Duro Felguera S A : Individual Annual Accounts 2020

Audit Report on Financial Statements issued by an Independent Auditor

DURO FELGUERA, S.A.

Financial Statements and Management Report for the year ended December 31, 2020

Deloitte, S.L.

Palacio Valdés, 9

33002 Oviedo

España

Tel: [phone]

www.deloitte.es

Translation of a report originally issued in Spanish based on our work performed in accordance with the audit regulations in force in Spain. In the event of a discrepancy, the Spanish-language version prevails.

INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS

To the Shareholders of Duro Felguera, S.A.,

Report on the Financial Statements

Opinion

We have audited the financial statements of Duro Felguera, S.A. (the Company), which comprise the balance sheet as at 31 December 2020, and the statement of profit or loss, statement of changes in equity, statement of cash flows and notes to the financial statements for the year then ended.

In our opinion, the accompanying financial statements present fairly, in all material respects, the equity and financial position of the Company as at 31 December 2020, and its results and its cash flows for the year then ended in accordance with the regulatory financial reporting framework applicable to the Company (identified in Note 3 to the financial statements) and, in particular, with the accounting principles and rules contained therein.

Basis for Opinion

We conducted our audit in accordance with the audit regulations in force in Spain. Our responsibilities under those regulations are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report.

We are independent of the Company in accordance with the ethical requirements, including those pertaining to independence, that are relevant to our audit of the financial statements in Spain pursuant to the audit regulations in force. In this regard, we have not provided any services other than those relating to the audit of financial statements and there have not been any situations or circumstances that, in accordance with the aforementioned audit regulations, might have affected the requisite independence in such a way as to compromise our independence.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Deloitte, S.L. Inscrita en el Registro Mercantil de Madrid, tomo 13.650, sección 8ª, folio 188, hoja M-54414, inscripción 96ª. C.I.F.: B-79104469. Domicilio social: Plaza Pablo Ruiz Picasso, 1, Torre Picasso, 28020, Madrid.

Material Uncertainty Related to Going Concern

We draw attention to Note 2.1 to the accompanying financial statements for 2020, in which the directors indicate that the Company has been considering a global restructuring process aimed at reestablishing its financial and equity position, which were severely impacted in 2020 by the pandemic caused by covid-19 and the concomitant shutdown of its business activities, and which led to an equity deficit and a working capital deficiency at 31 December 2020.

Considering the approval of the application for aid from the Fund for Supporting the Solvency of Strategic Companies dated 3 March 2021, which is still subject to the fulfilment of certain conditions, the directors trust that they will be able to conclude as soon as possible and successfully , in the negotiated terms and conditions, the remaining agreements pertaining to the aforementioned global restructuring process, especially with banks, in order to implement the Company's viability plan as intended and, accordingly, they prepared the financial statements in accordance with the going concern basis of accounting. However, as indicated in Note 2.1, delays in the achievement of the framework agreements or in their subsequent materialisation, as well as variances in the fulfilment of the objectives set out in the business plan, which could arise from, among other factors, the health crisis, together with the evolution of the processes described in Notes 22, 28 and 33 to the accompanying financial statements, may significantly affect the Company's ability to meet its present and future obligations, which indicates that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

In addition to the matter described in the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be the key audit matters to be communicated in our report.

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Recognition of revenue by reference to stage of completion

Description

The Company engages mainly in the provision of engineering services through EPC projects in the industrial, energy, minerals handling, logistics and environmental sectors, and follows the general policy of recognising the revenue from, and profit or loss on, each contract by reference to the estimated stage of completion thereof, calculated on the basis of the costs incurred in the contract as a percentage of the total budgeted costs. Revenue recognised by reference to stage of completion in 2020 amounted to EUR 77.1 million, with an amount of EUR 36.2 million receivable at year-end (see Note 11), of which EUR 20.3 million correspond to amounts to be billed for work performed, with amounts billed in advance for construction work totalling EUR 33.3 million (see Note 18).

Determination of the stage of completion necessarily involves a high degree of complexity and judgement by management in relation to, inter alia, the estimated total costs to be incurred in each project, the measurement of the work completed in the period (both the allocation of the cost associated with materials and subcontracted work to the project and engineering, manufacturing and erection hours) and the accounting for contract modifications, all of which fall within the framework of the applicable legislation.

Accordingly, the situation described was considered to be a key matter in our audit.

Procedures applied in the audit

Our audit procedures included obtaining an understanding of the Company's revenue recognition policies and the processes directly related to the periodic reviews of the contracts carried out by those responsible for each area and supervised by Company management taking into account the corresponding follow-up reports that include the costs incurred, the estimate of costs to be incurred, the estimated percentage of completion, the assessment of the margin and the possible penalties and obligations provided for in the contracts.

Also, our audit procedures included, among others, an itemised in-depth analysis of a selection of projects, in which we recalculated the stage of completion and evaluated the reasonableness of the hypotheses and assumptions used in determining the revenue for the year, as well as the identification of the contract price and performance obligations, the review of the consistency of the estimates made in the previous year with the actual data of the projects in the current year, considering the impact of covid-19, and the evaluation of the reasonableness of the costs yet to be incurred. To perform these procedures, we held meetings with the Company's technical staff and obtained the support of internal specialists in relation to certain issues.

Lastly, we reviewed the disclosures provided in the accompanying financial statements in relation to these matters. Specifically, Notes 3.16, 11 and 23-b contain relevant information on revenue recognition and on amounts yet to be billed or amounts billed in advance.

Measurement of non-current investments in Group companies and associates

Description	Procedures applied in the audit

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The Company has ownership interests in the share capital of Group companies that are not listed on regulated markets, as detailed in Note 10, and has granted the loans to them described in Note 31.

Each year the Company reviews the indicators of impairment and, where appropriate, the recoverable amount of these ownership interests and loans. The estimation of the recoverable amount of the ownership interests and loans for which it was considered that there were indications of impairment requires the application of significant judgements and estimates, when determining both the valuation method used and the key assumptions established for each method in question. The Company took into account the unrealised gains relating to real estate assets when determining the recoverable amount of its investees using the reports of an independent expert.

The matters indicated above, and the significance of the ownership interests held, the financing granted to the investees and the financial-support commitments acquired led us to determine the situation described to be a key matter in our audit.

Our audit procedures to address this matter included the review of the analysis conducted by the Company to detect indications of impairment. We obtained and analysed the impairment tests performed and other valuation-related evidence gathered by management in relation to the ownership interests that evidenced indications of impairment, verifying the clerical accuracy of the impairment calculations and the appropriateness of the valuation method used in relation to the investments held. Thus, we reviewed the consistency of the financial information used with that contained in the consolidation process and obtained the report of the experts engaged to appraise the property assets of each investee, evaluating their competence, capacity and objectivity, together with the adequacy of their work for use as audit evidence. With the cooperation of our internal valuation experts, we analysed and concluded on the reasonableness of the valuation procedures and methodology used by the experts engaged and for a sample of assets, on a selective basis, independent alternative analyses were performed.

Notes 10, 20 and 31 to the accompanying financial statements contain the disclosures and information relating to these matters.

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