years). Do participants pay for Options? When Options are granted, they are offered at a pre-determined share price, which the recipient must pay in order to exercise the Option award after it vests. At the time the participant exercises the Option, the participant may pay the exercise price of the Options by making a payment to the Company, executing a cashless (broker-assisted) exercise that complies with applicable laws, authorising the withholding by the Company of an equivalent number of Shares otherwise deliverable to the participant pursuant to the Option, or by a combination of the foregoing. __________________________________________________________________________________________ 34 38 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 BOART LONGYEAR LIMITED Do participants pay for Share Rights or Cash Rights? What rights are attached to the Options or Share Rights? Share Rights and Cash Rights are offered at no cost to the LTIP participants, and no amount is payable to the Company by the participant if they vest. Options and Share Rights do not carry voting rights. Shares allocated upon vesting of Share Rights or the exercise of Options will carry the same rights as other ordinary shares. The Company may acquire shares underlying the Share Rights that it has granted under the LTIP, and the price paid by the Company will be the prevailing market price of the shares at the time of acquisition. The acquired shares will be held in trust. All dividends paid on unvested Share Rights will be held in trust and payable when the underlying Share Right vests. Company employees are not entitled to trade or hedge their unvested Rights or Options. What are the vesting conditions? For the 2017 LTI grant to KMP and certain other senior executives, the vesting conditions are as follows: LTI Incentive Percentage of grant Vesting condition Partial vesting 50% 50% Performance Cash Rights (granted to the CEO, his direct reports and other senior leaders) Retention Cash Rights (granted to the CEO, his direct reports and other senior leaders) Satisfaction of cumulative adjusted EBITDA targets within three years of the grant date. PLUS Continued employment by the recipient as of the relevant testing date. Continued employment by the recipient as of the relevant testing date. Vesting may occur on a pro-rata basis according to the conditions set out below. Vesting may occur on a pro-rata basis according to the conditions set out below. __________________________________________________________________________________________ 35 39 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED How are the Performance Rights measured for awards granted to the CEO, his direct reports and other vice- presidents? Performance Cash Rights: The earnings target is defined as earnings before interest, tax, depreciation and amortisation (EBITDA) adjusted to exclude impairments, restructuring and other non-recurring items. The Board has established a minimum target adjusted EBITDA performance for the 2018 fiscal year that must be achieved for any Cash Rights to vest. Due to market sensitivity, the adjusted EBITDA targets will be communicated in the Remuneration Report for the period following the close of the 2019 plan year. Performance Cash Rights, subject to the Continued Employment Condition and a cumulative adjusted EBITDA target set by the Board for the 3-year performance period. For purposes of this performance condition, Adjusted EBITDA is defined as Earnings Before Interest Taxes and Depreciation minus impairments, restructuring and other non-recurring items consistent with the Company’s reported financial results for the financial year ending 31 December 2019. Performance against the EBITDA target will be measured on a cumulative basis over a three- year performance period and determined by the Board in its discretion, subject to any inclusions or exclusions it considers appropriate. Performance Rights will vest in accordance with the following schedule: Performance Thresholds 3-yr Cummulative Adj. EBITDA Payout % Max Target Theshold >336 296 174 156 91 < 91 150% 125% 100% 75% 50% 0% Why have the performance hurdles been chosen? The Board believes that earnings targets as the LTI metrics (each weighted as 50% of the total) provide a balanced long-term focus on both absolute shareholder returns and continued improvement of the underlying operational and financial performance of the Company. Given the challenging business environment in which the Company is currently operating, the highly leveraged capital structure and the investment made by our shareholders, the Board believes a balanced focus appropriately aligns management equity incentives to the interests of the Company’s shareholders. __________________________________________________________________________________________ 36 40 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 BOART LONGYEAR LIMITED What if a senior executive ceases employment? What happens in the event of a change of control? What Options or Rights were granted in 2017? What is the impact of MIP Implementation on the LTI? A senior executive’s unvested LTI awards will generally lapse on the date the executive ceases employment, unless the Board determines otherwise. However, where a senior executive’s employment ceases due to death or total and permanent disability, all unvested awards will vest. Also, unless the Board determines otherwise, where a senior executive’s employment ceases by reason of “Special Circumstances” (which includes redundancy, retirement or other circumstances which are considered by the Board to be extraordinary): • • where there is no performance condition attached to an Option or Right (i.e. it is an Option, Retention Share Right or Retention Cash Right), any applicable time-based condition will be waived and the number of Options, Retention Share Rights and/ or Retention Cash Rights that vest will be pro-rated according to the extent of the retention period actually worked; and where there is a performance condition attached to an Option or Right (i.e. it is a performance-based Option, Performance Share Right or Performance Cash Right), there will be no accelerated vesting of the performance-based Options or Rights and instead, the performance-based Options or Rights will remain “on foot” and be tested in the ordinary course and against the applicable performance condition. However, the number of performance-based Options or Rights that vest will be pro-rated over the period of time actually worked during the continued service period. In the event of a takeover or change of control of the Company, the Plan provisions will be applied in accordance with the Plan and the Board’s discretion. Rights granted during the year ended 31 December 2017 are set out in Table 5.2 of this Report. Effective 1 January 2018 the Board approved a resolution to introduce a new Management Incentive Plan (MIP) subject to shareholder approval, which will replace the LTIP program (STIP program remains in place). Effective 31 December 2017 the Long Term Incentive Plan (LTIP) and Retention Incentive Grant Agreement (RIGA) programs will cease and be replaced by the new MIP program, which is effective 1 January 2018. Retention based awards will be calculated on a pro-rata basis as of 31 December 2017 and will be paid on the original payment date as per the award agreement. Performance based awards and stock option plans are cancelled as of 31 December 2017. 3.5 Executive Remuneration Clawback Policy The Company has an incentive compensation clawback policy applicable to current and former senior executives, including the KMP listed in this report, as well as any other management of the Company who participated in the Company’s incentive compensation plans. The policy is applicable to incentive compensation including bonuses, awards or grants of cash or equity under any of the Company’s short or long-term incentive or bonus plans where bonuses, awards or grants are based in whole or in part on the achievement of financial results. If the Board determines that a covered employee was overpaid as a result of his or her fraud or willful misconduct that requires a restatement of the reported financial results, the Board may seek to recover the amount of the overpayment by a repayment or through a reduction or cancellation of outstanding future bonus or awards. The Board can make determinations of overpayment at any time through the third fiscal year following the year for which the inaccurate performance criteria were measured. __________________________________________________________________________________________ 37 41 Annual Financial Report 31 December 2017 3.6 Option Plans BOART LONGYEAR LIMITED The Board established the 2015 Option Plan, as described above, which authorised the granting of stock options to the CEO, his direct reports and other Company vice-presidents. The options granted pursuant to the 2015 Option Plan are subject to a share-price appreciation performance condition and, subject to meeting that condition, in part or in full on any of the 14 March 2018, 14 March 2019 and 14 March 2020 testing dates. The options can be exercised for 10 years after the vesting date unless an employee terminates employment with the Company, in which case the Board may shorten the exercise period to no less than six months from the termination date. During 2016, 1,000,000 options were issued under the 2015 Option Plan to Mr Mark Irwin, as a part of his new hire offer, with an exercise price of A$0.199. The fair value of the options awarded was approximately US$70 thousand. The terms and conditions of this award, including performance conditions, are the same as the 2015 LTI awards granted to other members of the KMP, as disclosed in the 2015 Remuneration Report. No new options were granted in 2017. Details of options that have been granted to senior executives historically can be found in Table 4.1.7. In accordance with the transition from the LTIP program to the MIP, all Stock Options are cancelled effective 31 December 2017. 4. PERFORMANCE AND RISK ALIGNMENT 4.1. PERFORMANCE ALIGNMENT While senior executive remuneration is structured to attract and retain talented employees, the amount of remuneration received by an individual is dependent on the achievement of superior performance and generating value for shareholders. Table 4.1.1 below summarises the Company’s performance over the past five years in respect of the financial and non- financial indicators identified by the Board to assess the Company’s performance and future prospects. Table 4.1.1: Year-on-year performance Share perform ance Earnings perform ance Closing share price A$ Dividend p/share US$ 1 Financial year 2017 2016 2015 2014 2013 0.01 0.13 0.06 0.17 0.38 EPS % 2 (205.1%) (179.4%) (822.4%) (510.9%) - - - - Revenue US$ m illions EBITDA US$ m illions NPAT US$ m illions 739 642 735 867 (37) 2 (115) (83) (337) (150) (157) (326) (333) (620) ROE (50.3%) (60.6%) (596.1%) (133.4%) (79.3%) Net Debt m illions 3 599 681 586 551 n/a 0.01 (403.7%) 1,223 (1) Dividends per share are shown based upon the cash amounts paid in each year. (2) Calculated as basic EPS divided by closing share price. (3) Net debt was selected as a performance criteria in 2014. Excludes impact of recapitalisation transaction, letters of credit, CRA & IRS obligations, strategic asset acquisitions & disposals, equity raise, potential asset backed loans, etc. __________________________________________________________________________________________ 38 42 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 Short-term performance indicators and outcomes BOART LONGYEAR LIMITED Overall, STI earned and awarded to KMP in 2017 was 53% on average (down from 89% in 2016). This result was due to lower than expected safety performance and under-performance against the free cash flow component of the Corporate Bonus Plan in 2017. Additional details on actual performance for each of the bonus plan components follow. Performance against 2017 financial targets For 2017, the Remuneration Committee specifically recommended, and the Board approved, the following performance payout matrix for the Free Cash Flow component: Free Cash Flow (35%) FCF US$'000 >48,182 24,091 < 6,023 % of Budget >200% 100% 29% Payout % 200% 100% 0% Actual corporate free cash flow generation for the year was $(20.6) million, which resulted in a 0% achievement and 0% payout of the targeted amount. In addition to the free cash flow component, for 2017, the Remuneration Committee specifically recommended, and the Board approved, the following performance payout matrix for the Adjusted EBITDA component: Adjusted EBITDA (35%) US$'000 >80,000 40,000 < 10,000 % of Budget >200% 100% 25% Payout % 200% 100% 0% Actual EBITDA for the year was $43.1 million, which resulted in a 108% achievement, or 37.7% payout of the target of 35%. Performance against 2017 non-financial targets For 2017, the Remuneration Committee specifically recommended, and the Board approved, the following performance payout matrix for the Safety component: Safety TCIR 1.69 1.24 0.90 Critical Risk Incident Correction Action Closure 93 70 47 Safety Severity Payout % 2.74 1.66 1.20 50% 100% 200% The Company did not meet its performance on its targeted overall Safety metrics with actual TCIR performance of 1.62, Severity Rate of 3.70, and Critical Risk of 82, representing 57.8%, 0.0%, and 200% achievement, respectively, although the Critical Risk performance is capped at 100% due the LTIR gateway exceeding the acceptable threshold of 0.20 with a final performance of 0.22. 2017 was a particularly challenging year as the Senior Leadership Team restructured and recapitalized BLY requiring significant focus and attention on all aspects of our business. We continue to look for additional efficiencies and cost savings in __________________________________________________________________________________________ 39 43 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED the business. Leadership changes at Boart Longyear impacted the Board of Directors, as well as Senior Leadership. The business delivered solid overall performance against 2017’s objectives including revenue, cost reductions and growth in underlying earnings. Boart Longyear understands the importance of transparent reporting in all facets of our business, as well as those that are represented in our incentive structures. Given the Company’s size and position in the industry, it believes disclosing certain detailed financial or strategic performance targets would put it at a competitive disadvantage due to commercial sensitivities. However, in 2017 the Board established several specific strategic and operational objectives that included, but were not limited to: • Delivering 2017 business performance in a difficult market environment by: o driving cost and efficiency improvements in corporate, business and functional areas; o reducing SG&A and overhead costs in 2017; o improving cash management and working capital related to our supply chain; o delivering targeted savings on drilling services efficiency and commercial initiatives; o and completing the recapitalisation Focusing on next generation engineering and manufacturing; • • Challenging our global footprint and streamlining as well as executing on a revised organisational structure to improve commercial, functional and operational alignment; • Defining key customer strategic alliance plans and measurably improving customer relationships and benefits by increasing the commercial capabilities of the Company, particularly in our Drilling Services business; • Achieving an improved safety culture through: o improved awareness across the entire organisation; o focusing on the THINK process; o increased transparency in reporting; and o increased use of engineering solutions to make our equipment safer. These objectives applied to all senior executives as they relate to their operation, function or region. Management’s incentive plan is based upon quantitative measures of safety, adjusted EBITDA, and free cash flow. While there were significant improvements made in the cost structure of our business and targets for EBITDA were achieved, our safety performance did not reach our targets and much higher than anticipated working capital requirements in the fourth quarter of 2017 resulted in under achievement versus cash flow targets. The consequence of these results is a significant incentive plan underachievement. Table 4.1.2: Average proportion of STI awarded, 2012 through 2017. % of target STI aw arded 1 2012 72% 2013 40% 2014 122% 2015 2 114% 2016 90% 2017 53% (1) Weighted average for senior executives. (2) Not including Mr Kirkey who was on his former bonus plan through 2015. __________________________________________________________________________________________ 40 44 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 Table 4.1.3: STI earned during the year ended 31 December 2017 BOART LONGYEAR LIMITED STI earned US$ Target STI 1 US$ STI earned as % of target STI % of target STI forfeited STI as % of m axim um STI 2 % of m axim um STI forfeited 2 Jeffrey Olsen Brendan Ryan Fabrizio Rasetti 3 Robert Closner 4 Brad Baker 3 Kari Plaster 5 Denis Despres Mark Irw in 3 312,120 131,090 108,202 40,584 84,389 58,991 128,593 117,045 600,000 240,000 208,000 78,016 162,225 108,000 240,000 225,000 52% 55% 52% 52% 52% 55% 54% 52% 48% 45% 48% 48% 48% 45% 46% 48% 26% 27% 26% 26% 26% 27% 27% 26% 74% 73% 74% 74% 74% 73% 73% 74% (1) The target potential value of the 2017 STI awards for the CEO and senior executives (who receive STI awards wholly in cash) is the amount disclosed. A minimum level of performance must be achieved before any STI is awarded. Therefore, the minimum potential value of the STI for all participants in 2017 was nil. (2) The maximum potential award assuming superior performance against all CBP metrics is 200% of target STI. (3) Mr Rasetti, Mr Baker and Mr Irwin’s employment with the Company ceased prior to or on 31 December 2017. However, they were eligible to receive a prorated STI bonus. Pursuant to their separation agreements, their prorated amounts assumed achievement of individual strategic performance at target. (4) Mr Closner was a KMP from 16 October through 31 December 2017, however the bonus reflected in table 4.1.3 represents his target and earned bonus for the entire year. (5) Ms Plaster’s target and earned bonus was calculated on her annualized base salary prorated from her date of hire on 30 October 2017. Long-term performance indicators and outcomes LTI awards are provided to assist in retaining key executives, encourage superior performance on a sustained basis, and provide such executives with an opportunity to share in the growth and value of the Company. The performance-based LTIP awards granted in 2014 were subject to a three-year Cumulative Net Debt target, adjusted for a Total Shareholder Return modifier. Due to challenging market conditions, the 2014 LITP awards vested at 61.2% of the target. This is derived by the Cumulative Net Debt achievement of 68% of the LTIP target, adjusted by a further 10% modifier as our total shareholder return was below our peers (68% - (68% x 10%) = 61.2%). Table 4.1.4: Cumulative Net Debt performance for 2014 grants of performance-based LTI awards Targets Threshold Target Maxim um Actual Net Debt1 Net Debt Perform ance 2014 2015 2016 Cumulative Performance % of Aw ard Earned 554,500 602,200 687,289 1,843,989 50% 542,676 573,500 654,537 530,852 550,758 544,800 586,272 621,885 681,044 1,770,713 100% 1,697,537 150% 1,818,074 68% 66% 78% 60% 68% 68% (1) Excludes impact of recapitalisation transaction, letters of credit, CRA & IRS obligations, strategic asset acquisitions & disposals, equity raise, potential asset backed loans, etc.; The vested Share Rights listed in Table 4.1.5 below include the Retention Share Rights and Performance Share Rights that were granted in 2014 and vested in 2017. The Performance Share Rights were subject to the performance period ended 31 December 2016 achieved 61.2% of the target award amount (as detailed in the narrative and table 4.1.4 above). __________________________________________________________________________________________ 41 45 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED Table 4.1.5: Movement in Share Rights during the year ended 31 December 2017 Nam e Jeffrey Olsen Brendan Ryan Fabrizio Rasetti Robert Closner Brad Baker Grant date 1-Apr-14 15-Mar-16 6-Sep-16 15-Mar-14 15-Mar-16 15-Mar-14 1-Jul-15 15-Mar-16 15-Mar-14 15-Mar-16 Denis Despres 1-Sep-16 Mark Irw in 15-Mar-16 FMV at Grant Date US$ 0.27 0.05 0.08 0.25 0.05 0.25 0.05 0.25 0.05 0.08 0.05 Vesting date 1-Apr-17 15-Mar-19 6-Sep-19 15-Mar-17 15-Mar-19 15-Mar-17 15-Mar-19 15-Mar-19 15-Mar-17 15-Mar-19 1-Sep-19 15-Mar-19 Held at the beginning of the financial year Num ber of Share Rights granted as rem uneration Number of Share Rights vested Value of Share Rights vested US$ 1 Num ber of Share Rights forfeited 2 Held at the end of the financial year 972,612 8,362,602 3,900,000 972,612 2,241,177 106,650 370,000 464,630 729,459 1,820,957 2,600,000 1,961,030 - - - - - - - - - - - - 846,821 36,169 125,791 - 8,362,602 - - 846,821 - 106,650 - - - 58,256 - 7,337 - - 3,900,000 125,791 1,023,321 3 - 243,470 464,630 94,343 - - - - 1,217,856 - 126,530 - - 635,116 43,692 - - - - - - 831,448 4 989,509 2,600,000 - 950,903 5 1,010,127 (1) (2) Represents the value of Share Rights vested during the year based on the market value of shares at the vesting and forfeiture date. A portion (38.8%) of the 2014 Performance Share Rights were forfeited due to performance targets not being reached at 100%, the remaining 61.2% vested in accordance with the met performance conditions (see table 4.1.4). In addition, a pro-rated portion of the outstanding 2015 and 2016 Retention Share Rights were forfeited due to the current LTIP plan being replaced by a new MIP plan to be implemented in 2018. All 2015 and 2016 outstanding Performance Share Rights were forfeited at year-end due to the MIP mentioned above. An exception to the year-end MIP pro-rating are employees who were terminated prior to 31 December 2017 and received a pro-rated letter based on their individual termination dates. (3) Mr Rasetti’s employment terminated on 31 December 2017, his outstanding Performance Share Rights were pro-rated upon his end date of 31 October 2017. This resulted in the forfeiture of 1,023,321 Performance Share Rights. The balance of 1,217,856 Performance Rights remain on foot and remain subject to meeting the performance condition. (4) Mr Baker’s employment terminated on 31 December 2017, his outstanding Performance Share Rights were pro-rated upon his end date of 31 October 2017. This resulted in the forfeiture of 831,448 Performance Share Rights. The balance of 989,509 Performance Rights remain on foot and remain subject to meeting the performance condition. (5) Mr Irwin’s employment terminated on 30 September 2017, at which time his outstanding Performance Share Rights were pro-rated upon his termination date. This resulted in the forfeiture of 950,903 Performance Share Rights. The balance of 1,010,127 Performance Rights remain on foot and remain subject to meeting the performance condition. __________________________________________________________________________________________ 42 46 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 BOART LONGYEAR LIMITED The Cash Rights listed in Table 4.1.6 below include the Retention Cash Rights and Performance Cash Rights that were granted in 2014 and vested in 2017, the Special Retention Rights granted in 2016 which will vest in 2019, and Retention Cash Rights and Performance Cash Rights granted in 2017 which will vest in 2020. Table 4.1.6: Movement in Cash Rights during the year ended 31 December 2017 Nam e Jeffrey Olsen Brendan Ryan Fabrizio Rasetti Robert Closner Brad Baker Denis Despres Grant date Vesting date 1-Apr-14 15-Mar-16 1-Mar-16 15-Mar-17 6-Sep-16 15-Mar-17 15-Mar-14 15-Mar-16 1-Mar-16 15-Mar-17 15-Mar-14 15-Mar-16 1-Mar-16 15-Mar-17 15-Mar-14 15-Mar-16 1-Mar-16 15-Mar-17 1-Sep-16 1-Sep-16 1-Apr-17 15-Mar-19 1-Mar-19 15-Mar-20 6-Sep-19 15-Mar-20 15-Mar-17 15-Mar-19 1-Mar-19 15-Mar-20 15-Mar-17 15-Mar-19 1-Mar-19 15-Mar-20 15-Mar-17 15-Mar-19 1-Mar-19 15-Mar-20 1-Sep-17 1-Sep-17 1-Sep-16 1-Sep-18 1-Sep-16 1-Sep-19 1-Sep-16 1-Sep-19 Held at the beginning of the financial year Num ber of Cash Rights granted as rem uneration Num ber of Cash Rights vested Value of Cash Rights vested US$ Value of Cash Rights forfeited US$ Held at the end of the financial year Num ber of Cash Rights forfeited 1 125,000 500,000 900,000 - 200,000 - 125,000 134,000 624,000 - 10,000 25,260 128,619 - 93,750 108,875 487,000 - 100,000 66,667 100,000 100,000 200,000 - - - 1,000,000 - 500,000 - - - 400,000 - - - 60,000 - - - 325,000 1 2 1 1 - - - - - 100,750 - - - - - 100,750 - - 42,120 10,000 - - - 75,562 - - 34,223 100,000 66,667 - - - - - - 2 3 4 5 100,750 - - - - - 100,750 - - 42,120 10,000 - - - 75,562 - - 34,223 100,000 66,667 - - - - - - 24,250 500,000 349,315 867,245 200,000 433,622 24,250 61,184 276,931 315,760 - 25,260 51,565 52,035 18,188 49,712 216,130 256,554 - - - - 200,000 433,622 56,854 247,877 408,800 2 2 2 3 3 3 6 6 6 24,250 500,000 349,315 867,245 200,000 433,622 24,250 61,184 276,931 315,760 - 25,260 51,565 52,035 18,188 49,712 216,130 256,554 - - - - 200,000 433,622 56,854 247,877 408,800 - - 550,685 132,755 - 66,378 - 72,816 347,069 42,120 - - 77,054 7,965 - 59,163 270,870 34,223 - - 100,000 100,000 - 66,378 60,396 277,123 45,600 15-Mar-17 15-Mar-20 - 500,000 Mark Irw in 15-Mar-16 15-Mar-19 1-Mar-16 1-Mar-19 117,250 525,000 - - 15-Mar-17 15-Mar-20 - 500,000 45,600 6 45,600 (1) A portion (38.8%) of the 2014 Performance Cash Rights were forfeited due to performance targets not being reached at 100%, the remaining 61.2% vested in accordance with the met performance conditions (see table 4.1.4). In addition, a pro-rated portion of the outstanding 2016 and 2017 Retention Cash Rights were forfeited due to the current LTIP plan being replaced by a new MIP plan to be implemented in 2018. All 2016 and 2017 outstanding Performance Cash Rights were forfeited at year-end due to the new MIP mentioned above. An exception to the year-end MIP pro-rating are employees who were terminated prior to 31 December 2017 and received a pro-rated letter based on their individual termination dates. (2) Mr Rasetti’s employment ceased on 31 December 2017 at which time he received a pro-rata vesting of 42,120 outstanding Retention Cash Rights based on his end date of 31 October 2017. The balance of 157,880 outstanding Retention Cash Rights were forfeited. He also received a pro-rata portion of his Special Retention Rights which will remain outstanding until the scheduled vesting date in March 2019. The amount of 276,931 Special Retention Rights were forfeited. In addition, Mr Rasetti’s outstanding Performance Cash Rights were also pro-rated based upon his end date resulting in the forfeiture of 219,064 Performance Cash Rights. The balance of 114,936 Performance Cash Rights remain on foot and are subject to meeting the performance conditions. (3) Mr Baker’s employment ceased on 31 December 2017 at which time he received a pro-rata vesting of 34,223 outstanding Retention Cash Rights based on his end date of 31 October 2017. The balance of 128,277 outstanding Retention Cash Rights were forfeited. He also received a pro-rata portion of his Special Retention Rights which will remain outstanding until the scheduled vesting date in March 2019. The amount of 216,130 Special Retention Rights were forfeited. In addition, Mr Baker’s outstanding Performance Cash Rights were also pro-rated based upon his end date resulting in the forfeiture of 177,989 Performance Cash Rights. The balance of 93,386 Performance Cash Rights remain on foot and are subject to meeting the performance conditions. __________________________________________________________________________________________ 43 47 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED (5) (4) In 2016, Mr Despres received a one-time new hire sign-on award of $300,000 to be paid in equal instalments of one-third each on the anniversary of his hire date (1 September 2016) beginning with the first anniversary and ending on the third. There were no performance conditions on these amounts and one third of the award vested in 2017. In 2016, Mr Despres was granted a sign-on share award of $200,000 to be paid in equal installments of one-third on each anniversary of his hire date (1 September 2016) beginning with the first anniversary and ending on the third. The shares were to be calculated by dividing one third of the share award by the 5-day volume weighted average share price for the five trading days immediately preceding and including the relevant anniversary date. As of 1 September 2017, one-third of the award vested and Mr Despres opted to receive cash instead of Company shares, resulting in a cash payment of $66,667. (6) Mr Irwin’s employment ceased on 30 September 2017 at which time he received a pro-rata vesting of 45,600 outstanding Retention Cash Rights upon his termination date. The balance of 204,400 outstanding Retention Cash Rights were forfeited. He also received a pro-rata portion of his Special Retention Rights which will remain outstanding until the scheduled vesting date in March 2019. The amount of 247,877 Special Retention Rights were forfeited. In addition, Mr Irwin’s outstanding Performance Cash Rights were also pro-rated based upon his cessation date resulting in the forfeiture of 261,254 Performance Cash Rights. The balance of 105,996 Performance Cash Rights remain on foot and are subject to meeting the performance conditions. Table 4.1.7: Movement in options during the year ended 31 December 2017 Nam e Jeffrey Olsen Fabrizio Rasetti 2 Effective grant date 1-Apr-14 1-Jul-15 15-Mar-14 1-Jul-15 Vesting date 1-Apr-17 15-Mar-20 15-Mar-17 15-Mar-20 Brad Baker 3 15-Mar-14 15-Mar-17 Mark Irw in 4 1-Jul-15 18-Jan-16 15-Mar-20 15-Mar-20 Held at the beginning of the financial year Num ber of options granted as rem uneration 324,204 8,265,360 324,204 5,289,830 243,153 4,297,990 1,000,000 - - - - - - - Number of options vested 324,204 - 324,204 - 243,153 - - Exercise price per option A$ Num ber of options forfeited Held at the end of the financial year Vested and exercisable as at 31 Dec 2017 0.32 0.20 0.32 0.20 0.32 0.20 0.20 1 - 8,265,360 - 2,504,205 - 2,034,668 590,900 324,204 - 324,204 2,785,625 243,153 2,263,322 409,100 324,204 - 324,204 - 243,153 - - (1) Mr Olsen’s outstanding options were forfeited in 2017 due to the LTIP plan being replaced by a new MIP plan in 2018. (2) Mr Rasetti’s employment ceased on 31 December 2017, his Options were pro-rated based on his end date of 31 October 2017. Options granted in 2015 were pro-rated from the date of the grant and the portion that was not forfeited remain on foot and subject to continuing performance conditions. (3) Mr Baker’s employment ceased on 31 December 2017, his Options were pro-rated based on his end date of 31 October 2017. Options granted in 2015 were pro-rated from the date of the grant and the portion that was not forfeited remain on foot and subject to continuing performance conditions. (4) Mr Irwin’s employment ceased on 30 September 2017. Options granted in 2015 were pro-rated from the date of the grant and the portion that was not forfeited remain on foot and subject to continuing performance conditions. 4.2. RISK ALIGNMENT 4.2.1 Employee and Director Trading in Company Securities Under the Company’s Securities Trading Policy, Directors and employees (including senior executives) are prohibited from entering into transactions that limit the economic risk of holding unvested Rights or options that have been received as part of their remuneration. The Company treats compliance with this policy as a serious issue and takes appropriate measures to ensure the policy is adhered to, including imposing appropriate sanctions where an employee is found to have breached the policy. Further restrictions also apply to Directors and senior executives with respect to their dealing in the Company’s shares and other securities under the Securities Trading Policy, which may be found in the Corporate Governance section on the Company website at www.boartlongyear.com. __________________________________________________________________________________________ 44 48 Boart Longyear 2017 Annual ReportI I D E T M L R A E Y G N O L T R A O B t r o p e R l a i c n a n F i l a u n n A 7 1 0 2 R E B M E C E D 1 3 . s e v i t u c e x e i r o n e s r e h t o d n a O E C e h t r o f s m r e t t c a r t n o c i e c v r e s d n a n o i t a r e n u m e r l a t o t f o s l i a t e d s e d v o r p i n o i t c e s i s h T I L A T E D N I I N O T A R E N U M E R E V T U C E X E I . 5 n i l d e t a u c a c ( l 6 1 0 2 d n a 7 1 0 2 r e b m e c e D 1 3 d e d n e s r a e y e h t g n i r u d n o i t a r e n u m e r ’ s e v i t u c e x e i r o n e s h c a e f o s l i a t e D l . 1 . 5 e b a T n i t u o t e s e r a ) s d r a d n a t s g n i t n u o c c a e b a c l i l p p a h t i w e c n a d r o c c a n o i t a r e n u m e r e v i t u c e x e i r o n e S : 1 . 5 l e b a T - I N O T A R E N U M E R L A T O T . 1 . 5 n o i t a s n e p m o c d e s a b - h s a c - n o N n o i t a s n e p m o c d e s a b - h s a C 2 n o i t a s n e p m o c d e s a b - e r a h S s t i f e n e B n o i t a n m i r e T s t i f e n e b m r e t - g n o l r e h t O s t i f e n e b t n e m y o l p m e - t s o P 1 s t i f e n e b m r e t t r o h S s t h g i R $ S U s n o i t p O $ S U r e h t O $ S U n o i t a n m i r e T s t h g i R $ S U $ S U - m r o f r e P h s a C e c n a 8 5 7 , 6 8 1 , 1 4 4 4 , 7 8 8 , 1 % 0 . 3 1 % 0 . 8 1 1 5 6 , 5 5 6 6 0 3 , 8 3 2 % 9 . 9 % 0 . 8 9 4 5 , 3 2 5 , 1 0 8 0 , 9 6 1 , 1 % 4 . 0 5 % 3 . 8 1 l a t o T $ S U - e r a h S d e s a b % 8 8 6 , 1 3 5 7 8 , 7 9 1 1 0 0 , 5 6 8 5 9 , 8 1 8 3 8 , 9 9 6 5 3 1 , 2 2 1 8 6 4 , 2 2 1 3 3 7 , 2 4 1 - - 4 8 4 , 7 6 4 1 9 , 8 9 2 6 4 , 9 9 2 % 6 . 2 1 3 5 7 , 7 3 - 3 6 5 , 6 3 8 5 3 1 , 5 1 9 % 4 . 4 3 % 8 . 8 1 4 1 5 , 3 9 6 3 1 , 3 3 2 7 0 5 , 4 5 4 1 8 , 8 7 1 4 0 , 4 0 1 % 0 . 0 - 1 7 4 , 9 6 7 6 0 7 , 4 4 3 0 7 3 , 3 5 5 4 2 6 , 8 1 8 % 6 . 8 1 % 0 . 6 1 % 7 . 6 % 1 . 5 5 8 1 , 5 5 3 3 3 , 3 4 1 1 3 6 , 4 2 5 7 8 , 5 2 - - - 4 9 5 , 2 1 2 4 0 , 6 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 0 5 2 8 3 , 9 5 7 2 5 1 , - 4 4 4 9 1 , 0 5 2 8 3 , 5 7 1 6 5 , n o i t n e t e R h s a C s t h g i R $ S U 0 0 5 2 6 , , 4 1 8 0 7 2 - - , 0 2 6 4 0 1 , 4 7 5 9 5 2 - 8 8 0 0 1 , 7 8 6 8 2 , 1 4 3 4 4 , - - 2 2 2 2 2 , - 1 4 9 0 3 , 9 9 0 1 8 , , 0 5 9 1 0 2 - 7 6 6 6 6 , 1 1 1 1 6 , - , 3 3 8 5 4 1 - - - - - - - - - - - - - - 0 0 1 8 , 0 5 9 7 , 0 0 1 8 , 5 1 6 1 , 0 0 1 8 , 0 5 9 7 , - 0 0 1 8 , 4 5 7 6 , 2 1 3 0 0 1 8 , 4 5 1 1 , 0 0 1 8 , 0 5 9 7 , r e h t O $ S U - r e p u S n o i t a u n n a 5 s t i f e n e b $ S U 4 r e h t O $ S U 0 8 4 5 2 , 0 6 7 4 2 , 3 1 9 5 4 1 5 , 0 2 3 6 , 3 1 5 5 0 1 8 , 0 6 4 4 2 , l a u n n A 3 s u n o b $ S U 0 2 1 , 2 1 3 0 2 3 , 4 5 5 0 3 4 , 0 7 0 9 0 , 1 3 1 2 0 2 , 8 0 1 2 7 8 , 3 8 1 4 5 1 , 6 8 5 4 5 1 , 6 3 5 0 0 0 , 0 0 4 9 3 5 , 1 2 1 0 0 0 , 6 1 4 0 0 0 , 6 1 4 y r a l a s h s a C $ S U 7 1 0 2 6 1 0 2 l n e s O y e r f f e J 6 n a y R n a d n e r B 7 1 0 2 6 1 0 2 7 i t t e s a R o z i r b a F i 7 1 0 2 6 1 0 2 8 r e n s o C l t r e b o R 7 3 2 4 2 , 4 8 5 , 0 4 0 0 8 , 6 8 1 7 1 0 2 5 9 1 2 2 , 0 5 1 5 2 , 9 8 3 , 4 8 2 6 1 , 0 4 1 0 5 4 , 4 2 3 0 5 4 , 4 2 3 0 0 2 3 , 1 9 9 , 8 5 8 3 5 , 1 4 0 6 5 6 , 8 7 7 2 2 , 0 0 0 6 1 , 1 7 3 7 5 , 0 2 3 , 2 7 3 9 5 , 8 2 1 5 4 0 , 7 1 1 0 8 8 , 2 9 1 0 0 0 , 0 0 4 4 5 1 , 6 2 1 0 0 0 , 5 7 3 2 3 7 , 1 4 3 1 1 s e r p s e D s n e D i 7 1 0 2 0 1 r e t s a Pl i r a K 7 1 0 2 6 1 0 2 9 r e k a B d a r B 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 2 1 n i w r I k r a M 5 4 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 49 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED (1) There were no non-monetary benefits provided. (2) In accordance with the requirements of the Australian Accounting Standards Board, remuneration includes a portion of the historical fair value of equity compensation recognised over the respective vesting period (i.e. Rights awarded under the LTIP and options awarded under the Option Plan(s)). The fair value of equity instruments is determined as at the grant date and is recognised over the vesting period. The amount included as remuneration is not related to or indicative of the benefit (if any) that senior executives may ultimately realise should the equity instruments vest. The fair value of options at the date of their grant has been determined in accordance with AASB 2 applying Black-Scholes and Brownian Motion valuation methods. The assumptions underpinning these valuations are set out in Note 10 to the financial statements. (3) The 2017 amount represents cash STI payments earned by the executive during the year ended 31 December 2017, which are expected to be paid in July and were approved by the Board in February 2018. The 2016 amount represents cash STI payments earned by the executive during the year ended 31 December 2016, which were paid in March 2017. (4) Includes automotive allowances, reimbursements of financial and tax preparation assistance, relocation expenses, and dividends received on Share Rights, if any. (5) Includes 401(k) plan matching contributions made by the employing entity in the United States. (6) Mr Ryan was hired on 6 September 2016, as such, his 2016 actual remuneration received reflects a partial year of earnings from his date of hire. (7) Mr Rasetti ceased employment on 31 December 2017. (8) Mr Closner was considered a KMP on 16 October 2017, however, his remuneration above for 2017 includes remuneration received during the entire year. (9) Mr Baker ceased employment on 31 December 2017. (10) Ms Plaster was hired on 30 October 2017, as such, her actual remuneration received reflects a partial year of earnings from her date of hire. The annual bonus column represents the first of two $20,000 sign-on bonus payments. (11) Mr Despres was hired on 1 September 2016, as such his 2016 remuneration received reflects a partial year of earnings from his hire date. (12) Mr Irwin ceased employment on 30 September 2017. However, Mr Irwin remained employed and provided assistance to the CEO as needed from 1 October to 31 December and received post-notice pay for these services. His severance pay did not begin until 1 January 2018. Therefore, no termination benefits are disclosed for Mr Irwin above. Mr Irwin was hired on 18 January 2016, as such, his 2016 remuneration received reflects a partial year of earnings from his date of hire. (13) Amounts reflect a portion of the expense associated with the special exertion award granted in 2017 which was granted, vested and paid in 2017. 50 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 5.2. RIGHTS AND OPTIONS GRANTED No options were granted in 2017. No share rights were granted in 2017. BOART LONGYEAR LIMITED Table 5.2: Cash Rights granted during the year ended 31 December 2017 table: Cash Rights Num ber of Special Retention Rights granted Future years payable Maxim um value of grant US$ - - - - - - - 3 yrs 3 yrs 3 yrs 3 yrs 3 yrs 3 yrs 3 yrs 1,000,000 500,000 400,000 60,000 325,000 500,000 500,000 Num ber of LTI Rights granted 1,000,000 500,000 400,000 60,000 325,000 500,000 500,000 Nam e Jeffrey Olsen Brendan Ryan Fabrizio Rasetti Robert Closner Brad Baker Denis Despres Mark Irw in 5.3. SHARE HOLDINGS Shares Table 5.3.1: Share holdings as at the end of the financial year and activity during the financial year, are as follows: Balance 1 January Granted as remuneration Received on exercise of options/rights Net other change during year Balance 31 Decem ber Balance held nom inally 2017 Marcus Randolph Kyle Cruz Law rence First Jason Ireland James Kern Gretchen McClain Robert Smith Richard Wallman Eric Waxman Jeffrey Olsen Brendan Ryan Robert Closner Kari Plaster Denis Despres 5,550,356 3,348,199 - - - - 819,242 - - - 135,000 - 37,441 - - - - - - 1,146,820 - - - 846,821 - 106,650 - - - - - - - - - - - - - - - - 1,430,212 10,328,767 - - - - - - - - (460,950) - (57,806) - - - - - - 1,966,062 - - - 520,871 - 86,285 - - - - - - - - - - - - - - - - ______________________________________________________________________________________ 47 51 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED Share holdings activity during the financial year for KMP and Directors who ceased employment or resigned prior to 31 December 2017, were as follows: Balance 1 January Granted as remuneration Received on exercise of options/rights Net other change during year Balance as of retirem ent date Balance held nom inally 2017 Bret Clayton 1 Peter Day 2 Jonathan Lew insohn 3 Jeffrey Long 4 Rex McLennan 5 Deborah O'Toole 6 Matthew Sheahan 7 Conor Tochilin 8 Fabrizio Rasetti 9 Brad Baker 10 Mark Irw in 11 1,548,091 1,608,865 - 955,215 1,163,684 914,111 - - 344,300 200,796 - 803,569 803,569 - 803,569 506,248 803,569 - - 846,821 635,116 - (14) Mr Clayton resigned 1 September 2017. (15) Mr Day resigned 1 September 2017. (16) Mr Lewinsohn resigned 20 January 2017. (17) Mr Long resigned 1 September 2017. (18) Mr McLennan resigned 1 September 2017. (19) Ms O’Toole resigned 1 September 2017. - - - - - - - - - - - (300,000) - - - - - - - (398,242) (321,855) - 2,051,660 2,412,434 - 1,758,784 1,669,932 1,717,680 - - 792,879 514,057 - - - - - - - - - - - - (20) Mr Sheahan was appointed effective 1 September 2017 and resigned 29 September 2017. (21) Mr Tochilin was appointed effective 20 January 2017 and resigned 29 September 2017. (22) Mr Rasetti’s employment ceased 31 December 2017. (23) Mr Baker’s employment ceased 31 December 2017. (24) Mr Irwin’s employment ceased 30 September 2017. ______________________________________________________________________________________ 48 52 Boart Longyear 2017 Annual Report Annual Financial Report 31 December 2017 5.4 SERVICE CONTRACTS AND TERMINATION PROVISIONS BOART LONGYEAR LIMITED Name and position held at the end of the financial year Jeffrey Olsen Chief Executive Officer Brendan Ryan Chief Financial Officer Robert Closner Vice President, General Counsel and Company Secretary Duration of contract No fixed term Notice period by Company None required Notice period by executive 180 days No fixed term None required 90 days No fixed term None required 90 days Kari Plaster Vice President, Human Resources No fixed term None required 90 days Denis Despres Chief Operating Officer No fixed term None required 90 days Termination payments (where these are in addition to statutory entitlements) For termination with cause, statutory entitlements only For termination without cause: • 12 months’ salary • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months For termination with cause, statutory entitlements only For termination without cause: • 12 months’ salary • Pro-rata bonus to termination date Waiver of medical insurance premiums for 12 months For termination with cause, statutory entitlements only For termination without cause: • One month per year of service with a minimum of 12 months and a maximum of 24 months. • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months For termination with cause, statutory entitlements only For termination without cause: • 12 months’ salary • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months For termination with cause, statutory entitlements only For termination without cause: • 12 months’ salary • Pro-rata bonus to termination date Waiver of medical insurance premiums for 12 months ______________________________________________________________________________________ 49 53 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED Under the terms of the Company’s LTIP and option plans, the Board has discretion to provide for early vesting of all or a portion of unvested Rights and Options depending on the circumstances of an employee’s termination. The executive employment contracts listed above contain a twelve-month non-competition and non-solicitation covenant in the Company’s favour. The Company may, at its option, extend the term of the covenants upon an executive’s termination of employment for up to an additional twelve months in exchange for monthly payments of the executive’s base salary for the term of the extension. 5.5 SPECIAL STRATEGIC RETENTION AWARDS FOR KEY EMPLOYEES (including the KMP) In March 2016, the Board approved special strategic retention awards to certain key employees that include the KMP in March 2016. The Board recognises there has been continued contraction in both the industry and the Company, with no immediately visible signs of recovery. The Board further recognises the importance of retaining key leaders during a time of heightened uncertainty and that current outstanding equity awards have little-to-no visible retention value. These awards will be in the form of cash retention and will vest on the third anniversary of the award. If the senior executive is terminated for reasons other than for cause, the award will be prorated (with a minimum of one third the original award value) and remain outstanding and payable on the original vesting date. For the Company’s KMP, all awards will vest in March 2019 and are in the following amounts: Jeff Olsen (1) Fabrizio Rasetti (2) Robert Closner (3) Brad Baker (4) Mark Irwin (5) $900,000 $624,000 $131,468 $487,000 $525,000 (1) Mr Olsen’s amount above was reduced to $550,685 as a result of his pro-rated forfeitures due to the new MIP plan in 2018. This amount will remain outstanding until the scheduled vesting date in March 2019. (2) Mr Rasetti’s amount above was reduced to $347,069 as a result of his cessation of employment and will remain outstanding until the scheduled vesting date in March 2019. (3) Mr Closner’s amount above was reduced to $80,439 as a result of his pro-rated forfeitures due to the new MIP plan in 2018. This amount will remain outstanding until the scheduled vesting date in March 2019. (4) Mr Baker’s amount above was reduced to $270,870 as a result of his cessation of employment and will remain outstanding until the scheduled vesting date in March 2019. (5) Mr Irwin’s amount above was reduced to $277,123 as a result of his cessation of employment and will remain outstanding until the scheduled vesting date in March 2019. 6. NON-EXECUTIVE DIRECTOR ARRANGEMENTS This section explains the remuneration structure and outcomes for non-executive Directors. 6.1. NON-EXECUTIVE DIRECTORS’ FEE STRUCTURE Non-executive Directors (NED) are remunerated by a fixed annual base fee with additional fees paid for serving on Board committees. NED who are also employees of Centerbridge, Ares or Ascribe do not receive any Director fees. The payment of committee fees recognises the additional time commitment required by NED who serve on board committees. The Chairman may attend any committee meetings but does not receive any additional committee fees in addition to base fees. The fees are determined within a maximum aggregate fee pool that is approved by shareholders. The approved fee pool limit is US$2.0 million, which aside from changing the currency exchange rate at the 2015 general meeting has not changed in quantum since the Company’s initial public offering in 2007. During the financial year, US$1.0 million of the pool was utilised for non-executive Director fees, being approximately 50% of the fee pool limit. In 2015, the Board retained Willis Towers Watson to provide an independent review of NED remuneration with the aim of ensuring an appropriate balance existed between North American and Australian Director pay practices. Effective 1 July 2015, NEDs were required to receive 50% of their annual base fees in ordinary shares of Company stock. This change was made to further strengthen the alignment of NED remuneration with shareholder interests and be more competitive with North American pay practices by including company stock as a component of the NED fee structure. The share issue occurred every three months by taking 50% of the base fees earned in US dollars, converting it to Australian dollars using the exchange rate on issue date and then dividing it by the volume weighted average price of the shares traded on the ASX in the first five days after each relevant fee period. The shares are then issued and deposited into each NED personal brokerage account. As described in Section 6.2 below, the Directors are not able to trade the shares, net of sales to cover income taxes, for a period of twelve months from when they are allocated. With the completion of the recapitalisation this practice was suspended as of 1 September 2017. Additionally, the base Board fee was increased by $40,000 per annum to a total of $160,000, while Committee fees were reduced from $15,000 per member to $7,500 and Committee Chair fees were reduced to $15,000 from $30,000. ______________________________________________________________________________________ 50 54 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 Table 6.1: Components of Non-executive Director Remuneration Component Explanation BOART LONGYEAR LIMITED Board fees Committee fees Other fees/benefits Post-employment benefits Current base fees per annum are: • US$160,000 for non-executive Directors other than the Board Chairman and the resident Australian Directors (US$120,000 to 1 September 2017); US$300,000 for the Board Chairman; and AUS$200,000 for the resident Australian Directors. • • Current committee fees for non-executive Directors (other than the Board Chairman) are: • US$7,500 annually for committee members (US$15,000 up to 1 September 2017); and US$15,000 annually for committee chairs (US$30,000 up to 1 September 2017). • Where the Board Chairman sits on a committee, he or she does not receive any additional fee. Non-executive Directors are entitled to be reimbursed for all reasonable out-of-pocket expenses incurred in carrying out their duties, including travel costs. The Board Chairman also is entitled to reimbursement for office and secretarial support. Non-executive Directors may also, with the approval of the Board, be paid additional fees for extra services or special exertions for the benefit of the Company. Non-executive Directors are not entitled to receive any performance-related remuneration, such as short-term or long-term incentives. During the term Mr Randolph serves as the Executive Chairman he is eligible to participate in the Company’s medical and dental plans. Compulsory superannuation contributions for Australian- resident non-executive Directors are included in the base fee and additional committee fees set out above. Non-executive Directors do not receive any retirement benefits other than statutory superannuation contributions. During the term Mr Randolph serves as the Executive Chairman he is eligible to participate in the Company’s 401(k) retirement plan, including receiving a 3% matching contribution by the Company up to a maximum of US$8,100 per annum. ______________________________________________________________________________________ 51 55 Annual Financial Report 31 December 2017 6.2 NON-EXECUTIVE SHAREHOLDING GUIDELINE BOART LONGYEAR LIMITED In 2015, the Board implemented a shareholding guideline requiring non-executive Directors to be paid 50% of their base fees in Company shares and hold these shares for a minimum of one year. With the completion of the recapitalization this practice was suspended effective 1 September 2017. 6.3. NON-EXECUTIVE DIRECTOR SHARE ACQUISITION PLAN In February 2008, the Remuneration Committee recommended, and the Board approved, the establishment of a non- executive Director Share Acquisition Plan (“NEDSAP”) as foreshadowed in the Company’s prospectus. The NEDSAP is a fee sacrifice plan in which only non-executive Directors may participate. Participation in the NEDSAP is voluntary and non-executive Directors may elect to sacrifice up to 100% of their pre-tax base and committee fees to acquire ordinary shares at the prevailing market price. Shares acquired under the NEDSAP will be subject to a holding lock for up to 10 years, during which they are unable to deal with their shares. The holding lock may be removed in certain circumstances, including a cessation of Directorship. No shares were purchased under this plan during the year ended 31 December 2017. ______________________________________________________________________________________ 52 56 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 BOART LONGYEAR LIMITED 6.4. DETAILS OF REMUNERATION PAID TO NON-EXECUTIVE DIRECTORS Details of non-executive Directors’ remuneration for the year ended 31 December 2017 and 2016 are set out in the table below. Table 6.4: Non-executive Director Remuneration Fees (incl. com m ittee fees) 1 US$ Superannuation contributions 2 US$ Shares US$ Total US$ Marcus Randolph 3 2017 2016 Bret Clayton 4 2017 2016 Kyle Cruz 5 2017 Peter Day 6 2017 2016 Law rence First 7 2017 Jason Ireland 8 2017 James Kern 9 2017 Jonathan Lew insohn 10 2017 2016 Jeffrey Long 11 2017 2016 Gretchen McClain 2017 2016 Rex McLennan 12 2017 2016 Deborah O'Toole 13 2017 2016 Matthew Sheahan 14 2017 Robert Smith 15 2017 Conor Tochilin 16 2017 Richard Wallman 17 2017 Eric Waxman 18 2017 538,906 1,159,975 3 3 100,000 105,000 - 91,324 95,891 - 51,710 41,875 - - 80,000 75,000 138,958 75,000 114,000 117,000 78,539 68,493 - 51,710 - 57,083 - 8,100 7,950 166,664 250,000 713,670 1,417,925 - - - 40,000 60,000 140,000 165,000 - - 8,676 9,109 40,000 60,000 140,000 165,000 - - - - - - - - - - - 7,461 6,507 - - - - - - - - - - 40,000 60,000 40,000 60,000 40,000 60,000 40,000 60,000 - - - - - - 51,710 41,875 - - 120,000 135,000 178,958 135,000 154,000 177,000 126,000 135,000 - 51,710 - 57,083 - ______________________________________________________________________________________ 53 57 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED (1) Please refer to Table 6.1 above for details of the annual non-executive Director base fees and committee fees. Some Director’s (2) (3) 2017 fees also include a special exertion fee paid in 2017. Includes compulsory superannuation guarantee payments to Australian-resident Directors which are deducted from their base and additional committee fees. Includes director fees, cash salary and performance bonus. In consideration for acting as interim CEO and Executive Chair, Mr Randolph received a cash salary of US$360,570 and performance bonus of US$45,000 in 2017 and cash salary of US$509,975 and performance bonus of US$500,000 in 2016. (4) Mr. Clayton resigned as of 1 September 2017. (5) Mr Cruz was appointed effective 1 September 2017. He is an employee of Centerbridge and receives no Director fees. (6) Mr Day resigned as of 1 September 2017. (7) Mr First was appointed effective 1 September 2017 and resigned effective 20 February 2018. He is an employee of Ascribe Capital and received no Director fees. (8) Mr Ireland was appointed effective 1 September 2017. (9) Mr Kern was appointed as an alternate director for Mr. First effective 29 September 2017 and was appointed as a director effective 20 February 2018. (10) Mr Lewinsohn resigned as of 20 January 2017. He is an employee of Centerbridge and received no Director fees. (11) Mr Long resigned as of 1 September 2017. (12) Mr Rex McLennan resigned as of 1 September 2017. (13) Ms O’Toole resigned as of 1 September 2017. (14) Mr Sheahan was appointed effective 1 September 2017 and resigned 29 September 2017. Mr Sheahan is an employee of Ares Management and received no Director fees. (15) Mr Smith was appointed effective 1 September 2017. (16) Mr Tochilin was appointed effective 20 January 2017 and resigned 1 September 2017. Mr Tochilin is an employee of Centerbridge and received no Director fees. (17) Mr Wallman was appointed effective 1 September 2017. (18) Mr Waxman was appointed effective 29 September 2017. He is an employee of Ares Management and receives no Director fees. ______________________________________________________________________________________ 54 58 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 BOARD OF DIRECTORS BOART LONGYEAR LIMITED A brief summary of the Directors’ work experience and qualifications is as follows. Marcus Randolph Marcus Randolph was appointed a Director of the Company and Chair on 23 February 2015. Mr Randolph has served more than 35 years in the mining industry in a variety of global, senior executive roles. Most recently, he was Chief Executive of BHP Billiton’s Ferrous and Coal business from July 2007 to September 2013, located in Melbourne, and was a member of BHP’s Group Management Committee. Prior to that role, he also held several other senior executive roles at BHP, including as its Chief Organisation Development Officer, President Diamonds and Specialty Products, Chief Development Officer Minerals and Chief Strategic Officer Minerals. His earlier career includes Chief Executive Officer, First Dynasty Mines, Mining and Minerals Executive, Rio Tinto Plc, Director of Acquisitions and Strategy, Kennecott Inc., General Manager Corporacion Minera Nor Peru, Asarco Inc., and various mine operating positions in the US with Asarco Inc. Mr Randolph holds a Bachelor of Sciences degree in Mining Engineering from the Colorado School of Mines in the United States and also holds a Master’s in Business Administration from Harvard University. Kyle Cruz Kyle Cruz was appointed a Director of the Company on 1 September 2017. He is a member of the Remuneration and Nominations Committee. Mr Cruz is a Senior Managing Director at Centerbridge Partners, L.P., the Company’s largest shareholder and investor. Prior to joining Centerbridge in 2007, he served as Vice President at Diamond Castle Holdings, a private equity firm founded by former senior professionals of DLJ Merchant Banking (DLJMB). Previously, he worked as an Associate at DLJMB and J.W. Childs Associates, a Boston-based private equity firm. He began his career as an analyst in the Mergers and Acquisitions department of Goldman Sachs. Jason Ireland Jason Ireland was appointed a Director of the Company on 1 September 2017. He is a member of the Remuneration and Nominations Committee. Mr Ireland is the Head of McGrath Nicol’s Advisory Business and is based in Sydney, Australia. He has over 24 years of experience in strategic reviews and implementation of performance improvement and restructuring initiative across a range of industries. In the past five years, he has spent considerable time in the mining services sector, advising boards and financiers on operations in key mining regions around the world. Prior to joining McGrath Nicol in 2006, Mr Ireland was a Senior Manager at KPMG. Mr Ireland holds a Bachelor of Business from Charles Sturt University and is a member of the Institute of Chartered Accountants in Australia. James Kern James Kern was appointed as a Director of the Company on 20 February 2018. He is a member of the Audit, Safety & Risk Committee. Mr Kern has served as Managing partner of Majestic Ventures 1 LLC, a consulting and investment partnership focused on early stage growth companies, since 2014, In addition, he currently serves on boards of THL Credit Inc. (NASDAZ), a middle market lending company, PlaySight Interactive, an Israeli-based sports data analytics business and Basic Energies Services (NYSE), an oilfield services company. From 2010 to 2014, Mr Kern was a Managing Director at Nomura Securities, serving as Head of Global Finance Financial Institution Group (“FIG”) and Specialty Finance Investment Banking for the Americas. He previously served as Managing Director at J. P. Morgan securities within the FIG practice and was focused on Asset Management and Specialty Finance clients. From 1994-2008, he was a Senior Managing Director at Bear Stearns, where he held several positions, including Head of Strategic Finance-FIG, head of Corporate Derivatives and was a founding member of the firm’s Structured Equity Products group. Mr Kern has a B.S. from the Marshall School of Business at the University of Southern California. ______________________________________________________________________________________ 55 59 Annual Financial Report 31 December 2017 Gretchen McClain BOART LONGYEAR LIMITED Gretchen W. McClain was appointed a Director of the Company on 15 November 2015. She is the Chairperson of the Remuneration and Nominations Committee and is also a member of the Audit, Safety & Risk Committee. She has more than 25 years of global experience in both Fortune 500 corporations and government service, including serving as founding CEO of an S&P 500 global water technology company, Xylem Inc., and NASA’s Chief Director of the International Space Station. Ms. McClain brings extensive business, developmental, strategic and technical expertise having served a broad industrial market. McClain serves as a Board of Director for publicly traded companies: AMETEK, Inc., Booz Allen Hamilton Holding Corporation, and Boart Longyear Limited, and a private family owned business, J.M. Huber Corp and serves as an Advisor to EPIC Ventures. Through her own consulting practice, she provides leadership and business services to executives, frequently working with start-up businesses and private equity firms. She graduated from the University of Utah with a B.S. in Mechanical Engineering and received the University’s prestigious Founders Award in 2015. McClain was inducted into the Utah Technology Council Hall of Fame and is the first woman to receive this honor. Jeffrey Olsen Jeffrey Olsen was appointed President and Chief Executive Officer on 1 March 2016 after serving as Chief Financial Officer since 2014. Before joining Boart Longyear, he served as Chief Commercial Officer for Rio Tinto’s Iron & Titanium business since 2010. Prior to that time, he was Chief Financial Officer for Rio Tinto’s Borax and Minerals divisions for approximately eight years, and held other financial roles at Rio Tinto. Mr Olsen’s experience also includes financial roles at General Chemical Corporation and Xerox Corporation in the United States. Mr Olsen holds a Bachelor’s of Arts from the University of Utah and a Master of Business Administration from the Simon School of Business at the University of Rochester. Robert Smith Robert Smith was appointed a Director of the Company on 1 September 2017. He is a member of the Audit, Safety & Risk Committee. Mr Smith is a Partner of McGrath Nicol. Based in Melbourne, Australia, he specializes in business restructuring and performance improvement and has led numerous complex assignments often involving prominent listed entities and/or multi-lender banking syndicates. Mr. Smith’s experience covers a wide variety of industries, including mining and mining services, energy, power and utilities, manufacturing, retail, media, information technology and financial services. Prior to joining McGrath Nicol in 2009, Mr. Smith was an Associate Director in Ernst & Young’s Transaction and Assurance divisions. Mr. Smith began his career as an accountant with Arthur Andersen. Mr Smith is a Member of Chartered Accountants Australia and New Zealand, a Member of the Australian Institute of Company Directors and a Registered Liquidator. He holds a Bachelor of Commerce from the University of Melbourne and a Graduate Diploma in Applied Finance and Investment. Richard Wallman Richard Wallman was appointed a Director of the Company on 1 September 2017 and is Chairperson of the Audit, Safety and Risk Committee. Mr Wallman’s distinguished career includes senior executive roles in finance, as well as non-executive director roles at several large, publicly listed US companies. His executive experience includes serving as the Chief Financial Officer and Senior Vice President at Honeywell International, Inc. and its predecessor, AlliedSignal, from 1995 until his retirement in 2003. He also has held senior financial positions with the IBM Corporation and Chrysler Corporation and worked at Ford Motor Company earlier in his career. Mr Wallman currently is a non-executive director of Roper Technologies, Inc. (NYSE), Charles River Laboratories International, Inc. (NYSE), Wright Medical Group, Inc. (NASDAQ) and Extended Stay America, Inc (NYSE).Mr Wallman holds a Bachelor of Engineering degree from Vanderbilt University in the United States and also holds a Master’s in Business Administration from the University of Chicago. ______________________________________________________________________________________ 56 60 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 Eric Waxman BOART LONGYEAR LIMITED Eric Waxman was appointed a Director of the Company on 29 September 2017. He is a member of the Remuneration and Nominations Committee. Mr Waxman is a Senior Advisor within Ares Management L.P.’s (“Ares”) Private Equity Group. Mr Waxman works on both the acquisition and disposition of Ares portfolio assets and assists Ares portfolio companies in dealing with a range of significant legal issues, including corporate governance, regulatory inquiries and litigation. Prior to joining Ares in 2016, he was a partner at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, where he practiced for more than 30 years. Mr Waxman holds a B.A. from the University of California Los Angeles in Economics and a J.D. from the University of California Davis School of Law. COMPANY SECRETARIES Fabrizio Rasetti was appointed Company Secretary on 26 February 2007. He joined Boart Longyear in April 2006. Prior to that time, he worked at SPX Corporation (New York Stock Exchange), where he held various management roles in the legal department and for business development over a period of almost nine years. He also worked in the private law firms of Howrey & Simon and Towey & Associates in Washington, DC. He received his BS in Foreign Service and J.D. from Georgetown University. Robert Closner was appointed Vice President, General Counsel in October 2017 and later appointed as Company Secretary on 7 December 2017. He began his career as an associate at one of the leading law firms in Toronto, Canada and prior to joining Boart Longyear served as the General Counsel and Corporate Secretary of Ivernia Inc. Since joining the Company in 2008, Mr Closner has served in several key leadership positions for Boart Longyear as Regional General Counsel, most recently responsible for the Americas where he oversaw compliance matters, provided legal guidance and corporate commercial support. Prior to his Vice President appointment, Mr Closner held the position of Interim Chief Commercial Officer. Mr Closner received a Bachelor of Arts in Economics and Political Science from McGill University in Montreal, Quebec and attained his Juris Doctorate in Law from Queen’s University in Kingston, Ontario. Philip Mackey was appointed Company Secretary on 29 January 2016. He has over three decades of company secretarial and commercial experience and is a member of the Company Matters’ secretariat team. Previously, he served as Company Secretary of ASX & SGX dual listed Australand Group Limited and Deputy Company Secretary of AMP Limited. Mr Mackey’s commercial experience includes appointment as Chief Operating Officer (Specialised Funds) of Babcock & Brown and at Bressan Group. He is a Fellow of Governance Institute Australia and a Graduate Member of the Australian Institute of Company Directors. ______________________________________________________________________________________ 57 61 Annual Financial Report 31 December 2017 DIRECTORS’ MEETINGS BOART LONGYEAR LIMITED The following tables set out for each Director the number of Directors’ meetings (including meetings of Board committees) held and the number of meetings attended by each Director during the financial year while he/she was a Director or committee member. The tables do not reflect the Directors’ attendance at committee meetings in an “ex-officio” capacity. The tables also do not reflect special or informal meetings of the Board or its committees. Pre Recapitalisation (Jan to Sep 2017) Board of Directors Special Board Meetings 1 Remuneration Committee Held Attended Held Attended Held Attended Audit, Compliance & Risk Committee 2 Held Attended Environment, Health & Safety Committee 2 Attended Held Bret Clayton Peter Day Jonathan Lewinsohn Jeffrey Long Gretchen McClain Rex McLennan Deborah O'Toole Marcus Randolph Jeffrey Olsen 5 4 0 5 5 5 5 5 5 5 5 0 5 5 5 5 5 5 15 15 2 15 15 15 15 15 15 15 14 2 12 14 13 14 15 14 Post Recapitalisation (Sep to Dec 2017) 3 3 3 3 3 3 3 3 3 3 3 3 2 2 2 2 2 2 Board Status Change During 2017 Retired 1 September 2017 Retired 1 September 2017 Retired 20 January 2018 Retired 1 September 2017 Retired 1 September 2017 Retired 1 September 2018 Appointed 1 March 2016 Board of Directors Remuneration Audit, Safety Committee & Risk Committee 2 Board Status Change Held Attended Held Attended Held Attended During 2017 Kyle Cruz Lawrence First Jason Ireland James Kern Gretchen McClain Marcus Randolph Robert Smith Richard Wallman Eric Waxman Jeffrey Olsen 3 3 3 3 3 3 3 3 3 3 3 0 3 3 3 3 3 2 3 3 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 Appointed 1 September Appointed 1 September Appointed 1 September Appointed 29 September Appointed 1 September Appointed 1 September Appointed 29 September (1) Special Board Meetings were held during 2017 to discuss the recapitalisation and other relevant topics. (2) The Board combined the Audit, Compliance & Risk and the Environment, Health & Safety committees into a single committee called the Audit, Safety & Risk Committee following the recapitalisation. ______________________________________________________________________________________ 58 62 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 DIRECTORS’ SHAREHOLDINGS BOART LONGYEAR LIMITED The following table sets out each Director’s relevant interest in shares, debentures, and rights or options over shares or debentures of the Company or a related body corporate as at the date of this report. Marcus Randolph Kyle Cruz Lawrence First Jason Ireland James Kern Gretchen McClain Robert Smith Richard Wallman Eric Waxman Fully paid ordinary shares 10,328,767 - - - - 1,966,062 - - - Rights offering ordinary shares Rights and options - - - - - - - - - - - - - - - - - - Total 10,328,767 - - - - 1,966,062 - - - The Board adopted a non-executive Director shareholding guideline which recommends that non-executive Directors acquire and hold at least 30,000 Company shares within five years of their appointment. The target share amount was established to be roughly equivalent to one year’s Directors’ fees and was based on the value of the Company shares at the time. The target shareholding amount may be adjusted from time to time to track movements in the Company’s share price. ______________________________________________________________________________________ 59 63 Annual Financial Report 31 December 2017 BOART LONGYEAR LIMITED GRANTS OF SHARES, RIGHTS OVER SHARES AND OPTIONS GRANTED TO DIRECTORS AND EXECUTIVES At the Company’s 2015 general meeting, shareholders approved a change to the remuneration structure for the Company’s non-executive Directors to further improve alignment with shareholders and preserve cash. Effective 1 July 2015, Directors were required to receive 50% of their annual base fees in ordinary shares of Company stock. The Directors are not able to trade the shares, net of sales to cover income taxes, for a period of twelve months following their allocation. Shares granted to non-executive Directors and the Executive Chairman in lieu of their base fees are set out in Table 5.3.1 of the Remuneration Report. Prior to the implementation of the revised remuneration structure for non-executive Directors, no shares or rights over shares of the Company were granted to non-executive Directors since the Company’s initial public offering in April 2007. Shares and rights granted to executives of the Company are included in the Remuneration Report. As detailed more fully in the Remuneration Report, the Company has at various times in 2009, 2010 and 2014 granted options to former and current members of senior management. 345,000 of these options granted in June 2009 vested in accordance with their terms and expired in June 2014, with none having been exercised. 25,000 of these options granted in March 2010 vested in accordance with their terms and expire in March 2015. 891,561 of these options granted in March and April of 2014 vested in accordance with their terms and expire in March and April of 2024. No shares or interests have been issued during the financial year as a result of the exercise of options. DIRECTORS' AND OFFICERS’ INTERESTS IN CONTRACTS Except as noted herein, no contracts involving Directors' or officers’ interests existed during, or were entered into, since the end of the financial year other than the transactions detailed in Note 30 to the financial statements. INDEMNIFICATION OF DIRECTORS AND OFFICERS AND AUDITORS The Directors and officers of the Company are indemnified by the Company to the maximum extent permitted by law against liabilities incurred in their respective capacities as Directors or officers. In addition, during the financial year, the Company paid premiums in respect of contracts insuring the Directors and officers of the Company and any related body against liabilities incurred by them to the extent permitted by the Corporations Act 2001. The insurance contracts prohibit disclosure of the nature of the liability and the amount of the premium. The Company has not paid any premiums in respect of any contract insuring Deloitte Touche Tohmatsu against a liability incurred in the role as an auditor of the Company. EXECUTIVE MANAGEMENT TEAM A brief summary of the Executive Management Team’s work experience and qualifications is as follows. Jeffrey Olsen Mr Olsen’s experience and qualifications are summarised above on page 60. Denis Despres Denis Despres was appointed the Company’s Chief Operating Officer on 6 September 2016. He began his career with Boart Longyear in 1981 and held various positions with progressive responsibility in the Company’s drilling services and products divisions over the next 26 years, including as Senior VP, Drilling Services. After leaving Boart Longyear in 2007, Mr Despres founded his own drilling business, which was acquired by Major Drilling in 2010. He most recently served as Major’s Chief Operating Officer prior to rejoining Boart Longyear. Mr Despres studied in Ontario, Canada, and received a diploma in mechanical engineering technology from Algonquin College, a Bachelor of Engineering from Lakehead University and a Master of Business Administration from Queen’s University, all of which are in Ontario, Canada. ______________________________________________________________________________________ 60 64 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 Brendan Ryan BOART LONGYEAR LIMITED Brendan Ryan was appointed Chief Financial Officer on 6 September 6 2016. Mr Ryan’s experience includes over 24 years within the mining industry, spent predominantly with Rio Tinto and Shell / Anglo Coal, working in a variety of key commercial and operating roles. Prior to a year working with Private Equity, Mr Ryan held the role of Global Head of Business Evaluation for Rio Tinto in London where he was accountable for managing the group capital planning and allocation process. Earlier roles during his 13 years with Rio Tinto included Head of Business Development for the Rio Tinto Copper & Diamonds Group in London, VP Projects & Expansion at Kennecott Utah Copper in Salt Lake City, as well as other Business Evaluation and Business Analysis roles in London and Australia. Mr Ryan holds a Master’s of Business Administration from the University of Oxford, UK as well as a Bachelor of Engineering (Mining) honors degree from the University of Queensland, Australia. Robert Closner Mr Closner’s experience and qualifications are summarised above on page 61. Kari Plaster Kari Plaster was appointed Vice President of Human Resources on 30 October 2017. Most recently, Ms Plaster served as CEO and Founder of Kindling Potential, a private coaching and consulting business using brain based strategies from the Neuroleadership Institute. Prior to this, Ms Plaster held several senior HR roles within Rio Tinto including General Manager, Leadership Model; VP HR, HSE Governance and External Relations; and Americas Director, Capability Development. She has worked in many different locations and businesses including Kennecott Utah Copper, US Borax and Iron Ore Company of Canada. Ms Plaster holds a Bachelor of Science Degree from Boise State University in Criminal Justice Administration, and has designed and attended several senior leadership programs for Rio Tinto in cooperation with Duke’s Corporate Education Programs. ______________________________________________________________________________________ 61 65 Annual Financial Report 31 December 2017 AUDITOR AUDITOR’S INDEPENDENCE DECLARATION The auditor’s independence declaration is included on page 68 of this report. NON-AUDIT SERVICES BOART LONGYEAR LIMITED Details of amounts paid or payable for non-audit services provided during the year by the auditor are outlined in Note 8 to the financial statements. The auditor of Boart Longyear Limited is Deloitte Touche Tohmatsu. The Company has employed Deloitte Touche Tohmatsu on assignments additional to their audit duties where their expertise and experience with the Company are important. These assignments principally have been related to tax advice and tax compliance services, the magnitude of which is impacted by the global reach of the Company. The Company and its Audit, Safety & Risk Committee (Audit Committee) are committed to ensuring the independence of the external auditor. Accordingly, significant scrutiny is given to non-audit engagements of the external auditor. The Company has a formal pre-approval policy that requires the pre-approval of non-audit services by the Chairman of the Audit Committee. Additionally, the total annual fees for such non-audit services cannot exceed the auditor’s annual audit fees without the approval of the Audit Committee. The Audit Committee believes that the combination of these two approaches results in an effective procedure to control services performed by the external auditor. None of the services performed by the auditor undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as an advocate for the Company or jointly sharing economic risks and rewards. The Directors are satisfied that the provision of non-audit services during the year by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 and are of the opinion that the services, as disclosed in Note 8 to the financial statements, do not compromise the external auditor’s independence. PROCEEDINGS ON BEHALF OF COMPANY No person has applied for leave of court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the financial year. ROUNDING OF AMOUNTS Boart Longyear Limited is a company of a kind referred to in ASIC Corporations (Rounding in Financial / Directors’ Report) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report and Financial Report. Amounts in the Directors’ Report and the Financial Report are presented in US dollars and have been rounded off to the nearest thousand dollars in accordance with that Instrument, unless otherwise indicated. ______________________________________________________________________________________ 62 66 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 REMUNERATION BOART LONGYEAR LIMITED The Remuneration Report is included beginning at page 25 and forms part of this Directors’ Report. Signed in accordance with a resolution of the Directors. On behalf of the Directors Marcus Randolph Chairman 28 February 2018 ______________________________________________________________________________________ 63 67 Deloitte Touche Tohmatsu ABN 74 490 121 060 u Tower 2, Brookfield Place 123 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au The Directors Boart Longyear Limited 26 Butler Boulevard Adelaide Airport SA 5650 Australia 28 February 2018 Dear Directors Boart Longyear Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Boart Longyear Limited. As lead audit partner for the audit of the financial statements of Boart Longyear Limited for the financial year ended 31 December 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) (ii) The auditor independence requirements of the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU A T Richards Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited __________________________________________________________________________________________ 64 68 Boart Longyear 2017 Annual ReportDeloitte Touche Tohmatsu ABN 74 490 121 060 Tower 2, Brookfield Place 123 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au Independent Auditor’s Report to the members of Boart Longyear Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Boart Longyear Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 31 December 2017, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 31 December 2017 and of its financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited ________________________________________________________________________________________ 65 69 Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter Liquidity How the scope of our audit responded to the Key Audit Matter At 31 December 2017, the Group has net liabilities of $259.0 million and net current assets of $107.8 million. Our audit procedures included, but were not limited to: As referred to below the Group completed the debt recapitalisation on 1 September 2017. The Group continues to manage its liquidity closely as disclosed in Note 1. This requires the achievement of budgets and cash flow forecasts which include assumptions about future cash flows and forecast results, which are uncertain. Accounting for debt recapitalisation On 1 September 2017 the Group completed the debt recapitalisation which achieved three primary objectives – reduced debt, improved liquidity and extended the maturities of the remaining debt. The Group was required to issue certain equity instruments in order to extinguish $196.0 million of debt, reduce the interest cost through a reduction in rates and extend the maturities of the remaining debt to December 2022. The accounting for the debt recapitalisation required a significant level of judgement the basis of which is disclosed in Note 21. • • • • • • Assessing the process undertaken by management to develop the budget and cash flow forecasts for the 15 months period ending 30 June 2019 (‘FY18/FY19’) Evaluating the key assumptions underlying the FY18/FY19 budget Assessing the quantum and timing of forecast cash flows Performing sensitivity analysis on the forecast cash flows, with reference to available cash balances and forecast cash flows from operating activities Evaluating performance in the period from year end to audit opinion date against the FY18/FY19 budget Assessing the appropriateness of the disclosures included in Note 1 to the financial statements. Our audit procedures included, but were not limited to: • • • • • • Reading relevant agreements and supporting documents in relation to the terms of the debt recapitalisation Assessing the accounting treatment in conjunction with the requirements of Australian Accounting Standards Challenging management’s assessment with respect to the conclusion that the fair value of the equity instruments issued could not be reliably estimated and the face value of the recapitalised debt was equal to fair value at the transaction date Testing that the necessary accounting entries were appropriately recorded in the Group’s financial records Testing on a sample basis the costs incurred to supporting documentation Assessing the appropriateness of the disclosures included in Note 21 of the financial statements. ________________________________________________________________________________________ 66 70 Boart Longyear 2017 Annual ReportCarrying value of goodwill As disclosed in Note 18, the Group has goodwill of $101.2 million which relates solely to the North America Drilling Services Cash Generating Unit (‘CGU’). AASB 136 requires goodwill to be tested for impairment on an annual basis and the Group’s testing date is 31 December. The evaluation of the recoverable amount (based on a Value in Use model) of the goodwill in the North America Drilling Services CGU requires significant judgement in determining the key assumptions including those relating to forecast revenue, gross margin, expenses, working capital, capital expenditure and discount rates applicable to the specific CGU. Our procedures included but were not limited to: • Understanding the process that management has undertaken to assess the recoverable amount of the goodwill Assessing management’s determination of the Group’s CGUs based on our understanding of the nature of the Group’s business and the economic environment in which the segments operate In conjunction with our corporate finance specialists, challenging the Group’s significant inputs, assumptions and estimates used as described in Note 18 to determine the recoverable value of the goodwill in the North America Drilling Services CGU including: o o forecast revenue, gross margin, expenses, working capital, capital expenditure by reference to actual results in the current period and approved budgets for the forecast period; and discount rates by reference to external data and Deloitte developed discount rates Testing, on a sample basis, the mathematical accuracy of the cash flow model Performing sensitivity analysis in relation to key assumptions, with particular focus on the gross margin, discount rate and terminal growth rate assumptions Assessing the appropriateness of the disclosures included in Note 18 to the financial statements. • • • • • ________________________________________________________________________________________ 67 71 Taxation The Group operates across a large number of jurisdictions and is subject to periodic challenges by local tax authorities on a range of tax matters during the normal course of business including application of transfer pricing rules, indirect taxes, and transaction- related tax matters as disclosed in Note 11 and 27. Our procedures performed in conjunction with relevant tax specialists, included but were not limited to: • Obtaining an understanding of the process that management has taken to determine the taxation balances recognised in the financial report At 31 December 2017, the Group has recorded an income tax expense of $6.9 million, current and non- current tax receivables of $1.7 million and $18.0 million, net current tax payables of $99.6 million and net deferred tax assets of $7.2 million and has disclosed its assessment of tax-related contingent liabilities in Notes 11 and 27. As disclosed in Note 11, the Group is under tax audit in Canada. The above matters give rise to complexity and uncertainty in respect of the determination of income taxes and deferred income tax assets as well as in the consideration of contingent liabilities associated with tax years open to audit. This requires significant judgement in estimating tax exposures and/or contingent liabilities. • • • • • Assessing the appropriateness of the treatment of selected specific transactions in the Group’s tax expense calculations Evaluating the appropriateness of management’s assumptions and estimates in relation to the likelihood of generating future taxable income to support the recognition of deferred income tax assets with reference to forecast taxable income Evaluating the consistency of the forecast used by management to derive forecast taxable income to support the recognition of deferred tax assets against the forecast used for assessing the carrying value of intangible assets and property, plant and equipment Challenging and evaluating management’s assessment of uncertain tax positions including contingent liabilities and conclusions on complex tax arrangements through enquiries of the Group Taxation department, obtaining and considering the Group’s correspondence with local tax authorities and advice received from third parties Considering the adequacy of the Group’s disclosures regarding current and deferred taxes, uncertain tax positions and tax-related contingencies. Other Information The directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information we are required to report that fact. We have nothing to report in this regard. ________________________________________________________________________________________ 68 72 Boart Longyear 2017 Annual ReportDirectors’ Responsibilities for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • • • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. ________________________________________________________________________________________ 69 73 We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 25 to 58 of the directors’ report for the year ended 31 December 2017. In our opinion, the Remuneration Report of Boart Longyear Limited, for the year ended 31 December 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU A T Richards Partner Chartered Accountants Perth, 28 February 2018 ________________________________________________________________________________________ 70 74 Boart Longyear 2017 Annual ReportAnnual Financial Report 31 December 2017 DIRECTORS’ DECLARATION The Directors declare that: BOART LONGYEAR LIMITED (a) (b) (c) in the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; in the Directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standards, as stated in Note 1 to the financial statements; in the Directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards, and giving a true and fair view of the financial position and performance of the consolidated entity; and (d) the Directors have been given the declarations required by section 295A of the Corporations Act 2001. The Directors draw the reader’s attention to Note 1 on page 81 concerning the going concern basis of preparation of the financial report. Signed in accordance with a resolution of the Directors made pursuant to section 295(5) of the Corporations Act 2001. On behalf of the Directors Marcus Randolph Chairman 28 February 2018 ________________________________________________________________________________________ 71 75 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED Continuing operations Revenue Cost of goods sold Gross margin Other income General and administrative expenses Sales and marketing expenses Other expenses Operating loss Interest income Finance costs Loss before taxation Income tax expense Loss for the year attributable to equity holders of the parent Loss per share: Basic loss per share Diluted loss per share Note 2017 US$'000 2016 US$'000 3 4 4 5 5 739,063 (628,461) 1 110,602 1 1 6,637 (152,858) (27,449) (24,679) (87,747) 1,783 (57,155) (143,119) 642,404 (556,569) 1 85,835 1 1 8,939 (108,842) (28,394) (18,360) (60,822) 2,486 (72,713) (131,049) 11 (6,925) (25,790) (150,044) (156,839) 12 12 (1.6) cents (1.6) cents (16.8) cents (16.8) cents Other comprehensive loss Loss for the year attributable to equity holders of the parent Items that may be reclassified subsequently to profit or loss Exchange gain (loss) arising on translation of foreign operations Items that will not be reclassified subsequently to profit or loss Actuarial (loss) gain related to defined benefit plans Income benefit (tax) on income and expense recognised directly through equity Other comprehensive loss for the year, net of tax 23 Total comprehensive loss for the year attributed to equity holders of the parent (150,044) (156,839) 18,543 364 7,791 (752) 25,582 (6,075) 1,116 (4,595) (124,462) (161,434) (1) In the current period significant items have not been separately presented but have been included in the relevant line items. Details of items considered to be significant are included in note 7. See accompanying Notes to the Consolidated Financial Statements included on pages 81 to 130 _______________________________________________________________________________________ 72 76 Boart Longyear 2017 Annual Report Consolidated Statement of Financial Position As at 31 December 2017 BOART LONGYEAR LIMITED Note 2017 US$'000 2016 US$'000 Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax receivable Prepaid expenses and other assets Asset classified as held for sale Total current assets Non-current assets Property, plant and equipment Goodwill Other intangible assets Deferred tax assets Non-current tax receivable Other assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Current tax payable Loans and borrowings Total current liabilities Non-current liabilities Loans and borrowings Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net liabilities Equity Issued capital Reserves Other equity Accumulated losses Total deficiency in equity 31 13 14 11 16 17 18 19 11 11 20 22 11 21 21 11 22 24 43,758 131,861 174,375 1,657 13,749 365,400 530 365,930 118,130 101,196 34,109 20,597 18,033 15,134 307,199 673,129 138,248 19,451 99,590 794 258,083 641,884 13,439 18,720 674,043 932,126 (258,997) 1,468,758 (101,135) (137,182) (1,489,438) (258,997) 59,343 107,898 165,020 4,399 13,604 350,264 5,923 356,187 127,660 100,036 43,920 19,465 19,035 10,326 320,442 676,629 126,589 13,014 94,577 140 234,320 734,987 18,884 25,941 779,812 1,014,132 (337,503) 1,263,798 (117,686) (137,182) (1,346,433) (337,503) See accompanying Notes to the Consolidated Financial Statements included on pages 81 to 130 _______________________________________________________________________________________ 73 77 Consolidated Statement of Changes in Equity For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED Foreign currency Equity-settled translation compensation Other 1 equity reserve US$'000 US$'000 reserve US$'000 Issued capital US$'000 Total attributable Accumulated to owners of losses US$'000 the parent US$'000 1,262,431 - (131,025) - 10,212 - (137,182) - (1,184,635) (156,839) (180,199) (156,839) - - 717 650 - 1,263,798 364 364 - - - (130,661) - - - (650) 3,413 12,975 - - - - - (137,182) (4,959) (161,798) - - - (1,346,433) (4,595) (161,434) 717 - 3,413 (337,503) 1,263,798 - (130,661) - 12,975 - (137,182) - (1,346,433) (150,044) (337,503) (150,044) - - 200,464 485 1,642 2,369 - 1,468,758 18,543 18,543 - - - - - (112,118) - - - (438) (1,642) (2,369) 2,457 10,983 - - - - - - - (137,182) 7,039 (143,005) - - - - - (1,489,438) 25,582 (124,462) 200,464 47 - - 2,457 (258,997) Balance at 1 January 2016 Loss for the period Other comprehensive loss for the period - net of tax Total other comprehensive loss Shares issued to directors Vesting of LTIP rights, restricted shares Share-based compensation Balance at 31 December 2016 Balance at 1 January 2017 Loss for the period Other comprehensive loss for the period - net of tax Total other comprehensive loss Shares issued Shares issued to directors Vesting of LTIP rights, restricted shares Cancellation of LTIP share rights Share-based compensation Balance at 31 December 2017 (1) Other equity represents the Company’s reorganisation reserve on creation of the Company in 2007. See accompanying Notes to the Consolidated Financial Statements included on pages 81 to 130 _______________________________________________________________________________________ 74 78 Boart Longyear 2017 Annual Report Consolidated Statement of Cash Flows For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED Note 2017 US$'000 2016 US$'000 (150,044) (156,839) 5 6 5 6 6b, 10 6b Cash flows from operating activities Loss for the year Adjustments provided by operating activities: Income tax expense recognised in profit Finance costs recognised in profit Depreciation and amortisation Interest income recognised in profit Gain on sale or disposal of non-current assets Other non-cash items Shares issued to directors Impairment of current and non-current assets Non-cash foreign exchange (gain)/loss Equity-settled share-based payments Long-term compensation - cash rights Changes in net assets and liabilities, net of effects from acquisition and disposal of business: (Increase) decrease in assets: Trade and other receivables Inventories Other assets (Decrease) increase in liabilities: Trade and other payables Provisions Cash (used in) provided by operations Interest paid Interest received Income taxes paid Net cash flows used in operating activities 5 6,925 57,155 51,108 (1,783) (4,385) (15,235) 485 2,175 (4,162) 2,457 2,178 (19,041) 12,672 (2,680) 18,323 3,444 (40,408) (7,384) 1,783 (8,006) (54,015) 25,790 72,713 62,470 (2,486) (3,807) (18,829) 717 2,048 10,309 3,413 1,830 1,755 21,372 7,579 (16,469) (12,997) (1,431) (45,296) 2,486 (6,177) (50,418) See accompanying Notes to the Consolidated Financial Statements included on pages 81 to 130 ____________________________________________________________________________________ 75 79 Consolidated Statement of Cash Flows For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 2017 US$'000 2016 US$'000 Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Intangible costs paid Investment in unaffiliated companies Net cash flows used in investing activities Cash flows from financing activities Proceeds from issuance of shares Payments for debt issuance costs Proceeds from borrowings Repayment of borrowings Net cash flows provided by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on the balance of cash held in foreign currencies Cash and cash equivalents at the end of the year 31 (25,501) 13,791 (2,850) (859) (15,419) 4,464 (2,550) 96,071 (51,594) 46,391 (23,043) 59,343 7,458 43,758 (19,190) 16,410 (3,173) (1,905) (7,858) - (82) 25,671 (8,105) 17,484 (40,792) 113,357 (13,222) 59,343 See accompanying Notes to the Consolidated Financial Statements included on pages 81 to 130 _______________________________________________________________________________________ 76 80 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 1. GENERAL INFORMATION Boart Longyear Limited (the “Parent”) is a public company listed on the Australian Securities Exchange Limited (ASX) and is incorporated in Australia. Boart Longyear Limited and subsidiaries (collectively referred to as the “Company”) operate in four geographic regions, which are defined as North America, Latin America, Asia Pacific, and Europe/Africa (EMEA). Boart Longyear Limited’s registered office and its principal place of business are as follows: Registered office 26 Butler Boulevard Burbridge Business Park Adelaide Airport, SA 5950 Tel: +61 (8) 8375 8375 Basis of Preparation Principal place of business 2570 West 1700 South Salt Lake City, Utah 84104 United States of America Tel: +1 (801) 972 6430 This financial report is a general purpose financial report which: - has been prepared in accordance with the requirements of applicable accounting standards including Australian interpretations and the Corporations Act 2001, Accounting Standards and Interpretations, and comply with other requirements of the law. Accounting Standards include Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the Company comply with IFRS. The financial report includes the consolidated financial statements of the Company. For purposes of preparing the consolidated financial statements, the Company is a for-profit entity; - is presented in United States dollars, which is Boart Longyear Limited’s functional and presentation currency. All values have been rounded to the nearest thousand dollars (US’000) unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) instrument 2016/191. The financial statements were authorised for issue by the Directors on 28 February 2018; - applies Accounting policies in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported. These accounting policies have been consistently applied by each entity in the Company; - is prepared by combining the financial statements of all of the entities that comprise the consolidated entity, Boart Longyear Limited and subsidiaries as defined in AASB 10 ‘Consolidated Financial Statements’. Consistent accounting policies are applied by each entity and in the preparation and presentation of the consolidated financial statements; Subsidiaries are all entities for which the Company (a) has power over the investee (b) is exposed or has rights, to variable returns from involvement with the investee and (c) has the ability to use its power to affect its return. All three of these criteria must be met for the Company to have control over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Company until such time as the Company ceases to control such entity. - all inter-company balances and transactions, and unrealised income and expenses arising from inter-company transactions, are eliminated. - adopts all new and revised accounting standards and interpretations issued by the AASB that are relevant to the Company. The accounting policies and methods of computation are the same as those in the prior annual financial report; and - does not early adopt Accounting Standards and Interpretations that have been issued or amended but are not yet effective. Refer to Note 33 for further details. The financial report has been prepared on a historical cost basis, except for the revaluation of certain financial instruments that are stated at fair value. Cost is based on fair values of the consideration given in exchange for assets. The financial report has also been prepared on the basis that the consolidated entity is a going concern, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business. _______________________________________________________________________________________ 81 77 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 1. GENERAL INFORMATION (CONTINUED) Going Concern The financial report has been prepared on a going concern basis, which contemplates the realisation of assets and the settlement of liabilities in the ordinary course of business. At 31 December 2017, the Company has net liabilities of $259.0 million (2016: net liabilities of $337.5 million as at 31 December). The decrease in net liabilities is mainly a result of the equitisation of the 7% Unsecured Notes. At 31 December 2017, the Company has net current assets of $107.8 million (2016: $121.9 million as at 31 December). In preparing the financial report, the Directors have made an assessment of the ability of the Company to continue as a going concern. The Company’s ability to meet its ongoing operational and financing obligations requires the Company to achieve its forecast cash flows by sustaining previously implemented cost reductions, realise cost savings from ongoing and future cost-reduction and actively managing cash flows. The Directors reaffirm that current and expected operating cash flow, cash on hand and available drawings under the Company’s asset-based loan facility provide sufficient liquidity to meet its debts as and when they fall due. Restructure On 1 September 2017 the Company announced the completion of its recapitalisation, which achieved three primary objectives – reduced debt, improved liquidity and extended maturities. The $284.0 million outstanding principal amount of the 7% Unsecured Notes due 2021 plus accrued and unpaid interest has been reduced by approximately $196.0 million in exchange for ordinary shares. Interest on all debt facilities may be paid in kind (rather than cash) at the Company’s election through to December 2018. Maturities on existing debt have been extended until December 2022. Refer to the loans and borrowings note 21 for more information. The Company remains heavily leveraged even after implementation of the restructuring. While interest on all of the Company's debt facilities (other than the revolving ABL facility with PNC Bank) is payable in kind until December 2018, interest on the 10% Secured Notes is payable in cash thereafter. The Company may therefore be required to dedicate a significant portion of its cash flow from operations to fund the payment of interest in the future, reducing the availability of cash flow to fund working capital, capital expenditures, development activity, acquisitions and other general corporate purposes. The Company’s ability to refinance or renew its debt in December 2022, when it is scheduled to come due, will still depend on its ability to generate cash flow and, potentially, other circumstances, such as existing market conditions at the time of refinancing. Cash flow Forecasts The Company has prepared detailed cash flow forecasts which incorporate the financial impact of continued actions to address the market environment. In preparing the cash flow forecasts the Company has used best estimate assumptions. The Directors have assessed the Company’s cash flow forecasts and revenue projections based on current market conditions and on results achieved to date attributable to ongoing cash-generating actions as well as continuing to evaluate risks and opportunities to this best estimate. Some of the key assumptions underpinning the cash flow forecasts and revenue projections are inherently uncertain and are subject to variation due to factors which are outside the control of the Company. The key assumptions are discussed below. Market risk The Company experienced significant declines in financial performance through mid-2016, as a result of declining demand for, and global oversupply of, the Company’s services and products. This decline was driven by the global contraction in exploration and development spending across the commodities sector and by mining customers in particular. Despite recent improvements in the market, and increasing revenues, mineral exploration, production and development activities and contract pricing could remain at depressed levels for an extended period of time or decline even further than assumed in the cash flow forecasts, resulting in adverse effects on the Company’s operating results, liquidity and financial condition. 82 _______________________________________________________________________________________ 78 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 1. GENERAL INFORMATION (CONTINUED) Going Concern (continued) Operational risk In response to the recent improvements in the market, the company is seeing higher working capital demand. In order to to meet these working capital and payment obligations, the Company has implemented significant cost savings and cash management initiatives. These initiatives are aggressively managing fixed, variable and capital costs and, in particular, improving operational efficiencies and commercial practices. The cash flow forecasts assume that the Company is able to maintain and improve on current volumes of work, sustain previously implemented reductions and realise additional cost savings from both ongoing and future cost-reduction and efficiency initiatives. Other key assumptions The cash flow forecasts also include a number of other key assumptions, in particular: • • assumptions relating to the timing and outcome of the tax audits detailed in Note 11 of the financial statements, that the US dollar remains consistent with current levels, particularly in relation to the Australian and Canadian dollars. Notwithstanding the uncertainties set out above, the Directors believe at the date of signing of the financial report that there are reasonable grounds to continue to prepare the financial report on the going concern basis. Key Judgements and Estimates In applying Australian Accounting Standards, management is required to make judgments, estimates and form assumptions that affect the application of accounting policies and reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported revenue and expenses during the periods presented herein. On an ongoing basis, management evaluates its judgments and estimates in relation to asset, liabilities, contingent liabilities, revenues and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the respective periods in which they are revised if only those periods are affected, or in the respective periods of the revisions as well as future periods if the revision affects both current and future periods. The key judgments, estimates and assumptions that have or could have the most significant effect on the amounts recognised in the financial statements are found in the following notes: Note 1 Note 11 Note 14 Note 17 Note 18 Note 27 Going Concern Income Tax Inventories Property, Plant and Equipment Goodwill and Other Asset Impairment Considerations Contingent Liabilities _______________________________________________________________________________________ 83 79 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 1. GENERAL INFORMATION (CONTINUED) Foreign Currency The Company’s presentation currency is the US dollar. The financial statements of the Company and its subsidiaries have been translated into US dollars using the exchange rates at each balance sheet date for assets and liabilities and at an average exchange rates for revenue and expenses throughout the period. The effects of exchange rate fluctuations on the translation of assets and liabilities are recorded as movements in the foreign currency translation reserve (“FCTR”). The Company determines the functional currency of its subsidiaries based on the currency used in their primary economic environment, and, as such, foreign currency translation adjustments are recorded in the FCTR for those subsidiaries with a functional currency different from the US dollar. The cumulative currency translation is transferred to the income statement when a subsidiary is disposed of or liquidated. Transaction gains and losses, and unrealised translation gains and losses on short-term inter-company and operating receivables and payables denominated in a currency other than the functional currency, are included in other income or other expenses in profit or loss. Where an inter-company balance is, in substance, part of the Company’s net investment in an entity, exchange gains and losses on that balance are taken to the FCTR. Other accounting policies Significant and other accounting policies that summarise the measurement basis used and are relevant to an understanding of the financial statements are provided throughout the notes to the financial statements. 84 _______________________________________________________________________________________ 80 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 2. SEGMENT REPORTING Information reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance is based on the Company’s two general operating activities: Global Drilling Services and Global Products. The Global Drilling Services segment provides a broad range of drilling services to companies in mining, energy and other industries. The Global Products segment manufactures and sells drilling equipment and performance tooling to customers in the drilling services and mining industries. Information regarding these segments is presented below. The accounting policies of the reportable segments are the same as the Company’s accounting policies. Segment profit shown below is consistent with the income reported to the chief operation decision maker for the purposes of resource allocation and assessment of segment performance. Segment profit represents earnings before interest and taxes. Segment revenue and results Drilling Services Global Products revenue Products third party revenue Products inter-segment revenue 1 Total Global Products Less Global Product sales to Global Drilling Services Total third party revenue Total segment profit Unallocated costs 2 Significant items Finance costs Interest income Loss before taxation Segment Revenue 2017 US$'000 2016 US$'000 500,583 447,656 Segment Profit 2017 US$'000 36,395 2016 US$'000 10,679 238,480 54,507 194,748 57,704 292,987 (54,507) 739,063 252,452 (57,704) 642,404 2,803 4,214 39,198 14,893 (47,259) (79,686) (57,155) 1,783 (143,119) (48,230) (27,485) (72,713) 2,486 (131,049) (1) Transactions between segments are carried out at arm's length and are eliminated on consolidation. (2) Unallocated costs include corporate general and administrative costs, as well as, other expense items such as foreign exchange gains or losses. Other segment information Depreciation and amortisation of segment assets 2017 US$'000 2016 US$'000 Additions to non-current assets 2 2017 US$'000 2016 US$'000 32,663 8,599 41,262 9,846 51,108 40,916 9,271 50,187 12,283 62,470 20,805 3,904 24,709 5,657 30,366 15,028 1,980 17,008 3,459 20,467 Global Drilling Services Global Products Total of all segments Unallocated 1 Total (1) Unallocated additions to non-current assets relate to the acquisition of general corporate assets such as software and hardware. (2) Non-current assets excluding deferred tax assets. _______________________________________________________________________________________ 85 81 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 2. SEGMENT REPORTING (CONTINUED) Geographic information The Company’s two business segments operate in four principal geographic areas – North America, Asia Pacific, Latin America and EMEA. The Company’s revenue from external customers and information about its segment assets by geographical locations are detailed below: Revenue from external customers 2017 US$'000 2016 US$'000 338,818 156,502 108,627 135,116 739,063 297,309 157,299 85,573 102,223 642,404 Non-current assets 1 2017 2016 US$'000 US$'000 210,440 45,476 23,054 7,632 286,602 218,460 56,188 24,232 2,097 300,977 North America Asia Pacific Latin America EMEA Total (1) Non-current assets excluding deferred tax assets. 3. REVENUE Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts, volume rebates and sales tax. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods. Transfers of risks and rewards vary depending on the individual terms of the contract of sale and with local statute, but are generally when title and insurance risk has passed to the customer and the goods have been delivered to a contractually agreed location. Revenue from services rendered is recognised in the statement of profit and loss and other comprehensive income in proportion to the stage of completion of the transaction at the reporting date. The stage of completion of the contract is determined as follows: • • revenue from drilling services contracts is recognised on the basis of actual meters drilled or other services performed for each contract; and revenue from time and material contracts is recognised at the contractual rates as labour hours are delivered and direct expenses are incurred. The components of revenue are as follows: Revenue from the rendering of services Revenue from the sale of goods 2017 US$'000 500,583 238,480 739,063 2016 US$'000 447,656 194,748 642,404 There were no customer(s) that contributed 10% or more to the Company’s revenue in 2017 and 2016. 86 _______________________________________________________________________________________ 82 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 4. OTHER INCOME / EXPENSE The components of other income are as follows: Gain on disposal of property, plant and equipment Gain on foreign currency exchange differences Gain on disposal of scrap Other The components of other expense are as follows: Amortisation of intangible assets VAT write-off Drilling services rework Loss on foreign currency exchange differences Impairment of Fixed Assets Environmental fees Other Total other expenses 5. INTEREST INCOME / FINANCE COSTS Interest income is as follows: Interest income: Bank deposits Finance costs are as follows: Finance costs: Interest on loans and bank overdrafts Amortisation of debt issuance costs Interest on obligations under finance leases Total finance costs Finance costs due to debt repayment: Write-off of debt issuance costs 2017 US$'000 2016 US$'000 4,385 - 805 1,447 6,637 3,807 1,616 309 3,207 8,939 US$'000 US$'000 10,657 3,323 - 6,564 1,936 1,179 1,020 24,679 12,745 2,897 603 - - - 2,115 18,360 2017 US$'000 2016 US$'000 1,783 2,486 2017 US$'000 2016 US$'000 52,243 2,012 60 54,315 2,840 2,840 70,643 2,070 - 72,713 - - Total finance costs 57,155 72,713 _______________________________________________________________________________________ 87 83 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 6. LOSS FOR THE YEAR Loss for the year includes the following: (a) Gains and losses Loss for the year includes the following gains and (losses): Gain on disposal of property, plant and equipment Net foreign exchange losses Net reversal of bad debt expense (b) Employee benefits expenses Salaries and wages Post-employment benefits: Defined contribution plans Defined benefit plans Long-term incentive plans: Equity-settled share-based payments Cash rights compensation Termination benefits Other employee benefits 1 2017 US$'000 2016 US$'000 4,385 (6,564) (1,343) 3,807 1,616 (181) 2017 US$'000 2016 US$'000 (244,119) (240,094) (5,751) (1,902) (2,457) (2,178) (11,625) (69,827) (337,859) (6,497) (1,337) (3,413) (1,830) (6,833) (66,540) (326,544) (1) Other employee benefits include items such as medical benefits, workers’ compensation, other fringe benefits and state taxes. (c) Other Depreciation of non-current assets Amortisation of non-current assets Operating lease rental expense 2017 US$'000 2016 US$'000 (39,236) (11,872) (15,753) (48,558) (13,912) (18,180) 88 _______________________________________________________________________________________ 84 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 7. SIGNIFICANT ITEMS During 2017, the Company continued to reduce operating costs through a series of restructuring activities. The Company’s restructuring efforts included: • • • • controlling SG&A and other overhead related costs; exiting certain loss-making drilling services project or territories; leveraging the supply chain function across the business, and focusing on operational efficiencies and productivity at the drill rig level and across the global organisation. The Company has incurred costs related to executing the recapitalisation, completed effective 1 September 2017 and its restructuring and cost-reduction plans. These costs include employee separations, exiting leased facilities and impairments of capital equipment related to relocating certain manufacturing activities and resizing the business. In addition, the Company reassessed the carrying value of certain assets, including goodwill, intangible assets, plant and equipment and inventories, resulting in impairment charges and provisions. Significant items for the years ended 31 December 2017 and 2016 are, as follows: Recapitalisation costs 1 Impairments: Equipment Intangible assets Employee and related costs 2 Other restructuring costs 3 Onerous leases Net of tax 4 Note 17 19 2017 US$'000 2016 US$'000 50,471 136 26 15,116 12,175 1,762 79,686 78,931 7,456 878 1,012 8,008 8,121 2,010 27,485 27,189 (1) Recapitalisation costs include fees for legal, finance and other advisory services. (2) Employee and related costs include separation costs, retention and other employee-related costs. (3) Other restructuring costs include fees and other advisory costs for business and operational improvement initiatives. (4) The tax effect was calculated using applicable local country tax rates before application of excess of net operating losses. The net operating losses were largely not benefitted. Classification of significant items on the income statement for the years ended 31 December 2017 and 2016 are, as follows: General and administrative expenses Cost of goods sold Research and development Sales and marketing expenses 2017 US$'000 2016 US$'000 76,511 2,669 189 317 79,686 22,096 3,015 2,278 96 27,485 _______________________________________________________________________________________ 89 85 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 7. SIGNIFICANT ITEMS (CONTINUED) Significant items for the years ended 31 December 2017 and 2016 by business segment are, as follows: Global Drilling Services1 Global Products2 Unallocated 2017 US$'000 2016 US$'000 6,320 5,316 68,050 79,686 11,209 2,397 13,879 27,485 (1) Transactions between segments are carried out at arm’s length and are eliminated in consolidation. (2) Unallocated costs include corporate general and administrative costs, as well as, other expense items such as foreign exchange gains or losses and recapitalisation costs. 8. REMUNERATION OF AUDITORS Company auditor's remuneration Audit and review of the financial report: Auditor of the parent entity Related practices of the parent entity auditor Non-audit services: Review of tax returns Tax services 2017 US$'000 2016 US$'000 974 927 1,901 449 308 757 1,031 1,136 2,167 489 360 849 Total remuneration to Company auditor 2,658 3,016 Remuneration to other accounting firms Audit services Non-audit services: Tax services Global mobility Accounting and payroll services Other Total remuneration to other accounting firms 229 2,116 196 363 105 3,009 184 2,362 342 280 83 3,251 Boart Longyear Limited’s auditor is Deloitte Touche Tohmatsu. The Company has employed Deloitte Touche Tohmatsu on assignments in addition to their audit duties where their expertise and experience with the Company are important. These assignments principally have been related to tax advice and tax compliance services, the magnitude of which is impacted by the global reach of the Company. The Board and its Audit, Safety & Risk Committee are committed to ensuring the independence of the external auditor. Accordingly, significant scrutiny is given to non-audit engagements of the external auditor. The Company has a formal pre-approval policy which requires the pre-approval of non-audit services by the Chairman of the Audit Committee. Additionally, the total annual fees for such non-audit services cannot exceed the auditor’s annual audit fees without the approval of the Audit Committee. The Audit Committee believes that the combination of these two approaches results in an effective procedure to pre-approve services performed by the external auditor. 90 _______________________________________________________________________________________ 86 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 9. KEY MANAGEMENT PERSONNEL COMPENSATION The aggregate compensation made to key management personnel of the Company is set out below. Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments 2017 US$ 4,940,895 65,048 430,161 - 1,899,097 7,335,201 2016 US$ 4,823,617 64,670 1,729,127 321,544 1,600,722 8,539,680 10. EMPLOYEE LONG TERM INCENTIVE PAYMENTS As disclosed in note 34, effective 31 December 2017 the Long Term Incentive Plan (“LTIP”) and Retention Incentive Grant Agreement (“RIGA”) programs were cancelled and replaced by the new Management Incentive Plan (“MIP”). Total share-based expense charged to the profit or loss was $6.2 million in 2017 prior to the LTIP and RIGA plan cancellation. _______________________________________________________________________________________ 91 87 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 11. INCOME TAXES Income Taxes The Company is subject to income taxes in Australia and other jurisdictions around the world in which the Company operates. Significant judgment is required in determining the Company’s current tax assets and liabilities. Judgments are required about the application of income tax legislation and its interaction with income tax accounting principles. Tax positions taken by the Company are subject to challenge and audit by various income tax authorities in jurisdictions in which the group operates. Judgment is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the balance sheet. Deferred tax assets, including those arising from unrecouped tax losses, capital losses, foreign tax credits and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Assumptions about the generation of future taxable profits and repatriation of retained earnings depend on management’s estimates of future cash flows. These judgments and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and tax liabilities recognised on the balance sheet. In such circumstances, some or all of the carrying amount of recognised deferred tax assets and tax liabilities may require adjustment, resulting in a corresponding credit or charge to the income statement. Current and deferred taxation Income tax expense includes current and deferred tax expense (benefit) and is recognised in profit or loss except to the extent that 1) amounts relate to items recognised directly in equity, in which case the income tax expense (benefit) is also recognised in equity, or 2) amounts that relate to a business combination, in which case the income tax expense (benefit) is recognised in goodwill. Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Management periodically evaluates provisions taken in tax returns with respect to situations in which applicable tax regulation is open to interpretation. The Company establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided on all temporary differences for which transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred but have not reversed at the balance sheet date. Temporary differences are differences between the Company’s taxable income and its profit before taxation, as reflected in profit or loss, that arise from the inclusion of profits and losses in tax assessments in periods different from those in which they are recognised in profit or loss. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they likely will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that sufficient taxable profit will be available to all or part of the deferred tax asset to be realised. United States of America Tax Cuts and Jobs Act In the United States, the Tax Cuts and Jobs Act (the Tax Act) was signed into law on 22 December 2017. The Tax Act changed many aspects of U.S. corporate income taxation and included a reduction of the corporate income tax rate from 35% to 21%, and an imposition of a tax on deemed repatriated earnings of foreign subsidiaries. We recognized the tax effects of the Tax Act in the year ended December 31, 2017 and recorded a $5 million tax benefit relating primarily to the remeasurement of deferred tax items to the 21% tax rate. We also recorded a $1 million tax charge related to the tax on deemed repatriated earnings. Upon completion of our 2017 U.S. income tax return in 2018, we may identify additional remeasurement adjustments related to the Tax Act. We will continue to assess our provision for income taxes as future guidance is issued but do not currently anticipate significant revisions will be necessary. 92 _______________________________________________________________________________________ 88 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 11. INCOME TAXES (CONTINUED) Tax consolidation The Company includes tax consolidated groups for the entities incorporated in Australia and the United States. The Parent Entity and its wholly-owned Australian resident entities are part of the same tax-consolidated group and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Boart Longyear Limited. Companies within the US group also form a tax-consolidated group within the United States. Tax expense (benefit) and deferred tax assets/liabilities arising from temporary differences of the members of each tax-consolidated group are recognised in the separate financial statements of the members of that tax-consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate financial statements of each entity. Tax credits of each member of the tax-consolidated group are recognised by the head entity in that tax-consolidated group. Entities within the Australian tax-consolidated group have entered into tax-funding arrangements with the head entity. Under the terms of the tax-funding arrangements, the tax-consolidated groups and each of the entities within the tax- consolidated group agrees to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. Such amounts are reflected in amounts receivable or payable to other entities in the tax-consolidated group. Income tax expense is as follows: Income tax expense: Current tax expense Adjustments recognised in the current year in relation to the current tax of prior years Deferred tax (income) expense 2017 US$'000 2016 US$'000 13,199 664 (6,938) 6,925 13,217 6,238 6,335 25,790 (a) Reconciliation of the prima facie income tax expense on pre-tax accounting profit to the income tax expense in the financial statements: Loss before taxation Income tax benefit calculated at Australian rate of 30% Impact of Non-Australia Tax Rates Change In Deferred taxes as result US Tax Law Change 1 Net non-deductible/non-assessable items other Unrecognised tax losses 2 Profit/(Loss) subject to double taxation in the US Withholding tax net of foreign tax credit Recognition of net prior year deferred tax assets Other Under provision from prior years Income tax expense per the Consolidated (143,119) (131,049) (42,936) 3,313 (5,020) 10,832 38,493 211 3,619 (2,180) (71) 6,261 664 (39,315) 2,059 - 20,692 31,094 (4,947) 2,035 (4,879) 12,813 19,552 6,238 Statement of Profit or Loss and Other Comprehensive Income 6,925 25,790 (1) On 22 December 2017, the United States of America (“US”) enacted the Tax Cuts and Jobs Act (the “TCJA”). Among other things, the TCJA reduces the US federal corporate tax rate from 35% to 21% percent effective on 1 January 2018. The combined federal and state statutory tax rate for the Company’s US subsidiaries for the measurement of deferred taxes for 2018 has been estimated at 25%. The Group will continue to monitor various US state law changes in reaction to the TCJA as changes are enacted. (2) Due to the group being in a tax loss position in many jurisdictions during the current financial year, the Company has not recognised current period losses. _______________________________________________________________________________________ 93 89 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 11. INCOME TAXES (CONTINUED) Deferred tax recognised in equity: Actuarial movements on defined benefit plans (c) Tax assets and liabilities Tax assets: Income tax receivable attributable to: Parent Other entities in the tax consolidated group Other entities Current tax liabilities: Income tax payable attributable to: Parent Entities other than parent and entities in the consolidated group (d) Deferred tax balances Deferred tax comprises: Temporary differences Unused tax losses and credits 2017 US$'000 2016 US$'000 (752) 1,116 (91,015) 91,015 19,690 19,690 1 - 99,590 99,590 (80,971) 80,971 23,434 23,434 - 94,577 94,577 (1,248) 8,406 7,158 (7,502) 8,083 581 (1) The income tax receivable for 2017 is $19.7 million (2016: $23.4 million) of which $1.7 million is classified as current tax receivable and $18.0 million is classified as non-current tax receivable (2016: $4.4 million and $19.0 million respectively). 94 _______________________________________________________________________________________ 90 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 11. INCOME TAXES (CONTINUED) 2017 Deferred tax assets (liabilities) temporary differences Property, plant and equipment Provisions Doubtful debts Other intangible assets Accrued liabilities Pension Inventories Investments in subsidiaries Unrealised foreign exchange Other Unused tax losses and credits: Tax losses Foreign tax credits Opening Recognised balance US$'000 US$'000 in income differences FX US$'000 38 228 - - 50 17 35 - - 23 391 - - - Recognised Closing balance US$'000 in equity US$'000 - - - - - (752) - - - - (752) - - - 3,568 3,326 64 (13,885) 3,314 (441) 1,940 - 171 695 (1,248) 8,406 - 8,406 1,304 7,854 - (19,429) 1,703 600 1,186 (1,500) (46) 826 (7,502) 5,717 2,366 8,083 2,226 (4,756) 64 5,544 1,561 (306) 719 1,500 217 (154) 6,615 2,689 (2,366) 323 581 6,938 391 (752) 7,158 Presented in the statement of financial position as follows: Deferred tax asset Deferred tax liability 20,597 (13,439) 7,158 Where deferred tax assets have been recognised, it is considered probable that the Company will generate sufficient future taxable income to utilise the assets. _______________________________________________________________________________________ 95 91 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 11. INCOME TAXES (CONTINUED) 2016 Deferred tax assets (liabilities) temporary differences Property, plant and equipment Provisions Doubtful debts Other intangible assets Accrued liabilities Pension Inventories Investments in subsidiaries Unrealised foreign exchange Other Unused tax losses and credits: Tax losses Foreign tax credits Opening Recognised balance US$'000 US$'000 in income differences FX Recognised Closing balance US$'000 in equity US$'000 - - - - - 1,116 - - - - 1,116 - - - 1,304 7,854 - (19,429) 1,703 600 1,186 (1,500) (46) 826 (7,502) 5,717 2,366 8,083 US$'000 (101) (182) (1) - (22) (2) (79) - - (28) (415) - - - 4,767 8,637 30 (15,246) 1,056 79 3,728 (1,500) (810) 1,368 2,109 4,106 - 4,106 (3,362) (601) (29) (4,183) 669 (593) (2,463) - 764 (514) (10,312) 1,611 2,366 3,977 6,215 (6,335) (415) 1,116 581 Presented in the statement of financial position as follows: Deferred tax asset Deferred tax liability 19,465 (18,884) 581 Unrecognised deferred tax assets Tax losses - revenue Unused tax credits Temporary differences 2017 US$'000 2016 US$'000 228,309 23,089 62,633 314,031 171,488 39,369 126,105 336,962 $87,679 expires within 3-20 years and $138,630 of the unrecognized deferred tax assets in relation to lax losses (revenue do not expire). $23,089 expires within 1-10 years of the unrecognised deferred tax assets in relation to unused tax credits. 96 _______________________________________________________________________________________ 92 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 11. INCOME TAXES (CONTINUED) Canadian income tax audits The Company’s Canadian income tax returns for the tax years 2007-2012 have been reassessed by the Canada Revenue Agency (“CRA”). These reassessments are being appealed through a multi-national dispute resolution process, known as “competent authority” to prevent the double-taxation of income assessed by multiple jurisdictions. The assessment for the 2007 through 2012 tax years, if upheld, would result in federal and provincial tax liabilities (including interest) of approximately C$109.4 million. The outcome and timing of any resolution of the Canadian reassessments are unknown. Interest will continue to accrue on all disputed and unpaid amounts until they are paid, or, alternatively, until the disputes are resolved in the Company’s favour. The Company has recorded a tax provision related to the CRA’s audits of the 2007 through 2012 tax years. The provision reflects the uncertainties regarding the outcome of those audits. While the Company believes it is appropriately reserved in respect of the CRA tax disputes, the resolution of those disputes on terms substantially as assessed by the CRA for the 2007 through 2012 tax years could be material to the Company’s financial position or results of operations. The Company’s liquidity could also be impacted negatively by the CRA reassessments. _______________________________________________________________________________________ 97 93 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 12. LOSS PER SHARE Basic loss per share Diluted loss per share Basic loss per share The loss and weighted average number of ordinary shares used in the calculation of basic loss per share are as follows: Loss used in the calculation of basic EPS Weighted average number of ordinary shares for the purposes of basic loss per share Diluted loss per share The loss used in the calculation of diluted loss per share are as follows: Loss used in the calculation of diluted EPS Weighted average number of ordinary shares used in the calculation of diluted EPS 2017 US cents per share 2016 US cents per share (1.6) (1.6) (16.8) (16.8) 2017 US$'000 2016 US$'000 (150,044) (156,839) 2017 '000 2016 '000 9,225,868 935,553 2017 US$'000 2016 US$'000 (150,044) (156,839) 2017 '000 2016 '000 9,225,868 935,553 The following potential shares are anti-dilutive and are therefore excluded from the weighted average number of ordinary shares for the purposes of diluted earnings per share. Shares deemed to be issued for no consideration in respect of LTIP share rights 2017 '000 2016 '000 2,270 16,596 98 _______________________________________________________________________________________ 94 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 13. TRADE AND OTHER RECEIVABLES Trade receivables are recorded at amortised cost. The Company reviews collectability of trade receivables on an ongoing basis and provides allowances for credit losses when there is evidence that trade receivables may not be collectible. These losses are recognised in the income statement within operating expenses. When a trade receivable is determined to be uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are recorded in other income in profit or loss. Trade receivables Allowance for doubtful accounts Goods and services tax receivable Other receivables The ageing of trade receivables is detailed below: Current Past due 0 - 30 days Past due 31 - 60 days Past due 61-90 days Past due 90 days 2017 US$'000 2016 US$'000 123,554 (1,844) 8,229 1,922 131,861 94,220 (1,278) 13,194 1,762 107,898 2017 US$'000 2016 US$'000 90,156 18,963 6,338 3,338 4,759 123,554 68,591 14,682 4,134 3,259 3,554 94,220 The average credit period on sales of goods is 60 days as at 31 December 2017, compared to 53 days at 31 December 2016. No interest is charged on trade receivables. The Company’s policy requires customers to pay the Company in accordance with agreed payment terms. The Company’s settlement terms are generally 30 to 60 days from date of invoice. All credit and recovery risk associated with trade receivables has been provided for in the statement of financial position. Trade receivables have been aged according to their original due date in the above ageing analysis. Credit risk management The Company has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, when appropriate, as a means of mitigating the risk of financial loss from defaults. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on accounts receivable. The Company holds security for a number of trade receivables in the form of letters of credit, deposits, and advanced payments. The Company does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. No derivative financial instruments were entered into during 2017 or 2016. 14. INVENTORIES Inventories are measured at the lower of cost or net realisable value. The cost of most inventories is based on a standard cost method, which approximates actual cost on a first-in first-out basis, and includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overhead expenses (including depreciation) based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Allowances are recorded for inventory considered to be excess or obsolete and damaged items are written down to the net realisable value. Due to the decline in the demand for products, and consumables used in our Global Drilling Services business, and the high inventory balances across the group and the speed at which inventory is turning in the current market, significant judgment is required in determining net realisable value of inventory. _______________________________________________________________________________________ 99 95 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 14. INVENTORIES (CONTINUED) Raw materials Work in progress Finished products 2017 US$'000 2016 US$'000 28,023 3,265 143,087 174,375 25,726 3,364 135,930 165,020 The Company did not record any additional provisions against inventory for the years ended 31 December 2017 and 2016. Obsolescence provisions were $25.0 million and $36.9 million as at 31 December 2017 and 2016, respectively. 15. FINANCIAL RISK MANAGEMENT Capital risk management The Company manages its capital to ensure that entities in the Company will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balances. The capital structure of the Company consists of debt, which includes the loans and borrowings disclosed in Note 21, cash and cash equivalents and equity attributable to equity holders of the Company, comprising issued capital, reserves, and accumulated losses/retained earnings. Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed throughout these notes. Of the outstanding loans and borrowings, Centerbridge Partners, L.P. accounted for $190.0 million of Term Loans outstanding and accreted interest of $74.8 million. The backstop ABL of $45.0 million and accreted interest of $1.6 million was provided by Centerbridge Partner, L.P., Ares Management L.P. and Ascribe Capital. There are no significant concentrations of credit risk. The carrying amount reflected above represents the Company’s maximum exposure to credit risk for trade and other receivables. Financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss is not recognised directly for trade receivables because the carrying amount is reduced through the use of an allowance account. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. Financial risk management objectives The Company’s corporate treasury function provides services to the business, coordinates access to domestic and international financial markets, and monitors and manages the financial risks relating to the operations of the Company through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. 100 _______________________________________________________________________________________ 96 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 15. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk The Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Company seeks to minimise the effects of these risks, where deemed appropriate, by using derivative financial instruments and other non-derivative strategies to manage these risk exposures to interest rate and foreign currency risk, including: • • • foreign exchange forward contracts to hedge the exchange rate risk arising from transactions not recorded in an entity’s functional currency, interest rate swaps to mitigate the risk of rising interest rates; and other non-derivative strategies. Foreign currency risk management Company subsidiaries undertake certain transactions denominated in currencies other than their functional currency, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters, which may include utilising forward foreign exchange contracts as well as options in addition to non- derivative strategies. The Company did not utilise any derivative instruments during the years ended 31 December 2017 or 2016. The most significant carrying amounts of monetary assets and monetary liabilities (which include intercompany balances with other subsidiaries) that: (1) are denominated in currencies other than the functional currency of the respective Company subsidiary; and (2) cause foreign exchange rate exposure, at 31 December are as follows: Assets 2017 US$'000 2016 US$'000 Liabilities 2017 US$'000 2016 US$'000 94,116 190 30,454 131,041 310,407 1,032 23,218 167,783 163,003 27,577 146,070 336,060 117,848 43,048 114,206 593,271 Australian Dollar Canadian Dollar Euro US Dollar Foreign currency sensitivity The Company is mainly exposed to exchange rate fluctuations in the Australian Dollar (AUD), Canadian Dollar (CAD), Euro (EUR) and United States Dollar (USD). The Company is also exposed to translation differences as the Company’s presentation currency is different from the functional currencies of various subsidiaries. However, this represents a translation risk rather than a financial risk and consequently is not included in the following sensitivity analysis. The following tables reflect the Company’s sensitivity to a 10% change in the exchange rate of each of the currencies listed above. This sensitivity analysis includes only outstanding monetary items denominated in currencies other than the respective subsidiaries’ functional currencies and remeasures these at the respective year end to reflect a 10% decrease in the indicated currency against the respective subsidiaries’ functional currencies. A positive number indicates an increase in net profit and/or net assets. Net profit Net assets Net profit Net assets 10% decrease in AUD 2016 US$'000 2017 US$'000 10% decrease in CAD 2017 US$'000 2016 US$'000 (1,247) 6,264 (2,965) (19,538) 1,557 2,483 1,616 3,835 10% decrease in EUR 10% decrease in USD 2017 US$'000 3,919 7,886 2016 US$'000 1,753 5,566 2017 US$'000 9,035 18,638 2016 US$'000 8,120 38,681 In management’s opinion, the sensitivity analysis is not fully representative of the inherent foreign exchange risk as the year-end exposure may not reflect the exposure during the course of the year. _______________________________________________________________________________________ 101 97 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 15. FINANCIAL RISK MANAGEMENT (CONTINUED) Forward foreign exchange contracts There were no open forward foreign currency contracts as at 31 December 2017 or 2016. Interest rate risk management The Company is not currently exposed to interest rate risk as entities within the Company borrow funds at fixed interest rates. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Company’s Treasurer and Board. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Liquidity risk The following tables reflect the expected maturities of non-derivative financial liabilities as at 31 December 2017 and 2016. These are based on the undiscounted expected cash flows of financial liabilities based on the maturity profile per the loan agreement. The table includes both interest and principal cash flows. The adjustment column represents the possible future cash flows attributable to the instrument included in the maturity analysis which are not included in the carrying amount on the balance sheet. Weighted average effective interest rate % Less than 3 months 1 to 3 to 1 year 1 month months US$'000 US$'000 US$'000 1 - 5 years 5+ years US$'000 US$'000 Adjust- ment US$'000 Total US$'000 - 93,196 45,052 - - 5.1% 8.9% 4.6% 73 146 656 18,376 - 66 93,335 - 132 45,330 - 595 1,251 930,935 1,877 951,188 - 91,064 35,525 - - 4.2% 9.5% 4.7% 61 122 548 19,328 - 10 91,135 - 24 35,671 39,380 106 40,034 913,994 495 933,817 - - - - - - - - - - - 138,248 (2,240) 17,011 (304,421) - (306,661) 626,514 2,670 784,443 - 126,589 (2,493) 17,566 (230,595) - (233,088) 722,779 635 867,569 31 December 2017 Non-interest bearing payables Variable interest rate instruments Fixed interest rate instruments Financial Lease 31 December 2016 Non-interest bearing payables Variable interest rate instruments Fixed interest rate instruments Financial Lease 102 _______________________________________________________________________________________ 98 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 15. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) The following tables reflect the expected maturities of non-derivative financial assets. These are based on the undiscounted expected cash flows of the financial assets. 2017 Non-interest bearing receivables Cash 2016 Non-interest bearing receivables Cash Less than 1 month US$'000 1 to 3 months US$'000 3 months to 1 year US$'000 Total US$'000 61,399 43,758 105,157 60,582 - 60,582 9,880 - 9,880 131,861 43,758 175,619 52,830 59,343 112,173 40,503 14,565 - - 40,503 14,565 107,898 59,343 167,241 The liquidity risk tables are based on the Company’s intent to collect the assets or settle the liabilities in accordance with the contractual terms. Fair value of financial instruments The fair values of financial assets and financial liabilities are determined as follows: • • • Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements. The fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices. The fair value of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analyses using prices from observable current market transactions. Management considers that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements materially approximate their fair values. 16. ASSETS CLASSIFIED AS HELD FOR SALE Based on current market conditions and future outlook, the Company has classified certain property, plant and equipment assets in the amount of $530 thousand as held for sale as at 31 December 2017 (31 December 2016: $5.9 million). These assets consist primarily of excess rigs and ancillary equipment. The opportunity for a gain by the disposition of these targeted assets allows the Company to rationalise its assets, raise capital and eliminate ongoing costs associated with maintaining these assets. _______________________________________________________________________________________ 103 99 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 17. PROPERTY, PLANT AND EQUIPMENT The Company’s assets are held in various differing geographical, political and physical environments across the world, therefore, the estimation of useful lives of assets is an area of significant judgment. Our current estimate has been based on historical experience. In addition, the condition of the assets is assessed at least annually and considered against the remaining useful life. Adjustments to useful lives are made when considered necessary. Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Costs include expenditures that are directly attributable to the acquisition of the asset, including the costs of materials and direct labour and other costs directly attributable to bringing the asset to a working condition for the intended use. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate assets. Subsequent costs related to previously capitalised assets are capitalised only when it is probable that they will result in commensurate future economic benefit and the costs can be reliably measured. All other costs, including repairs and maintenance, are recognised in profit or loss as incurred. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease terms or their useful lives. Items in the course of construction or not yet in service are not depreciated. The following useful lives are used in the calculation of depreciation: Buildings Plant and machinery Drilling rigs Other drilling equipment Office equipment Computer equipment: Hardware Software 20-40 years years 5-10 years 5-12 years 1-5 years 5-10 3-5 1-7 years years Depreciation methods, useful lives and residual values are reassessed at each reporting date. Leased assets Leases are classified as finance leases when the terms of the leases transfer substantially all the risks and rewards incidental to ownership of the leased assets to the Company. All other leases are classified as operating leases. Assets held under finance leases are initially recognised at fair value or, if lower, at amounts equal to the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Finance lease payments are apportioned between finance charges and reductions of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance leased assets are amortised on a straight-line basis over the shorter of the lease terms or the estimated useful lives of the assets. Operating lease payments are recognised as expenses on a straight-line basis over the lease terms. 104 _______________________________________________________________________________________ 100 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 17. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Land and Buildings US$'000 Plant and Equipment US$'000 Construction in Progress US$'000 Total US$'000 Balance at 1 January 2016 Additions Disposal Transfers to assets held for sale Transfer to/from CIP Transfer to intangible assets Currency movements Balance at 1 January 2017 Additions Disposal Transfer from CIP Transfer from intangible assets Currency movements Balance at 31 December 2017 Accumulated depreciation and impairment: Balance at 1 January 2016 Depreciation Reversal of/(impairment of) Disposal Transfers to assets held for sale Currency movements Balance at 1 January 2017 Depreciation Impairment Disposal Currency movements Balance at 31 December 2017 Net book value at 31 December 2016 Net book value at 31 December 2017 61,630 40 (12,814) - 59 - (1,571) 47,344 34 (3,022) 562 - 2,755 47,673 (20,982) (2,106) 167 8,116 - (338) (15,143) (1,723) (196) 1,854 (1,292) (16,500) 32,201 31,173 711,122 962 (81,565) (29,529) 16,531 - (8,853) 608,668 797 (63,956) 18,063 723 31,541 595,836 (586,460) (46,452) (1,045) 73,660 23,606 13,909 (522,782) (37,513) (1,875) 61,111 (26,033) (527,092) 85,886 68,744 11,165 16,542 - - (16,590) (1,536) (8) 9,573 26,684 - (18,625) - 581 18,213 - - - - - - - - - - - - 9,573 18,213 783,917 17,544 (94,379) (29,529) - (1,536) (10,432) 665,585 27,515 (66,978) - 723 34,877 661,722 (607,442) (48,558) (878) 81,776 23,606 13,571 (537,925) (39,236) (2,071) 62,965 (27,325) (543,592) 127,660 118,130 Property, plant and equipment is reviewed at each reporting date to determine whether there is any indication of impairment. Assets are first considered individually to determine whether there is any impairment related to specific assets due to factors such as technical obsolescence, declining market value, physical condition or saleability within a reasonable timeframe. As a result of this exercise, the Company recorded an impairment loss at 31 December 2017 and 31 December 2016 of $2.1 million and $878 thousand, respectively on property, plant and equipment. _______________________________________________________________________________________ 105 101 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 18. GOODWILL AND OTHER ASSET IMPAIRMENT CONSIDERATIONS Goodwill resulting from business combinations is recognised as an asset at the date that control is acquired. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the previously held equity interest in the acquiree (if any) over the net amounts of the identifiable assets acquired and the liabilities assumed. Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Company’s cash-generating units expected to benefit from the acquisition. Cash- generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the carrying value of the unit may be impaired. If the recoverable amount of the cash- generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Upon disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill, intangible assets and property, plant and equipment The Company determines whether goodwill is impaired on an annual basis and assesses impairment of all other assets at each reporting date by evaluating whether indicators of impairment exist. This evaluation includes consideration of the market conditions specific to the industry in which the group operates, the increase, or decline in demand for our drilling services and rig utilisation rates, the political environment in countries in which the group operates, technological changes, expectations in relation to future cash flows and the Company’s market capitalisation. Where an indication of impairment exists the recoverable amount of the asset is determined. Recoverable amount is the greater of fair value less costs to sell and value in use. Impairment is considered for individual assets, or cash generating units (“CGU”). Judgments are made in determining appropriate cash generating units. When considering whether impairments exist at a CGU, the Company uses the value in use methodology. The value in use calculation requires the Company to estimate the future cash flows expected to arise from a cash- generating unit and a suitable discount rate in order to calculate present value. These estimates are subject to risk and uncertainty; hence there is a possibility that changes in circumstances will alter these projections, which may impact the recoverable amount of the assets. Goodwill by cash-generating units Gross carrying amount: Balance at 1 January 2016 Currency movements Balance at 31 December 2016 Balance at 1 January 2017 Currency movements Balance at 31 December 2017 US$'000 99,658 378 100,036 100,036 1,160 101,196 The carrying amount of goodwill of $101.2 million as at 31 December 2017 and $100.0 million as at 31 December 2016 was in the North America Drilling Services CGU. The carrying amount of goodwill is tested for impairment annually at 31 December and whenever there is an indicator that the asset may be impaired. If goodwill is impaired, it is written down to its recoverable amount. 106 _______________________________________________________________________________________ 102 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 18. GOODWILL AND OTHER ASSET IMPAIRMENT CONSIDERATIONS (CONTINUED) Goodwill impairment by cash-generating units Goodwill and intangible assets in the EMEA, Latin America and Asia Pacific Drilling Services CGUs have been fully impaired. For the cash-generating units with remaining goodwill and intangible assets, being the North America Drilling Services CGU, the Company performed a goodwill impairment test at 31 December 2017 and the recoverable amount for the North America Drilling Services CGU exceeded the goodwill carrying amount. Consequently, no goodwill impairments were recorded for the year ended 31 December 2017. Key assumptions Certain key assumptions are used for CGU impairment testing and are described below. In its impairment assessment, the Company calculates the recoverable amounts based on value-in-use calculations. Cash flow projections are based on the Company’s expected performance over a ten-year period, which approximates the length of a typical mining business cycle based on historical industry experience, with a terminal value. Central to the approach adopted is the assumption that the mining industry will continue to follow its historical trend of cycles. In assessing value in use, the estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. The post-tax discount rate is applied to post tax cash flows that include an allowance for tax based on the respective jurisdictions’ tax rate. No allowance is made for existing timing differences or carry-forward losses. This method is used to approximate the requirement of the accounting standards to apply a pre-tax discount rate to pre-tax cash flows as the Company determined it was not feasible to calculate a stand-alone pre-tax discount rate. _______________________________________________________________________________________ 107 103 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 18. GOODWILL AND OTHER ASSET IMPAIRMENT CONSIDERATIONS (CONTINUED) Revenue – NAM Drilling Services In determining the growth rates applied to revenue through the mining cycle, we have had regard to the following: • Average revenue growth over previous mining cycles, with revenue in the forecast period and terminal year based on the average actual revenue in the last five years. • Rates of inflation in the countries where the Company does business (sourced from Bloomberg and CapIQ). • Price and volume expectations over the forecast period. Expenses In determining gross margin and SG&A expenses management has used historical performance trends, overlaying the impacts of recent programs and other initiatives already taken within the business to reduce costs. Working capital and capital expenditure Working capital and capital expenditure assumptions are assumed to be in line with historic trends given the level of utilisation and operating activity. Discount rate and terminal growth rate A global discount rate of 11.5% is used and adjusted on a case-by-case basis for regional variations in the required equity rate of return. Based on information published by Bloomberg, the adjusted post-tax discount rate for the North American region is 10.8% and the terminal growth rate of 2.1% does not exceed the long-term average growth rate for the industry. As part of our impairment test we have considered a number of different scenarios that consider the impact on the value-in-use calculations if key assumptions were to vary from those used in the calculations. We analysed the impact If revenue and gross margins do not improve as forecast in our impairment analysis due to lower than expected price and volume recovery and the Company is unable to adjust its cost structure. The analysis resulted in no impairment under these scenarios. 108 _______________________________________________________________________________________ 104 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 19. OTHER INTANGIBLE ASSETS Trademarks and trade names Trademarks and trade names recognised by the Company that are considered to have indefinite useful lives are not amortised. Each period, the useful life of each of these assets is reviewed to determine whether events and circumstances continue to support an indefinite useful life assessment for the asset. Trademarks and trade names that are considered to have a finite useful life are carried at cost less accumulated amortisation and accumulated impairment losses and have an average useful life of three years. Such assets are tested for impairment at least annually or more frequently if events or circumstances indicate that the asset might be impaired. Contractual customer relationships Contractual customer relationships acquired in business combinations are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be reliably measured. Contractual customer relationships have finite useful lives and are carried at cost less accumulated amortisation and accumulated impairment losses. Contractual customer relationships are amortised over 10 – 15 years on a straight-line basis. Amortisation methods and useful lives are reassessed at each reporting date. Patents Patents are measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation is charged on a straight-line basis over estimated useful lives of 10 - 20 years. Amortisation methods and useful lives are reassessed at each reporting date. Research and development costs Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognised in profit or loss when incurred. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development costs are capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Capitalised costs include the cost of materials, direct labour and overhead costs directly attributable to preparing the asset for its intended use. Other development costs are expensed when incurred. Capitalised development costs are measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over the estimated useful lives, which on average is 15 years. _______________________________________________________________________________________ 109 105 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 19. OTHER INTANGIBLE ASSETS (CONTINUED) Gross carrying amount: Balance at 1 January 2016 Additions Disposals Transfer from PP&E Currency movements Balance at 31 December 2016 Balance at 1 January 2017 Additions Disposals Transfer to PP&E Currency movements Balance at 31 December 2017 Accumulated amortisation: Balance at 1 January 2016 Amortisation for the period Disposals Impairment for the period Currency movements Balance at 31 December 2016 Balance at 1 January 2017 Amortisation for the period Disposals Impairment for the period Currency movements Balance at 31 December 2017 Trademarks Patents US$'000 US$'000 Customer relationships and other US$'000 Develop- ment Software assets US$'000 US$'000 4,253 40 - - - 4,293 4,293 33 (1,266) - - 3,060 (1,270) - - - - (1,270) (1,270) - 1,270 - - - 6,250 891 (4) - - 7,137 7,137 961 (1) - - 8,097 (1,025) (488) - - - (1,513) (1,513) (471) - - - (1,984) 46,675 - - - (146) 46,529 46,529 - (5,321) - 1,752 42,960 (37,705) (1,609) - - 238 (39,076) (39,076) (1,622) 5,321 - (1,712) (37,089) 87,471 1,626 (5) - 19 89,111 89,111 12 (2) - 20 89,141 (66,184) (10,653) - - (9) (76,846) (76,846) (8,568) - - (18) (85,432) 43,940 362 (164) 1,536 71 45,745 45,745 1,844 (1) (723) (23) 46,842 (28,001) (1,162) 143 (1,170) - (30,190) (30,190) (1,211) - (104) 19 (31,486) Total US$'000 188,589 2,919 (173) 1,536 (56) 192,815 192,815 2,850 (6,591) (723) 1,749 190,100 (134,185) (13,912) 143 (1,170) 229 (148,895) (148,895) (11,872) 6,591 (104) (1,711) (155,991) Net book value at 31 December 2016 Net book value at 31 December 2017 3,023 3,060 5,624 6,113 7,453 5,871 12,265 3,709 15,555 15,356 43,920 34,109 Other intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment. As a result of the Company’s review of specific intangible assets, the Company recorded an impairment loss at 31 December 2017 and 31 December 2016 of $104 thousand and $1.2 million, respectively. The Company has reassessed the carrying value of certain development assets relating to its Global Products business. The 31 December 2017 review did not lead to an impairment for that period. The Company recognised $8.1 million of research and development expenses in the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2017 (2016: $1.1 million). 110 _______________________________________________________________________________________ 106 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 20. TRADE AND OTHER PAYABLES Trade payables and other payables are carried at amortised cost. They represent unsecured liabilities for goods and services provided to the Company prior to the end of the financial period that are unpaid and arise when the Company becomes obligated to make future payments. Current Trade payables Accrued payroll and benefits Accrued recapitalision costs Goods and services tax payable Accrued interest Accrued legal and environmental Professional fees Accrued drilling costs Other sundry payables and accruals 2017 US$'000 2016 US$'000 65,486 26,759 9,898 13,229 1,051 5,625 4,535 2,484 9,181 138,248 55,082 24,000 4,150 11,128 10,036 1,866 7,351 2,798 10,178 126,589 The average credit period on purchases of certain goods is 39 days (2016: 37 days). No interest is charged on the trade payables for this period. Thereafter, various percentages of interest may be charged on the outstanding balance based on the terms of the specific contracts. The Company has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (“GST”), except: • • where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. _______________________________________________________________________________________ 107 111 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 21. LOANS AND BORROWINGS All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. Debt issuance costs are amortised using the effective interest rate method over the life of the borrowing. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Unsecured - at amortised cost Non-current Senior notes Accreted interest Debt issuance costs Secured - at amortised cost Current Finance lease liabilities Non-current Senior notes Term loans Accreted interest Revolver bank loans Debt issuance costs Original issue discount Finance lease liabilities Disclosed in the financial statements as: Current borrowings Non-current borrowings A summary of the maturity of the Company's borrowings is as follows: Less than 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years More than 4 years Original issue discount Debt issuance costs 2017 US$'000 2016 US$'000 88,882 444 - 284,000 - (2,473) 794 140 217,035 190,000 85,153 62,011 (1,917) (1,600) 1,876 642,678 794 641,884 642,678 794 657 64,255 562 579,927 646,195 (1,600) (1,917) 642,678 195,000 190,000 53,779 17,566 (3,380) - 495 735,127 140 734,987 735,127 140 328,576 156 128,068 284,040 740,980 (5,853) 735,127 _______________________________________________________________________________________ 108 112 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 21. LOANS AND BORROWINGS (CONTINUED) Recapitalisation On 3 April 2017, the Company announced a proposed recapitalisation with Centerbridge Partners L.P., Ares Capital Ltd., and Ascribe Capital LLC to reduce the Company’s debt and interest costs which would provide the Company with a more sustainable capital structure to support its operations (known as the “Recapitalisation”). The Recapitalisation was completed at the end of September 2017, effective 1 September 2017 and resulted in: • • • reduction of the 7% unsecured debt (both principal and accrued interest costs) through a $196.0 million reduction in the principal amount and $16.4 million reduction in accrued interest and reduced interest rates (from 7% to 1.5% payable-in-kind1 (“PIK”) backdated to 1 January 2017), reduction in the interest burden on other debt instruments through a combination of a decrease in interest rates and deferral of interest payment through payable-in-kind (“PIK”)/interest capitalisation arrangements; and deferring the maturity of retained debt funding to December 2022. In order to achieve the Recapitalisation, the Company issued 24.9 billion shares and warrants (see note 24 for further details on the equity instruments issued). Accounting for the equity instruments issued under the Recapitalisation requires the determination of fair value. As a result of the financial position of the Group at the time of the Recapitalisation, and the dilutionary impact of the number of equity instruments issued there was a wide range of possible fair value estimates requiring a significant level of judgement. Further the probabilities of the various estimates could not be reasonably assessed and it was concluded that the fair value of the equity could not be reliably measured and was recorded based on the net reduction in the recorded value of the loans and borrowings pre and post the Recapitalisation. Further, the Company has determined that the fair value of the revised loans and borrowings is the face value of such instruments. The movements in the loans and borrowings in the period are complex and include significant non cash transactions and debt reductions. The following table provides the movement in the material line items of loans and borrowings: Description US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 2016 Debt Drawn Debt Reduction Backstop ABL Capitalised Interest 2017 Interest Other 2017 Senior Unsecured Notes Senior Unsecured Notes Accreted Interest Senior Secured Notes Term Loans Term Loan A Term Loan B Total Term Loans Accreted Interest Revolver Bank Loans Bank credit facility ABL DDL Loan Backstop ABL Total Revolver Bank Loans Other Total 284,000 - 195,000 85,000 105,000 190,000 53,779 - - - - - - (196,000) - - - - - - - - - - - - - - 882 444 22,035 - - - - - - - - - - - - - 88,882 444 217,035 85,000 105,000 190,000 (22,035) 51,722 1,687 85,153 17,566 - - - 17,566 14,709 15,400 20,930 - 51,039 (15,264) (15,400) (20,930) - (51,594) - - - 45,000 45,000 (5,218) - - - 735,127 51,039 (247,594) 45,000 - - - - - - - - - - - - - - - - - 17,011 - - 45,000 62,011 4,107 264 (847) 57,155 1,951 642,678 1 Payable-in-kind interest refers to non-cash capitalised interest paid on maturity of the debt. _______________________________________________________________________________________ 109 113 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 21. LOANS AND BORROWINGS (CONTINUED) Senior notes Senior Unsecured Notes As of 31 December 2016 there was $284.0 million of senior unsecured notes outstanding at an interest rate of 7% with a scheduled maturity date of 1 April 2021. As part of the Recapitalisation as noted above, the Company restructured its senior unsecured notes. The $284.0 million outstanding principal amount of the 7% Unsecured Notes due 2021 has been reduced by $196.0 million in exchange for ordinary shares (see note 24 for further details on the equity instruments issued). Interest rate on the senior unsecured notes carry an interest rate of 1.5% per annum, which is payable-in-kind (i.e. non cash) until maturity in December 2022. The Company has $88.9 million of senior unsecured notes outstanding at 31 December 2017. The Company may redeem all or a portion of the notes prior to maturity subject to certain conditions, including in certain cases the payment of premiums or make-whole amounts. Senior Secured Notes As of 31 December 2016 there was $195.0 million of senior secured notes outstanding at an interest rate of 10% with a scheduled maturity date of 1 October 2018. As part of the Recapitalisation as noted above, the Company restructured its senior secured notes. Accrued and unpaid interest of $22.0 million has been capitalised on 1 September 2017 as part of the Recapitalisation. The Company has $217.0 million of senior secured notes outstanding at 31 December 2017 that carry a payable-in-kind interest rate of 12% per annum at the Company’s election until December 2018 and thereafter in cash at the reduced interest rate of 10% per annum with a scheduled maturity date of December 2022. The Company may redeem all or a portion of the notes prior to maturity subject to certain conditions, including in certain cases the payment of premiums or make-whole amounts. Bank Credit Facility The Company has an asset-based, revolving bank credit facility (the “ABL”) that was amended in July 2017 that increased its capacity from $40.0 million to $50.0 million of capacity for loans or other purposes such as letters of credit. As at 31 December 2017 there was $17.0 million outstanding under this facility (31 December 2016: $17.6 million outstanding). In addition, as at 31 December 2017 there were outstanding letters of credit totalling $13.0 million that reduced the amount available to draw under the ABL commitments (31 December 2016: $11.9 million outstanding letters of credit). Interest rates on usage/drawings (we pay this on letters of credit which are not “borrowings”) are based on a base rate plus an applicable margin. The base rate is generally based on 30-day USD LIBOR, while the margin is determined based on the Company’s leverage according to a pricing grid. As at 31 December 2017 the applicable margin was 3.5% for LIBOR- based loans. The ABL facility is secured by a first lien on the accounts receivable, inventories, deposit accounts and cash (“Working Capital Assets”) of the ABL borrower and guarantors and a third lien on substantially all of the other tangible and intangible assets (“Non-Working Capital Assets”) of the ABL borrower and guarantors, including equipment, intellectual property and the capital stock of subsidiaries (but excluding real property). Provisions in the facility currently restrict availability by $5.0 million until the Company maintains an unadjusted fixed charge coverage ratio of at least 1.0:1.0 for four consecutive quarters. Provisions also require that $5.0 million of cash be held in a restricted bank account with the lender until the Company maintains an unadjusted fixed charge coverage ratio of at least 1.0:1.0 for four consecutive quarters, at which time the restricted cash shall be released. Following release of the restricted cash, but only to the extent that less than $7.5 million of excess availability exists under the facility. the facility contains a requirement to maintain a minimum liquidity of $10.0 million at all times in the facility through 30 June 2018 after that time there is a springing Fixed Charge Coverage Ratio (“FCCR”) of 1.1:1.0 if excess availability is less than $7.5 million. Scheduled maturity has been extended until July 2020. Backstop ABL As part of the Recapitalisation on 1 September 2017, the Company entered into a new term loan facility. The new term loan has an interest rate of 11% per annum payable-in kind or 10% per annum payable in cash at the option of the borrower. It is secured by substantially the same collateral as the ABL credit facility and contains a maturity of October 2020. As at 31 December 2017 the amount outstanding under this facility was $45.0 million. _______________________________________________________________________________________ 110 114 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 21. LOANS AND BORROWINGS (CONTINUED) Term Loans The Company has a term loan facility which is structured as Tranche A and Tranche B loans. As part of the Recapitalisation in September 2017 the Company restructured its Term Loans. Interest on Term Loans A and B is reduced from 12% to 10% payable –in-kind through to December 2018 and 8% payable-in-kind thereafter. Maturity was extended until December 2022. The term loan tranches are structured to accrete interest, which is payable to the term loan lender, Centerbridge Partners, L.P., a related party. Tranche A As at 31 December 2017 and 2016 the amount outstanding was $85.0 million. This tranche contains a maturity of December 2022 and is non-callable for the first 4 years. It is secured by a first lien on the Working Capital Assets of the Term Loan A guarantors that are not ABL guarantors, a second lien on the Working Capital assets of the Term Loan A issuer and the Term Loan A guarantors that are also ABL guarantors, and a second lien on substantially all of the Non- Working Capital Assets of the Term Loan A issuer and guarantors, including equipment, intellectual property, the capital stock of subsidiaries and certain owned real property. Tranche B As at 31 December 2017 and 2016 the amount outstanding under Tranche B was $105.0 million. This tranche contains a maturity of December 2022 and is non-callable for the life of the loan. It is secured by a second lien on the Working Capital Assets of the Term Loan B and Senior Secured Notes guarantors that are not ABL guarantors, a third lien on the Working Capital Assets of the Term Loan B and Senior Secured Notes issuer and the Term Loan B and Senior Secured Notes guarantors that are also ABL guarantors, and a first lien on substantially all of the Non-Working Capital Assets of the Term Loan B and Senior Secured Notes issuer and guarantors, including equipment, intellectual property, the capital stock of subsidiaries and certain owned real property. Covenants and other material items – bank credit facility and senior notes The Company’s ABL term loans do not require maintenance or testing of financial covenant ratios. With respect to the senior notes issued by the Company, the indenture governing those senior notes includes covenants that restrict the Company’s ability to engage in certain activities, including incurring additional indebtedness and making certain restricted payments as well as a limitation on the amount of secured debt the Company may incur. The senior notes contain certain provisions that provide the note holders with the ability to declare a default, and accelerate the notes, should a default occur under either of the Term Loans that results in acceleration of such Term Loans. The senior notes do not require maintenance or testing of financial covenant ratios. The Company’s ABL includes a covenant that requires the Company to maintain $10.0 million minimum liquidity in the facility through 30 June 2018 after that there is a springing Fixed Charge Coverage Ratio (“FCCR”) of 1.1:1.0 if excess availability is less than $7.5 million. As at 31 December 2017 the Company was in compliance with all of its debt covenants. _______________________________________________________________________________________ 111 115 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 21. LOANS AND BORROWINGS (CONTINUED) Covenants and other material items – bank credit facility and senior notes (continued) Further details around the Issuer/Borrower and Guarantors of the Company’s debt instruments are included below: Description Issuer/Borrower Guarantors Senior Secured Notes Boart Longyear Management Pty Limited Australia: Boart Longyear Australia Pty Limited, Boart Longyear Limited and Votraint No. 1609 Pty Limited Canada: Boart Longyear Canada, Boart Longyear Manufacturing Canada Ltd. And Longyear Canada ULC Chile: Boart Longyear Chile Limitada and Boart Longyear Commercializadora Limitada Peru: Boart Longyear S.A.C. Switzerland: Boart Longyear Suisse Sarl United States: Boart Longyear Company, Boart Longyear Manufacturing and Distribution, Inc.,Longyear Holdings, Inc., BLY IP Inc, and Longyear TM, Inc. Term Loan Tranche B Same as Senior Secured Notes Same as Term Loan – tranche A ABL Same as Senior Secured Notes Australia: Boart Longyear Australia Pty Limited, Boart Longyear Limited and Votraint No. 1609 Pty Limited Canada: Boart Longyear Canada, Boart Longyear Manufacturing Canada Ltd. And Longyear Canada ULC Chile: Boart Longyear Chile Limitada and Boart Longyear Commercializadora Limitada Peru: Boart Longyear S.A.C. Switzerland: Boart Longyear Suisse Sarl United States: Boart Longyear Company, Boart Longyear Manufacturing and Distribution, Inc.,Longyear Holdings, Inc., BLY IP Inc. and Longyear TM, Inc., BL DDL NY Holdings Inc. Backstop ABL Same as Senior Secured Notes Same as ABL Term Loan Tranche A Same as Senior Secured Notes Senior Unsecured Notes Same as Senior Secured Notes Australia: Boart Longyear Australia Pty Limited, Boart Longyear Limited, Votraint No. 1609 Pty Limited, BL DDL Holdings Pty. Ltd, and BL DDL II Holdings. Ltd, Canada: Boart Longyear Canada, Boart Longyear Manufacturing Canada Ltd. And Longyear Canada ULC, BL Canada DDL Inc., and BL Canada Holdings Inc. Chile: Boart Longyear Chile Limitada and Boart Longyear Commercializadora Limitada Peru: Boart Longyear S.A.C. Switzerland: Boart Longyear Suisse Sarl United States: Boart Longyear Company, Boart Longyear Manufacturing and Distribution, Inc.,Longyear Holdings, Inc., BLY IP Inc. and Longyear TM, Inc., BL DDL NY Holdings Inc. Australia: Boart Longyear Australia Pty Limited, Boart Longyear Limited and Votraint No. 1609 Pty Limited Canada: Boart Longyear Canada, Boart Longyear Manufacturing Canada Ltd. And Longyear Canada ULC Chile: Boart Longyear Chile Limitada and Boart Longyear Commercializadora Limitada Peru: Boart Longyear S.A.C. Switzerland: Boart Longyear Suisse Sarl United States: Boart Longyear Company, Boart Longyear Manufacturing and Distribution, Inc.,Longyear Holdings, Inc., and Longyear TM, Inc. _______________________________________________________________________________________ 112 116 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 22. PROVISIONS A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Employee benefits Liabilities for employee benefits for wages, salaries, annual leave, long service leave, and sick leave represent present obligations resulting from employees’ services provided and are calculated at discounted amounts based on rates that the Company expects to pay as at reporting date, including costs such as workers’ compensation insurance and payroll tax, when it is probable that settlement will be required and they are capable of being reliably measured. Liabilities recognised in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the Company in respect of services provided by employees up to reporting date. Non-accumulating non-monetary benefits, such as medical care, housing, cars and free or subsidised goods and services, are expensed based on the net marginal cost to the Company as the benefits are provided to the employees. Provisions are recognised for amounts expected to be paid under short-term cash bonus or profit-sharing plans if the Company has present legal or constructive obligations to pay these amounts as a result of past service provided by employees and the obligations can be reliably estimated. Warranties The Company maintains warranty reserves for products it manufactures. A provision is recognised when the following conditions are met: 1) the Company has an obligation as a result of an implied or contractual warranty; 2) it is probable that an outflow of resources will be required to settle the warranty claims; and 3) the amount of the claims can be reliably estimated. Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived from a contract are less than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. The following table reflects the provision balances: Current Employee benefits Restructuring and termination costs Warranty Onerous leases Non-current Employee benefits Pension and post-retirement benefits (Note 23) Onerous leases 2017 US$'000 2016 US$'000 8,995 7,644 1,299 1,513 19,451 4,607 12,601 1,512 18,720 38,171 9,935 590 885 1,604 13,014 1,559 22,435 1,947 25,941 38,955 _______________________________________________________________________________________ 113 117 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 23. PENSION AND POST-RETIREMENT BENEFITS Defined contribution pension plans and post-retirement benefits A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The amount recognised as an expense in profit or loss in respect of pension costs and other post-retirement benefits is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the statement of financial position. Defined contribution plans Pension costs represent actual contributions paid or payable by the Company to the various plans. At 31 December 2017, and 2016, there were no significant outstanding/prepaid contributions. Company contributions to these plans were $5.8 million and $6.5 million for the years ended 31 December 2017 and 2016, respectively. The assets of the defined contribution plans are held separately in independently administered funds. The charge in respect of these plans is calculated on the basis of contributions payable by the Company during the fiscal year. Defined Benefit Pension Plans The Company’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any fund assets is deducted. The discount rate is the yield at the balance sheet date on high quality corporate bonds that have maturity dates approximating the terms of the Company’s defined benefit obligations. The calculation is performed by a qualified actuary using the projected unit credit method. Actuarial gains and losses arising from experience adjustments and related changes in actuarial assumptions are charged or credited to retained earnings. The Company provides defined contribution and defined benefit pension plans for the majority of its employees. It also provides post-retirement medical arrangements in North America. The Company’s accounting policy for defined benefit pension plans requires management to make annual estimates and assumptions about future returns on classes of assets, future remuneration changes, employee attrition rates, administration costs, changes in benefits, inflation rates, exchange rates, life expectancy and expected remaining periods of service of employees. In making these estimates and assumptions, management considers advice provided by external advisers, such as actuaries. Where actual experience differs to these estimates, actuarial gains and losses are recognised directly in equity. Full actuarial valuations of the defined benefit pension plans were performed as at various dates and updated to 31 December 2017 by qualified independent actuaries. The estimated market value of the assets of the funded pension plans was $211.1 million and $185.5 million at 31 December 2017, and 2016, respectively. The market value of assets was used to determine the funding level of the plans. The market value of the assets of the funded plans was sufficient to cover 90% in 2017 and 2016, of the benefits that had accrued to participants after allowing for expected increases in future earnings and pensions. Entities within the Company are paying contributions as required by statutory requirements and in accordance with local actuarial advice. The majority of the defined benefit pension plans are funded in accordance with minimum funding requirements by local regulators. The assets of these plans are held separately from those of the Company, in independently administered funds, in accordance with statutory requirements or local practice throughout the world. The majority of the defined benefit pension plans are closed to new participants. Under the projected unit credit method, service cost will increase as the participant ages until retirement when it goes to zero. In addition, changes to the discount rate can increase or decrease service cost. _______________________________________________________________________________________ 114 118 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 23. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) Defined Benefit Pension Plans (Continued) Company contributions to these plans were $5.8 million and $6.8 million during the years ended 31 December 2017 and 2016, respectively. Contributions in 2018 are expected to be $10.4 million. The principal assumptions used to determine the actuarial present value of benefit obligations and pension costs are detailed below (shown in weighted averages): Discount rates Expected Average Rate Increases: Salaries Pensions in payment Healthcare costs (initial) Healthcare costs (ultimate) 2017 2016 North America 3.5% Europe 1.6% North America 4.0% Europe 1.4% 3.5% - 5.0% 5.0% 3.0% 1.5% - - 3.5% - 5.0% 5.0% 3.0% 1.5% - - Amounts recognised in profit or loss in respect of these defined benefit plans are as follows: 2017 Post- retirement Pension Plan medical Plan US$'000 1,226 665 - US$'000 - 11 - Total US$'000 1,226 675 - 2016 Post- retirement medical Plan US$'000 - 13 - Total US$'000 1,173 682 (518) Pension Plan US$'000 1,173 669 (518) 1,891 11 1,901 1,324 13 1,337 Current service cost Net interest expense Past service cost Total charge to profit and loss account For the financial years ended 31 December 2017 and 2016, charges of approximately $1.6 million and $1.1 million, respectively, have been included in cost of goods sold and the remainder in general and administrative or sales and marketing expenses. _______________________________________________________________________________________ 115 119 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 23. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) Changes in the present value of the defined benefit obligations were as follows: Opening defined benefit obligation Current service cost Interest cost Actuarial gains arising from demographic assumptions Actuarial losses arising from financial assumptions Past service cost Exchange differences on foreign plans Benefits paid Closing defined benefit obligation 2017 Post- retirement Medical Plan US$'000 324 - 11 Pension Plan US$'000 207,653 1,226 6,487 Total US$'000 207,977 1,226 6,498 2016 Post- retirement Medical Plan US$'000 356 - 13 Pension Plan US$'000 201,488 1,173 7,049 Total US$'000 201,844 1,173 7,062 (1,197) - (1,197) (802) - (802) 3,983 - 15,910 (10,791) 223,271 115 - 28 (61) 417 4,098 - 15,938 (10,852) 223,688 10,925 (518) (1,145) (10,517) 207,653 5 - 10 (60) 324 10,930 (518) (1,135) (10,577) 207,977 Changes in the fair value of the plan assets were as follows: Opening fair value plan of assets Expected return on plan assets Actuarial gains arising from financial assumptions Administrative expenses paid from the trust Exchange differences on foreign plans Contributions from the employer Benefits paid Closing fair value of plan assets 2017 Post- retirement Medical Plan US$'000 - - - - 61 (61) - Total US$'000 185,542 5,823 10,536 (1,141) 15,341 5,838 (10,852) 211,087 Pension Plan US$'000 180,529 6,380 4,079 (1,028) (729) 6,828 (10,517) 185,542 2016 Post- retirement Medical Plan US$'000 - - - - - 60 (60) - Total US$'000 180,529 6,380 4,079 (1,028) (729) 6,888 (10,577) 185,542 Pension Plan US$'000 185,542 5,823 10,536 (1,141) 15,341 5,777 (10,791) 211,087 Assumed healthcare cost trend rates impact the amounts recognised in profit or loss. A one percentage point change in assumed healthcare cost trend rates would have the following effects: One percentage point increase Effect on the aggregate of the service cost and interest cost Effect on accumulated post-employment benefit obligation One percentage point decrease Effect on the aggregate of the service cost and interest cost Effect on accumulated post-employment benefit obligation 2017 US$'000 2016 US$'000 - 2 - (2) - 7 - (7) _______________________________________________________________________________________ 116 120 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 24. ISSUED CAPITAL Ordinary shares Share capital 2017 Shares '000 US$'000 2016 Shares '000 US$'000 Ordinary shares, fully paid 26,289,795 1,463,167 940,585 1,204,291 Movements in ordinary shares Balance at beginning of year Issued to Directors Issued under the recapitalisation Conversion of perferred shares Vesting of LTIP rights Cancellation of LTIP rights Purchase of shares for LTIP 940,585 12,758 24,895,916 434,002 6,534 - - 1,204,291 485 194,873 59,507 1,642 2,369 - Balance at end of the year 26,289,795 1,463,167 Total shares outstanding Shares held in trust Balance at end of the year 26,289,795 1,463,167 - - 26,289,795 1,463,167 929,062 11,243 - - 2,209 - (1,929) 940,585 942,108 (1,523) 940,585 Convertible Preference shares Preferred shares, fully paid Conversion of perferred shares Balance at end of the year 2017 Shares '000 US$'000 2016 Shares '000 434,002 (434,002) - 59,507 (59,507) 434,002 - - 434,002 1,202,924 717 - - 650 - - 1,204,291 1,204,622 (331) 1,204,291 US$'000 59,507 - 59,507 Issued Warrants Warrants issued but not exercised Balance at end of the year Total ordinary, convertible preference shares and warrants Impact of the recapitalisation 2017 Warrants '000 US$'000 2016 Warrants '000 US$'000 731,082 731,082 5,591 5,591 - - - - 1,468,758 1,263,798 Accounting for the equity instruments issued under the Recapitalisation requires the determination of fair value. As a result of the financial position of the Group at the time of the Recapitalisation, and the dilutionary impact of the number of equity instruments issued there was a wide range of possible fair value estimates requiring a significant level of judgement. Further the probabilities of the various estimates could not be reasonably assessed and it was concluded that the fair value of the equity could not be reliably measured and was recorded based on the net reduction in the recorded value of the loans and borrowings pre and post the Recapitalisation. Transaction costs on the issue of equity instruments Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. _______________________________________________________________________________________ 117 121 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 25. DIVIDENDS No dividend has been determined for any of the half-years ended 30 June 2017, 31 December 2017, 30 June 2016 or 31 December 2016. There are no franking credits available for the years ended 31 December 2017 or 2016. 26. COMMITMENTS FOR EXPENDITURE The Company has a number of continuing operational and financial commitments in the normal course of business. Capital commitments Purchase commitments for capital expenditures 3,298 2,030 2017 US$'000 2016 US$'000 Non-cancellable future operating lease commitments as at 31 December 2017 and 2016 consist of the following: Payments due within: 1 year 2 to 5 years After 5 years 31 December 2017 31 December 2016 Land and buildings US$'000 Plant and equipment US$'000 Land and buildings US$'000 Plant and equipment US$'000 8,908 8,711 22,242 39,861 719 1,256 334 2,309 10,476 14,999 19,333 44,808 628 931 - 1,559 Description of operating leases The Company has operating leases for land, buildings, plant and equipment with the following lease terms: • • • 1 – 20 years for land and buildings with an average lease term of six years 1 – 8 years for machinery and equipment with an average lease term of five years 1 – 11 years for all other property with an average lease term of five years The Company’s property operating leases generally contain escalation clauses, which are fixed increases generally between 3% and 8%, or increase subject to a national index. The Company does not have any significant purchase options. Contingent rental payments exist for certain pieces of equipment and are not significant compared with total rental payments. These are based on excess wear and tear and excess use. _______________________________________________________________________________________ 118 122 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 27. CONTINGENT LIABILITIES The recognition of provisions for legal disputes is subject to a significant degree of judgment. Provisions are established when (a) the Company has a present legal or constructive obligation as a result of past events, (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) the amount of that outflow has been reliably estimated. Letters of credit Standby letters of credit primarily issued in support of commitments or other obligations as at 31 December 2017 are as follows: Subsidiary Australia Australia Australia United States United States United States Purpose Secure credit facility Secure a facility rental Secure a facility rental Secure workers compensation program Secure a performance bond Secure insurance program Expiration Date April 2018 August 2018 September 2018 January 2018 June 2018 August 2018 Amount US $'000 195 579 619 100 11,000 500 12,993 Financial guarantee contract liabilities are measured initially at their fair values and subsequently at the higher of the amount recognised as a provision or the amount initially recognised less cumulative amortisation in accordance with the revenue recognition policies described in Note 3. A summary of the maturity of issued letters of credit is as follows: Less than 1 year Guarantees 2017 US$'000 2016 US$'000 12,993 11,872 The subsidiaries of the Company provide guarantees within the normal course of business which includes payment guarantees to cover import duties, taxes, performance and completion of contracts. In addition, the Parent and certain subsidiaries are guarantors on the Company’s loans and borrowings. See Note 21. Legal contingencies The Company is subject to certain routine legal proceedings that arise in the normal course of its business. Management believes that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect the Company’s operations, liquidity, or financial position taken as a whole. However, the ultimate outcome of any litigation is uncertain, and unfavourable outcomes could have a material adverse impact. Tax and customs audits The Company is subject to certain tax and customs audits that arise in the normal course of its business. Management believes that the ultimate amount of liability, if any, for any pending assessments (either alone or combined) would not materially affect the Company’s operations, liquidity, or financial position taken as a whole. However, the ultimate outcome of these audits is uncertain and unfavourable outcomes could have a material adverse impact. See additional disclosure in Note 11. _______________________________________________________________________________________ 119 123 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 27. CONTINGENT LIABILITIES (CONTINUED) Other contingencies Other contingent liabilities as at 31 December 2017 and 2016 consist of the following: Contingent liabilities Guarantees/counter-guarantees to outside parties 2,717 4,495 2017 US$'000 2016 US$'000 Except as detailed in the following table, the carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Company’s maximum exposure to credit risk without taking account of the value of any collateral obtained. See Note 15. Financial assets and other credit exposure Performance guarantees provided, including letters of credit Maximum credit risk 2017 2016 US$'000 US$'000 15,710 16,367 _______________________________________________________________________________________ 120 124 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 28. PARENT ENTITY DISCLOSURES Financial position Assets Current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net Assets Equity Issued capital Reserves Accumulated losses Total equity Financial performance Loss for the year Total comprehensive loss 2017 US$'000 2016 US$'000 465,648 465,648 311,312 311,312 64,525 310,491 375,016 90,632 56,026 254,515 310,541 771 3,219,218 4,523 (3,133,109) 90,632 3,015,893 11,690 (3,026,812) 771 2017 US$'000 (128,028) (128,028) 2016 US$'000 (155,483) (155,483) During the year ended 31 December 2017 there was no provision recorded against intercompany accounts (31 December 2016: $253.1 million). This provision has no impact on the consolidated financial statements. Guarantees entered into by the parent entity in relation to debts of its subsidiaries Other guarantees are described in Note 27. Contingent liabilities As at 31 December 2017 and 2016, Boart Longyear Limited did not have any contingent liabilities. Contractual obligations As at 31 December 2017 and 2016, Boart Longyear Limited did not have any contractual obligations. Guarantees entered into by the parent entity in relation to debts of its subsidiaries The Parent has entered into agreements with the Canada Revenue Agency and Ministry of Finance for the province of Ontario to guarantee the payment of all amounts finally determined to be due and payable by its Canadian affiliates in respect of contested tax assessments for the tax years from 2007 through 2012. See Note 11. Other guarantees are described in Note 27. _______________________________________________________________________________________ 121 125 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 29. COMPANY SUBSIDIARIES The Company’s percentage ownership of the principal subsidiaries are as follows: Subsidiaries A.C.N. 066 301 531 Pty Ltd1 Aqua Drilling & Grouting Pty Ltd.2 BL Canada DDL Inc.¹ BL Canada Holdings Inc.¹ BL DDL Holdings Pty Ltd BL DDL II Holdings Pty Ltd BL DDL NY Holdings Inc. BL DDL US Holdings Inc.¹ BLI Zambia Ltd. BLY Cote d'Ivoire S.A. BLY EMEA UK Holdings Ltd. BLY Gabon S.A. BLY Ghana Limited BLY Guinea S.A.2 BLY IP Inc. BLY Madagascar S.A. BLY Mali S.A. BLY Mexico Servicios S.A. de C.V.1 BLY Senegal S.A. BLY Sierra Leone Ltd. Boart Longyear (Cambodia) Ltd.² Boart Longyear (D.R.C.) S.A. Boart Longyear (NZ) Limited Boart Longyear (Vic) No. 1 Pty Ltd Boart Longyear (Vic) No. 2 Pty Ltd Boart Longyear Alberta Limited Boart Longyear Argentina S.A. Boart Longyear Australia Holdings Pty Limited Boart Longyear Australia Pty Ltd Boart Longyear Bermuda Limited¹ Boart Longyear Burkina Faso Sarl Boart Longyear B.V. Boart Longyear Canada Boart Longyear Chile Limitada Boart Longyear Colombia S.A.S. Boart Longyear Comercializadora Limitada¹ Boart Longyear Company Boart Longyear Consolidated Holdings, Inc. Boart Longyear de Mexico, S.A. de C.V. BLY Drilling Services and Products Mexico, S.A. de C.V.2 Boart Longyear Drilling Products (Wuxi) Co., Ltd. Boart Longyear Drilling Services KZ LLP Boart Longyear Eritrea Ltd. Boart Longyear Global Holdco, Inc Boart Longyear GmbH & Co., KG Boart Longyear Holdings (Thailand) Co., Ltd. Boart Longyear International B.V. Boart Longyear International Holdings, Inc. Boart Longyear Investments Pty Ltd Boart Longyear Liberia Corporation Boart Longyear Limitada Boart Longyear Limited Boart Longyear Limited Country of incorporation Business 31 Dec 2017 31 Dec 2016 Australia Dormant Australia Dormant Canada Holding Company Canada Holding Company Australia Holding Company Australia Holding Company USA Holding Company USA Holding Company Zambia Drilling Services Ivory Coast Drilling Services United Kingdom Holding Company Gabon Drilling Services Ghana Drilling Services Guinea Dormant USA Holding Company Madagascar Drilling Services Mali Drilling Services Mexico Dormant Senegal Drilling Services Sierra Leone Drilling Services Drilling Services Cambodia Dem. Rep. of Congo Drilling Services Drilling Services New Zealand Holding Company Australia Holding Company Australia Holding Company Canada Drilling Services Argentina Holding Company Australia Drilling Services Australia Holding Company Bermuda Drilling Services Burkina Faso Drilling Products Netherlands Drilling Products and Services Canada Drilling Products and Services Chile Drilling Services Colombia Chile Drilling Products Drilling Products and Services USA Holding Company USA Drilling Services Mexico Dormant Mexico Drilling Products and Services China Drilling Services Kazakhstan Drilling Services Eritrea Holding Company USA Drilling Products and Services Germany Drilling Services Thailand Holding Company Netherlands Holding Company USA Holding Company Australia Drilling Services Liberia Drilling Products Brazil Drilling Products Ireland Drilling Services Thailand - 100 - - 100 100 100 - 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 _______________________________________________________________________________________ 122 126 Boart Longyear 2017 Annual Report Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 29. COMPANY SUBSIDIARIES (CONTINUED) Subsidiaries Boart Longyear LLC Boart Longyear Management Pty Ltd Boart Longyear Manufacturing Canada Ltd. Boart Longyear Manufacturing and Distribution Inc. Boart Longyear Netherlands BV Boart Longyear Poland Spolka Z.o.o. Boart Longyear Products KZ LLP Boart Longyear RUS Boart Longyear S.A.C. Boart Longyear Saudi Arabia LLC2 Boart Longyear Sole Co., Limited Boart Longyear Suisse Sàrl Boart Longyear Ventures Inc. Boart Longyear Vermogensverwaltung GmbH Boart Longyear Zambia Limited Cooperatief Longyear Holdings UA Dongray Industrial Limited2 Drillcorp Pty Ltd² Geoserv Pesquisas Geologicas S.A. Grimwood Davies Pty Ltd² Inavel S.A. Longyear Canada, ULC Longyear Global Holdings, Inc. Longyear Holdings New Zealand, Ltd2 Longyear Holdings, Inc. Longyear South Africa (Pty) Ltd Longyear TM, Inc. North West Drilling Pty Limited P.T. Boart Longyear Patagonia Drill Mining Services S.A. Portezuelo S.A. Prosonic Corporation2 Resources Services Holdco, Inc Votraint No. 1609 Pty Ltd ‘(1) This entity was merged, liquidated or dissolved in 2017. ‘(2) This entity is currently in liquidation status. Country of incorporation Russia Federation Australia Canada USA Netherlands Poland Kazakhstan Russia Federation Peru Saudi Arabia Laos Switzerland Canada Germany Zambia Netherlands United Kingdom Australia Brazil Australia Uruguay Canada USA New Zealand USA South Africa USA Australia Indonesia Argentina Paraguay USA USA Australia Business 31 Dec 2017 31 Dec 2016 Drilling Products Holding Company Drilling Products Drilling Products Holding Company Drilling Products and Services Drilling Products Drilling Services Drilling Products and Services Drilling Services Drilling Services Holding Company Holding Company Holding Company Drilling Products Holding Company Dormant Drilling Services Drilling Services Drilling Services Drilling Services Drilling Products Holding Company Dormant Holding Company Drilling Products and Services Holding Company Dormant Drilling Services Drilling Services Drilling Services Dormant Holding Company Drilling Services 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 _______________________________________________________________________________________ 123 127 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 30. RELATED PARTY TRANSACTIONS Transactions with key management personnel (i) Key management personnel compensation Details of key management personnel compensation are disclosed in Note 9. (ii) Other transactions with key management personnel of the Company None. (iii) During the year the Company incurred the following interest expenses associated with the relevant parties and corresponding debt facilities: Centerbridge Partners, L.P. and entities related to Centerbridge Partners, L.P. – Term Loans A and B of $11.0 million and $13.2 million, respectively from 1 January 2017 to 31 December 2017. Ares Capital, Ltd. and entities related to Ares Capital, Ltd. – Sr. Unsecured Notes, $72.8 thousand, from 1 September 2017 to 31 December 2017 Ares Capital, Ltd. and entities related to Ares Capital, Ltd. – Sr. Secured Notes, $101.4 thousand, from 1 September 2017 to 31 December 2017 Ascribe Capital, LLC and entities related to Ascribe Capital, LLC – Sr. Unsecured Notes, $202.2 thousand, from 1 September 2017 to 31 December 2017 Ascribe Capital, LLC and entities related to Ascribe Capital, LLC – Sr. Secured Notes, $2.0 million, from 1 September 2017 to 31 December 2017 (iv) Amounts owing (principal and accreted interest) at 31 December 2017: - Centerbridge Partners, L.P. and entities related to Centerbridge Partners, L.P.: $264.8 million - Ares Capital, Ltd. and entities related to Ares Capital, Ltd. (Sr. Unsecured/Secured Notes): - Ascribe Capital, LLC and entities related to Ascribe Capital, LLC (Sr. Unsecured/Secured Notes): $17.3 million $93.8 million _______________________________________________________________________________________ 124 128 Boart Longyear 2017 Annual ReportNotes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 31. CASH AND CASH EQUIVALENTS Included in the cash balance at 31 December 2017 is $5.8 million of restricted cash and at 31 December 2016 $6.9 million of restricted cash. The Company cannot access these cash balances until certain conditions are met. These conditions pertain to the Company’s ABL facility as well as restrictions to secure facility leases. 32. NON-CASH TRANSACTIONS During the current year, the Company entered into the following non-cash financing activities, which are not reflected in the consolidated statement of cash flows: • • • $53.0 million of non-cash interest expense; $22.9 million of capitalised interest on the Sr. Unsecured and Sr. Secured Notes; and $196.0 million of reduction in the principal amount of the Sr. Unsecured Notes. 33. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS The Company has adopted all of the new and revised standards and interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for the current annual reporting period. These standards and interpretations are set forth throughout the notes to the financial statements. The adoption of each standard individually did not have a significant impact on the Company’s financial results or consolidated statement of financial position. Standards and Interpretations issued not yet effective The accounting standards and AASB Interpretations that will be applicable to the Company and may have an effect in future reporting periods are detailed below. Apart from these standards and interpretations, management has considered other accounting standards that will be applicable in future periods, however they have been considered insignificant to the Company. • AASB 15 Revenue from Contracts with Customers The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. An entity recognises revenue in accordance with that core principle by applying the following steps: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligation in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation The standard permits either a full restrospective or a modified restrospective approach for the adoption. Management has not yet determined the effects of applying the new standard on the Company’s financial statements. The standard is mandatory for financial years commencing on or after 1 January 2018. • AASB 16 Leases IFRS 16 was issued in January 2016. For lessees it will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change. _______________________________________________________________________________________ 125 129 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2017 BOART LONGYEAR LIMITED 33. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (CONTINUED) The standard will affect primarily the accounting for the Company’s operating leases. As at the reporting date, the Company has non-cancellable operating lease commitments of $42.2 million (see note 26). The Company has not yet assess what adjustments, if any, are necessary because of the requirement to recognise the Right-of-use asset and lease liability including consideration of other related matters including a change in definition of the lease term and the treatment of variable lease payments and of extension and termination options. It is therefore not yet possible to estimate the amount of right-of-use assets and lease liabilities that will have to be recognised on adoption of the new standard and how this may affect the Company’s profit or loss and classification of cash flows going forward. Mandatory for financial years commencing 1 January 2019. At this stage, the Company does not intend to adopt the standard before its effective date. • AASB 9 Financial Instruments AASB 9 contains accounting requirement for financial instruments, replacing AASB 139 and will be effective 1 January 2018. The standard: a. Contains a simpler model for classification and measurement of financial assets; b. A single, forward looking ‘expected loss’ impairment model that will require more timely recognition of expected credit losses; c. A substantially reformed approach to hedge accounting including changes to hedge effectiveness testing, treatment of hedging costs, risk components that can be hedged and disclosures. Management has not yet determined the impact of this standard on the financial statements. 34. SUBSEQUENT EVENTS On 26 January 2018 the Company announced a new Management Incentive Plan (MIP) that has been implemented as of 1 January 2018. The MIP has been created to give senior leaders an opportunity to share in the growth and value of Boart Longyear’s business success. This plan is replacing the LTIP and the Retention Incentive Grant Agreements (RIGA). The new MIP is a private equity based long-term incentive plan, which is similar in design to a stock option plan, in that it allows participants to share in the gain of the Company’s value over time. Specifically, the MIP offers two ways to achieve payment: 1) time vesting and 2) performance thresholds. The time vesting portion represents 33.3% of the plan, spread over a 5-year time window. The performance portion of the MIP is based on the Company’s improvement in Total Enterprise Value (TEV), which has been set at a baseline of $650.0 million. There are two performance vesting criteria; one set at $900.0 million TEV, representing another 33.3% and the other set at $1.1 billion TEV, the final 33.3%. Awards are denominated in MIP Units, which represent proportional interest in the gain in opportunity value. These units will be shared amongst a pool of the Company’s senior leaders. Vested MIP Units will be paid in either cash or shares at the discretion of the Board of Directors. LTIP accruals of Share Rights and Cash Rights will cease as of 31 December 2017. Therefore, LTIP Share Rights and Cash Rights will be calculated on a pro-rata basis on the applicable grant date through 31 December 2017. The pro-rated LTIP cash and shares will be paid out on the LTIP Vesting Date, in compliance with the continued employment condition provisions and other applicable provisions in the LTIP agreement. Likewise, the Target Retention Grant Value of the RIGA will be calculated on a pro-rata basis on the date of grant through 31 December 2017. The pro-rata amount will be paid out to RIGA holders employed on their Vesting Date set forth in their RIGA agreement (subject to the existing RIGA provisions). _______________________________________________________________________________________ 126 130 Boart Longyear 2017 Annual ReportSUPPLEMENTARY INFORMATION ADDITIONAL INFORMATION as at 23 March 2018. Substantial shareholders The substantial shareholders as disclosed to the Company in substantial holders’ notices are: Holder Number of Ordinary Shares in which relevant interest held Centerbridge Partners group of Companies (as set out in Form 604: Notice of change of interests of substantial holder lodged 17 October 2017) Ascribe group of Companies (as set out in Form 604: Notice of change of interests of substantial holder lodged 27 September 2017) Ares Management group of Companies (as set out in Form 604: Notice of change of interests of substantial holder lodged 9 January 2018) 13,368,237,284 5,497,572,395 4,341,739,051 (a) Ordinary share capital There are 26,289,795,216 fully paid ordinary shares on issue, held by 7,613 individual shareholders. Each ordinary shareholder present at a general meeting (whether in person or by proxy or representative) is entitled to one vote on a show of hands or, on a poll, one vote for each fully paid ordinary share held. (b) Share rights and share options There are 27,828,976 unquoted share options held by 15 individual option holders. The share options do not carry rights to vote. There are 602,739,424 quoted share options that are publically traded on the ASX under reference “BLYO”. The share options do not carry rights to vote. Distribution of holders of equity securities Range Holders - Fully Paid Ordinary Shares 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total 1,111 1,490 1,048 1,917 2,047 7,613 The number of security investors holding less than a marketable parcel of 50,000 securities ($0.01 on 23/03/2018) is 4,847 and they hold 40,876,304 securities. 131 SUPPLEMENTARY INFORMATION TOP 20 HOLDERS No. Holder Fully Paid Ordinary Shares Percent of Issued Capital Held 1 2 3 4 5 6 7 8 9 CCP II DUTCH ACQUISITION - E2, B.V. ASCRIBE II INVESTMENTS LLC HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED CCP CREDIT SC II DUTCH ACQUISITION - E, B.V. J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED CS THIRD NOMINEES PTY LIMITED PACIFIC CUSTODIANS PTY LTD RUSSELL INVESTMENTS 10 HISHENK PTY LTD 11 MR JIMMY YIP 12 KEONG LIM PTY LIMITED 13 MS LINLIN LI 14 MERRILL LYNCH (AUSTRALIA) NOMINEES LIMITED 15 RIADIS HOLDINGS PTY LTD 16 SIGFRIDO - SCA SICAV - SIF 17 SNOWSIDE PTY LTD 18 CLASSIC ROOFING PTY LIMITED 19 MR MARK ANTHONY LEE 20 ALCESTIS INVESTMENT SICAV 20 DUNCORMICK - AG GLOBAL SICAV 8,833,932,993 5,490,395,109 4,689,925,565 4,069,802,685 789,138,568 447,130,623 167,711,045 61,306,706 60,733,162 50,000,000 45,665,797 41,418,211 26,000,000 23,121,131 22,000,000 18,190,630 17,460,439 17,000,000 16,872,398 14,552,504 14,552,504 33.60 20.88 17.84 15.48 3.00 1.70 0.64 0.23 0.23 0.19 0.17 0.16 0.10 0.09 0.08 0.07 0.07 0.06 0.06 0.06 0.06 TOTAL FOR TOP 20 24,916,910,070 94.78 132 Boart Longyear 2017 Annual ReportListing Boart Longyear Limited is listed on the Australian Securities Exchange under the symbol ‘BLY’ Share Registry Link Market Services Limited Level 12, 680 George Street Sydney, New South Wales 2000 Tel: +61 1800 781 633 Website www.boartlongyear.com CORPORATE INFORMATION Headquarters Global Headquarters 2570 West 1700 South Salt Lake City, Utah 84104 United States of America Tel: +1 801 972 6430 Fax: +1 801 977 3374 Registered Office 26 Butler Boulevard Burbridge Business Park Adelaide Airport, SA 5950 Tel: +61 8 8375 8375 Fax: +61 8 8375 8497 Auditors Deloitte Touche Tohmatsu Company Secretaries Robert Closner Phil Mackey Shareholder Enquiries Boart Longyear Investor Relations 2570 West 1700 South Salt Lake City, Utah 84104 United States of America Australia: +61 8 8375 8300 Others: +1 801 952 8343 Email: ir@boartlongyear.com 

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