Operating and Financial Review

1. Operations

1.1 Overview

WorleyParsons is a professional services provider to the resources, energy and industrial sectors.

During the year ended 30 June 2013 (FY2013), our business was reported in four customer sector groups which focused on customers involved in the following activities:

  • Hydrocarbons – the extraction and processing of oil and gas;
  • Minerals, Metals & Chemicals – the extraction and processing of mineral resources and the manufacture of chemicals;
  • Infrastructure & Environment – projects related to water, the environment, transport, ports and site remediation and decommissioning; and
  • Power – all forms of power generation, transmission and distribution.

From 1 July 2013, we combined our Power and Infrastructure & Environment sectors into one sector referred to as Infrastructure.

For customers in each of these sectors, we provide Consult, Deliver, Improve and Advisory services:

  • Consult – assisting with project viability, assessment and selection. Consult services can include undertaking feasibility studies, providing conceptual designs, being involved in cost estimating and contract planning and providing technical advice;
  • Deliver – converting projects from concept into fully defined and executed projects. Defining a project can include undertaking cost estimates and preparing preliminary engineering designs. Executing a project can include preparing detailed engineering designs, procuring specialist materials and components required for the project and managing and executing the project’s construction;
  • Improve – maintaining and improving existing assets such as a gas processing plant or power station. This can involve us in reducing the costs involved in operating an asset or increasing the revenue earned from an asset; and
  • Advisory – providing project and business solutions to customers who develop, operate and maintain physical assets in the infrastructure and resources sectors. This can involve us in bringing our commercial and technical insights and experience to the complex problems they face and working alongside them to solve those problems.

These services range from small studies bringing in thousands of dollars in revenue to the delivery of major projects bringing in hundreds of millions of dollars in revenue.

Our customers range from multi-national oil and gas, resources and chemicals companies to more locally focused companies, national oil companies and government utilities operating in the sectors described above.

In order to provide local delivery to our customers, with global support, we employ around 39,800 people, in 165 offices located in 43 countries.

Our competitive position was most recently assessed when, in July 2013, the Engineering News-Record’s Top 225 International Design Firms ranked WorleyParsons as the number one International Design Firm, number one for Petroleum Design and number two for Power Design.

1.2 Business Model

We are a people business. We empower our people to deliver services to our customers at a local level, but with the benefit of globalized support. We support our people with our systems and other infrastructure and charge their time spent performing professional services to our customers.
OFR Chart

Aggregated revenue and profit: Our sources of revenue and profit are diversified and our revenue and profit are generated from a large number of customers. As a result, we are not dependent on any one of our customers for a significant portion of our revenue and profit. We believe the disclosure of revenue attributable to associates provides additional information in relation to the financial performance of the Group and include this within Aggregated revenue.

Costs: Other than costs reimbursed by our customers, our two largest costs are: staff costs; and administration costs, which includes office lease costs.

Assets and liabilities: The significant items on our balance sheet are mainly project related, such as trade receivables (e.g. payments due from our customers), and provisions (e.g. amounts we have set aside for potential future liabilities, particularly those related to our employees), and borrowings (eg. bank debt). We also hold a number of intangible assets generated through previous acquisitions.

Our business is not capital intensive. However, our contract terms typically require our customers to pay us within 30 days of receiving our invoice, while, in a number of our locations, we must pay expenses (e.g. staff salaries) at shorter intervals. This time differential makes up the majority of our capital requirements.

1.3 Review of Operations

A review of WorleyParsons’ operations for FY2013 can be found in the section headed “Business Summary” on pages 6 to 9 of the Annual Report. That section is incorporated into, and forms part of this Operating and Financial Review

Go to Business Summary

There are three measures that are key to understanding our results:

  1. Aggregated revenue;
  2. EBIT (earnings before interest and tax); and
  3. NPAT (net profit after tax), attributable to shareholders
  FY2013
$M
FY2012
$M
Comments Movement
1. Aggregrated revenue 7,627.0 7,362.6

We define aggregrated revenue as:

  • our revenue and income calculated in accordance with relevant accounting standards;
  • plus our share of revenue earned by our associates;
  • less procurement at nil margin, interest income, and net gain on revaluation of investments previously accounted for as equity accounted associates.
Our aggregated revenue increased by 4% in FY2013 when compared with that for FY2012 due to increased construction activities and contribution from acquired entities.
2. EBIT 527.0 530.3 EBIT means earnings before interest and tax. Our EBIT is in line with that for FY2012.
3. NPAT, attributable to shareholders 322.1 345.6 NPAT means net profit after tax. Our NPAT decreased by 7% in FY2013 when compared with that for FY2012 due to a higher effective tax rate (27.3% v 24.1%) and additional interest costs from the US debt raised to fund acquisitions and working capital.

*We have calculated the numbers set out above so that they do not take into account the effect of the net gain of $7.6 million on revaluation of investments already held, as required under the accounting standards, that occurred during FY2012, but for which there were no corresponding gains during FY2013.

1.4 Significant changes in operations during FY2013

With effect from the conclusion of our 2012 Annual General Meeting on 23 October 2012, John Grill retired as our Chief Executive Officer and Andrew Wood was appointed to that role.

2. Financial Position and Cashflow

2.1 Matters relevant to understanding WorleyParsons’ financial position

There are four items that are key to understanding our financial position:

  1. Operating cash flow;
  2. Gearing ratio;
  3. Debt facility utilization; and
  4. Loan and overdraft facilities
  FY2013
$M
FY2012
$M
Comments Movement
1. Operating cash flow 443.5 437.5 Our operating cash flow comprises the payments we receive from our customers less the amount we pay our suppliers plus related interest and tax paid. In our financial statements, operating cash flow is called "net cash inflow from operating activities". Our operating cash flow increased by 1% in FY2013.
2. Gearing ratio 25.3% 19.9% Our gearing ratio is our net debt divided by the sum of our net debt and our total equity, at the end of the financial year. Our gearing ratio increased by 5.4 percentage points in FY2013 when compared with that for FY2012 because we funded acquisitions.
This ratio is at the lower end of our gearing target of 25% to 35%.
3. Debt facility utilization 55.5% 51.2% Our debt facility utilization is the percentage of our debt facilities that we were using at the end of the financial year. Our debt facility utilization increased 4.3 percentage points in FY2013 when compared with that for FY2012 because of funding required for acquisitions.
4. Loan and overdraft facilities 1,912.4 1,444.6 Our loan and overdraft facilities are the amount of our debt facilities at the end of the financial year. The amount of our loan and overdraft facilities increased during FY2013 given the US debt raising referred to above and the change in foreign exchange rates from the beginning of the year to the end of the year.

Our financial capacity remains strong given our cash, gearing and debt positions.

2.2 Dividends

Our practise has been that in the order of 60% to 70% of WorleyParsons’ full year net profit after tax will be available for distribution as dividends, with the balance being retained for funding ongoing growth. Dividends are franked to the extent franking credits are available.

In line with this practise, our directors have resolved to pay a final dividend of 51.0 cents per fully paid ordinary share unfranked. As a result, 70.8% of our full year net profit after tax for FY2013 will be distributed to shareholders as a dividend. This compares with distributing 64.7% of our full year net profit after tax for FY2012.

2.3 Significant changes in WorleyParsons' financial position during FY2013

There were no significant changes in WorleyParsons' financial position during FY2013.

2.4 Future Commitments

There are two types of future commitments which do not appear on our balance sheet and are relevant to understanding our financial position:

  1. operating leases; and
  2. operating expenditure commitments.

In general, we lease the various office buildings from which we operate, rather than owning those buildings. “Operating leases” refers to those leases.

In addition, we are generally licensed to use software (e.g. engineering software) and also lease various items of computer hardware (e.g. laptops, monitors and keyboards) that we use in operating our business, rather than owning the software or computer hardware ourselves. We refer to our commitments to pay software license and equipment lease fees as “operating expenditure commitments”.

These future commitments represent approximately 10% of our expenses.

3. Business Strategy, Outlook and Risks

3.1 Business Strategy

We develop strategy at an overall group level, within our sectors and for our locations and functions. Our process is intended to be one that is iterative and that remains alive and is updated and adjusted to suit the changing competitive and economic landscape.

Our strategy includes building our project delivery capability and as a result, doing more reimbursable EPC and full scope EPCM for greenfield projects and expanding the scope of support we offer for existing assets as a part of our Improve offering.

We see growth potential in Improve, which includes services in engineering, procurement and construction across a portfolio of minor capital projects and maintenance, asset integrity and operations support

Equally, we see benefit in continuing to develop our EPCM, PMC and largely reimbursable EPC capabilities in the major project arena. Core to this is our Consult capability, along with front-end engineering design and detailed engineering.

Our EcoNomics™ offering is a differentiated way of helping customers build sustainability into their operations and make increasingly difficult economic decisions around social license to operate and other traditionally intangible areas.

We continue to move into new locations, particularly in the developing world and to refine and leverage our customer relationships both globally and locally.

Strategy cycle: We have a mature, structured approach to strategy which includes development of:

  1. a five year aspirational vision for our organization;
  2. a three year global strategy, which is refreshed on an annual basis;
  3. three year sector strategies, which are refreshed on an annual basis; and
  4. functional and location annual business plans that reflect the sector and global strategies.

Our annual strategy workshops are followed by a series of communications across our business.

Strategy focus: The annual strategy process includes consideration of the following three factors and how they can best be combined to deliver value to our customers and returns to our shareholders:

  1. market conditions;
  2. customer needs; and
  3. our capability.

Strategy review: While a detailed strategy provides us with direction, it is also designed to be sufficiently flexible to adapt to changing market and customer demands. We monitor progress against our strategy throughout the year and we make adjustments where appropriate.

3.2 Outlook

While recognizing the uncertainties in world markets, we expect our geographic and sector diversification to provide a solid foundation to deliver increased earnings in FY2014.

We have a clear growth strategy in place which includes developing our skill set and geographic footprint across our customer sectors. This will be achieved through organic growth as well as by taking advantage of acquisition opportunities that provide value for shareholders.

We are confident our medium and long term prospects remain positive based on our competitive position, our diversified operations and strong financial capacity.

3.3 Risks

Achievement of our medium and long term prospects could be impacted by a number of risks, some of which are beyond our control. Those risks could, individually or together, have an adverse effect on achievement of those prospects.

Set out below is an overview of a number of key risks that we face in seeking to achieve our medium and long term prospects. The risks are not set out in any particular order and do not comprise every risk we face in conducting our business or every risk that may affect the achievement of those prospects. Rather, they are the most significant of the risks that we believe we should be monitoring and seeking to mitigate or otherwise manage at this point in time.

Health and safety risk: Our business sometimes requires our people to be in high risk geographies, travel long distances by road, be in close proximity to complex operating equipment and be engaged in construction and operating activities. There is the risk of injury to, or the loss of life of, our people. To seek to mitigate this risk, we have a OneWay™ framework which includes the expectations that every one of our people must meet with respect to health and safety. OneWay™ expectations are supported by our business processes and we use them in assessing our performance; however, the risk exists that the failure to comply with such processes, customer health and safety requirements and applicable regulations could expose us to losses and liability.

Reputation risk: We rely on the strength of our reputation to help win and retain work, attract and retain employees, secure lines of credit and gain access to capital. Reputation can be damaged in a number of ways including through unethical business practises, poor project outcomes, negative media and not meeting the market’s expectation of our financial performance. We use a range of strategies and actions to seek to mitigate this risk including training on our Code of Conduct for our people globally, an ethics helpline and our enterprise management systems.

Strategy risk: Strategy risk is the risk of failing to develop and implement an effective business strategy. Failure to do so may over time lead to a loss of market share, damage to our reputation and negatively impact our financial performance. To mitigate this risk, we have an annual strategy development process which is discussed under the heading “Business strategy” on page 22 of this Operating and Financial Review. We develop and implement strategic initiatives and review our strategy during each year, making adjustments to it where appropriate.

People risk: Our ability to attract and retain top talent and industry leaders is a risk that, if not effectively managed, could have a negative impact on our reputation, technical performance and longer term financial performance. We seek to mitigate this risk by seeking to offer market competitive remuneration, training and career development opportunities and by seeking to be an attractive and engaging employer.

Project delivery risk: Our execution of projects and assignments involves professional judgment regarding the planning, design, development, construction and operation of often complex operating facilities. While our customers generally retain liability for consequential damages and while we have adopted a range of insurance, risk management and mitigation programs designed to seek to reduce potential liabilities, a catastrophic event resulting from the services we have provided could result in significant professional or product liability, warranty or other claims against us, as well as reputational damage.

Contract pricing risk: We have a relatively low level of exposure to fixed price contracts with the majority of our revenue derived on a reimbursable basis. However, if we materially underestimate the cost of providing equipment, plant and/or services, there is a risk of a material negative impact on financial performance. Where we do enter into fixed price contracts, we mitigate the pricing risk by using our estimating systems, knowledge and experience to seek to price them appropriately.

Competition risk: Our markets are highly competitive and this competition can place downward pressure on prices and margins. If we are unable to compete effectively in our markets, we run the risk of losing market share. We mitigate this risk by seeking to target the projects in relation to which we have a competitive advantage, manage our costs and margins and use low cost delivery centers to execute certain aspects of our work.

Demand risk: The volatile and cyclical nature of commodity prices and demand for our customers’ goods and services means that the demand for our services can likewise be cyclical and may sometimes vary markedly over relatively short periods. We have a number of strategies and processes in place to mitigate this risk including retaining a proportion of personnel on short notice contracts, seeking contractual protection for project demobilization, particularly for projects that require a significant in-country mobilization of our people, and sharing work across locations.

Legal and contractual risk: We are, from time to time, engaged in disputes with third parties, some of which involve litigation and disputes over contractual terms. The outcomes of these disputes can be difficult to predict and may cause a material negative impact on any one year’s financial performance. We manage this risk through our contract review and risk screening processes and active dispute management.

Finance Market risk: Finance market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect our income or the value of our balance sheet items. We use risk management techniques to seek to contain finance market risk exposures within acceptable parameters. We enter into derivatives, and also incur financial liabilities, in order to mitigate that risk and reduce volatility in earnings. In the ordinary course of business, we structure our contracts to be paid in the currency of the country in which the costs are incurred

Liquidity risk: Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due. Our approach to managing liquidity is to seek to ensure that we will always have sufficient liquidity to meet our liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to our reputation. In addition, we seek to ensure that we have efficient cash management processes and carry sufficient cash and credit lines to meet expected operational expenses, including obligations to our lenders.

Business interruption risk: As a global company, we are heavily reliant on computer, information and communications technology and related systems to operate efficiently and securely. We also operate at times in locations subject to natural disasters, civil unrest and military conflict. We seek to manage this risk through business continuity and disaster recovery systems and planning using a Ready, Response and Recovery (R3) methodology.

Partner risk: We operate through a number of joint ventures and partnering arrangements. The success of these businesses depends on the satisfactory performance by our partners of their obligations. The failure of our partners to meet these obligations could impose on us additional financial and performance obligations that could cause significant impact on our reputation and financial results. We mitigate this risk by conducting due diligence in relation to potential partners and by undertaking compliance reviews and regularly monitoring the performance of our joint ventures.

3.4 Unreasonable prejudice

We have omitted information regarding:

  1. our internal budgets and internal forecasts; and
  2. details of our business strategy, on the basis that if we had included that information, doing so would have been likely to result in unreasonable prejudice to us.