Analysis & Excel


Case Study

FGL_Table 1

Forge Group Ltd
Table 1. Timeline of Forge Group Ltd (FGL)
Date Closing Market Major Announcement/Change
June 27, 2007 $0.56 FGL listed on Australian Stock Exchange
June 30, 2008 $0.78
June 30, 2009 $0.43 Global Financial Crisis impact
April 6, 2010 $2.96 Clough purchases 10.5 million shares for 13% ownership
June 30, 2010 $2.66
June 30, 2012 $5.46
June 30, 2012 $4.37
January 13, 2012 $5.25 FGL purchases 100% of CTEC Pty Ltd for $32.26 million
March 6, 2013 $6.98 Peak share price
March 26, 2013 $6.05 Clough sells FGL shares at $6.05 ($187 million, 35% of FGL)
May 17, 2013 FGL awarded major contract (Dugald Rover)
June 3, 2013 FGL acquires Taggart Global (U.S. company) at $43 million
July 2, 2013 FGL awarded major contract (TAN Burrup plant)
June 30, 2013 $4.09
August 29, 2013 Annual Report released NPAT at $63 million, equity at $213.5 million, dividend at $0.14 per share
September 2, 2013 $1.47 billion joint venture with Duro Felguera announced (value to Forge is $830 million – order book now at $2.1 billion)
September 12, 2013 FGL awarded major contract (Yandicooogina for Rio Tinto – $100 million contract)
September 19, 2013 FGL major contract terminated (Dugald River)
October 7, 2013 FGL declares $50 million in major contracts in U.S. and Australia since June 1, 2013
November 4, 2013 $4.18 Trading halt
November 5, 2013 ANZ Bank (major financier) appoints KordaMentha to review books
November 28, 2013 FGL Market Announcement:
–ANZ Bank supports and negotiates new finance facilities
–Considering equity capital raising
–Identifies underperforming assets (i.e., CTEC projects)
–Negotiates agreements with customers and sub-contractors
–Normal operations for other parts of business
November 28, 2013 $0.69 FGL Market Announcement:
-$127 profit write down on two large contracts (Diamantina Power Station and West Angelas Power Station; $45 million to complete both projects)
–Challenging liquidity period (net cash flow Nov. and Dec.)
–ANZ Bank continued support with some adjustment to finance facilities
–Business as usual
November 28, 2013 $0.69 Trading halt lifted
December 4, 2013 FGL Market Announcement:
– In response to ASX query, indicated became aware of problems with Diamantina Power Station and West Angelas Power Station projects in late Sept. with margin erosions due to cost overruns and delays causing the profit down­grade. Costing analysis during Oct. and Nov. led to requested trading halt and profit downgrade in Nov.
December 17, 2013 FGL awarded major $40 million contract in North American coal sector
January 10, 2014 $1.25 Trading halt until January 14, 2014
January 14, 2014 $1.02 Trading halt until January 28, 2014
January 24, 2014
January 28, 2014 $0.90
February 10, 2014 $0.92 Trading ceases
February 11, 2014 Board appoints administrators, and secured creditors appoint receivers.

FGL_Table 2

Forge Group Ltd
Table 2. Comprehensive Income Statement (in thousands of Australian dollars)
June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013 Unaudited January 31, 2014
Revenue $246,169 $421,595 $774,879 $1,054,100 $520,041
Cost of sales (711,430)
Changes in inventories of finished goods and WIP 9,696 15,000
Materials, plant, and contractor costs (125,171) (211,000) (516,867) (656,334)
Employee benefits expense (79,194) (157,191) (164,502) (256,515)
Depreciation and amortization (3,218) (5,159) (16,292) (21,361)
Consulting fees (582) (5,380)
Provision for impairment losses (1,628) (304)
Other expenses (7,132) (8,043) (12,711) (21,033)
Other gains and losses 537 257 188
Results from Operating Activities 40,059 54,898 64,182 93,665
Finance income 1,023 3,079 5,698 6,939
Finance costs (716) (711) (2,850) (4,816)
Net finance income 307 2,368 2,848 2,123
Share of profit/(loss) of associates and jointly controlled entities (513) 3,052 (5,679)
Net Profit Before Tax 40,366 56,753 70,082 90,109 (324,162)
Income tax expense (10,915) (17,920) (20,780) (27,190) (2,301)
Net Profit After Tax 29,451 38,833 49,302 62,919 (326,463)
Foreign exchange differences (net of tax) (346) (1,946) (310) 1,826
Total Comprehensive Income 29,105 36,887 48,992 64,745

FGL_Table 3

Forge Group Ltd
Table 3. Balance Sheet (in thousands of Australian dollars)
June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013 Unaudited January 31, 2014
Current Assets
Cash and cash equivalents 51,921 78,285 51,091 90,728 15,316
Short-term deposits 72,500 2,748
Trade and other receivables 42,162 49,542 196,884 83,254 103,279
Inventories and WIP 14,621 29,622 11,331 150,491 40,616
Current tax assets 2,535
Other assets 2,246 1,574 2,487 1,560 (23,415)
Noncurrent assets classified as held for sale 6,900
Total Current Assets 117,850 159,023 334,293 331,316 135,796
Noncurrent Assets
Trade and other receivables 7,051 1,424 73,293
Term deposits 14,260 10,468
Property, plant, and equipment 26,789 36,577 67,736 71,546
Deferred tax assets 1,827 2,043 4,273 9,124
Investments accounted for using equity method 2,545
Intangibles 15,621 15,637 48,243 40,332
Other assets 90,467
Total Noncurrent Assets 44,237 54,257 144,108 132,894 163,760
Total Assets 162,087 213,280 478,401 464,210 299,556
Current Liabilities
Trade and other payables 52,968 72,845 267,169 219,568 299,909
Borrowings 2,789 3,272 8,734 11,139
Current tax liabilities 8,644 6,387 8,367
Provisions 525 755 825 3,970
Other liabilities 63,731
Total Current Liabilities 64,926 83,259 285,095 234,677 363,640
Noncurrent Liabilities
Trade and other payables 9,246 1,517
Borrowings 4,901 17,453 14,547
Deferred tax liabilities 51 2,793 1,067
Investments accounted for using the equity method 308 489 493
Provisions 164 299 489 493
Other liabilities 50,667
Total Noncurrent Liabilities 3,785 5,559 29,981 16,107 52,184
Total Liabilities 68,711 88,818 315,076 250,784 415,824
Net Assets 93,376 124,462 163,325 213,426 (116,268)
Issued capital 42,839 44,294 45,430 45,430 42,768
Profit reserve 62,919
Reserves 1,034 (912) (1,221) 1,471 (159,036)
Retained earnings 49,505 81,080 119,116 103,606
Total Equity 93,376 124,462 163,325 213,426 (116,268)
Number of shares 70,699,487 81,541,569 86,169,014 86,169,014 86,169,014
Share price 2.66 5.46 4.37 4.20

FGL_Table 4

Forge Group Ltd
Table 4. Statement of Cash Flows (in thousands of Australian dollars)
2010 2011 2012 2013
Cash Flows from Operating Activities
Receipts from customers 245,418 431,399 744,720 1,176,226
Payments to suppliers and employees (215,240) (373,464) (631,924) (1,113,073)
Other revenue 943 638
Income taxes paid (670) (20,390) (21,537) (45,231)
Net cash flows provided by operating activities $30,451 $38,183 $91,259 $17,922
Cash Flows from Investing Activities
Payments for property, plant, and equipment (8,371) (11,257) (39,737) (19,521)
Proceeds from disposal of property, plan, and equipment 224 6,485 500 869
Interest received 1,023 3,079 5,649 7,379
Term deposits matured/expired (86,760) 73,545
Amount received from joint ventures 130
Acquisition of investments or associates (205) (3,439)
Payment of deferred consideration (19,798)
Net cash flows provided by/used in financing activities (7,124) (1,898) (123,787) 42,604
Cash Flows from Financing Activities
Proceeds from issue of share capital 18,907 1,458 1,136
Proceeds from borrowings 23,011 9,152
Repayment of borrowings (4,131) (3,464) (4,698) (9,654)
Interest paid (271) (658) (2,850) (4,877)
Dividends paid (3,419) (7,257) (11,265) (15,510)
Net cash provided by/used in financing activities $11,086 -$9,921 $5,334 -$20,889
Net increase/decrease in cash and equivalents 34,413 26,364 (27,194) 39,637
Cash and equivalents at beginning of year 17,440 51,921 78,285 51,091
Effect of exchange rate changes 67
Cash and equivalents at end of year 51,920 78,285 51,091 90,728

FGL_Table 5

Forge Group Ltd
Table 5. Reconciliation (in thousands of Australian dollars)
2010 2011 2012 2013
Profit for the year after tax $29,450 $38,832 $49,302 $62,919
Depreciation and amortization 3,217 5,159 16,292 21,361
Other noncash differences 907 (1,815) (43,488) 28,409
Decrease/Increase in trade debtors and receivables (25,202) (7,380) (154,393) 119,258
Decrease/Increase in inventories and WIP (9,696) (15,000) 18,291 (139,160)
Decrease/Increase in other current assets (104) 671 (913) 927
Increase in deferred tax assets (779) (215) (2,231) (4,851)
Decrease/Increase in trade and payables 21,881 19,877 203,417 (37,123)
Decrease/Increase in current tax liabilities 10,649 (2,311) 1,980 (10,903)
Decrease/Increase in deferred tax liabilities 64 2,742 (1,727)
Increase in other provisions 64 365 260 86
Net cash inflow from operating activities $30,451 $38,183 $91,259 $39,196

Unit 5_Student Template

No specific template provided for Unit 5. Just be sure to label your work and clearly identify your final answers.

Adapted from IMA


ISSN 1940-204X Forge Group Ltd Case Study (A)The Revealing Nature of Numbers

Suzanne Maloney University of Southern Queensland Toowoomba, Australia, 4350. [email protected]


In 2012-2013, Forge Group Limited had more than 2,000 employees working across

eight countries on four continents. The pride in the growth story is evident, as Forge

Group’s 2012 Annual Report (released in September 2013) lists accomplishments in

what is described as a groundbreaking year. The main milestones give a snapshot of

the types of projects the company was involved in (see Figure 1). At the time of listing

(June 26, 2007), Forge Group Ltd (FGL) shares traded for $0.56. (All monetary amounts

discussed herein are in Australian dollars. To convert to another currency, visit www.x- The shares peaked at $6.98 on March 6, 2013, valuing the company at

$600 million. In less than a year, FGL was placed in a trading halt (February 11, 2014).

Voluntary administrators and receivers were appointed.



The engineering and construction sector provides significant economic activity in many

countries. Large-scale engineering and construction projects—including highways,

bridges, railways, airports, harbors, production facilities, and office and apartment

buildings—provide employment opportunities and attract large capital investment. The

quantum of resources employed in this industry and the profound affect they have on

society means that there are strict compliance, regulatory, environmental, and tax

requirements on those operating in the sector. The governments of many countries

publicly funded a number of large-scale infrastructure projects in the aftermath of the

Global Financial Crisis (GFC) to stimulate the economy.

Joint ventures and public/private partnerships are common in the industry to reduce the

risk of large-scale projects and to ensure adequate capital and expertise. Major

contracts generally involve a number of different companies with primary contractor and

sub-contractor status, all tendering and quoting on various stages of work in a project.

This makes the industry highly competitive, and therefore it is vital to have appropriate

costing and project management expertise.

Mining companies also took advantage of the cheaper finance post GFC and the

upswing in demand for minerals and resources. Large-scale mining projects have been

the driving force for some economies, especially in Australia. But with the construction

of a number of the large projects nearing completion (and moving into production

phase), there is a drop in engineering and construction spending. In Australia in 2013-

2014, engineering and construction spending was $128 billion, dropping $1 billion from

the previous year. This increased competition in the sector and, therefore, demand for

lower-priced contracts and shorter completion times.

The market value of engineering and construction companies are based partly on their

future secured order book. “Order book” is a term used in the engineering and

construction sector to capture the company’s future work and the dollar value of the

work. The future work is contracted through the normal selling of services and through

“tendering” for large-scale works needed by governments and large private companies.

If a project is very large, it may be divided into segments with a separate tender process

for each segment. Companies have to carefully consider the risk attached to each

segment of the larger project and the interrelationship of each of the segments. A

company can be held liable to another company if their segment completion is delayed

and the other company cannot complete its work on time, as per their contract, because

of the delay. For example, when building a tunnel, the riskier segment may be blasting

the rock and strengthening the actual tunnel. Excavating the ground and surfacing the

road may not carry the same risk but could be held up if the blasting and strengthening

is not completed on time.

In comparison to a retail or manufacturing concern, the products being sold are large

capital works that tend not to be completed within a neat 12-month period. This means

that there needs to be payment points built into the contracts. These are called

“milestones.” Once a project milestone is reached, it triggers a point when the

engineering and construction company can invoice the purchaser and recognize the

revenue in its accounts. The product cost (Cost-of-Goods-Sold) expensed against this

revenue will contain material, labor, equipment costs, and sub-contractor costs. These

costs are all capitalized into inventory at the time they are incurred but not expensed

until they reach a milestone. A lot of dollars, long-term time horizons, subjective

milestones, and the application of large capital equipment costs contribute to the overall

business risk in the sector. Many companies have suffered as a result of stalled

projects, unforeseen circumstances or problems, poor costing of the work, and

mismanaged cash flow.

Within the industry, there is usually significant take-over activity. This is driven in part by

companies not performing well and/or insolvency and also by normal merger and

acquisition activity. Smaller companies find it difficult to compete with larger companies

for the larger projects and generally need to combine or merge in some way or stay

small. This adds further risk and places the financial statements and the order book

under increased scrutiny as business valuations rely on this information.


The company was a success story. It listed on the Australian stock exchange on June

26, 2007, from a private construction company called AiConstruction. It was a well-run

company that needed access to more capital if it was to continue to grow. Within a year,

it made its first acquisition by taking over Abesque Engineering. The company survived

the Global Financial Crisis and leveraged to the subsequent mining and construction

boom led by China’s appetite for minerals and resources. Over the next few years, the

company grew organically and in April 2010 another construction company called

Clough bought 13% (10.5 million shares) of FGL ordinary shares, thus becoming the

largest shareholder. Clough continued to purchase shares in FGL until it divested its

total holding of 35% in March 2013. Clough management explained its divestment by

indicating that expectations of joint ventures between the two companies did not

eventuate, and, therefore, the equity holding was cashed in to allow the pursuit of other


In January 2012, FGL undertook a major acquisition by purchasing CTEC Pty Ltd. In essence, the acquisition meant taking over two major projects. The Diamantina Power Station (DPS) Project in Queensland, Australia, and the West Angelas Power Station (WAPS) Project in the Pilbara region of Western Australia. It was expected that these

major projects would add $7.5 million and $10.8 million to earnings before interest, tax, depreciation, and amortization (EBITDA) in 2012 and 2013, respectively. The purchase price was $16 million up-front with further payments due on the meeting of specified performance targets (total paid was $32.26 million). This increased FGL’s order book significantly, and FGL’s share price rose in response. In June 2013, FGL acquired Taggart Global for $43 million. This purchase meant that FGL was now diversifying into asset management and into other economies.


The historical share price chart since listing is shown in Figure 2.

The market closing prices, major announcements, and significant shareholding changes are listed in chronological order in Table 1.


In the wash up of the demise of FGL is the attention being paid to two main contracts:

The Diamantina Power Station (DPS) Project in Queensland, Australia, and the West

Angelas Power Station (WAPS) Project in the Pilbara region of Western Australia. Both

projects were acquired after FGL took over CTEC Pty Ltd on January 13, 2012. The

purchase of CTEC was to change the business model by bringing sub-contracting work

in-house with the intended consequence of taking out the “middle man” and thereby

increasing earnings (by negating sub-contractor margins). The CTEC purchase

payment terms required an up-front payment of $16 million with subsequent payments

conditional on meeting performance criteria (possible further payment of $40 million in

total). CTEC’s prior year (June 30, 2011) EBIT was $2 million, with expected EBITDA at

year end 2012 and 2013 to be $18.4 million and $24.8 million, respectively. The DPS

and WAPS projects were to increase this expected EBITDA by $7.5 million in 2012 and

$10.8 million in 2013.

Instead cost overruns and poor budgeting meant that the projects’ revised 2013 estimates showed a $61 million project margin loss for the DPS project and a $41.7 million project margin loss on the WAPS project. The cost overruns on these two projects lead to the profit downgrade and contributed to the resulting shortage of cash.

Added to that was the discovery of an early payment to the vendors of CTEC Pty Ltd

before its performance conditions were met. Further, the payment of bonuses to the

previous Managing Director, Peter Hutchinson, of $375,000 was made for a successful

acquisition and integration. These payments are the subject of further investigations by

the liquidator.

DPS AND WAPS COSTING AND BUDGETING In any business the costing and budgeting systems are critical to success. The FGL administrator report for 2013/2014 (year ending January 2014) shows that the:

• Actual work-in-progress income for the period was $126 million below management forecast. • Labor costs were $70 million over budget. • Material costs were $55 million over budget. • Work-in-progress overheads were $22 million over budget.


The financial statements for 2010-2014 are presented in Tables 2-5 in your Excel


Forge Group Ltd.