Canadian engineering company SNC-Lavalin Group Inc. is grappling with a series of fixed-price contracts that it is trying to close out as it swung to an unexpected loss in its latest quarter.
The stock fell 9.8 per cent to close at $18.64 in heavy trading Friday on the Toronto Stock Exchange, a six-month low.
An arbitration ruling that went against SNC-Lavalin on a decade-old unnamed resources project cost the Montreal-based company $57.9-million, contributing to a loss of $85.1-million or 48 cents a share for the third quarter. The company said it is now doing a review of all outstanding legal issues on its legacy projects to get a better handle on the remaining risk.
“Clearly we’re really disappointed” by this development, SNC-Lavalin chief executive Ian Edwards said on a conference call Friday. The company expects little change from the review but will do it “to give it absolute additional assurance that there is nothing there that needs updating,” he said.
Ten months after striking a deal with federal prosecutors to settle a criminal corruption scandal centred on past business dealings in Libya, Mr. Edwards is trying to reshape SNC-Lavalin into a company that does more consultancy and project management-type work while closing out billions of dollars worth of higher-risk construction contracts. The latest results show that the road to clearing off those projects won’t necessarily be a smooth one.
“It feels like another risk factor (i.e., the potential for negative arbitration settlements on legacy projects) has been added to the equation,” Bank of Nova Scotia analyst Mark Neville said in a research note.
Analysts had been expecting SNC to post a profit on an adjusted basis of 17 cents for its latest three-month period instead of the adjusted loss of 33 cents it reported. Revenue was $2-billion, down from $2.4-billion for the same period last year. Adjusted net income strips out things such as restructuring costs to provide a picture of the company’s underlying operations.
SNC generally settles its accounts and receives payment fairly quickly after it completes a contract, Mr. Edwards explained on the call. In some cases however, a dispute arises with the client and the company pursues legal avenues to get paid.
SNC-Lavalin weighs the possible outcomes of such arbitration and disputes with the help of external legal advice, the CEO said, and uses an internal risk assessment process to weigh whether to take any financial provisions it will then report publicly. The arbitration ruling that went against the company in the case of the resources project “was outside the company’s internal and external experts' assessments,” he said.
The engineering firm continues to work through its backlog of lump-sum, turn-key construction projects and reimbursable resources contracts in a bid to bring it to zero by 2024. It stood at $3.1-billion worth of work at the end of September, down from $3.4-billion in June and $4-billion at the end of 2019.
SNC is currently working to complete three big infrastructure construction contracts, all of them located in Canada and all of them light-rail transit systems. In Toronto, the company is part of a consortium building the Eglinton Crosstown LRT.
The consortium this month sued its clients, Metrolinx and Infrastructure Ontario, over escalating costs and delays on the project caused by the pandemic. The builders say the provincial agencies are refusing to declare COVID-19 an emergency and recognize its effects on construction.
Mr. Edwards said stricter health and safety measures implemented over the past eight months are hurting productivity on construction of the Crosstown LRT and other projects, particularly on things such as tunnelling and working at heights when workers are traditionally in close proximity with one another. Revised work protocols and cost projections on such projects resulted in a loss on earnings before interest and taxes of $25-million for the infrastructure engineering, procurement and construction projects business in the latest quarter.
Industry-wide changes to productivity from COVID range between 10 per cent and 25 per cent depending on the project and the activities involved, Mr. Edwards. SNC is negotiating with clients to recoup those costs and continues to expect that the Canadian light-rail projects will be cash-flow positive over their lifespans, the CEO said.
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