Boart Longyear Group
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 BOART LONGYEAR 2018 ANNUAL REPORTCONTENTS 2018 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 I II IV 1 3 5 19 33 37 41 46 47 Supplementary Information Corporate Information 105 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 de-watering, 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 and Adjusted EBIT are non IFRS measures and are used internally by management to assess the performance of the business. Cash from Operations excludes interest and tax. BOART LONGYEAR 2018 ANNUAL REPORT BOART LONGYEAR 2018 ANNUAL REPORT Copyright © 2019 Boart Longyear. All rights reserved. 2018 OVERVIEW 2018 OVERVIEW 2018 2017 2016 Revenue US$770m Adjusted Gross Margin US$142m Adjusted EBITDA US$81m Gross Margin US$131m EBITDA US$54m Net Profit After Tax US$-44m 770 739 642 131 113 111 142 86 89 54 81 -44 -37 43 2 32 -150 -157 Cash from Operations US$24m Number of Employees 4,637 Safety TCIR 1.90 Safety LTIR 0.10 -40 24 -1 4,637 4,604 4,337 1.90 1.62 1.41 0.10 0.11 0.22 Drilling Services Revenue US$534m Drilling Services EBITDA US$83m Products Revenue US$237m Products EBITDA US$31m 534 501 448 83 69 52 237 239 195 31 11 13 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 30% 23% 18% 15% 7% 4% 3% USA Asia Pacific Canada EMEA Latin America 27% 22% 19% 18% 14% Development (Near Mine/Brownfield) Production (In-Pit) 59% 21% Exploration (Greenfield) 13% Non-Mining 7% Gold Copper Non-Mining Water Nickel Energy Other Metals Iron Other 53% 21% 7% 5% 5% 4% 3% 2% BOART LONGYEAR 2018 ANNUAL REPORT I Dear Shareholders, Your Board is pleased to share with you Boart Longyear’s financial results for 2018. The company’s profitability increased by 87% over 2017 and Jeff Olsen, Boart Longyear’s CEO, will fill you in on the details in his report. 2018 began with great promise with prices for gold, copper, and iron ore increasing and giving a renewed confidence in the mining industry. However, the second half of the year saw the increase in global trade instability including the introduction of new tariffs, and a general increase in the cost of raw materials. Despite the uncertainty created by tariffs, our expectation is that the short- and medium-term business environment is going to be good for Boart Longyear. A five-year deficit in drilling left mining companies with insufficient reserves. This played a major factor in the recent round of gold company mergers. Mining balance sheets are also in good shape, with companies looking for places to put cash. This bodes well for the exploration business generally and Boart Longyear in particular. The overhang that Boart Longyear has had for more than five years is high debt levels. Uncertainty about our ability to pay back these debts, or the potential for dilutive equity offerings, have been detrimental to our share price. As we face the next few years, the combination of a good exploration environment and the strong improvement in results that T R O P E R S ’ N A M R A H C I II BOART LONGYEAR 2018 ANNUAL REPORT The good results we achieved this year were helped by stability in both management and the board. I continue to work with an experienced and excellent board of directors including Jeff Olsen (CEO), Kyle Cruz, Jason Ireland, James Kern, Gretchen McClain, Rob Smith, Richard Wallman, and Eric Waxman, and a strong Boart Longyear management team who are all committed to increasing value in your investment. Yours sincerely, Marcus Randolph Chairman management is delivering, provides a path to address our debt. We are now cash positive and both our revenues and our margins are steadily improving. As these results, and the ones to come, show that we will have the liquidity to strengthen our balance sheet, this should flow through to a strengthening market of our share price. We have also had good news on the technology front. For several years we have talked about Geologic Data Services (“GDS”) providing an ability to expand our business by delivering valuable data (assays, logging, orientation, etc). We have introduced several tools which have been well accepted by our customers, including a true “superstar” product – TruScan™. This tool provides immediate, on-site assay of drill core and is progressively moving into assaying chips from production drill holes. This is a new business for us, and we now have 12 TruScan units built and operational. Demand is high, the business is high margin, and we are adding more TruScan units as fast as we can. Our expectation is that the GDS results will start to materially impact financial results in the next 12-18 months. BOART LONGYEAR 2018 ANNUAL REPORT III Dear Shareholders, I’m pleased to report to you on our 2018 full-year results. Our management team and employees are proud of our significantly improved financial and operating performance during 2018. To highlight some of our achievements, I’d like to start first with safety. In 2018, we had the fewest number of lost time incidents for the company, resulting in a Lost-Time Incident Rate (LTIR) of 0.10 per 200,000 man work hours. This is really world class and is a factor often considered by mining companies when they choose service providers, so our safe track record continues to open doors. Increased volume coupled with improving our operating performance and continued focus on cost-saving initiatives have resulted in significantly increased profitability. Profitability (adjusted EBITDA) improved by US$38 million, which was an increase of 87% over 2017, and made for stronger volumes up 12.5% (adjusted for exited countries). Operating cash flow improved tremendously and was up US$58 million. Global exploration budgets still remain below 2014 levels, giving good reason to believe in continued improvement in the market. We are focused on operating efficiencies, with labor costs decreasing 2% as a percentage of revenue, despite increasing wages. We were also able to reduce inventory more than 5% and our global facility footprint decreased by 30%. While we will continue to watch cash, it is evident that the hard work is paying off. Watching the leading indicators in our industry, we continue to see gold as the commodity which drives approximately 50% of investment in exploration activities.* Recent news of large mergers and acquisitions in the gold sector continue to open up drilling opportunities as these companies look to improve the value of their investments and replenish reserves. Copper is improving, and so are most of the base metals commodities, representing opportunities for Boart Longyear to both provide expert services and state-of-the-art products. Although we are recognised as an industry leader, we know we need to continue innovating in a changing market. With an eye keenly focused on exploration potential, Boart Longyear continued to invest in advanced drilling techniques in 2018. As a priority we are providing new products and services that deliver time- sensitive and critical geological information to assist mining companies with their exploration Iv BOART LONGYEAR 2018 ANNUAL REPORT decisions. Our Geological Data Services (GDS) technologies, which include TruCore™, TruShot™, and TruScan™, were rolled out to more locations with wider acceptance in 2018 and enabled revenues to double over the year. We have also seen more product sales success in 2018, since introducing the full-line of Longyear™ diamond coring bits. Reports of successful field experiences from our own drilling services teams and customers helped drive Longyear bit sales up 70% in 2018. Our executive team, board, and employees are are committed to keeping the momentum going for 2019 by taking advantage of the growth potential in exploration. The results were good for 2018, but we still have a ways to go. We have redefined our Company’s strategy to be the drilling partner who builds our customers’ orebody knowledge, while continuing to be the best global drilling services and drilling products company. This all adds up to delivering more value to our customers and to our shareholders. Yours sincerely, Jeff Olsen President and CEO *Source: S&P Global Market Intelligence Report, as of January 31, 2019 T R O P E R S ’ O E C BOART LONGYEAR 2018 ANNUAL REPORT v BOART LONGYEAR 2018 ANNUAL REPORT T R O P E R L A C N A N I F I BOART LONGYEAR LIMITED A.B.N. 49 123 052 728 ANNUAL FINANCIAL REPORT YEAR ENDED 31 DECEMBER 2018 1 BOART LONGYEAR 2018 ANNUAL REPORT BOART LONGYEAR 2018 ANNUAL REPORT 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 3 5 19 33 37 38 41 46 47 48 49 50 52 105 BOART LONGYEAR 2018 ANNUAL REPORT 2 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 BOART LONGYEAR LIMITED ANNUAL REPORT 2018 DIRECTORS’ REPORT 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 2018 (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 Executive Chairman Kyle Cruz Non-executive Director Jason Ireland Non-executive Director James Kern1 Non-executive Director (appointed effective 20 February 2018) Gretchen McClain Non-executive Director Jeffrey Olsen Executive Director Robert Smith Non-executive Director Richard Wallman Non-executive Director Eric Waxman Non-executive Director For a summary of experience and qualifications for each Director, see the Board of Directors section on page 33 of this Report. COMPANY SECRETARIES Robert Closner Philip Mackey PRINCIPAL ACTIVITIES 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 129 years of drilling expertise, the Company believes its insignia and brand represent the gold standard in the global mineral drilling industry. (1) James Kern served as an alternate, non-executive director on behalf of Lawrence First from 29 September 2017 to 20 February 2018 at which time Mr. First resigned from the Board and Mr. Kern was appointed to fill the vacated Board position. __________________________________________________________________________________________ 3 3 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS During the second half of 2018 the Company completed a transaction to increase its position to a majority stake (51.7%) in Globaltech Corporation Pty Ltd. Boart Longyear and acted on its rights to convert debt to equity to increase the total ownership position. The continued investment in Globaltech builds upon the in-house knowledge tied to electronic instrumentation and data collection in the mineral exploration and mining industry. This is an intentional decision to further support the Company’s Geological Data Services strategy that is fully focused on developing digital technologies and services and delivering resource-defining information for mining clients. EVENTS SUBSEQUENT TO REPORTING DATE No subsequent events. DIVIDENDS No dividends have been paid during the financial year. __________________________________________________________________________________________ 4 BOART LONGYEAR 2018 ANNUAL REPORT 4 Boart Longyear Limited Annual Report 2018 REVIEW OF OPERATIONS 1 1. Safety Performance, Market Conditions and Strategies 1.1 Overview 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 any point in the mining cycle. Our successes include the LF160 surface coring drill paired with our Freedom Loader which has set a new benchmark in productivity and hands-free rod handling. Launched in the second half of 2017, our patented Longyear™ coloured diamond bits continue to show improved productivity by lasting longer and cutting faster. Commercial launch of the new XQ™ coring rod continues globally, featuring a greater depth capacity than the RQ™ rod, and faster, easier joint make/breaks for higher productivity. TruCore™ core orientation tools continue to expand geographically and are available globally. The TruShot™ magnetic survey instrument, the second in a future suite of tools, was launched in the first half of 2018 and we are now using our TruScanTM geological sample field screening technology at mine sites with several mining customers. These 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. As at 31 December 2018 cash flows from operating activities was $3.7 million. This represents an improvement of $57.7 million over 2017 cash flows from operating activities of negative $54.0 million. This significant improvement was achieved through continued discipline on cost control and capital management, focused cost reductions, productivity enhancements and working capital management. 1.2 Safety Performance Boart Longyear strives to continuously improve safety performance each year. The Company is driving culture and consistency across the globe though new systems and programs designed to focus on the Company’s critical risks, the simplification of field standards, and through system based critical control verification audits. For the year ending 31 December 2018, the Company performance on key indicators includes a Total Case Incident Rate (TCIR) of 1.90 and Lost Time Injury Rate (LTIR) of 0.10, compared to corresponding rates of 1.62 and 0.22 in 2017. Both TCIR and LTIR are rates calculated based on 200,000 hours worked. During this period, our employees experienced 5 injuries resulting in lost work time, the lowest number of lost time injuries in the past 12 years. The Company’s TCIR increase from 2018 reflects, in part, the increase in exposure in drilling services activity and the deployment of increasing numbers of new employees into the operations. The majority of recordable injuries are low severity, including muscle pulls, muscle strains, and abrasions. The continued improvements made this year are primarily due to the focus shift from lagging indicators to proactive leading indicator programs. Boart Longyear’s key leading indicator programs focused on management interactions and hazard identification, new and existing employee training, non-conformance corrective action monitoring, and vehicle driver performance – monitored with a fleet of In-Vehicle Monitoring Systems (IVMS). The 2019 KPI programs now includes Critical Risk Management. These programs are measured and reviewed monthly by Boart Longyear’s Executive Committee who drive overall performance. These systems reflect our ongoing priority to identify and mitigate significant and critical risks. (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 5 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 1.3 Impact of Market Conditions Market conditions in 2018 have continued to improve with the mining companies looking for opportunities to invest to replenish their depleted ore reserves. Mining companies continue to project increasing exploration and drilling activity over the coming periods however we do see them continue to tightly control their exploration, development and capital expenditures. During 2018, drill rig utilisation improved slightly across the global operations. The Company continues to improve on terms and conditions in each contract as they mature. Increasing demand for our goods and services has allowed the Company to make small improvements on pricing conditions. We added new exploration drill rigs to the drilling services fleet around the world to meet the demand of expanding exploration budgets and we continue to evaluate opportunities where we can help our customers meet their exploration goals, utilising the latest technology improvements that support both safety and productivity enhancements. As a result of improving market conditions and continued focus on cost control and productivity improvements, the Company reported a statutory loss for the period ended 31 December 2018 of $43.5 million, which was a significant improvement over the prior year (2017: $150.0 million loss). 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, achieving and maintaining sustainable EBITDA-to-revenue margins, improving returns on capital through disciplined variable and fixed cost management and capital spending programs, and maintaining a rigorous focus on working capital, particularly inventory and accounts receivable. We are committed to driving long-term shareholder value by executing on several initiatives to improve our commercial practices in both our divisions and safety, productivity and profitability in our Global Drilling Services division, including through: 1. 2. 3. 4. focusing on operational efficiencies and productivity at the drill rig level; 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. Ultimately, our goal is to help our customers build their ore body knowledge. Through our focus on operational excellence, we will address the risks and challenges of the mining industry cycle while also preserving the significant upside that we may realise in our operations as market conditions improve, combined with a significantly improved cost structure and operating performance. We are also capitalising on longer-term growth opportunities through investment in technologies that will broaden our customer offerings. __________________________________________________________________________________________ 6 BOART LONGYEAR 2018 ANNUAL REPORT 6 Boart Longyear Limited Annual Report 2018 2 Financial and Operating Highlights For the year ended 31 December 2018 2017 US$ Millions US$ Millions $ Change % Change Key financial data Revenue NPAT(1) EBITDA(2) Adjusted EBITDA(2) Operating profit (loss) Profit (loss) from Trading Activities (3) Cash generated (used) in operations Net cash flows generated (used) in operating activities Capital expenditures (accrual) Capital expenditures (cash) 770.2 (43.5) 54.1 80.6 17.6 54.8 24.1 3.7 40.9 39.1 739.1 (150.0) (36.6) 43.1 (87.7) 10.0 (40.4) (54.0) 30.4 28.4 31.1 106.5 90.7 37.5 105.3 44.8 64.5 57.7 10.5 10.7 Weighted Average number of ordinary shares 26,290.8 9,225.9 Earnings per share (basic and diluted) (0.2) cents (1.6) cents 17,064.9 1.4 cents Average BLY rig utilisation Average Fleet size 46% 676 43% 720 3% (44) 4.2% 71.0% 247.8% 87.0% 120.1% 448.0% 159.7% 106.9% 34.5% 37.7% 185.0% 98.9% 7.0% -6.1% (1) NPAT is 'Net profit after tax'. (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 2018 of $770.2 million increased by 4.2%, or $31.1 million, compared to revenue for the prior year ended 31 December 2017 of $739.1 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 2018, 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 2017. __________________________________________________________________________________________ 7 7 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 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 2018 As Reported Significant Items Adjusted Balance As Reported 2017 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 profit (loss) 770.2 (639.1) 131.1 10.4 (80.6) (22.1) - (21.2) 17.6 - 11.2 11.2 - 14.5 0.8 (26.5) - - 770.2 (627.9) 142.3 10.4 (66.1) (21.3) (26.5) (21.2) 17.6 739.1 (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) Gross margin in 2018 improved to 18.5% compared to 15.3% in 2017. 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 $98.2 million in 2018 was 19.0% less than 2017 of $121.3 million. The lower cost structure is driven by lower G&A and sales and marketing expenses as a result of continued emphasis on cost savings and delivery of key value initiatives. __________________________________________________________________________________________ 8 BOART LONGYEAR 2018 ANNUAL REPORT 8 Boart Longyear Limited Annual Report 2018 3.3 Significant Items During the years ended 31 December 2018 and 2017, the Company incurred the following restructuring expense, recapitalisation costs and impairment charges: US$ Millions EBITDA(1) Recapitalisation costs Impairments Property, plant and equipment Inventories Employee and related costs Other restructuring expenses Other non-recurring items Tax effect of significant items Total of significant and non-recurring items Adjusted EBITDA(1) For the year ended 31 December 2018 2017 US$ Millions US$ Millions 54.1 - 0.1 10.9 2.6 12.9 - - 26.5 80.6 (36.6) 50.5 0.1 - 15.1 14.0 - - 79.7 43.1 (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'. __________________________________________________________________________________________ 9 9 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 4 Discussion and Analysis of Cash Flow Cash provided by (used in) operations Net cash flows provided by (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 For the year ended 31 December 2018 2017 US$ Millions US$ Millions $ Change % Change 24.1 3.7 (25.4) 11.6 (40.4) (54.0) (15.4) 46.4 64.5 57.7 (10.0) (34.8) 159.7% 106.9% -64.9% -75.0% Cash flow from operating activities for the year ended 31 December 2018 was $3.7 million, which is an improvement of $57.7 million compared to 2017 of negative $54.0 million. The primary reason for the improvement is related to cash generated from higher EBITDA. We have invested $32.5 million in capital equipment and research and development to support existing operations during 2018, which is higher than the comparable prior period (2017: $25.5 million). Of the 2018 amount, approximately $24.8 million was spent on sustainment activities relating to refurbishing current rigs and other support equipment, $0.6 million was spent on product development activities, including engineering and patent maintenance, and $7.1 million was invested in Globaltech research and development following our acquisition of the company. The 2018 capital expenditures have been partially offset by proceeds from the sale of property, plant and equipment of $13.7 million (2017: $13.8 million). The decrease in cash flows provided by financing activities is primarily due to generating higher operating cash flows. 5 Discussion of the Balance Sheet The net liabilities of the Company increased by $55.9 million, to negative $314.9 million as at 31 December 2018, compared to negative $259.0 million as at 31 December 2017. This increase results primarily from higher long-term debt arising from accrued interest, partially offset by lower accounts payable. Total assets of $637.2 million were $35.9 million lower than 2017 of $673.1 million primarily as a result of lower accounts receivable and inventory as continued emphasis was placed on improving working capital metrics. Total liabilities increased by $19.9 million to $952.0 million compared to $932.1 million in 2017. This is primarily driven by accreted interest for the period, partly offset by lower current tax liabilities as a result of the partial resolution of the Canada Revenue Agency reassessments for the tax years 2007-2012. __________________________________________________________________________________________ 10 BOART LONGYEAR 2018 ANNUAL REPORT 10 Boart Longyear Limited Annual Report 2018 Liquidity and Debt Facilities The Company’s debt is comprised of the following instruments: Description Principal Outstanding as at 31 December 2018 (millions) Accreted Interest as at 31 December 2018 (millions) Interest Rate Scheduled Maturity Security Senior Secured Notes $217.0 $36.6 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 $159.9 Nil 10%3 December 2022 Same as Senior Secured Notes ABL $30.0 1 Nil Variable4 23 July 2020 Term Loan – Tranche A $132.6 Nil 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 $6.7 11%5 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 $1.8 1.5%6 December 2022 Unsecured (1) $5.9 million in letters of credit were issued in addition to the $30.0 million borrowings that were outstanding. (2) Interest rate payable-in kind at an interest rate of 12% per annum at the Company’s election until December 2018 and thereafter in cash at a reduced interest rate of 10% per annum. Interest is 10% payable-in-kind through December 2018 and 8% payable in-kind thereafter. (3) (4) Based on LIBOR + margin (grid-based margin is currently 3.25%). (5) Interest is payable-in-kind at 11% at Company’s election or 10% Cash. Maturity Date is 23 October 2020 or 90 days after the ABL due date. Interest is 1.5% payable-in-kind at Company’s election until maturity. (6) __________________________________________________________________________________________ 11 11 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 6 Review of Segment Operations The following table shows our third party revenue and revenue from inter-segment sales by our Global Drilling Services division. Segment profit represents earnings before interest and taxes. 2018 US$ Millions Segment Revenue 2017 Segment Profit 2018 2017 US$ Millions US$ Millions US$ Millions Global Drilling Services 533.6 500.6 57.1 36.4 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 236.6 56.0 238.5 54.5 292.6 (56.0) 770.2 293.0 23.5 2.8 (54.5) 739.1 80.6 39.2 (1) Transactions between segments are carried out at arm’s length and are eliminated on consolidation. __________________________________________________________________________________________ 12 BOART LONGYEAR 2018 ANNUAL REPORT 12 Boart Longyear Limited Annual Report 2018 6.1 Review of Segment Operations - Global Drilling Services For the year ended 31 December 2018 2017 US$ Millions US$ Millions $ Change % Change 533.6 500.6 33.0 6.6% 423.9 23.6 447.5 83.9% 77.6 14.5% 8.6 17.3 82.9 27.9 310 676 3,406 398.4 30.2 428.6 85.6% 62.8 12.5% 9.3 21.1 69.1 20.8 308 720 3,320 25.5 (6.6) 18.9 -1.7% 14.8 2.0% (0.7) (3.8) 13.8 7.1 2 (44) 86 6.4% -21.9% 4.4% -2.0% 23.6% 16.0% -7.5% -18.0% 20.0% 34.1% 0.6% -6.1% 2.6% 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 2018 was 2.04, compared to 1.96 for the comparable period in 2017. The Lost-Time Incident Rate (LTIR) for 2018 was 0.09, compared to 0.28 for the comparable period in 2017. We continue to push our key safety initiatives, which include better analysis of high-potential near miss incidents and significant injuries; applying corrective actions more globally; increasing management safety interactions at operating locations; increasing supervisory competencies through training; reinforcing hazard assessments; and increasing drill rig inspection frequency. Revenue Global Drilling Services’ revenue in 2018 was $533.6 million, up 6.6% from $500.6 million in 2017. The revenue increase was driven primarily by volume, but price did play a role in the increase. Volume increases were driven by Surface Coring and Underground Coring work in the Australia, EMEA, and LAM. Price increases are averaging approximately 1.9% as a percentage of year-over-year revenue. Approximately 88% of Global Drilling Services’ revenue for 2018 was derived from major mining companies, including Barrick, BHP, Freeport-McMoRan, Goldcorp, Newmont and Rio Tinto. Our top 10 Global Drilling Services customers represented approximately 65% of the division’s revenue for the first half of 2018, with no single contract contributing more than 10% of our consolidated revenue. Margins With Revenues increasing from $500.6 million in 2017 to $533.6 million in 2018, a 6.6% increase, Global Drilling Services also achieved an increase in Contribution Margin. The 2018 Contribution Margin was $77.6 million compared to $62.8 million in 2017, an increase of 23.6%. Throughout 2018 the business continued to focus on improving meters per shift, non-billable hours and revenue per shift while reducing variable and fixed costs to maintain a flat cost structure from a percent of revenue perspective. ______________________________________________________________________________________ 13 13 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 6.2 Review of Segment Operations - Global Products 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 basis) Other Metrics Manufacturing plants Average backlog Inventories 1 # of Employees For the year ended 31 December 2018 2017 US$ Millions US$ Millions $ Change % Change 236.6 238.5 (1.9) -0.8% 175.4 0.3 4.7 180.4 76.2% 39.3 16.6% 16.9 14.3 30.7 1.0 6 27.7 165.4 927 189.8 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 (14.4) (1.1) (1.4) (16.9) -6.5% 18.8 8.0% (4.4) (1.7) 19.4 (0.1) - 1.7 (9.0) (49) -7.6% -78.6% -23.0% -8.6% -7.9% 91.7% 93.0% -20.7% -10.6% 171.7% -9.1% 0.0% 6.6% -5.2% -5.0% (1) Represents total Company inventories including Global Drilling Services and Global Products. Safety In 2018, the Total Case Incident Rate (“TCIR”) for the Global Products segment was 1.60 recordable incidents per 200,000 hours worked compared to 1.16 in 2017. The Lost-Time Incident Rate (“LTIR”) was 0.40, compared to 0.0 for 2017. 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 2018 revenue of $236.6 million was aligned with 2017 revenue of $238.5 million for the Global Products division. Revenues generated from coring tools and drill rigs remained strong in 2018 relative to the prior period. Margins Although revenue for Global Products was relatively flat compared to 2017, EBITDA for the year ended 31 December 2018 increased by $19.4 million or 171.7%. The increase in EBITDA was primarily driven by flow through of disciplined cost control in both variable and fixed SG&A. We continue to operate our manufacturing facilities at lean levels, only producing what is required to meet market demand. Backlog At 31 December 2018, Global Products had a backlog of product orders valued at $30.0 million. This compares to $33.5 million at 31 December 2017. Average backlog during the second half of 2018 was $25.4 million compared to $29.8 million during the first half of 2018. The decrease in our backlog – which we define as product orders we believe to be firm – was ______________________________________________________________________________________ 14 BOART LONGYEAR 2018 ANNUAL REPORT 14 Boart Longyear Limited Annual Report 2018 driven by decrease 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 show up in backlog. Also, there is no certainty that orders in our backlog will result in actual sales at the times or in the amounts ordered. 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 2018, we had 418 issued patents, 579 registered trademarks, 182 pending patent applications and 28 pending trademark applications. One of the most significant products for which we have obtained patent protection during 2018 is our XQ™ wireline coring rod. The XQ™ wireline coring rods feature self-aligning double start threads, rod joints that engage smoothly without wedging or jamming, and exclusive heat treatments to provide stronger, longer lasting rods. 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 amongst our divisions 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. New product development efforts remain focused on product changes that continue to drive increased safety and productivity, so customers see real added value regardless of the business environment. Our recent successes include the LF160 surface coring drill paired with our Freedom Loader which has set a new benchmark in productivity and hands-free rod handling. Launched in the second half of 2017, our patented Longyear™ coloured diamond bits continue to show improved productivity by lasting longer and cutting faster. Commercial launch of the new XQ™ coring rod continues globally, featuring a greater depth capacity than the RQ™ rod, and faster, easier joint make/breaks for higher productivity. Under our Geological Data Services business, TruCore™ core orientation tools continue to expand geographically and are available globally. The TruShot™ magnetic survey technology, the second in a future suite of tools, was launched in 2018 and is available globally. Our TruscanTM matrix calibrated XRF and photo sample scanning technology is currently being used at several locations around Australia with long term 24/7 utilisation producing results that are being used for real time decision making by the mining client. TruscanTM continues to spread its footprint globally with additional units being deployed within Australia as well as North and South America. TruscanTM was the winner of the South Australia Governments “Excellence in Innovation – Productivity Improvement” in November 2018. New features utilising artificial intelligence and machine learning continue to be integrated in to TruscanTM ensuring it is well differentiated in the market. These technologies are part of our strategy to provide subsurface resource defining information to mining companies, which is now even further enhanced through the acquisition of Globaltech in the second half of 2018. Inventories Cash continued to be generated from inventory in 2018 due to continued management of demand in our supply chain organisation and continuous efforts to reduce excess inventory. There was a significant push to scrap product that cannot be utilised in the business. The Supply Chain teams scrapped $15.5 million of product that will result in decreased operating expenses. We also generated $3.9 million of cash related to third-party sales and consumption in our Global Drilling Services division. As a result of efforts to generate cash and scrap old product, days on hand improved by 16 days in 2018. There will be ongoing focus in 2019 to increase inventory turnover to support the business with less inventory requirements. ______________________________________________________________________________________ 15 15 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 7. Outlook 7.1 Our 2019 Priorities 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 critical risks, continually seeking ways to mitigate those risks and ensuring that, when significant incidents 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 2018 that will benefit our safety in 2019 are (1) the implementation of the BLY Integrated Training System (BITS); (2) implementation of simplified EHS Field Standards setting company expectations; (3) the implementation and refocus on our global Field Level Risk Assessment (FLRA) process; and (4) EHS Lead Indicator KPI’s which will include: Critical Risk Management – Critical Control Verifications, BITS assigned training modules, In-Vehicle Monitoring System utilization, 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. Specifically, our goal is to increase our business with our existing customers and find new ways to partner with existing and potential customers to grow our business. 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 2019, with the goal to continue to be cash positive, through careful management of liquidity and costs. Ongoing improvement in cash generation in 2019 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. 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 2019 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 by embedding a cash return on investment metric throughout the organisation. 7.2 Outlook and Future Developments We are not providing an outlook for 2019 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 2018 results. We anticipate seeing ongoing gains from those identified initiatives which we continue to actively manage. The mining industry is cyclical and 2018 continued to show signs of 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 cash position of our customers; 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 ______________________________________________________________________________________ 16 BOART LONGYEAR 2018 ANNUAL REPORT 16 Boart Longyear Limited Annual Report 2018 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. In prior years 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 current 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 over the past five years, but our future operating results, financial condition and competitiveness 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 2018, our net debt was $682.6 million, with $721.5 million in gross debt and $38.9 million of cash on hand. The Company also has an additional $14.1 million of liquidity available through the 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. 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 ______________________________________________________________________________________ 17 17 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 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 counsel. 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. ______________________________________________________________________________________ 18 BOART LONGYEAR 2018 ANNUAL REPORT 18 Boart Longyear Limited Annual Report 2018 REMUNERATION REPORT This remuneration report has been prepared in accordance with section 300A of the Australian Corporations Act 2001 and summarises the arrangements in place for the remuneration of directors, Key Management Personnel (“KMP”) and other employees of Boart Longyear for the period from 1 January 2018 to 31 December 2018. Changes in 2018 In late 2018 the Company announced that Brendan Ryan would transition to the role of Chief Business Development Officer. Additionally, Miguel Desdin was identified to replace Mr Ryan as Chief Financial Officer. This change was carefully designed to support the key strategic, financial, growth and human resources objectives of the Company. 1. 2018 REMUNERATION OVERVIEW Four principles guide our decisions about executive remuneration at Boart Longyear: • • • • Fairness: provide a fair level of reward to all employees. Transparency: build a culture of achievement by transparent lines between reward and performance. Alignment: promote mutually beneficial outcomes by aligning employee, customer and shareholder interests. The Boart Longyear Culture: drive leadership performance and behaviors that create a culture that promotes safety, diversity and employee satisfaction. 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. 1.2 DIRECTORS AND SENIOR EXECUTIVES Directors and senior executives who were KMP during the year ended 31 December 2018 were: Directors Position Senior Executives Position Marcus Randolph Executive Chairman Jeffrey Olsen Executive Director and Chief Executive Officer Kyle Cruz Non-executive Director Robert Closner Vice President, General Counsel & Company Secretary Lawrence First Non-executive Director Miguel Desdin Chief Financial Officer (appointed effective January 2019) Jason Ireland James Kern Non-executive Director Denis Despres Chief Operating Officer Non-executive Director Kari Plaster Chief Human Resources Officer Gretchen McClain Non-executive Director Brendan Ryan Chief Business Development Officer Jeffrey Olsen Robert Smith Executive Director Non-executive Director Richard Wallman Non-executive Director Eric Waxman Non-executive Director 1.3 REMUNERATION OUTCOMES The actual remuneration earned by executives is set out below. This information is considered to be relevant as it provides shareholders with a view of the remuneration actually paid to executives for performance for the year ended 31 December 2018. This differs from the remuneration details prepared in accordance with statutory obligations and accounting standards, which are reported on page 28 of this Report. The remuneration calculations reported there 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. Compensation represents base salary and benefits such as US 401(k) retirement plan, Company matching and/or profit sharing contributions, car allowance, and tax preparation service reimbursement. STI represents the cash paid in respect of the executive’s Short Term Incentive (“STI”) award earned for the prior year’s performance but paid in the current reporting year and Other represents sign-on bonuses granted in 2016 - 2017 and paid in 2018. ______________________________________________________________________________________ 19 19 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 Sr. Executive Remuneration US$ Compensation STI1 LTI (cash)2 Jeffrey Olsen Brendan Ryan Robert Closner Kari Plaster Denis Despres 625,962 400,000 240,941 271,154 400,000 312,120 131,090 38,772 10,046 128,593 - - - - 66,667 Other3 36,955 27,050 20,543 46,526 128,945 Total 975,037 558,140 300,256 327,726 724,205 (1) Represents the cash paid in respect of the executive’s STI earned for the prior year’s performance, but paid in the current reporting year. For further details of the STI plan, see section 3.2. (2) In 2016 Mr Despres was awarded a one-time, 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. In 2018 he received the second installment of $66,667. Mr Despres opted to receive cash instead of Company shares. (3) Represents benefits such as US 401(k) retirement plan, car allowance and tax preparation service reimbursement. Also includes sign-on bonuses and other bonuses granted and paid in 2018, including the second of three installments of Mr Despres’ sign on bonus. 1.4 EXECUTIVE REMUNERATION STRATEGY The Board recognizes that appropriate remuneration for BLY executives and other employees is inextricably linked to the attraction, development, performance and retention of top-level talent and human capital. Given the current economic climate and the ongoing skills shortage, it is essential that adequate measures are in place to attract and retain the required skills. In order to meet the strategic objectives of a high-performance organization, the remuneration philosophy is positioned to reward strong performance and to maintain that performance over time. The primary objectives of Boart Longyear’s policy are to: • • • • attract, motivate, reward and retain key talent; promote the organization’s strategic objectives, within its risk appetite; promote positive outcomes across the geographies where we operate; promote an ethical culture and behaviour that are consistent with values and which encourage responsible corporate citizenship. ______________________________________________________________________________________ 20 BOART LONGYEAR 2018 ANNUAL REPORT 20 Boart Longyear Limited Annual Report 2018 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 for senior executives, including the use of external remuneration consultants. The diagram below illustrates the primary design features of the Company’s executive remuneration strategy and how the components of overall remuneration have been designed to support them: Attraction and Retention Best Practice Fairness and Alignment Pay for Performance ▪ Accurate and up-to-date market information and information on trends is a crucial factor in determining the quantum of the remuneration packages. ▪ Remuneration levels are competitive with similar roles in the markets in which the Company competes for talent. ▪ Fixed and at risk remuneration is appropriately industry and market competitive. ▪ Long-term incentive compensation provides for meaningful retention. ▪ The long-term incentive component is delivered to Directors and Executives through the Management Incentive Plan. ▪ Reward packages and practices reflect local and international best practice, where appropriate and practical. ▪ There is a significant amount of total executive remuneration which is at risk and dependent upon achieving challenging key business objectives. ▪ Performance management assists in indicating the overall total rewards for each ExCo member. ▪ Compensation is relevant and meaningful to the Executive receiving it. ▪ RemCo regularly ▪ The framework performs executive compensation benchmarking utilising independent compensation consultants. ▪ Reward measures for executives are aligned with, linked to and influenced by the interests and strategies of BLY and its shareholders. encourages consistency, but allows for differentiation where it is fair, rational and explainable. ▪ Incentive based compensation is designed to reward executives for delivered performance against important Company, safety, financial and strategic objectives. ▪ The aspiration is that our ▪ remuneration philosophy, policy and practices, as well as the processes to determine individual pay levels are transparent. ▪ Clawback: where performance achievements are subsequently found to have been misstated, provisions are made for redress. Incentive plans utilise an appropriate mix of challenging performance measures designed to deliver value to executives when performance is achieved over short and longer terms. ▪ Incentive based compensation provides for upside potential with strong performance. 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 informed by and considers input from management, but retains independent decision making authority. To assist in making decisions related to remuneration, the Board has established a Remuneration and Nominations Committee. Remuneration and Nominations Committee (“Remuneration Committee” or “Committee”) The Remuneration Committee (RemCo) 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. RemCo 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 and create value for shareholders and support the Company’s remuneration related principles. ______________________________________________________________________________________ 21 21 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 The Remuneration Committee’s responsibilities include: • • • • • • • • review of strategic objectives; 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 Key Management Personnel (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 consideration of performance thresholds and regulatory and market requirements; developing performance thresholds for the CEO and reviewing proposed performance thresholds for other KMP; reviewing and approving performance achievement relative to executive incentive plans; 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 Chief Human Resources Officer 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/or External Advisors Where appropriate, the Board seeks and considers advice from independent remuneration consultants and external advisors. 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 2018, 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 (MIP). In addition, the Committee continued to rely on the independent market review of KMP compensation obtained from Mercer Consulting. 2.2 REMUNERATION COMPENSATION STRATEGY There are several components of an executive’s total compensation opportunity: fixed compensation, short and long-term incentives as well as non-monetary benefits. Fixed Remuneration: guaranteed package delivered as a cash salary and mix of compulsory and discretionary benefits reflects market-relatedness in conjunction with the individual’s background, competence and potential. • 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. ______________________________________________________________________________________ 22 BOART LONGYEAR 2018 ANNUAL REPORT 22 Boart Longyear Limited Annual Report 2018 Short Term Incentive Program: creates a high-performance culture by providing a cash bonus annually. This is determined based on role and responsibility as well as achievement against predetermined performance hurdles for business and personal goals. • • • • • This component of compensation is “at-risk” and earned when certain performance metrics are achieved. Key performance metrics are determined annually, in alignment with the Company’s business strategy. They include some measure of the following (or related) metrics: free cash flow, adjusted EBITDA, safety performance, and individual strategic goals. These metrics were designed to reflect corporate as well as business unit level performance. This helps to ensure rewards are relevant and affordable as well as reflective of performance. The metrics weight performance in areas which build and promote collaboration and ensure alignment to strategy and shareholder interests. Individual strategic goals can include financial, operational, strategic or project based targets. Examples include items such as, milestone achievement, revenue growth, cost control goals, cash flow generation, geographic expansion, and productivity programs. 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. Long Term Incentive Program: based on the individual’s performance and value to the business. It is achieved through achievement and alignment with shareholder interests. See section 3.3 of the Remuneration report for more information. • • • 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. In January of 2018, the long-term incentive plan design changed where LTIP was replaced with another Management Incentive Plan. This plan is driven by Total Enterprise Value (TEV). The plan creates value for participants when specific criteria are reached for performance as well as time vesting. The MIP enables cash and/or share releases to participants as and when its shareholders monetise their shareholdings at various volumes. The LTI is awarded in cash or shares, at the discretion of the Board. Other Benefits (Monetary and Non-monetary): provided to ensure executive compensation remains relevant and Executives are well cared for. Non-monetary Benefits include: meaningful work, access to continuous learning and professional growth, recognition and appreciation, career advancement and in some cases flex schedules and/or tele-commuting. Additional Monetary Benefits include: various types of insurance: D&O, life, and regionally based health and welfare insurance for employee and family members; as well as vehicle allowances and/or other regionally based perks. ______________________________________________________________________________________ 23 23 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 3. COMPONENTS OF EXECUTIVE REMUNERATION 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 cash tied to vesting conditions, such as performance hurdles (TEV) and continued employment. The relevant proportion of fixed to at-risk components for senior executive remuneration during 2018 are shown below. The table illustrates the annualised remuneration mix for executive KMP, including annualised fixed salary, target STI (assuming that 100% of target bonus performance is achieved). 100% 80% 60% 40% 20% 0% 55% 45% 36% 64% 29% 30% 71% 70% 36% 64% J E F F R E Y O L S E N B R E N D A N R Y A N R O B E R T C L O S N E R K A R I P L A S T E R D E N I S D E S P R E S Fixed At Risk STI Potential 3.1 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 the United States’ 401(k) defined contribution retirement plan. 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. 3.2 SUMMARY OF THE SHORT-TERM INCENTIVE 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. 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. There are four key Company performance components (1) free cash flow; (2) adjusted EBITDA; (3) Safety and (4) Individual component for the CBP. Each component has a threshold performance level; a target level of performance, and a maximum stretch level of performance whereby superior results can earn up to 200% of that component of the bonus. All bonuses awarded under the CBP are paid in cash. The CBP performance components for 2018 and their relative weighting are: (1) Corporate Financial Target - Free Cash Flow (FCF) - 30% 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 ______________________________________________________________________________________ 24 BOART LONGYEAR 2018 ANNUAL REPORT 24 Boart Longyear Limited Annual Report 2018 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. (2) Corporate Financial Target – Adjusted EBITDA - 50% 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 Significant Items = Adjusted EBITDA. (3) Corporate Non-Financial Target - Safety - 20% 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 2018, the Board agreed, on the recommendation of its Audit, Safety and Risk Committee to use total case incident rates (TCIR), lost time incident rates (LTIR), Critical Risk Incident Rate and leading indicators as the measurements of safety performance for the CBP. (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 and specific project or initiative progress, etc. Individual objectives carry individual proportions of 100%. 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 3.3 SUMMARY OF THE LONG-TERM INCENTIVE PROGRAM On 31 December 2017 the Long Term Incentive Plan (LTIP) and Retention Incentive Grant Agreement (RIGA) programs ceased. Retention based awards, under LTIP, were 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, under the LTIP, were cancelled as of 31 December 2017. Effective 1 January 2018 the Board approved a resolution to introduce a new long term incentive plan, the Management Incentive Plan (“MIP”). The MIP is a long-term incentive plan, which is similar in design to a stock option plan, and consistent with many incentive plans in private equity, in that it allows participants to share in the gain of Boart Longyear’s value over time. The MIP was created to give senior leaders an opportunity to share in the growth and value of Boart Longyear’s business success. The executives eligible to participate in the MIP are senior management and corporate executives, including the KMP. The percentage of the MIP payouts vary depending on the participant’s position, skills and contributions to the Company. The percentage amounts are generally based on market averages for comparable roles at similar-sized companies. There are both time and performance vesting hurdles in the MIP. The time vesting portion of the MIP represents 33.3% of the plan and is spread over a 5-year time window. ______________________________________________________________________________________ 25 25 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 The performance vesting portion of the MIP represents 66.7% of the plan and is based on Boart Longyear’s gain in Total Enterprise Value (TEV), above a baseline of $650 million. The MIP includes a two-tiered performance vesting criteria; one set at $900 million TEV, representing 33.3% of the award and the other set at $1.1 billion TEV, which represents the final 33.3% of the award. Performance vesting is based on a trigger events aligned with sale of ownership at certain predetermined levels. Upon these trigger events, TEV will be measured and if the criteria are met, business leaders will be paid a percentage of the value accretion, based on their MIP allocation. There has been no trigger event with respect to performance vesting criteria, so no accrual has been recorded for 2018. The MIP will be paid in either cash or shares at the discretion of the Board. 3.4 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. 4. PERFORMANCE AND RISK ALIGNMENT Below is a summary of our year on year operating performance which underpins our compensation program. Net debt excludes the impact of recapitalization transactions, letters of credit, CRA & IRS obligations, strategic asset acquisitions and disposals, equity raise, and potential asset backed loans. Dividends per share are calculated as basic EPS divided by closing share price. Financial Year Closing Share Price $A Dividend p/share US$ 2018 2017 2016 2015 2014 0.01 0.01 0.13 0.06 0.17 - - - - - EPS % (23.5%) (205.1%) (179.4%) (822.4%) (510.9%) Revenue US$ millions Adj. EBITDA 1 US$ millions ROE Net Debt US$ millions 770 739 642 735 867 81 43 32 0 31 (15.3%) (50.3%) (60.6%) (596.1%) (133.4%) 683 599 681 586 551 (1) Adjusted EBITDA is 'Earnings before interest, tax, depreciation and amortisation and before signficant and other non-recurring items. 4.1 PERFORMANCE AGAINST SHORT AND LONG-TERM INCENTIVE MEASURES A combination of financial and non-financial measures is used to measure performance for STI awards. Business and individual performance against those measures was measured on a weighted average basis. The average proportion of STI awarded, 2014 through 2018 is below: % of target STI awarded 2014 122% 2015 114% 2016 90% 2017 53% 2018 103% ______________________________________________________________________________________ 26 BOART LONGYEAR 2018 ANNUAL REPORT 26 Boart Longyear Limited Annual Report 2018 STI earned during the year ended 31 December 2018: STI Earned in 2018 STI Earned US$ Target STI US$ STI Earned as % of Target % of STI Forfeited STI as % of Max STI 1 % of Max STI Forfeited Jeffrey Olsen Brendan Ryan Robert Closner Kari Plaster Denis Despres 767,981 226,320 99,187 135,546 295,200 675,000 240,000 100,800 116,000 240,000 114% 94% 98% 117% 123% 0% 6% 2% 0% 0% 57% 47% 49% 58% 62% 43% 53% 51% 42% 39% (1) The maximum potential award assuming superior performance against all CBP metrics is 200% of target STI. 4.2 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. ______________________________________________________________________________________ 27 27 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 5. EXECUTIVE REMUNERATION IN DETAIL Details of each senior executive’s remuneration during the years ended 31 December 2018 and 2017 are set out in the table below. The remuneration calculations reported in this table 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. It should be noted that Mr Rasetti, Mr Baker and Mr Irwin are not included in the table below because they ceased employment in 2017. Details of their remuneration is available in the 2017 annual report. Short term benefits 1 Post-employment benefits Other long-term benefits Cash-based compensation Non-cash-based compensation Share-based compensation 2 Jeffrey Olsen 2018 2017 Brendan Ryan 2018 2017 Robert Closner 2018 2017 Kari Plaster 2018 2017 Denis Despres 2018 2017 Compensation US$ 625,962 586,154 400,000 400,000 240,941 186,800 271,154 41,538 400,000 400,000 Annual bonus 3 US$ 767,981 312,120 226,320 131,090 99,187 40,584 135,546 10,046 Other 4 US$ 28,705 25,480 20,800 51,459 20,543 24,237 40,800 3,200 295,200 128,593 122,695 22,778 Super- annuation benefits 5 US$ Other US$ Retention Cash Rights US$ Perform- ance Cash Rights US$ Options US$ Rights US$ Share- based % Total US$ 8,250 8,100 6,250 8,100 - - 5,726 312 6,250 8,100 - - - - - - - - - - - 62,500 - 38,250 - 122,468 - - - 10,088 - - 66,667 66,667 - - - - - - - - - - - - - - - - - 31,688 - 65,001 - 37,753 - - - 143,333 - 1,430,898 13.0% 1,186,760 - 9.9% 653,370 655,651 - 12.6% 360,671 299,462 - - 453,226 55,096 - 18.6% 890,812 769,471 (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. (3) The 2018 amount represents cash STI payments earned by the executive during the year ended 31 December 2018, which are expected to be paid in 2019 and were approved by the Board in February 2019. The 2017 amount represents cash STI payments earned by the executive during the year ended 31 December 2017, which were paid in July 2018. Includes sign-on bonuses, automotive allowances, and reimbursements of financial and tax preparation assistance. Includes 401(k) plan matching contributions made by the employing entity in the United States. (4) (5) ______________________________________________________________________________________ 28 BOART LONGYEAR 2018 ANNUAL REPORT 28 Boart Longyear Limited Annual Report 2018 5.1 SERVICE CONTRACTS AND TERMINATION PROVISIONS Name and position held at the end of the financial year Duration of contract Notice period by Company Notice period by executive Chief Executive Officer No fixed term None required 180 days Vice President, General Counsel and Company Secretary No fixed term None required 90 days No fixed term None required 90 days Chief Financial Officer; Chief Human Resources Officer; Chief Operating Officer, Chief Business Development Officer 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: • 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 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. 5.2 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. All awards granted were reduced on a pro-rata basis due to the new MIP plan implemented in 2018. These awards were granted in the form of cash retention and will vest on the third anniversary of the award. Mr Olsen’s and Mr Closner’s awards of $550,685 and $77,054, respectively, will vest in March 2019. 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. Furthermore, in 2018, the Board approved a one-time additional bonus incentive for certain members of senior leadership. The performance bonus is payable upon the Company achieving metrics for the fiscal year ending 2020 which are materially above budget. In the event the Company achieves the performance targets, eligible participants will receive a one-time $200,000 cash payment which would become payable in 2021.All KMP with the exception of the CEO are eligible to participate in this bonus plan. ______________________________________________________________________________________ 29 29 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 5.3 SHARE HOLDINGS Shareholdings as at the end of the financial year and activity during the financial year, are as follows: Balance 1 January Granted as remuneration Received on exercise of options/rights Net other change during year Balance 31 December Balance held nominally 10,328,767 - - - - 1,966,062 - - - 520,871 - 86,285 - - - - - - - - - 6,420,233 - - - - - - - - - - - - - - - - - - - - - - - - - - - 3,200,000 - - - - - - 10,328,767 - - - - 1,966,062 - 9,620,233 - 520,871 - 86,285 - - - - - - - - - - - - - - - - 2018 Marcus Randolph Kyle Cruz Jason Ireland Lawrence First James Kern Gretchen McClain Robert Smith Richard Wallman Eric Waxman Jeffrey Olsen Brendan Ryan Robert Closner Kari Plaster Denis Despres 5.4 CASH RIGHTS Cash rights as at the end of the financial year, and activity during the year, are as follows: Name Jeffrey Olsen Brendan Ryan Robert Closner Denis Despres Grant date 1-Mar-16 15-Mar-17 15-Mar-17 1-Mar-16 15-Mar-17 1-Sep-16 1-Sep-16 Vesting date 1-Mar-19 15-Mar-20 15-Mar-20 1-Mar-19 15-Mar-20 1-Sep-18 1-Sep-19 15-Mar-17 15-Mar-20 Held at the beginning of the financial year Number of Cash Rights granted as remuneration Number of Cash Rights vested Value of Cash Rights vested US$ 550,685 132,755 66,378 77,054 7,965 100,000 100,000 66,378 - - - - - - - - - - - - - 100,000 - - - - - - - - - - Number of Cash Rights Value of Cash Rights forfeited US$ forfeited - - - - - - - - Held at the end of the financial year 550,685 132,755 66,378 77,054 7,965 - 100,000 66,378 - - - - - - - - Robert Closner holds 126,530 retention share rights as of 31 December 2018. The rights were granted on 1 July 2015 and vest on 15 March 2019. Jeffrey Olsen holds 324,204 options which are vested and exercisable as of 31 December 2018. The options vested on 1 April 2017 and will expire on 1 April 2024. The exercise price of each option is AUD $0.32. 6. 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 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. No shares rights or options vested or were awarded as remuneration in 2018. ______________________________________________________________________________________ 30 BOART LONGYEAR 2018 ANNUAL REPORT 30 Boart Longyear Limited Annual Report 2018 6.1 COMPONENTS OF NON-EXECUTIVE DIRECTOR REMUNERATION Component Explanation Board fees Current base fees per annum are: • US$160,000 for non-executive Directors other than the Board Chairman and the resident Australian Directors; US$300,000 for the Board Chairman; and AUS$200,000 for the resident Australian Directors. • • Committee fees Current committee fees for non-executive Directors (other than the Board Chairman) are: • • US$7,500 annually for committee members; and US$15,000 annually for committee chairs. Where the Board Chairman sits on a committee, he or she does not receive any additional fee. Other fees/benefits 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$8,100 per annum. Post- employment benefits ______________________________________________________________________________________ 31 31 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 6.2 REMUNERATION PAID TO NON-EXECUTIVE DIRECTORS Details of non-executive Directors’ remuneration for the year ended 31 December 2018 and 2017 are set out in the table below. Non Executive Directors Remuneration US$ Marcus Randolph 2018 2017 Jason Ireland 2018 2017 James Kern 2018 2017 Gretchen McClain 2018 2017 Robert Smith 2018 2017 Richard Wallman 2018 2017 Fees (Including committee fees) Superannuation Contributions Shares Total 481,879 538,906 149,671 51,710 167,500 41,875 186,667 138,958 149,725 51,710 157,500 57,083 1,277 8,100 - 166,664 - - - - - - - - - - - - - - - - - - 17,500 - 483,156 713,670 149,671 51,710 167,500 41,875 186,667 138,958 149,725 51,710 175,000 57,083 Mr Cruz, Mr First and Mr Waxman are not included in the table above as they are employees of Centerbridge, Ascribe Capital and Ares Management, respectively, and therefore did not receive Director fees. Mr Randolph’s remuneration includes director fees of $300,000 and cash salary of $181,879 in 2018. In 2017, he received director fees of $133,336, cash salary of $360,570 and a performance bonus of $45,000. Ms McClain was appointed the Lead Independent Director in February 2018. She received an additional $5,000 in committee fees for the appointment. As of 31 December 2018, she had received $4,167 of this fee. Mr Wallman elected to receive $17,500 of his fees in shares under the NED plan. As noted in the 2017 annual report, Bret Clayton, Jonathan Lewinsohn, Jeffrey Long, Rex McLennan, Deborah O’Toole, Matthew Sheahan and Conor Tochilin resigned from the Board in 2017. Their executive remuneration is available in the 2017 annual report. ______________________________________________________________________________________ 32 BOART LONGYEAR 2018 ANNUAL REPORT 32 Boart Longyear Limited Annual Report 2018 Board of Directors 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 Science 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. Mr Cruz holds a B.B.A from the University of Michigan with high distinction, and a Master’s in Business Administration from the Wharton School of the University of Pennsylvania, with honors. 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 initiatives 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. Gretchen McClain 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 was appointed the lead Independent Director in February 2018. Ms McClain 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, ______________________________________________________________________________________ 33 33 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 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. In 2018 Utah Business recognised her as one of their outstanding director nominees. 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 Bachelors of Arts degree 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. Eric Waxman 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. ______________________________________________________________________________________ 34 BOART LONGYEAR 2018 ANNUAL REPORT 34 Boart Longyear Limited Annual Report 2018 Company Secretaries Robert Closner 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 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. DIRECTORS’ MEETINGS The following tables set out for each Director the number of meetings (including meetings of Board committees) held and the number of meetings attended 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. Board of Directors Remuneration Audit, Safety Committee & Risk Committee Held Attended Held Attended Held Attended Kyle Cruz Jason Ireland James Kern Gretchen McClain Marcus Randolph Robert Smith Richard Wallman Eric Waxman Jeffrey Olsen 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 4 5 5 6 6 6 6 6 6 6 6 4 4 4 4 4 4 4 4 DIRECTORS’ SHAREHOLDINGS 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 Jeffrey Olsen Robert Smith Richard Wallman Eric Waxman Fully paid ordinary shares 10,328,767 - - - - 1,966,062 520,871 - 9,620,233 - Rights offering ordinary shares Rights and options - - - - - - - - - - - - - - - - - - - - Total 10,328,767 - - - - 1,966,062 520,871 - 9,620,233 - ______________________________________________________________________________________ 35 35 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 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. GRANTS OF SHARES, RIGHTS OVER SHARES AND OPTIONS GRANTED TO DIRECTORS AND EXECUTIVES At the Annual General Meeting of Shareholders held in May 2018, Shareholders approved a non-executive director share purchase plan (the “Plan”) which allows current and future Non-Executive Directors to elect to receive up to 100% of their director fees in shares in the Company in lieu of cash payments. The election of Non-Executive Directors to receive all or a portion of their compensation in shares of the Company in lieu of cash pursuant to the plan does not result in any additional remuneration for the Non-Executive Directors. It is merely a mechanism for the Non-Executive Directors to elect to invest some of the fees to which they are otherwise entitled in the Company. Under the terms of the Plan, if a Director elects to participate in the Plan, NED Shares are issued quarterly (or at other intervals in compliance with insider trading laws and the requirements of the Company’s Securities Trading Policy) at predetermined dates throughout the year. Following issue, Non-Executive Directors are not able to deal in the shares for a 12 month period. After this period, they will be free to deal in the shares subject to the Company’s Securities Trading Policy and any minimum shareholding requirements adopted by the Board. The number of NED Shares to be allocated to Non-Executive Directors who elect to participate in the Plan each quarter is calculated by dividing the amount of director's fees which the relevant Non-Executive Director has elected to contribute to the Plan by the arithmetic average of the daily volume weighted average sale price of the Company’s shares sold on ASX on the ordinary course of trading during the five trading days preceding the issue date of the shares. During 2018 Mr. Richard Wallman participated in the plan and elected to receive $17,500 of his director compensation paid in shares (6,420,233 shares). 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 the financial statements. INDEMNIFICATION OF DIRECTORS, 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. ______________________________________________________________________________________ 36 BOART LONGYEAR 2018 ANNUAL REPORT 36 Boart Longyear Limited Annual Report 2018 EXECTUVE MANAGEMENT TEAM Jeffrey Olsen Mr Olsen’s experience and qualifications are summarised on page 34. 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. Brendan Ryan Brendan Ryan was appointed Chief Financial Officer on 6 September 2016 and late 2018 was appointed Chief Business Development Officer. 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 of Business Administration degree 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 on pages 35. Kari Plaster Kari Plaster was appointed Chief Human Resources Officer 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 to help businesses and people to thrive. 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. Miguel Desdin Miguel Desdin was appointed Chief Financial Officer in January 2019. He relocated from Houston, Texas where he worked for seven years as CFO and Senior Vice President of TPC Group, a two-billion dollar chemical company. During his tenure, he helped transition and position the company to take advantage of the cyclical recovery during a downturn in commodity prices. This included serving as interim CEO during the latter part of 2015. Miguel’s career has led him through several key executive and financial roles within the industrial chemicals and related industries including working for Furmanite Corporation, Celanese Corporation, Great Lakes Chemical Corporation, and AlliedSignal, Inc. He earned his MBA in Finance from the Wharton School at the University of Pennsylvania, and a Bachelor of Science in Industrial and Systems Engineering from the University of Florida. ______________________________________________________________________________________ 37 37 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 AUDITOR AUDITOR’S INDEPENDENCE DECLARATION The auditor’s independence declaration is included on page 41 of this report. NON-AUDIT SERVICES 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. ______________________________________________________________________________________ 38 BOART LONGYEAR 2018 ANNUAL REPORT 38 Boart Longyear Limited Annual Report 2018 REMUNERATION The Remuneration Report is included beginning at page 19 and forms part of this Directors’ Report. Signed in accordance with a resolution of the Directors. On behalf of the Directors Marcus Randolph Chairman 26 February 2019 ______________________________________________________________________________________ 39 39 BOART LONGYEAR 2018 ANNUAL REPORT 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 26 February 2019 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 2018, 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 __________________________________________________________________________________________ 40 BOART LONGYEAR 2018 ANNUAL REPORT 40 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 2018, 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) giving a true and fair view of the Group’s financial position as at 31 December 2018 and of its financial performance for the year then ended; and (ii) 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 ________________________________________________________________________________________ 41 41 BOART LONGYEAR 2018 ANNUAL REPORT 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 As at 31 December 2018, the Group has net liabilities of $314.9 million and net current assets of $134.0 million. The Group continues to manage its liquidity closely as disclosed in Note 1 to the financial statements. This requires the achievement of budgets and cash flow forecasts, which include assumptions about those future cash flows and the forecast results, which are inherently uncertain. How the scope of our audit responded to the Key Audit Matter Our audit procedures included, but were not limited to: • • • • • • Assessing the process undertaken by management to develop the budget and cash flow forecasts for the 15 month period ending 31 March 2020 (‘FY19/FY20’) Evaluating the key assumptions underlying the FY18/FY19 budget Assessing the quantum and timing of forecast cash in the FY18/FY19 cashflow forecast 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 the audit opinion date against the FY18/FY19 budget the appropriateness of Assessing the disclosures included in Note 1 to the financial statements. 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 Notes 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 statements As at 31 December 2018, the Group has recorded an income tax benefit of $7.5 million, current and non-current tax receivables of $0.3 million and $16.3 million, net current tax payables of $54.6 million and net deferred tax assets of $3.2 million and has disclosed its assessment of tax-related contingent liabilities in Notes 11 and 27. • • 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 BOART LONGYEAR 2018 ANNUAL REPORT 42 As disclosed in Note 11, the Group is under a tax audit in Canada. The above matters give rise to complexity and uncertainty in respect of the determination of income taxes, deferred income tax assets as well as the consideration of contingent liabilities associated with tax years open to audit. This requires significant judgement in estimating tax exposures and/or contingent liabilities. • • • 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 Assessing the appropriateness of the Group’s Note disclosures regarding current and deferred taxes, uncertain tax positions and tax-related contingencies in the financial statements. 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. 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 ________________________________________________________________________________________ 43 43 BOART LONGYEAR 2018 ANNUAL REPORT 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. 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. ________________________________________________________________________________________ 44 BOART LONGYEAR 2018 ANNUAL REPORT 44 Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 19 to 39 of the Directors’ Report for the year ended 31 December 2018. In our opinion, the Remuneration Report of Boart Longyear Limited, for the year ended 31 December 2018, 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, 26 February 2019 ________________________________________________________________________________________ 45 45 BOART LONGYEAR 2018 ANNUAL REPORT Boart Longyear Limited Annual Report 2018 DIRECTORS’ DECLARATION The Directors declare that: (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 53 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 26 February 2019 ________________________________________________________________________________________ 46 BOART LONGYEAR 2018 ANNUAL REPORT 46 Consolidated Statement of Profit or Loss and Other Comprehensive Income CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 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 profit / (loss) Interest income Finance costs Loss before taxation Note 2018 US$'000 2017 US$'000 3 4 4 5 5 770,167 (639,100) 1 131,067 1 1 10,360 (80,634) (22,138) (21,080) 17,575 889 (69,482) (51,018) 739,063 (628,461) 1 110,602 1 1 6,637 (152,858) (27,449) (24,679) (87,747) 1,783 (57,155) (143,119) Income tax benefit / (expense) 11 7,495 (6,925) Loss for the year attributable to equity holders of the parent Loss per share: Basic loss per share (43,523) (150,044) 12 (0.2) cents (1.6) cents Other comprehensive loss Loss for the year attributable to equity holders of the parent Items that may be reclassified subsequently to profit or loss Exchange gain (loss) arising on translation of foreign operations Items that will not be reclassified subsequently to profit or loss Actuarial gain related to defined benefit plans Income tax on income and expense recognised directly through equity Other comprehensive loss for the year, net of tax 23 Total comprehensive loss for the year attributed to equity holders of the parent (43,523) (150,044) (15,121) 18,543 414 (104) (14,811) 7,791 (752) 25,582 (58,334) (124,462) (1) In the current period significant items have not been separately presented but have been included in the relevant line items. Details of items considered to be significant are included in Note 7. See accompanying Notes to the Consolidated Financial Statements included on pages 52 to 104. _______________________________________________________________________________________ 47 47 BOART LONGYEAR 2018 ANNUAL REPORT Consolidated Statement of Financial Position As at 31 December 2018 CONSOLIDATED STATEMENT OF FINANCIAL POSITION as of 31 December 2018 BOART LONGYEAR LIMITED Note 2018 US$'000 2017 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 Non-controlling interest Total equity 31 13 14 11 16 17 18 19 11 11 20 22 11 21 21 11 22 24 38,942 119,582 165,410 268 12,813 337,015 467 337,482 114,098 103,859 37,763 20,709 16,284 6,975 299,688 637,170 111,198 19,891 71,194 1,183 203,466 720,268 17,502 10,792 748,562 952,028 (314,858) 1,468,776 (116,231) (137,182) (1,532,651) (317,288) 2,430 (314,858) 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) - (258,997) See accompanying Notes to the Consolidated Financial Statements included on pages 52 to 104. _______________________________________________________________________________________ 48 BOART LONGYEAR 2018 ANNUAL REPORT 48 D E T I M I L R A E Y G N O L T R A O B Y T I U Q E N I i y t i u q E n S E G N A H C F 8 O 1 0 2 T r N e b E m M e c e E D T 1 A 3 T d e S d n e D r E a e T y A a D c n I L a n O i f S e h N t r O o F C s e g n a h C f o t n e m e t a t S d e t a d o s n o C i l i l l a t o T y t i u q e ' 0 0 0 $ S U ' 0 0 0 $ S U ' 0 0 0 $ S U t s e r e t n I t n e r a p e h t s e s s o l ' 0 0 0 $ S U n o N l e b a t u b i r t t a l a t o T g n i l l o r t n o C f o s r e n w o o t l d e t a u m u c c A 1 r e h t O y t i u q e ' 0 0 0 $ S U d e l t t e s - y t i u q E y c n e r r u c n o i t a s n e p m o c n o i t a l s n a r t e v r e s e r ' 0 0 0 $ S U e v r e s e r ' 0 0 0 $ S U d e u s s I l a t i p a c ' 0 0 0 $ S U n g i e r o F 8 1 0 2 r e b m e c e D 1 3 d e d n e r a e y l i a c n a n fi e h t r o F ) 3 0 5 , 7 3 3 ( ) 4 4 0 , 0 5 1 ( 2 8 5 , 5 2 ) 2 6 4 , 4 2 1 ( 4 6 4 , 0 0 2 - - 7 4 7 5 4 , 2 ) 7 9 9 , 8 5 2 ( ) 3 2 5 , 3 4 ( ) 7 9 9 , 8 5 2 ( ) 1 1 8 , 4 1 ( ) 4 3 3 , 8 5 ( 5 2 8 1 0 3 4 , 2 - - - - - - - - - - - - - - - - 0 3 4 , 2 ) 3 0 5 , 7 3 3 ( ) 4 4 0 , 0 5 1 ( ) 4 4 0 , 0 5 1 ( - - 7 4 7 5 4 , 2 4 6 4 , 0 0 2 - - - - - 2 8 5 , 5 2 9 3 0 , 7 ) 2 6 4 , 4 2 1 ( ) 5 0 0 , 3 4 1 ( - - - - - - - - - - - - ) 8 3 4 ( ) 2 4 6 , 1 ( ) 9 6 3 , 2 ( 7 5 4 , 2 - 3 4 5 , 8 1 3 4 5 , 8 1 - - - - - - - - - 5 8 4 2 4 6 , 1 9 6 3 , 2 4 6 4 , 0 0 2 s e r a h s d e t c i r t s e r , s t h g i r I P T L f o g n i t s e V s t h g i r e r a h s P T L I f o n o i t a l l e c n a C n o i t a s n e p m o c d e s a b - e r a h S s s o l i e v s n e h e r p m o c r e h t o l a t o T s r o t c e r i d o t d e u s s i s e r a h S d e u s s i s e r a h S x a t f o t e n - d o i r e p e h t r o f i n a g i e v s n e h e r p m o c r e h t O d o i r e p e h t r o f s s o L ) 3 3 4 , 6 4 3 , 1 ( ) 2 8 1 , 7 3 1 ( 5 7 9 , 2 1 ) 1 6 6 , 0 3 1 ( 8 9 7 , 3 6 2 , 1 7 1 0 2 y r a u n a J 1 t a e c n a a B l ) 7 9 9 , 8 5 2 ( ) 8 3 4 , 9 8 4 , 1 ( ) 2 8 1 , 7 3 1 ( 3 8 9 , 0 1 ) 8 1 1 , 2 1 1 ( 8 5 7 , 8 6 4 , 1 7 1 0 2 r e b m e c e D 1 3 t a e c n a l a B 8 1 - 5 2 ) 3 2 5 , 3 4 ( ) 7 9 9 , 8 5 2 ( ) 1 1 8 , 4 1 ( ) 4 3 3 , 8 5 ( - - - ) 3 2 5 , 3 4 ( 0 1 3 ) 3 1 2 , 3 4 ( - - - - - - - - - - - 5 2 - - - - ) 1 2 1 , 5 1 ( ) 1 2 1 , 5 1 ( - - - - - 8 1 s s o l i e v s n e h e r p m o c r e h t o l a t o T n o i t a s n e p m o c d e s a b - e r a h S t s e r e t n i g n i l l o r t n o c - n o N d e u s s i s e r a h S x a t f o t e n - d o i r e p e h t r o f s s o l i e v s n e h e r p m o c r e h t O d o i r e p e h t r o f s s o L ) 8 3 4 , 9 8 4 , 1 ( ) 2 8 1 , 7 3 1 ( 3 8 9 , 0 1 ) 8 1 1 , 2 1 1 ( 8 5 7 , 8 6 4 , 1 8 1 0 2 y r a u n a J 1 t a e c n a a B l ) 8 5 8 , 4 1 3 ( 0 3 4 , 2 ) 8 8 2 , 7 1 3 ( ) 1 5 6 , 2 3 5 , 1 ( ) 2 8 1 , 7 3 1 ( 8 0 0 , 1 1 ) 9 3 2 , 7 2 1 ( 6 7 7 , 8 6 4 , 1 8 1 0 2 r e b m e c e D 1 3 t a e c n a l a B . 7 0 0 2 n i y n a p m o C e h t f o n o i t a e r c n o e v r e s e r n o i t a s n a g r o e r i ’ s y n a p m o C e h t s t n e s e r p e r y t i u q e r e h O t ) 1 ( 9 4 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . 4 0 1 o t 2 5 s e g a p n o d e d u c n l i s t n e m e t a t S l i i a c n a n F d e t a d i l o s n o C e h t o t i s e t o N g n y n a p m o c c a e e S 49 BOART LONGYEAR 2018 ANNUAL REPORT BOART LONGYEAR LIMITED Note 2018 US$'000 2017 US$'000 (43,523) (150,044) Consolidated Statement of Cash Flows CONSOLIDATED STATEMENT OF CASH FLOWS For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 Cash flows from operating activities Loss for the year Adjustments provided by operating activities: Income tax (benefit)/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 5 6 5 6 6b, 10 6b Interest paid Interest received Income taxes paid Net cash flows generated/used in operating activities 5 (7,495) 69,482 36,587 (889) (7,794) (17,135) 18 11,493 2,062 25 - 3,037 4,023 (980) (18,944) (5,818) 24,149 (6,095) 889 (15,231) 3,712 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) See accompanying Notes to the Consolidated Financial Statements included on pages 52 to 104. ____________________________________________________________________________________ 50 BOART LONGYEAR 2018 ANNUAL REPORT 50 Consolidated Statement of Cash Flows CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 BOART LONGYEAR LIMITED Note 2018 US$'000 2017 US$'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 (37,095) 13,738 (2,016) - (25,373) - - 16,964 (5,345) 11,619 (10,042) 43,758 5,226 38,942 (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 See accompanying Notes to the Consolidated Financial Statements included on pages 52 to 104. _______________________________________________________________________________________ 51 BOART LONGYEAR 2018 ANNUAL REPORT 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 1. GENERAL INFORMATION BOART LONGYEAR LIMITED 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 5650 Tel: +61 (8) 8375 8375 Basis of Preparation Principal place of business 2455 South 3600 West Salt Lake City, Utah 84119 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 26 February 2019; - 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. - adopted AASB 15 Revenue from Contracts from Customers and AASB 9 Financial Instruments. The accounting policies been updated for changes resulting from the adoption of those tow standards. Refer to Note 33 for further details on the changes in accounting policies. - 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 Company 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. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 52 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 1. GENERAL INFORMATION (CONTINUED) Going Concern BOART LONGYEAR LIMITED 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 2018, the Company has net liabilities of $314.9 million (2017: net liabilities of $259.0 million). The increase in net liabilities is mainly a result of accreted interest on long-term debt. At 31 December 2018 the Company has net current assets of $134.0 million (2017: $107.8 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. 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. We have seen an improvement in the market through 2017 and into 2018; however, 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, resulting in adverse effects on the Company’s operating results, liquidity and financial condition. Operational risk In response to the recent improvements in the market, the company is seeing higher working capital demand. 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. In order 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. 53 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 1. GENERAL INFORMATION (CONTINUED) Key Judgements and Estimates BOART LONGYEAR LIMITED 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 18 Note 27 Going Concern Income Tax Goodwill and Other Asset Impairment Considerations Contingent Liabilities 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. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 54 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 2. SEGMENT REPORTING BOART LONGYEAR LIMITED 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 Global Drilling Services 533,606 500,583 Segment Revenue 2018 US$'000 2017 US$'000 Segment Profit 2018 US$'000 57,137 2017 US$'000 36,395 Global Products revenue Products third party revenue Products inter-segment revenue 1 Total Global Products Less Global Product sales to Global Drilling Services Total third party revenue Total segment profit Unallocated costs 2 Significant items Finance costs Interest income Loss before taxation 236,561 56,021 238,480 54,507 292,582 (56,021) 770,167 292,987 23,493 2,803 (54,507) 739,063 80,630 39,198 (36,554) (26,501) (69,482) 889 (51,018) (47,259) (79,686) (57,155) 1,783 (143,119) (1) Transactions between segments are carried out at arm's length and are eliminated on consolidation. (2) Unallocated costs include corporate general and administrative costs, as well as, other expense items such as foreign exchange gains or losses. Other segment information Depreciation and amortisation of segment assets 2018 US$'000 2017 US$'000 Additions to non-current assets 2 2018 US$'000 2017 US$'000 25,768 7,175 32,943 3,644 36,587 32,663 8,599 41,262 9,846 51,108 27,932 3,013 30,945 10,427 41,372 20,805 3,904 24,709 5,657 30,366 Global Drilling Services Global Products Total of all segments Unallocated 1 Total (1) Unallocated additions to non-current assets relate to the acquisition of general corporate assets such as software and hardware. (2) Non-current assets excluding deferred tax assets. 55 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 2. SEGMENT REPORTING (CONTINUED) Geographic information BOART LONGYEAR LIMITED The Company’s two business segments operate in four principal geographic areas – North America, Asia Pacific, Latin America and EMEA. The Company’s revenue from external customers and information about its segment assets by geographical locations are detailed below: Revenue from external customers 2018 US$'000 2017 US$'000 353,206 169,031 110,066 137,864 770,167 338,818 156,502 108,627 135,116 739,063 Non-current assets 1 2018 2017 US$'000 US$'000 201,767 39,922 18,349 18,941 278,979 210,440 45,476 23,054 7,632 286,602 North America Asia Pacific Latin America EMEA Total (1) Non-current assets excluding deferred tax assets. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 56 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 3. REVENUE BOART LONGYEAR LIMITED Boart Longyear operates two different business units throughout various geographical locations – Global Drilling Services and Global Drilling Products. Global Drilling Services The Company performs various types of drilling services within the mining and minerals industry. Contracts entered into can cover services which involve different processes and continuous drilling services activities in a sequential set of mobilisation, drilling, and demobilisation activities which are invoiced to the customer as those activities progress. These processes and activities are highly inter-related and the Company provides a significant service of integration of such activities. Where this is the case, these activities and processes are accounted for as one performance obligation. Revenue from services rendered is recognised in the statement of profit and loss and other comprehensive income over time. Boart Longyear has a contractual right to consideration from a customer for an amount that corresponds directly with the value to the customer of the performance completed to date (for example, number of meters drilled). As a result, Boart Longyear applies the practical expedient under AASB15.B16 to recognise revenue at the amount which it has the right to invoice. Customers are invoiced on a fortnightly basis and revenue is recognised in the accounting period in which the right to invoice is obtained. Payment is received following invoice according to standard payment terms, which are generally between 30 to 60 days. There are no significant financing components. Most drilling services contracts do not include variable payment terms. Where variable payment terms exist these are usually in the form of penalties for late completion. Variable consideration is only recognised to the extent that it is considered highly probable that such amounts will not reverse in the future and is estimated using the expected value approach. Global Drilling Products The Company manufactures, distributes and sells equipment that is necessary for the mining and mineral industry. Sales orders are completed across multiple geographies for products, such as large drill rigs and drilling components such as bits and coring rods. Each product promised to the customer is distinct under the contract according to AASB15.27 and gives rise to a separate performance obligation. Revenue is recognised when control of the products has transferred to the customer. Transfer of control happens at the point the products are delivered to the customer for drilling rigs and at the point the products are shipped to the customer’s specific location for drilling components. The transaction price is allocated to each product on stand-alone basis. Payment is received following invoice according to standard payment terms, which are generally between 30 to 60 days. There are no significant financing components and there is no significant reversal of variable consideration expected at the point of revenue recognition. The components of revenue are as follows: Revenue from the rendering of services Revenue from the sale of goods 2018 US$'000 533,606 236,561 770,167 2017 US$'000 500,583 238,480 739,063 There were no customer(s) that contributed 10% or more to the Company’s revenue in 2018 and 2017. 57 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 4. OTHER INCOME / EXPENSE The components of other income are as follows: Gain on disposal of property, plant and equipment Gain on disposal of scrap Other The components of other expense are as follows: Amortisation of intangible assets VAT write-off Loss on foreign currency exchange differences Impairment of fixed assets Environmental fees Other Total other expenses 5. INTEREST INCOME / FINANCE COSTS Interest income is as follows: Interest income: Bank deposits Finance costs are as follows: Finance costs: Interest on loans and bank overdrafts Amortisation of debt issuance costs Interest on obligations under finance leases Total finance costs Finance costs due to debt repayment: Write-off of debt issuance costs BOART LONGYEAR LIMITED 2018 US$'000 2017 US$'000 7,794 326 2,240 10,360 4,385 805 1,447 6,637 2018 US$'000 2017 US$'000 4,216 2,938 11,615 79 24 2,208 21,080 10,657 3,323 6,564 1,936 1,179 1,020 24,679 2018 US$'000 2017 US$'000 889 1,783 2018 US$'000 2017 US$'000 67,432 1,902 148 69,482 - - 52,243 2,012 60 54,315 2,840 2,840 Total finance costs 69,482 57,155 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 58 58 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 6. LOSS FOR THE YEAR Loss for the year includes the following: (a) Gains and losses Loss for the year includes the following gains and (losses): BOART LONGYEAR LIMITED Gain on disposal of property, plant and equipment 2018 US$'000 2017 US$'000 7,794 4,385 Net foreign exchange losses (11,615) (6,564) Bad debt expense, net of reversals (228) (1,343) (b) Employee benefits expenses Salaries and wages Post-employment benefits: Defined contribution plans Defined benefit plans Long-term incentive plans: Equity-settled share-based payments Cash rights compensation Termination benefits Other employee benefits 1 2018 US$'000 2017 US$'000 (244,925) (244,119) (6,411) (1,507) (25) - (3,164) (66,944) (322,976) (5,751) (1,902) (2,457) (2,178) (11,625) (69,827) (337,859) (1) Other employee benefits include items such as medical benefits, workers’ compensation, other fringe benefits and state taxes. (c) Other Depreciation of non-current assets Amortisation of non-current assets Operating lease rental expense 2018 US$'000 2017 US$'000 (31,129) (5,446) (25,696) (39,236) (11,872) (15,753) _______________________________________________________________________________________ 59 BOART LONGYEAR 2018 ANNUAL REPORT 59 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 7. SIGNIFICANT ITEMS BOART LONGYEAR LIMITED During 2018, the Company continued to reduce operating costs through a series of restructuring activities. The Company’s restructuring efforts included: • • • • controlling SG&A and other overhead related costs; exiting certain loss-making drilling services project or territories; leveraging the supply chain function across the business, and focusing on operational efficiencies and productivity at the drill rig level and across the global organisation. The Company has incurred costs related to cost-reduction plans. These costs include employee separations, exiting leased facilities, impairments of plant and equipment and inventories, and professional fees related to resizing the business. Significant items for the years ended 31 December 2018 and 2017 are, as follows: Recapitalisation costs 1 Impairments: Equipment Intangible assets Inventories Employee and related costs 2 Other restructuring costs 3 Onerous leases Net of tax 4 2018 US$'000 2017 US$'000 - 44 - 10,941 2,601 12,915 - 26,501 26,099 50,471 136 26 - 15,116 12,175 1,762 79,686 78,931 (1) Recapitalisation costs include fees for legal, finance and other advisory services. (2) Employee and related costs include separation costs, retention and other employee-related costs. (3) Other restructuring costs include fees and other advisory costs for business and operational improvement initiatives. (4) The tax effect was calculated using the applicable local country tax rates before application of excess of net operating losses. The net operating losses were largely not benefitted. Classification of significant items on the income statement for the years ended 31 December 2018 and 2017 are, as follows: General and administrative expenses Cost of goods sold Research and development Sales and marketing expenses 2018 US$'000 2017 US$'000 14,493 11,242 266 500 26,501 76,511 2,669 189 317 79,686 Significant items for the years ended 31 December 2018 and 2017 by business segment are, as follows: Global Drilling Services1 Global Products Unallocated2 2018 US$'000 2017 US$'000 8,566 10,513 7,422 26,501 6,320 5,316 68,050 79,686 (1) Transactions between segments are carried out at arm’s length and are eliminated in consolidation. (2) Unallocated costs include corporate general and administrative costs, as well as, other expense items such as foreign exchange gains or losses and recapitalisation costs. _______________________________________________________________________________________ 60 BOART LONGYEAR 2018 ANNUAL REPORT 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 8. REMUNERATION OF AUDITORS Company auditor's remuneration Audit and review of the financial report: Auditor of the parent entity Related practices of the parent entity auditor Non-audit services: Tax Compliance Tax Services BOART LONGYEAR LIMITED 2018 US$'000 2017 US$'000 835 757 1,592 429 427 856 974 927 1,901 449 308 757 Total remuneration to Company auditor 2,448 2,658 Remuneration to other accounting firms Audit services Non-audit services: Tax services Professional services Global mobility Accounting and payroll services Other Total remuneration to other accounting firms 264 2,326 1,944 101 402 292 5,329 229 2,116 - 196 363 105 3,009 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. 61 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 9. KEY MANAGEMENT PERSONNEL COMPENSATION BOART LONGYEAR LIMITED 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 Share-based payments 10. EMPLOYEE LONG TERM INCENTIVE PAYMENTS 2018 US$'000 2017 US$'000 4,989 28 67 18 5,101 4,892 65 430 1,899 7,286 On 31 December 2017 the Long Term Incentive Plan (LTIP) and Retention Incentive Grant Agreement (RIGA) programs ceased. Retention based awards, under LTIP, were 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, under the LTIP, were cancelled as of 31 December 2017. Effective 1 January 2018 the Board approved a resolution to introduce a long-term incentive plan, the Management Incentive Plan (“MIP”). The MIP is a long-term incentive plan, which is similar in design to a stock option plan, and consistent with many incentive plans in private equity, in that it allows participants to share in the gain of Boart Longyear’s value over time. The MIP was created to give senior leaders an opportunity to share in the growth and value of Boart Longyear’s business success. The executives eligible to participate in the MIP are senior management and corporate executives, including the KMP. The percentage of the MIP payouts vary depending on the participant’s position, skills and contributions to the Company. The percentage amounts are generally based on market averages for comparable roles at similar-sized companies. There are both time and performance vesting hurdles in the MIP. The time vesting portion of the MIP represents 33.3% of the plan and is spread over a 5-year time window. The performance portion of the MIP is based on Boart Longyear’s gain in Total Enterprise Value (TEV), which has been set at a baseline of $650 million. The MIP has two performance vesting criteria; one set at $900M TEV, representing 33.3% of the award and the other set at $1.1B TEV, which represents the final 33.3% of the award. Upon sale of ownership at certain predetermined levels, TEV will be measured and if the critieria are met, business leaders will be paid a percentage of the value based on their MIP allocation. No trigger event took place in 2018, so no amount was recorded in the financial statements at 31 December 2018. The MIP will be paid in either cash or shares at the discretion of the Board. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 62 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 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. The Company recognized the tax effects of the Tax Act in the year ended December 31, 2017 and recorded a $5.0 million tax benefit relating primarily to the remeasurement of deferred tax items to the 21% tax rate. 63 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 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. (a) Income tax (benefit)/expense is comprised of: Income tax (benefit)/expense: Current tax (benefit)/expense Adjustments recognised in the current year in relation to the current tax of prior years Deferred tax (benefit)/expense 2018 US$'000 2017 US$'000 (5,585) 13,199 (1,920) 10 (7,495) 664 (6,938) 6,925 (b) 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 Net Unrecognised tax losses and tax credits for the current year 2 Recognition of deferred tax assets arising in prior years Other 3 (Over) / under provision from prior years Income tax (benefit)/expense per the Consolidated (51,018) (143,119) (15,305) (2,292) - 13,166 23,452 (6,168) (18,428) (5,575) (1,920) (42,936) 3,313 (5,020) 7,817 46,596 (3,648) 139 6,261 664 Statement of Profit or Loss and Other Comprehensive Income (7,495) 6,925 (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 a tax benefit for current period losses. (3) The majority of this adjustment relates to effectively settling a portion of the disputes in the Canada Revenue Agency tax audit for tax years 2007-2012 (See the Canadian income tax audits section on page 68). _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 64 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 11. INCOME TAXES (CONTINUED) BOART LONGYEAR LIMITED (c) Income tax recognised directly in equity during the period The following current and deferred amounts were (charged) credited directly to equity during the year: Deferred tax recognised in equity: Actuarial movements on defined benefit plans (d) 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 (e) Deferred tax balances Deferred tax comprises: Temporary differences Unused tax losses and credits 2018 US$'000 2017 US$'000 (104) (752) (97,271) 97,271 16,552 16,552 1 1,398 69,796 71,194 (91,015) 91,015 19,690 19,690 - 99,590 99,590 (5,122) 8,329 3,207 (1,248) 8,406 7,158 (1) The income tax receivable for 2018 is $16.6 million (2017: $19.7 million) of which $0.3 million is classified as current tax receivable and $16.3 million is classified as non-current tax receivable (2017: $1.7 million and $18.0 million respectively). 65 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 11. INCOME TAXES (CONTINUED) BOART LONGYEAR LIMITED Opening Recognised balance US$'000 FX in income differences disposed US$'000 US$'000 Acquired/ Recognised Closing balance in equity US$'000 US$'000 US$'000 2018 Deferred tax assets (liabilities) temporary differences Property, plant and equipment Provisions Doubtful debts Other intangible assets Accrued liabilities Pension Inventories Unrealised foreign exchange Other Unused tax losses and credits: Tax losses 3,568 3,326 64 (13,885) 3,314 (441) 1,940 171 695 (1,248) 8,406 7,158 941 (188) (40) (228) (458) 147 267 (446) 72 67 (77) (10) (422) (394) (8) - (392) 52 (230) - (85) (1,479) - (1,479) - - - (2,358) - - - - (2,358) (2,358) Presented in the statement of financial position as follows: Deferred tax asset Deferred tax liability - - - - - (104) - - - (104) - (104) 4,087 2,744 16 (16,471) 2,464 (346) 1,977 (275) 682 (5,122) 8,329 3,207 20,709 (17,502) 3,207 Where deferred tax assets have been recognised, it is considered probable that the Company will generate sufficient future taxable income to utilise the assets. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 66 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 11. INCOME TAXES (CONTINUED) BOART LONGYEAR LIMITED Opening Recognised balance US$'000 FX in income differences disposed US$'000 US$'000 Acquired/ Recognised Closing balance in equity US$'000 US$'000 US$'000 2017 Deferred tax assets (liabilities) temporary differences Property, plant and equipment Provisions Doubtful debts Other intangible assets Accrued liabilities Pension Inventories Investments in subsidiaries Unrealised foreign exchange Other Unused tax losses and credits: Tax losses Foreign tax credits 1,304 7,854 - (19,429) 1,703 600 1,186 (1,500) (46) 826 (7,502) 5,717 2,366 8,083 2,226 (4,756) 64 5,544 1,561 (306) 719 1,500 217 (154) 6,615 2,689 (2,366) 323 38 228 - - 50 17 35 - - 23 391 - - - 581 6,938 391 - - - - - - - - - - - - Presented in the statement of financial position as follows: Deferred tax asset Deferred tax liability - - - - - (752) - - - - (752) - - - 3,568 3,326 64 (13,885) 3,314 (441) 1,940 - 171 695 (1,248) 8,406 - 8,406 (752) 7,158 20,597 (13,439) 7,158 Unrecognised deferred tax assets Tax benefit of unused losses 1 Unused tax credits 2 Tax benefit of temporary differences 2018 US$'000 2017 US$'000 221,355 16,698 63,415 301,468 228,309 23,089 62,633 314,031 (1) $93,066 of the tax benefit of unused losses expire within 3-20 years and $128,289 related to tax losses that do not expire. (2) All of the unused tax credits expire within 1-10 years. 67 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 11. INCOME TAXES (CONTINUED) Canadian income tax audits BOART LONGYEAR LIMITED As previously disclosed by the Company, the Canada Revenue Agency (“CRA”)’s audit division made a reassessment which would have resulted in tax, penalties and interest payable as of 31 December 2017 of C$109.4 million for the 2007 through 2012 tax years. The Company has filed applications under the mutual agreement procedures (“MAP”) of Canada’s tax treaties with the jurisdictions of residence of various relevant foreign affiliates, for relief from double taxation arising as a result of international reassessments. These procedures have been completed and agreed with the U.S. and Australia. The CRA chose to withdraw its adjustments from all other treaty partner jurisdictions except Switzerland, which is underway. As a result of the settlements achieved on domestic issues and in the MAP process, the remaining unsettled tax, penalties and interest could result in a maximum remaining assessment of C$29 million. After the application of tax credits and payments, the maximum future cash outlay could be C$15 million for the remaining unsettled issues. The Company continues negotiation with the CRA in the appeals process but it is not possible to predict the outcome with any certainty at this time. The Company has also been reassessed for domestic adjustments for 2013 through 2014 tax years but international issues have not yet been reassessed. The Company appealed these domestic reassessments of C$3.3 million by filing Notices of Objection with the CRA, and certain provincial tax authorities. The Company plans to vigorously dispute these reassessments. 12. LOSS PER SHARE Basic loss per share Basic loss per share The loss and weighted average number of ordinary shares used in the calculation of basic loss per share are as follows: Loss used in the calculation of basic EPS 2018 US cents per share 2017 US cents per share (0.2) (1.6) 2018 US$'000 2017 US$'000 (43,523) (150,044) _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 68 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 13. TRADE AND OTHER RECEIVABLES BOART LONGYEAR LIMITED Trade receivables are recorded at amortised cost. The Company reviews collectability of trade receivables on an ongoing basis and provides allowances for credit losses when there is evidence that trade receivables may not be collectible. These losses are recognised in the income statement within operating expenses. When a trade receivable is determined to be uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are recorded in other income in profit or loss. Trade receivables Loss allowance Goods and services tax receivable Other receivables The ageing of trade receivables is detailed below: Current Past due 0 - 30 days Past due 31 - 60 days Past due 61-90 days Past due 90 days 2018 US$'000 2017 US$'000 109,195 (1,391) 7,056 4,722 119,582 123,554 (1,844) 8,229 1,922 131,861 2018 US$'000 2017 US$'000 89,315 13,106 2,166 1,243 3,365 109,195 90,156 18,963 6,338 3,338 4,759 123,554 The Company always measures the loss allowance for trade receivables at an amount equal to lifetime expected credit losses (ECL). The expected credit losses on trade receivables are estimated using a provision matrix by reference to past default experience of the debtor and an analysis of the debtor’s current financial position, adjusted for factors that are specific to the debtors, general economic conditions of the industry in which the debtors operate and an assessment of both the current as well as the forecast direction of conditions at the reporting date. The Company has recognised a loss allowance of 100% against all receivables over 120 days past due because historical experience has indicated that these receivables are generally not recoverable. 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. No interest is charged on trade receivables. 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 advance 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 2018 or 2017. 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. 69 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 14. INVENTORIES (CONTINUED) BOART LONGYEAR LIMITED Raw materials Work in progress Finished products 2018 US$'000 2017 US$'000 30,836 5,488 129,086 165,410 28,023 3,265 143,087 174,375 The Company did not record any additional provisions against inventory for the years ended 31 December 2018 and 2017. Obsolescence provisions were $18.7 million and $25.0 million as at 31 December 2018 and 2017, 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. Credit risk management The Company reviews the recoverable amount of each trade debt on an individual basis at the end of the reporting period to ensure that adequate loss allowance is made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable. Of the outstanding loans and borrowings, Centerbridge Partners, L.P. accounted for $292.5 million of Term Loans outstanding. Centerbridge Partner, L.P., Ares Management L.P. and Ascribe Capital hold $20.6 million of the backstop ABL with $3.1 million of accreted interest. 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 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. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 70 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 15. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk BOART LONGYEAR LIMITED 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. The Company did not utilise any derivative instruments during the years ended 31 December 2018 or 2017. 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 Liabilities 2018 US$'000 2017 US$'000 2018 US$'000 2017 US$'000 170,842 269 27,593 143,756 94,116 190 30,454 131,041 55,519 22,933 158,496 153,168 163,003 27,577 146,070 336,060 Australian Dollar Canadian Dollar Euro US Dollar Foreign currency sensitivity The Company is mainly exposed to exchange rate fluctuations in the Australian Dollar (AUD), Canadian Dollar (CAD), Euro (EUR) and United States Dollar (USD). The Company is also exposed to translation differences as the Company’s presentation currency is different from the functional currencies of various subsidiaries. However, this represents a translation risk rather than a financial risk and consequently is not included in the following sensitivity analysis. The following tables reflect the Company’s sensitivity to a 10% change in the exchange rate of each of the currencies listed above. This sensitivity analysis includes only outstanding monetary items denominated in currencies other than the respective subsidiaries’ functional currencies and remeasures these at the respective year end to reflect a 10% decrease in the indicated currency against the respective subsidiaries’ functional currencies. A positive number indicates an increase in net profit and/or net assets. Net profit Net assets Net profit Net assets 10% decrease in AUD 2017 US$'000 2018 US$'000 10% decrease in CAD 2018 US$'000 2017 US$'000 (8,689) (10,485) (1,247) 6,264 1,273 2,059 1,557 2,483 10% decrease in EUR 10% decrease in USD 2018 US$'000 4,692 9,186 2017 US$'000 3,919 7,886 2018 US$'000 (5,818) 856 2017 US$'000 9,035 18,638 In management’s opinion, the sensitivity analysis is not fully representative of the inherent foreign exchange risk as the year-end exposure may not reflect the exposure during the course of the year. 71 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 15. FINANCIAL RISK MANAGEMENT (CONTINUED) Forward foreign exchange contracts BOART LONGYEAR LIMITED There were no open forward foreign currency contracts as at 31 December 2018 or 2017. Interest rate risk management Most of the Company’s loan portfolio is at fixed interest rates, as such it has less exposure to variable interest rates than fixed interest rates. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Company’s Treasurer and Board. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Liquidity risk The following tables reflect the expected maturities of non-derivative financial liabilities as at 31 December 2018 and 2017. These are based on the undiscounted expected cash flows of financial liabilities based on the maturity profile per the loan agreement. The table includes both interest and principal cash flows. The adjustment column represents the possible future cash flows attributable to the instrument included in the maturity analysis which are not included in the carrying amount on the balance sheet. Weighted average effective interest rate % Less than 1 to 3 3 months to 1 year 1 month months US$'000 US$'000 US$'000 1 to 5 years US$'000 Adjustment US$'000 Total US$'000 31 December 2018 Non-interest bearing payables Variable interest rate instruments Fixed interest rate instruments Financial Lease 31 December 2017 Non-interest bearing payables Variable interest rate instruments Fixed interest rate instruments Financial Lease - 93,091 18,107 - - - 111,198 5.7% 8.1% 7.1% 142 283 1,274 31,008 (2,654) 30,053 - 98 93,331 - 196 18,586 - 884 2,158 916,232 3,765 951,005 (227,760) (230,414) 688,472 4,943 834,666 - 93,196 45,052 - - - 138,248 5.1% 8.9% 4.6% 73 146 656 18,376 (2,240) 17,011 - 66 93,335 - 132 45,330 - 595 1,251 930,935 1,877 951,188 (304,421) (306,661) 626,514 2,670 784,443 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 72 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 15. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) BOART LONGYEAR LIMITED The following tables reflect the expected maturities of non-derivative financial assets. These are based on the undiscounted expected cash flows of the financial assets. 2018 Non-interest bearing receivables Cash 2017 Non-interest bearing receivables Cash Less than 1 month US$'000 1 to 3 months US$'000 3 months to 1 year US$'000 Total US$'000 62,535 38,942 101,477 48,778 - 48,778 61,399 43,758 105,157 60,582 - 60,582 8,269 - 8,269 9,880 - 9,880 119,582 38,942 158,524 131,861 43,758 175,619 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 $467 thousand as held for sale as at 31 December 2018 (31 December 2017: $530 thousand). 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. 73 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 17. PROPERTY, PLANT AND EQUIPMENT BOART LONGYEAR LIMITED 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. See Note 26 for more information. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 74 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 17. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) BOART LONGYEAR LIMITED Land and Buildings US$'000 Plant and Equipment US$'000 Construction in Progress US$'000 Total US$'000 Balance at 1 January 2017 Additions Disposal Transfers from assets held for sale Transfer from CIP Transfer from intangible assets Currency movements Balance at 31 December 2017 Additions Disposal Transfers from assets held for sale Transfer from CIP Transfer from intangible assets Currency movements Balance at 31 December 2018 Accumulated depreciation and impairment: Balance at 1 January 2017 Depreciation Impairment Disposal Currency movements Balance at 31 December 2017 Depreciation Impairment Disposal Transfers from assets held for sale Currency movements Balance at 31 December 2018 Net book value at 31 December 2017 Net book value at 31 December 2018 47,344 34 (3,022) - 562 - 2,755 47,673 8 (2,067) - 5,754 - (2,365) 49,003 (15,143) (1,723) (196) 1,854 (1,292) (16,500) (1,965) - 1,310 - 1,403 (15,752) 31,173 33,251 608,668 797 (63,956) - 18,063 723 31,541 595,836 1,260 (51,227) - 39,084 - (35,373) 549,580 (522,782) (37,513) (1,875) 61,111 (26,033) (527,092) (29,164) (123) 46,040 - 28,690 (481,649) 68,744 67,931 9,573 26,684 - - (18,625) - 581 18,213 38,088 - - (44,838) - 1,453 12,916 - - - - - - - - - - - - 18,213 12,916 665,585 27,515 (66,978) - - 723 34,877 661,722 39,356 (53,294) - - - (36,285) 611,499 (537,925) (39,236) (2,071) 62,965 (27,325) (543,592) (31,129) (123) 47,350 - 30,093 (497,401) 118,130 114,098 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 salability within a reasonable timeframe. As a result of this exercise, the Company recorded an impairment loss at 31 December 2018 and 31 December 2017 of $123 thousand and $2.1 million, respectively on property, plant and equipment. 75 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 18. GOODWILL AND OTHER ASSET IMPAIRMENT CONSIDERATIONS BOART LONGYEAR LIMITED 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 2017 Currency movements Balance at 31 December 2017 Balance at 1 January 2018 Acquisiton of business Currency movements Balance at 31 December 2018 Note US$'000 100,036 1,160 101,196 101,196 3,940 (1,277) 103,859 34 The carrying amount of goodwill of $103.9 million as at 31 December 2018 and $101.2 million as at 31 December 2017 was in the North America Drilling Services CGU. The additions of $3.9 million are related to the acquisition of Globaltech. See Note 34 for more information. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 76 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 BOART LONGYEAR LIMITED 18. GOODWILL AND OTHER ASSET IMPAIRMENT CONSIDERATIONS (CONTINUED) Allocation of goodwill to cash-generating units Goodwill has been allocated for impairment testing purposes to individual cash-generating units. The carrying amount of goodwill by geographic segment allocated to cash-generating units that are significant individually or in aggregate is as follows: Goodwill by cash-generating units North America Drilling Services Asia Pacific - Globaltech 2018 US$'000 99,919 3,940 103,859 2017 US$'000 101,196 - 101,196 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. 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 North America Drilling Services CGU, the Company performed a goodwill impairment test at 31 December 2018 and the recoverable amount for the North America Drilling Services CGU exceeded the goodwill carrying amount. Goodwill arising from the acquisition of Globaltech in Asia Pacific was also tested for impairment and the recoverable amount exceeded the Globaltech carrying amount. Consequently, no goodwill impairments were recorded for the year ended 31 December 2018. 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. 77 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 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 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 11.0% and the terminal growth rate of 3.0% 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. _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 78 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 19. OTHER INTANGIBLE ASSETS Trademarks and trade names BOART LONGYEAR LIMITED 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. 79 _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 19. OTHER INTANGIBLE ASSETS (CONTINUED) BOART LONGYEAR LIMITED Gross carrying amount: Balance at 1 January 2017 Additions Disposals Transfer to PP&E Currency movements Balance at 31 December 2017 Balance at 1 January 2018 Additions Acquisition of business Disposals Currency movements Balance at 31 December 2018 Accumulated amortisation: Balance at 1 January 2017 Amortisation for the period Disposals Impairment for the period Currency movements Balance at 31 December 2017 Balance at 1 January 2018 Amortisation for the period Disposals Impairment for the period Currency movements Balance at 31 December 2018 Note Trademarks Patents US$'000 US$'000 Customer relationships and other US$'000 Develop- ment Software assets US$'000 US$'000 34 4,293 33 (1,266) - - 3,060 3,060 27 1 - - 3,088 (1,270) - 1,270 - - - - - - - - - 7,137 961 (1) - - 8,097 8,097 815 353 (52) (7) 9,206 (1,513) (471) - - - (1,984) (1,984) (388) - - - (2,372) 46,529 - (5,321) - 1,752 42,960 42,960 - - - (2,206) 40,754 (39,076) (1,622) 5,321 - (1,712) (37,089) (37,089) (1,124) - - 2,195 (36,018) 89,111 12 (2) - 20 89,141 89,141 - - (12) (29) 89,100 (76,846) (8,568) - - (18) (85,432) (85,432) (2,693) 28 (18) 23 (88,092) 45,745 1,844 (1) (723) (23) 46,842 46,842 1,174 7,436 - (244) 55,208 (30,190) (1,211) - (104) 19 (31,486) (31,486) (1,241) - (410) 26 (33,111) Total US$'000 192,815 2,850 (6,591) (723) 1,749 190,100 190,100 2,016 7,790 (64) (2,486) 197,356 (148,895) (11,872) 6,591 (104) (1,711) (155,991) (155,991) (5,446) 28 (428) 2,244 (159,593) Net book value at 31 December 2017 Net book value at 31 December 2018 3,060 3,088 6,113 6,834 5,871 4,736 3,709 1,008 15,356 22,097 34,109 37,763 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 2018 and 31 December 2017 of $428 thousand and $104 thousand, respectively. The Company has reassessed the carrying value of certain development assets relating to its Global Products business. The 31 December 2018 review did not lead to an impairment for that period. The Company recognised $6.6 million of research and development expenses in the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2018 (2017: $8.1 million). _______________________________________________________________________________________ BOART LONGYEAR 2018 ANNUAL REPORT 80 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 20. TRADE AND OTHER PAYABLES BOART LONGYEAR LIMITED Trade payables and other payables are carried at amortised cost. They represent unsecured liabilities for goods and services provided to the Company prior to the end of the financial period that are unpaid and arise when the Company becomes obligated to make future payments. Current Trade payables Accrued payroll and benefits Accrued recapitalision costs Goods and services tax payable Accrued interest Accrued legal and environmental Professional fees Accrued drilling costs Other sundry payables and accruals 2018 US$'000 2017 US$'000 52,685 23,834 - 17,788 192 4,405 4,583 2,572 5,139 111,198 65,486 26,759 9,898 13,229 1,051 5,625 4,535 2,484 9,181 138,248 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. _______________________________________________________________________________________ 81 81 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 21. LOANS AND BORROWINGS BOART LONGYEAR LIMITED 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 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 2018 US$'000 2017 US$'000 88,882 1,791 88,882 444 1,183 794 217,035 292,441 43,317 75,054 (1,017) (1,000) 3,765 721,451 1,183 720,268 721,451 1,183 83,020 1,100 637,555 610 723,468 (1,000) (1,017) 721,451 217,035 190,000 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 _______________________________________________________________________________________ 82 BOART LONGYEAR 2018 ANNUAL REPORT 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 21. LOANS AND BORROWINGS (CONTINUED) Senior notes BOART LONGYEAR LIMITED Senior Unsecured Notes The Company has $88.9 million of senior unsecured notes outstanding as at 31 December 2018 and 2017. These 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 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 The Company has $217.0 million of senior secured notes outstanding as at 31 December 2018 and 2017. These notes carry an interest rate of 12% per annum which is payable-in-kind at the Company’s election until December 2018 and thereafter in cash at the reduced interest rate of 10% per annum with a scheduled maturity date of December 2022. The Company may redeem all or a portion of the notes prior to maturity subject to certain conditions, including in certain cases the payment of premiums or make-whole amounts. With respect to the senior notes issued by the Company, the indenture governing those senior notes includes covenants that restrict the Company’s ability to engage in certain activities, including incurring additional indebtedness and making certain restricted payments as well as a limitation on the amount of secured debt the Company may incur. The senior notes contain certain provisions that provide the note holders with the ability to declare a default, and accelerate the notes, should a default occur under either of the Term Loans that results in acceleration of such Term Loans. The senior notes do not require maintenance or testing of financial covenant ratios. Revolver Bank Loans ABL Available facility Drawn (i) Letters of credit (ii) Availability block Undrawn (iii) 31 December 2018 US$m 31 December 2017 US$m 50.0 30.0 5.9 - 14.1 50.0 40.0 17.0 13.0 5.0 5.0 40.0 (i) (ii) The Company has an asset based revolving bank facility with capacity of $50.0 million of which $30.0 million (31 December 2017: $17.0 million) was drawn. As at 31 December 2018 $5.9 million (31 December 2017: $13.0 million) of outstanding letters of credit were drawn under the facility. (iii) Of the undrawn amount $7.5 million is subject to springing dominion as of a date of determination if Undrawn Availability shall be less than or equal to $7.5 million as of the last day of any month. Interest on drawn amounts and letters of credit are based on a base rate plus margin (30 day USD LIBOR plus 3.25%). The 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 over 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). Scheduled maturity date of the facility is July 2020. As at 30 June 2018 the Company was in compliance with all of its debt covenants. _______________________________________________________________________________________ 83 83 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 21. LOANS AND BORROWINGS (CONTINUED) BOART LONGYEAR LIMITED Backstop ABL The term loan facility 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 2018 and 2017 the amount outstanding under this facility was $45.0 million. As at 31 December 2018 the Company was in compliance with all of its debt covenants. 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. Since inception, interest of $47.6 million and $34.8 million had accreted for Tranche A and Tranche B loans, respectively. On 31 December 2018, the issuer of these loans was changed from Boart Longyear Management Pty. Ltd. to BL Capital Management LLC and the accreted interest to 31 December 2018 was capitalised to the principal balance. No changes to interest rates or maturity dates were made. Tranche A As at 31 December 2018 and 2017 the amount outstanding was $132.6 and $85.0 million, respectively. 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 2018 and 2017 the amount outstanding under Tranche B was $159.9m and $105.0 million, respectively. 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. The Company’s term loans do not require maintenance or testing of financial covenant ratios. _______________________________________________________________________________________ 84 BOART LONGYEAR 2018 ANNUAL REPORT 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 21. LOANS AND BORROWINGS (CONTINUED) BOART LONGYEAR LIMITED Further details around the Issuer/Borrower and Guarantors of the Company’s debt instruments are included below: Description Issuer/Borrower Guarantors Australia: Boart Longyear Australia Pty Limited, Boart Longyear Limited, Boart Longyear Investments Pty Limited and Votraint No. 1609 Pty Limited Canada: Boart Longyear Canada, Boart Longyear Manufacturing Canada Ltd. and Longyear Canada, ULC Senior Secured Notes Boart Longyear Management Pty Limited Chile: Boart Longyear Chile 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., BL Capital Management LLC, BLY US Holdings Inc. and Longyear TM, Inc. Australia: Boart Longyear Australia Pty Limited, Boart Longyear Limited, Boart Longyear Investments Pty Limited and Votraint No. 1609 Pty Limited Canada: Boart Longyear Canada, Boart Longyear Manufacturing Canada Ltd. and Longyear Canada, ULC Senior Unsecured Notes Boart Longyear Management Pty Limited Chile: Boart Longyear Chile 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., BL Capital Management LLC, BLY US Holdings Inc. and Longyear TM, Inc. Australia: Boart Longyear Management Pty Limited, Boart Longyear Australia Pty Limited, Boart Longyear Limited, Boart Longyear Investments Pty Limited and Votraint No. 1609 Pty Limited Canada: Boart Longyear Canada, Boart Longyear Manufacturing Canada Ltd. and Longyear Canada, ULC Term Loan A BL Capital Management LLC Chile: Boart Longyear Chile 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., BLY US Holdings Inc. and Longyear TM, Inc. Term Loan B BL Capital Management LLC Same as Term Loan A Australia: Boart Longyear Australia Pty Limited, Boart Longyear Limited, Boart Longyear Investments Pty Limited and Votraint No. 1609 Pty Limited Canada: Boart Longyear Canada, Boart Longyear Manufacturing Canada Ltd. and Longyear Canada, ULC ABL Boart Longyear Management Pty Limited Chile: Boart Longyear Chile 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., BL Capital Management LLC, BLY US Holdings Inc. and Longyear TM, Inc. Backstop ABL Boart Longyear Management Pty Limited Same as ABL _______________________________________________________________________________________ 85 85 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 22. PROVISIONS BOART LONGYEAR LIMITED 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 provides statutory product warranties through its contracts with customers and does not offer the option to purchase warranties separately. 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 2018 US$'000 2017 US$'000 11,561 6,054 1,268 1,008 19,891 1,291 8,682 819 10,792 30,683 8,995 7,644 1,299 1,513 19,451 4,607 12,601 1,512 18,720 38,171 _______________________________________________________________________________________ 86 BOART LONGYEAR 2018 ANNUAL REPORT 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 23. PENSION AND POST-RETIREMENT BENEFITS BOART LONGYEAR LIMITED 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 2018, and 2017, there were no significant outstanding/prepaid contributions. Company contributions to these plans were $6.0 million and $5.8 million for the years ended 31 December 2018 and 2017, 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 2018 by qualified independent actuaries. The estimated market value of the assets of the funded pension plans was $193.5 million and $211.1 million at 31 December 2018, and 2017, 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 2018 and 2017, 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. _______________________________________________________________________________________ 87 87 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 23. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) Defined Benefit Pension Plans (Continued) BOART LONGYEAR LIMITED Company contributions to these plans were $6.0 million and $5.8 million during the years ended 31 December 2018 and 2017, respectively. Contributions in 2019 are expected to be $6.5 million. The principal assumptions used to determine the actuarial present value of benefit obligations and pension costs are detailed below (shown in weighted averages): Discount rates Expected Average Rate Increases: Salaries Pensions in payment Healthcare costs (initial) Healthcare costs (ultimate) 2018 2017 North America 4.3% Europe 1.8% North America 3.5% Europe 1.6% 3.5% - 5.0% 5.0% 3.0% 1.5% - - 3.5% - 5.0% 5.0% 3.0% 1.5% - - Amounts recognised in profit or loss in respect of these defined benefit plans are as follows: 2018 Post- retirement Pension Plan medical Plan US$'000 1,083 411 - 1,494 US$'000 - 12 - 12 Total US$'000 1,083 424 - Pension Plan US$'000 1,226 665 - 1,507 1,891 2017 Post- retirement medical Plan US$'000 - 11 - 11 Total US$'000 1,226 676 - 1,902 Current service cost Net interest expense Past service cost Total charge to profit and loss account For the financial years ended 31 December 2018 and 2017, charges of approximately $1.3 million and $1.6 million, respectively, have been included in cost of goods sold and the remainder in general and administrative or sales and marketing expenses. _______________________________________________________________________________________ 88 BOART LONGYEAR 2018 ANNUAL REPORT 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 BOART LONGYEAR LIMITED 23. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) Changes in the present value of the defined benefit obligations were as follows: Opening defined benefit obligation Current service cost Interest cost Actuarial gains arising from demographic assumptions Actuarial losses arising from financial assumptions Assets distributed on settlements Past service cost Exchange differences on foreign plans Benefits paid Federal subsidy on benefits paid Closing defined benefit obligation 2018 Post- retirement Medical Plan US$'000 417 - 13 Pension Plan US$'000 223,271 1,083 6,243 Total US$'000 223,688 1,083 6,256 2017 Post- retirement Medical Plan US$'000 324 - 11 Pension Plan US$'000 207,653 1,226 6,487 Total US$'000 207,977 1,226 6,498 231 - 231 (1,197) - (1,197) (7,803) (5) (7,808) 3,983 - (10,388) (10,752) - (31) (55) - - - - (10,419) (10,807) - 15,910 (10,791) - 201,885 339 202,224 223,271 115 - - 28 (61) - 417 4,098 - - 15,938 (10,852) - 223,688 Changes in the fair value of the plan assets were as follows: Opening fair value plan of assets Expected return on plan assets Actuarial gains arising from financial assumptions Administrative expenses paid from the trust Exchange differences on foreign plans Contributions from the employer Distribution of assets from settled plan Contributions from plan participants Benefits paid Closing fair value of plan assets 2018 Post- retirement Medical Plan US$'000 - - - - - 55 - - (55) - Pension Plan US$'000 211,087 5,911 (6,910) (1,045) (10,647) 5,898 - - (10,752) 193,542 Total US$'000 211,087 5,911 (6,910) (1,045) (10,647) 5,953 - - Pension Plan US$'000 185,542 5,823 10,536 (1,141) 15,341 5,777 - - 2017 Post- retirement Medical Plan US$'000 - - - - 61 Total US$'000 185,542 5,823 10,536 (1,141) 15,341 5,838 - - (10,807) 193,542 (10,791) 211,087 (61) - (10,852) 211,087 Assumed healthcare cost trend rates impact the amounts recognised in profit or loss. A one percentage point change in assumed healthcare cost trend rates would have the following effects: One percentage point increase Effect on the aggregate of the service cost and interest cost Effect on accumulated post-employment benefit obligation One percentage point decrease Effect on the aggregate of the service cost and interest cost Effect on accumulated post-employment benefit obligation 2018 US$'000 2017 US$'000 1 - - 2 - - (1) (2) _______________________________________________________________________________________ 89 89 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 24. ISSUED CAPITAL BOART LONGYEAR LIMITED 2018 Shares '000 US$'000 2017 Shares '000 US$'000 Ordinary shares Share capital Ordinary shares, fully paid 26,296,215 1,463,185 26,289,795 1,463,167 Movements in ordinary shares Balance at beginning of year Non-controlling interest Issued to Directors Issued under the recapitalisation Conversion of perferred shares Vesting of LTIP rights Cancellation of LTIP rights Balance at end of the year 26,289,795 1,463,167 940,585 1,204,291 - 6,420 - - - - - 18 - - - - 12,758 24,895,916 434,002 6,534 - 26,296,215 1,463,185 26,289,795 485 194,873 59,507 1,642 2,369 1,463,167 Total shares outstanding Shares held in trust Balance at end of the year 26,296,215 1,463,185 26,289,795 1,463,167 - - - - 26,296,215 1,463,185 26,289,795 1,463,167 Convertible Preference shares Preferred shares, fully paid Conversion of perferred shares Balance at end of the year Issued Warrants Warrants issued but not exercised Balance at end of the year Total ordinary, convertible preference shares and warrants 2018 Shares '000 US$'000 2017 Shares '000 - - - - - - 434,002 (434,002) - US$'000 59,507 (59,507) - 2018 Warrants '000 US$'000 2017 Warrants '000 US$'000 731,082 731,082 5,591 5,591 731,082 731,082 5,591 5,591 1,468,776 1,468,758 Transaction costs on the issue of equity instruments Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. _______________________________________________________________________________________ 90 BOART LONGYEAR 2018 ANNUAL REPORT 90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 25. DIVIDENDS BOART LONGYEAR LIMITED No dividend has been determined for any of the half-years ended 30 June 2018, 31 December 2018, 30 June 2017 or 31 December 2017. There are no franking credits available for the years ended 31 December 2018 or 2017. 26. COMMITMENTS FOR EXPENDITURE The Company has a number of continuing operational and financial commitments in the normal course of business. Capital commitments Purchase commitments for capital expenditures 3,560 3,298 2018 US$'000 2017 US$'000 Non-cancellable future operating lease commitments as at 31 December 2018 and 2017 consist of the following: Payments due within: 1 year 2 to 5 years After 5 years 31 December 2018 31 December 2017 Land and buildings US$'000 Plant and equipment US$'000 Land and buildings US$'000 Plant and equipment US$'000 2,101 11,686 19,732 33,519 445 10,525 198 11,168 8,908 8,711 22,242 39,861 719 1,256 334 2,309 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 five years 1 – 5 years for machinery and equipment with an average lease term of two years 1 – 5 years for all other property with an average lease term of four years The Company’s property operating leases generally contain escalation clauses, which are fixed increases generally between 2% 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. See Note 33 for more information. _______________________________________________________________________________________ 91 91 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 27. CONTINGENT LIABILITIES BOART LONGYEAR LIMITED 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 2018 are as follows: Subsidiary Australia Australia Australia United States 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 Secure DS bonding program Expiration Date May 2019 August 2019 September 2019 January 2019 June 2019 August 2019 January 2019 Amount US $'000 352 523 558 100 606 1,050 2,670 5,859 Financial guarantee contract liabilities are measured initially at their fair values and subsequently at the higher of the amount recognised as a provision or the amount initially recognised less cumulative amortisation in accordance with the revenue recognition policies described in Note 3. A summary of the maturity of issued letters of credit is as follows: Less than 1 year Guarantees 2018 US$'000 5,859 2017 US$'000 12,993 The subsidiaries of the Company provide guarantees within the normal course of business which includes payment guarantees to cover import duties, taxes, performance and completion of contracts. In addition, the Parent and certain subsidiaries are guarantors on the Company’s loans and borrowings. See Note 21. Legal contingencies The Company is subject to certain routine legal proceedings that arise in the normal course of its business. Management believes that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect the Company’s operations, liquidity, or financial position taken as a whole. However, the ultimate outcome of any litigation is uncertain, and unfavourable outcomes could have a material adverse impact. Tax and customs audits The Company is subject to certain tax and customs audits that arise in the normal course of its business. Management believes that the ultimate amount of liability, if any, for any pending assessments (either alone or combined) would not materially affect the Company’s operations, liquidity, or financial position taken as a whole. However, the ultimate outcome of these audits is uncertain and unfavourable outcomes could have a material adverse impact. See additional disclosure in Note 11. _______________________________________________________________________________________ 92 BOART LONGYEAR 2018 ANNUAL REPORT 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 27. CONTINGENT LIABILITIES (CONTINUED) Other contingencies BOART LONGYEAR LIMITED Other contingent liabilities as at 31 December 2018 and 2017 consist of the following: Contingent liabilities Guarantees/counter-guarantees to outside parties 2,079 2,717 2018 US$'000 2017 US$'000 Except as detailed in the following table, the carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Company’s maximum exposure to credit risk without taking account of the value of any collateral obtained. See Note 15. Financial assets and other credit exposure Performance guarantees provided, including letters of credit Maximum credit risk 2018 2017 US$'000 US$'000 7,938 15,710 _______________________________________________________________________________________ 93 93 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 28. PARENT ENTITY DISCLOSURES Financial position BOART LONGYEAR LIMITED Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net Assets Equity Issued capital Reserves Accumulated losses Total equity Financial performance Loss for the year Other comprehensive income Total comprehensive loss 2018 US$'000 2017 US$'000 15,087 491,119 506,206 58,639 389,343 447,982 58,224 485,469 - 485,469 64,525 310,491 375,016 110,453 3,219,236 9,538 (3,170,550) 58,224 3,219,218 4,523 (3,113,288) 110,453 2018 US$'000 2017 US$'000 (37,441) - (37,441) (51,368) - (51,368) Guarantees entered into by the parent entity in relation to debts of its subsidiaries Other guarantees are described in Note 27. Contractual obligations As at 31 December 2018 and 2017, 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. _______________________________________________________________________________________ 94 BOART LONGYEAR 2018 ANNUAL REPORT 94 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the financial year ended 31 December 2018 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.1 BL Capital Management LLC3 BL DDL Holdings Pty Ltd BL DDL II Holdings Pty Ltd BL DDL NY 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.2 BLY Mali S.A. BLY Senegal S.A. BLY Sierra Leone Ltd. BLY US Holdings Inc.3 Boart Longyear (Cambodia) Ltd.2 Boart Longyear (DRC) 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 Burkina Faso Sarl2 Boart Longyear B.V. Boart Longyear Canada Boart Longyear Chile Limitada Boart Longyear Colombia S.A.S.2 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 Limited2 Country of incorporation Business 31 Dec 2018 31 Dec 2017 Dormant Dormant Holding Company Holding Company Holding Company Holding Company Drilling Services Drilling Services Holding Company Drilling Services Drilling Services Dormant Holding Company Dormant Drilling Services Drilling Services Drilling Services Holding Company Dormant Australia Australia USA Australia Australia USA Zambia Ivory Coast United Kingdom Gabon Ghana Guinea USA Madagascar Mali Senegal Sierra Leone USA 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 Drilling Services Burkina Faso Drilling Products Netherlands Drilling Products and Services Canada Drilling Products and Services Chile Dormant Colombia 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 95 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the financial year ended 31 December 2018 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. Globaltech Corporation Pty Ltd4 Grimwood Davies Pty Ltd1 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. Prosonic Corporation1 Resources Services Holdco, Inc Votraint No. 1609 Pty Ltd (1) This entity was merged or dissolved in 2018 (2) This entity is currently in liquidation status (3) This entity was formed in 2018 (4) Boart Longyear became a majority shareholder in 2018 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 Australia Uruguay Canada USA New Zealand USA South Africa USA Australia Indonesia Argentina USA USA Australia Business 31 Dec 2018 31 Dec 2017 Drilling Products Holding Company Drilling Products Drilling Products Holding Company Drilling Products and Services Drilling Products Drilling Services Drilling Products and Services Dormant Drilling Services Holding Company Holding Company Holding Company Drilling Products Holding Company Dormant Dormant Drilling Services Holding Company Dormant Drilling Services Drilling Products Holding Company Dormant Holding Company Drilling Products and Services Holding Company Dormant 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 52 - 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 BOART LONGYEAR 2018 ANNUAL REPORT 96 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 30. RELATED PARTY TRANSACTIONS Transactions with key management personnel (i) Key management personnel compensation BOART LONGYEAR LIMITED 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: Balances at Interest expense for the financial year ended 31 Dec 2018 31 Dec 2018 US$'000 US$'000 Centerbridge Term Loan A Term Loan B Backstop ABL Senior Secured Notes Backstop ABL Senior Secured Notes Unsecured Notes Ascribe 132,597 159,845 14,239 21,612 4,994 59,853 41,258 14,010 16,860 1,491 1,353 523 6,584 613 _______________________________________________________________________________________ 97 97 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 31. CASH AND CASH EQUIVALENTS BOART LONGYEAR LIMITED Included in the cash balance at 31 December 2018 is $1.6 million of restricted cash and at 31 December 2017 $5.8 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: • • $65.6 million of non-cash interest expense; $292.4 million Term Loan A and B changed issuers within the Group. 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 and effective Standard / Interpretation AASB 15 'Revenue from Contracts w ith Customers' Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 January 2018 31 December 2018 AASB 9 'Financial Instruments' 1 January 2018 31 December 2018 AASB 15 – Revenue from Contracts with Customers In the current year, the Company has applied AASB 15 Revenue from Contracts with Customers (as amended in April 2016) which has come into effect 1 January 2018. AASB 15 establishes a comprehensive framework for determining the timing and quantum of revenue recognised. It replaces existing guidance, including AASB 118 Revenue and AASB 111 Construction Contracts. The core principle of AASB 15 is that an entity shall recognise revenue when control of a good or service transfers to a customer. The Company adopted AASB 15 using the modified transition approach to implementation, which allows any transition adjustments to be recognised in retained earnings at 1 January 2018. The comparative financial statements are not restated. AASB 15 was only applied to contracts that were not completed at 1 January 2018. There have been no material adjustments made to the financial statements on adoption of AASB 15, and therefore, there are no adjustments to retained earnings at 1 January 2018. See Note 3 Revenue for further information. _______________________________________________________________________________________ 98 BOART LONGYEAR 2018 ANNUAL REPORT 98 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 BOART LONGYEAR LIMITED 33. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (CONTINUED) AASB 9 – Financial Instruments In the current year, the Company has applied AASB 9 Financial Instruments (as revised in July 2014) and the related consequential amendments to other AASB Standards that are effective for an annual period that begins on or after 1 January 2018. The transition provisions of AASB 9 allow an entity not to restate comparatives. Additionally, the Company adopted consequential amendments to AASB 7 Financial Instruments: Disclosures that were applied to the disclosures for 2018 and to the comparative period. AASB 9 introduced new requirements for: 1) The classification and measurement of financial assets and financial liabilities, 2) Impairment of financial assets, and 3) General hedge accounting. The Company has applied AASB 9 in accordance with the transition provisions set out in AASB 9 and has concluded that there are no material adjustments to the financial statements. (a) Classification and measurement of financial assets The date of initial application (i.e. the date on which the Company has assessed its existing financial assets and financial liabilities in terms of the requirements of AASB 9) is 1 January 2018. Accordingly, the Company has applied the requirements of AASB 9 to instruments that continue to be recognised as at 1 January 2018 and has not applied the requirements to instruments that have already been derecognised as at 1 January 2018. There were no restatements to comparative amounts in relation to instruments that continue to be recognised as at 1 January 2018. All recognised financial assets that are within the scope of AASB 9 are required to be measured subsequently at amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Specifically: • • • • • debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured subsequently at amortised cost; debt instruments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured subsequently at fair value through other comprehensive income (FVTOCI); all other debt investments and equity investments are measured subsequently at fair value through profit or loss (FVTPL). Despite the foregoing, the Company may make the following irrevocable election/designation at initial recognition of a financial asset; the Company may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination in other comprehensive income; and the Company may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. In the current year, the Company has not designated any debt investments that meet the amortised cost or FVTOCI criteria as measured at FVTPL. When a debt investment measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. When an equity investment designated as measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is subsequently transferred to retained earnings. Debt instruments that are measured subsequently at amortised cost or at FVTOCI are subject to impairment. See (b) below. The directors of the Company reviewed and assessed the Group’s existing financial assets as at 1 January 2018 based on the facts and circumstances that existed at that date and concluded that the initial application of _______________________________________________________________________________________ 99 99 BOART LONGYEAR 2018 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 33. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (CONTINUED) BOART LONGYEAR LIMITED BOART LONGYEAR LIMITED AASB 9 – Financial Instruments AASB 9 has had the following impact on the Group’s financial assets as regards their classification and measurement: In the current year, the Company has applied AASB 9 Financial Instruments (as revised in July 2014) and the related consequential amendments to other AASB Standards that are effective for an annual period that begins on or after 1 financial assets classified as held-to-maturity and loans and receivables under AASB 39 that were measured January 2018. The transition provisions of AASB 9 allow an entity not to restate comparatives. Additionally, the Company at amortised cost continue to be measured at amortised cost under AASB 9 as they are held within adopted consequential amendments to AASB 7 Financial Instruments: Disclosures that were applied to the disclosures for a business model to collect contractual cash flows and these cash flows consist solely of payments of 2018 and to the comparative period. principal and interest on the principal amount outstanding. • AASB 9 introduced new requirements for: None of the other reclassifications of financial assets have had any impact on the Group’s financial position, profit or loss, other comprehensive income or total comprehensive income in either year. 1) The classification and measurement of financial assets and financial liabilities, 2) Impairment of financial assets, and Impairment of financial assets 3) General hedge accounting. (b) In relation to the impairment of financial assets, AASB 9 requires an expected credit loss model as opposed to an The Company has applied AASB 9 in accordance with the transition provisions set out in AASB 9 and has concluded that incurred credit loss model under AASB 39. The expected credit loss model requires the Company to account for there are no material adjustments to the financial statements. expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition of the financial assets. In other words, it is no longer necessary for a credit event to have (a) Classification and measurement of financial assets occurred before credit losses are recognised. The date of initial application (i.e. the date on which the Company has assessed its existing financial assets and financial liabilities in terms of the requirements of AASB 9) is 1 January 2018. Accordingly, the Company has applied Specifically, AASB 9 requires the Company to recognise a loss allowance for expected credit losses on: the requirements of AASB 9 to instruments that continue to be recognised as at 1 January 2018 and has not applied the requirements to instruments that have already been derecognised as at 1 January 2018. There were no (1) Debt investments measured subsequently at amortised cost or at FVTOCI; restatements to comparative amounts in relation to instruments that continue to be recognised as at 1 January 2018. (2) Lease receivables; All recognised financial assets that are within the scope of AASB 9 are required to be measured subsequently at amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the (3) Trade receivables and contract assets; and contractual cash flow characteristics of the financial assets. (4) Financial guarantee contracts to which the impairment requirements of AASB 9 apply. Specifically: • • In particular, AASB 9 requires the Company to measure the loss allowance for a financial instrument at an amount debt instruments that are held within a business model whose objective is to collect the contractual cash equal to the lifetime expected credit losses (ECL) if the credit risk on that financial instrument has increased flows, and that have contractual cash flows that are solely payments of principal and interest on the principal significantly since initial recognition, or if the financial instrument is a purchased or originated credit-impaired financial amount outstanding, are measured subsequently at amortised cost; asset. However, if the credit risk on a financial instrument has not increased significantly since initial recognition debt instruments that are held within a business model whose objective is both to collect the contractual (except for a purchased or originated credit-impaired financial asset), the Company is required to measure the loss cash flows and to sell the debt instruments, and that have contractual cash flows that are solely payments of allowance for that financial instrument at an amount equal to 12-months ECL. AASB 9 also requires a simplified principal and interest on the principal amount outstanding, are measured subsequently at fair value through approach for measuring the loss allowance at an amount equal to lifetime ECL for trade receivables, contract assets other comprehensive income (FVTOCI); and lease receivables in certain circumstances. all other debt investments and equity investments are measured subsequently at fair value through profit or loss (FVTPL). Despite the foregoing, the Company may make the following irrevocable election/designation at initial recognition of a financial asset; the Company may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination in other comprehensive income; and Note the Company may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. Items existing as at 1 Jan 2018 that are subject to the impairment provisions of AASB 9 Credit risk attributes at 1 Jan 2017 and 1 Jan 2018 • • • The result of the assessment is as follows: In the current year, the Company has not designated any debt investments that meet the amortised cost or FVTOCI criteria as measured at FVTPL. Trade and other receivables When a debt investment measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. When an equity investment designated as measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is subsequently transferred to retained earnings. The Company applies the simplified approach and recogonises lifetime ECL for these assets. No impairment on finance lease due to existence of collateral. 13 Debt instruments that are measured subsequently at amortised cost or at FVTOCI are subject to impairment. See (b) Cash and bank balances below. 21 All bank balances are assessed to have low credit risk at each reporting date as they are held with reputable international banking institutions. The directors of the Company reviewed and assessed the Group’s existing financial assets as at 1 January 2018 based on the facts and circumstances that existed at that date and concluded that the initial application of _______________________________________________________________________________________ _______________________________________________________________________________________ 99 100 BOART LONGYEAR 2018 ANNUAL REPORT 100 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 33. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (CONTINUED) BOART LONGYEAR LIMITED BOART LONGYEAR LIMITED Standards and Interpretations issued not yet effective AASB 9 – Financial Instruments The accounting standards and AASB Interpretations that will be applicable to the Company and may have an effect in In the current year, the Company has applied AASB 9 Financial Instruments (as revised in July 2014) and the related future reporting periods are detailed below. Apart from these standards and interpretations, management has considered consequential amendments to other AASB Standards that are effective for an annual period that begins on or after 1 other accounting standards that will be applicable in future periods. January 2018. The transition provisions of AASB 9 allow an entity not to restate comparatives. Additionally, the Company adopted consequential amendments to AASB 7 Financial Instruments: Disclosures that were applied to the disclosures for Effective for annual reporting 2018 and to the comparative period. periods beginning on or after Expected to be initially applied in the financial year ending Standard / Interpretation AASB 9 introduced new requirements for: AASB 16 'Leases' 1 January 2019 31 December 2019 Intrepretation 23 'Uncertainty over 1) The classification and measurement of financial assets and financial liabilities, 2) Impairment of financial assets, and Income Tax Treatments' 3) General hedge accounting. 1 January 2019 31 December 2019 AASB 16 – Leases The Company has applied AASB 9 in accordance with the transition provisions set out in AASB 9 and has concluded that there are no material adjustments to the financial statements. General impact of application of IFRS 16 Leases (a) Classification and measurement of financial assets AASB 16 provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements for both lessors and lessees. AASB 16 will supersede the current lease guidance including IAS 17 Leases and The date of initial application (i.e. the date on which the Company has assessed its existing financial assets and the related Interpretations when it becomes effective for accounting periods beginning on or after 1 January 2019. The financial liabilities in terms of the requirements of AASB 9) is 1 January 2018. Accordingly, the Company has applied date of initial application of AASB 16 for the Company will be 1 January 2019. the requirements of AASB 9 to instruments that continue to be recognised as at 1 January 2018 and has not applied the requirements to instruments that have already been derecognised as at 1 January 2018. There were no The Company has chosen the modified retrospective application of AASB 16 in accordance with AASB 16:C8(a). restatements to comparative amounts in relation to instruments that continue to be recognised as at 1 January 2018. Consequently, the Company will not restate the comparative information. In contrast to lessee accounting, AASB 16 substantially carries forward the lessor accounting requirements in IAS 17. All recognised financial assets that are within the scope of AASB 9 are required to be measured subsequently at amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Impact of the new definition of a lease • • • • Specifically: The Company will make use of the practical expedient available on transition to AASB 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to apply to those leases entered or modified before 1 January 2019. The right to obtain substantially all of the economic benefits from the use of an identified asset; and The right to direct the use of that asset. • The change in definition of a lease mainly relates to the concept of control. AASB 16 distinguishes between leases and service contracts on the basis of whether the use of an identified asset is controlled by the customer. Control is considered to exist if the customer has: debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured subsequently at amortised cost; debt instruments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured subsequently at fair value through other comprehensive income (FVTOCI); all other debt investments and equity investments are measured subsequently at fair value through profit or loss (FVTPL). Despite the foregoing, the Company may make the following irrevocable election/designation The Company will apply the definition of a lease and related guidance set out in AASB 16 to all lease contracts entered at initial recognition of a financial asset; into or modified on or after 1 January 2019 (whether it is a lessor or a lessee in the lease contract). In preparation for the first‑time application of AASB 16, the Company has carried out an implementation project. The project has shown that the the Company may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination new definition in AASB 16 will not change significantly the scope of contracts that meet the definition of a lease for the in other comprehensive income; and Company. • the Company may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. Impact on Lessee Accounting • Operating leases In the current year, the Company has not designated any debt investments that meet the amortised cost or FVTOCI criteria as measured at FVTPL. AASB 16 will change how the Company accounts for leases previously classified as operating leases under IAS 17, which When a debt investment measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in were off‑balance sheet. other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. When an equity investment designated as measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is subsequently transferred to retained earnings. a) Recognize right‑of‑use assets and lease liabilities in the consolidated statement of financial position, initially On initial application of AASB 16, for all leases (except as noted below), the Company will: measured at the present value of the future lease payments; Debt instruments that are measured subsequently at amortised cost or at FVTOCI are subject to impairment. See (b) b) Recognize depreciation of right‑of‑use assets and interest on lease liabilities in the consolidated statement of below. profit or loss; c) Separate the total amount of cash paid into a principal portion (presented within financing activities) and interest The directors of the Company reviewed and assessed the Group’s existing financial assets as at 1 January 2018 based on the facts and circumstances that existed at that date and concluded that the initial application of (presented within operating activities) in the consolidated cash flow statement. _______________________________________________________________________________________ _______________________________________________________________________________________ 99 101 BOART LONGYEAR 2018 ANNUAL REPORT 101 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 33. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (CONTINUED) BOART LONGYEAR LIMITED BOART LONGYEAR LIMITED Lease incentives (e.g. rent‑free period) will be recognized as part of the measurement of the right‑of‑use assets and AASB 9 – Financial Instruments lease liabilities whereas under IAS 17 they resulted in the recognition of a lease liability incentive, amortized as a reduction of rental expenses on a straight‑line basis. In the current year, the Company has applied AASB 9 Financial Instruments (as revised in July 2014) and the related consequential amendments to other AASB Standards that are effective for an annual period that begins on or after 1 January 2018. The transition provisions of AASB 9 allow an entity not to restate comparatives. Additionally, the Company Under AASB 16, right‑of‑use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. This adopted consequential amendments to AASB 7 Financial Instruments: Disclosures that were applied to the disclosures for will replace the previous requirement to recognize a provision for onerous lease contracts. 2018 and to the comparative period. For short‑term leases (lease term of 12 months or less) and leases of low‑value assets (such as personal computers and AASB 9 introduced new requirements for: office furniture), the Company will opt to recognize a lease expense on a straight‑line basis as permitted by AASB 16. 1) The classification and measurement of financial assets and financial liabilities, 2) Impairment of financial assets, and 3) General hedge accounting. As at 31 December 2018, the Company has non‑cancellable operating lease commitments of $44.7 million. A preliminary assessment indicates that $10.7 million of these arrangements relate to leases other than short‑term leases and leases of low‑value assets, and hence the Company will recognize a right‑of‑use asset and a corresponding lease liability of $32.4 million in respect of all these leases. The impact on profit or loss is to decrease rent expenses by $12.2 million, to The Company has applied AASB 9 in accordance with the transition provisions set out in AASB 9 and has concluded that increase depreciation by $9.6 million, and to increase interest expense by $2.4 million. The provision for onerous lease there are no material adjustments to the financial statements. contracts which was required under AASB 117 of $0.3 million will be derecognized. (a) Classification and measurement of financial assets Under AASB 117, all lease payments on operating leases are presented as part of cash flows from operating activities. The impact of the changes under AASB 16 would be to reduce the cash generated by operating activities by $3.7 million The date of initial application (i.e. the date on which the Company has assessed its existing financial assets and and to increase net cash used in financing activities by the same amount. financial liabilities in terms of the requirements of AASB 9) is 1 January 2018. Accordingly, the Company has applied the requirements of AASB 9 to instruments that continue to be recognised as at 1 January 2018 and has not applied The Company will make use of the practical expedient to not separate non-lease and lease components (AASB16.15). the requirements to instruments that have already been derecognised as at 1 January 2018. There were no restatements to comparative amounts in relation to instruments that continue to be recognised as at 1 January 2018. Finance leases • • Specifically: All recognised financial assets that are within the scope of AASB 9 are required to be measured subsequently at The main differences between AASB 16 and AASB 117 with respect to assets formerly held under a finance lease is the amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the measurement of the residual value guarantees provided by the lessee to the lessor. AASB 16 requires that the Company contractual cash flow characteristics of the financial assets. recognizes as part of its lease liability only the amount expected to be payable under a residual value guarantee, rather than the maximum amount guaranteed as required by AASB 117. On initial application, the Company will present equipment previously included in property, plant and equipment within the line item for right‑of‑use assets and the lease liability, previously presented within borrowing, will be presented in a separate line for lease liabilities. Based on an analysis of the Company’s finance leases as at 31 December 2018 on the basis of the facts and circumstances that exist at that date, the directors of the Company have assessed that the impact of this change will not have an impact on the amounts recognized in the Company’s consolidated financial statements. debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured subsequently at amortised cost; debt instruments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured subsequently at fair value through other comprehensive income (FVTOCI); all other debt investments and equity investments are measured subsequently at fair value through profit or Under AASB 16, a lessor continues to classify leases as either finance leases or operating leases and account for those loss (FVTPL). Despite the foregoing, the Company may make the following irrevocable election/designation two types of leases differently. However, AASB 16 has changed and expanded the disclosures required, in particular at initial recognition of a financial asset; regarding how a lessor manages the risks arising from its residual interest in leased assets. the Company may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination in other comprehensive income; and the Company may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. Under AASB 16, an intermediate lessor accounts for the head lease and the sublease as two separate contracts. The intermediate lessor is required to classify the sublease as a finance or operating lease by reference to the right‑of‑use asset arising from the head lease (and not by reference to the underlying asset as was the case under AASB 117). Impact on Lessor Accounting • • • Because of this change the Company will reclassify certain of its sublease agreements as finance leases. As required by In the current year, the Company has not designated any debt investments that meet the amortised cost or FVTOCI AASB 9, an allowance for expected credit losses will be recognized on the finance lease receivables. The leased assets criteria as measured at FVTPL. will be derecognized, and finance lease asset receivables recognized. This change in accounting will change the timing of recognition of the related revenue (recognized in finance income). When a debt investment measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. When an equity investment designated as measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is subsequently transferred to retained earnings. Debt instruments that are measured subsequently at amortised cost or at FVTOCI are subject to impairment. See (b) below. The directors of the Company reviewed and assessed the Group’s existing financial assets as at 1 January 2018 based on the facts and circumstances that existed at that date and concluded that the initial application of _______________________________________________________________________________________ _______________________________________________________________________________________ 99 102 BOART LONGYEAR 2018 ANNUAL REPORT 102 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 33. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (CONTINUED) BOART LONGYEAR LIMITED BOART LONGYEAR LIMITED Interpretation 23 Uncertainty over Income Tax Treatments AASB 9 – Financial Instruments In the current year, the Company has applied AASB 9 Financial Instruments (as revised in July 2014) and the related Interpretation 23 sets out how to determine the accounting tax position when there is uncertainty over income tax consequential amendments to other AASB Standards that are effective for an annual period that begins on or after 1 treatments. The Interpretation requires an entity to: January 2018. The transition provisions of AASB 9 allow an entity not to restate comparatives. Additionally, the Company determine whether uncertain tax positions are assessed separately or as a group; and adopted consequential amendments to AASB 7 Financial Instruments: Disclosures that were applied to the disclosures for assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be 2018 and to the comparative period. used, by an entity in its income tax filings: • • o o AASB 9 introduced new requirements for: If yes, the entity should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income tax filings. If no, the entity should reflect the effect of uncertainty in determining its accounting tax position. 1) The classification and measurement of financial assets and financial liabilities, 2) Impairment of financial assets, and 3) General hedge accounting. The Interpretation is effective for annual periods beginning on or after 1 January 2019. Entities can apply the Interpretation with either full retrospective application or modified retrospective application without restatement of comparatives retrospectively or prospectively. The Company has applied AASB 9 in accordance with the transition provisions set out in AASB 9 and has concluded that there are no material adjustments to the financial statements. The directors of the Company do not anticipate that the application of the amendments in the future will have an impact on the Company’s consolidated financial statements. (a) Classification and measurement of financial assets 34. ACQUISITION OF OPERATIONS The date of initial application (i.e. the date on which the Company has assessed its existing financial assets and financial liabilities in terms of the requirements of AASB 9) is 1 January 2018. Accordingly, the Company has applied On 1 July 2018 the Boart Longyear Company acquired an additional 11.9% of the issued share capital of Globaltech the requirements of AASB 9 to instruments that continue to be recognised as at 1 January 2018 and has not applied Corporation Pty Ltd (“Globaltech”), increasing its shareholding to 51.7% and obtaining control of Globaltech. The direct the requirements to instruments that have already been derecognised as at 1 January 2018. There were no parent entity of Globaltech is Votraint No. 1609 Pty Ltd (“Votraint”). The goodwill arising on the acquisition of Globaltech is restatements to comparative amounts in relation to instruments that continue to be recognised as at 1 January 2018. related to the designing, development and manufacturing of electronic instrumentation for drilling operations for the mining industry. All recognised financial assets that are within the scope of AASB 9 are required to be measured subsequently at amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below. Specifically: Fair Value • • • • • US$’000 277 1,813 Financial assets Property, plant and equipment Research & development assets debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured subsequently at amortised cost; debt instruments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are solely payments of Current Tax Payable principal and interest on the principal amount outstanding, are measured subsequently at fair value through other comprehensive income (FVTOCI); Deferred Tax Liability all other debt investments and equity investments are measured subsequently at fair value through profit or loss (FVTPL). Despite the foregoing, the Company may make the following irrevocable election/designation at initial recognition of a financial asset; the Company may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination in other comprehensive income; and the Company may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. Total identifiable assets Financial liabilities Total Assets (922) (785) (2,358) 5,461 9,401 7,436 3,940 Boart Longyear 51.7% share 4,860 Goodwill Satisfied by: In the current year, the Company has not designated any debt investments that meet the amortised cost or FVTOCI Converting loans and accrued interest to ordinary shares of criteria as measured at FVTPL. GlobalTech 4,860 Total consideration transferred When a debt investment measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. When an equity investment designated as measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is subsequently transferred to retained earnings. 4,860 The fair value of the financial assets includes trade receivables with a fair value of $1.0 million. Debt instruments that are measured subsequently at amortised cost or at FVTOCI are subject to impairment. See (b) below. The goodwill of $3.9 million arising from the acquisition consists of the excess of the total consideration transferred and Votraint’s share (51.7%) of the fair value of Globaltech’s net assets at acquisition date. The directors of the Company reviewed and assessed the Group’s existing financial assets as at 1 January 2018 based on the facts and circumstances that existed at that date and concluded that the initial application of The non-controlling interest (48.3%) recognised at the acquisition date was measured by reference to the non-controlling share of the fair value of the net assets of Globaltech at acquisition date and amounted to $2.4 million. _______________________________________________________________________________________ _______________________________________________________________________________________ 99 103 BOART LONGYEAR 2018 ANNUAL REPORT 103 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements For the financial year ended 31 December 2018 For the financial year ended 31 December 2018 BOART LONGYEAR LIMITED 35. SUBSEQUENT EVENTS None. _______________________________________________________________________________________ 104 BOART LONGYEAR 2018 ANNUAL REPORT 104 SUPPLEMENTARY INFORMATION SUPPLEMENTARY INFORMATION Additional Information as at 18 March 2019 ADDITIONAL INFORMATION as at 19 March 2019. 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) 13,368,237,284 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 28 February 2018) 5,497,572,395 2,235,152,952 (a) Ordinary share capital. There are 26,296,215,464 fully paid ordinary shares on issue, held by 4,307 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 602,739,409 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 483 389 177 1,025 2,233 4,307 The number of security investors holding less than a marketable parcel of 125,000 securities ($0.004 on 19/03/2019) is 2,241 and they hold 80,396,288 securities. 130 105 BOART LONGYEAR 2018 ANNUAL REPORT SUPPLEMENTARY INFORMATION SUPPLEMENTARY INFORMATION Additional Information as at 18 March 2019 TOP 20 HOLDERS No. Holder Fully Paid Ordinary Shares Percent of Issued Capital Held 1 CCP II DUTCH ACQUISITION - E2, B.V. 2 ASCRIBE II INVESTMENTS LLC 3 CCP CREDIT SC II DUTCH ACQUISITION - E, B.V. 4 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 5 J P MORGAN NOMINEES AUSTRALIA LIMITED 6 CITICORP NOMINEES PTY LIMITED 7 MERRILL LYNCH (AUSTRALIA) NOMINEES LIMITED 8 CS THIRD NOMINEES PTY LIMITED 9 MS LINLIN LI 10 KEONG LIM PTY LIMITED 11 MR JZHONG-WEI MIAO 12 E-TECH CAPITAL PTY LTD 13 RUSSELL INVESTMENTS 14 MR JIMMY YIP 15 MR CHRISTOPHER STUART KING 16 MR GRAHAM JOHN ALMOND 17 RIADIS HOLDINGS PTY LTD 18 LEKON GLOBAL PTY LTD 19 TWYNAM AGRICULTURAL GROUP PTY LTD 20 MR SUNDER RAJ ESWARA + MRS KALAVATHY SUNDER RAJ 8,863,453,789 5,490,395,109 4,040,281,889 2,873,674,540 783,575,974 742,816,403 356,874,677 167,711,045 115,000,000 77,418,211 65,500,000 65,000,000 60,733,162 54,549,202 52,500,000 51,000,000 50,000,000 49,500,000 36,000,000 30,099,999 33.71 20.88 15.36 10.93 2.98 2.82 1.36 0.64 0.44 0.29 0.25 0.25 0.23 0.21 0.20 0.19 0.19 0.19 0.14 0.11 TOTAL FOR TOP 20 24,026,084,000 91.37 Boart Longyear Annual Report 2016 131 BOART LONGYEAR 2018 ANNUAL REPORT 106 B o a r t L o n g y e a r L i m i t e d — A n n u a l R e p o r t 2 0 1 8 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 2455 South 3600 West West Valley City, UT 84119 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 2455 South 3600 West West Valley City, UT 84119 United States of America Australia: +61 8 8375 8300 Others: +1 801 952 8343 Email: ir@boartlongyear.com 

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