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Big write-downs darken Boart Longyear

The 2013 half-year results for Boart Longyear (ASX: BLY) tell of a deep hole in profits — a net loss of $329.4 million, down from a profit of $97.7 million in December 2012. The world’s leading supplier of drilling services, equipment and tooling declared a massive US$315 million in restructuring charges and impairments due to ongoing core market weakness.

Weak commodity prices have caused a slowdown in the resources industry domestically and internationally, and the Chinese economy cooling down has had a knock-on effect with the company’s customers, reducing their capital budgets and needs for drilling services.

The negative impact has continued though the first half of 2013, reducing revenue by 35% compared to the first half of 2012. Rationalisation of the company has meant a reduction of over 2,800 personal since the start of 2013, and divisional groups are being consolidated to cut costs and streamline works.

The cost of the restructuring is estimated to cost about $98 million, but the company projects it will save about $90 million annually. The impairments include $175 million in goodwill and intangible assets being written down, as well as a $42 million write-down of assets in the drilling services division.

Drill rig utilisation only averaged about 50%, down from 70% in the same period last year. Revenue for drilling services was down 34%, with a 53% fall in EBITDA. The company has completed its sell off non-core US-based environmental and infrastructure drilling services in July after the balance date. The products division has felt the same effect with revenues down 36%, and EBITDA was off 68% to $22 million.

The company expects its second-half 2013 result to be lower than the adjusted result for the first half, yet the restructuring will still produce savings. Richard O’Brien, the company’s President and Chief Executive Officer, said,“… we are taking aggressive steps to control costs. Our latest cost reduction initiatives should lead to approximately US$90 million of reductions, on a run-rate basis, by the end of 2014 in addition to the US$70 million of reductions announced in late-2012 and already being realized in 2013.”

The share price has fallen from about $3.00 in July 2012 to currently around $0.50. No dividend was declared for this first half.

Foolish takeaway

Cyclical industries have to be avoided until they are so bad that they can’t get worse. That’s when buying opportunities present themselves. Your margin of safety may be built into that price drop because it can’t get much worse.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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