Transfield’s $254 million loss

Transfield Services (ASX:TSE) has reported a $254 million loss for the 2013 financial year, after taking $296 million of impairment charges, post-tax.

Transfield has written down the value of its Easternwell Minerals business by $169.2 million, due to a sharp decline in exploration by miners, as rig use drops to historic lows. The company also took a $18.6 million hit to Easternwell Marine Geotechnical, an $87.2 million hit to TIMEC, a $9.3 million writedown on Middle Easterns and Asian and $33.5 million on its Chilean mining services business. Total writedowns come to $317.8 million before tax.

As a result, Transfield won’t pay a final dividend, as it expects tough conditions ahead, with many of the companies that it provides services to under pressure to cut costs, while it says the Australian dollar is hurting its work volumes in asset services. Transfield is under pressure to strengthen its balance sheet, with a whopping $566 million of debt, after paying down $75 million in the last six months.

So far the company has cut 359 jobs out of the business, taking $20.2 million in redundancy costs, but saving $51 million in annualised costs in the first half of this financial year, and a further $30.1 million in the last quarter. 180 permanent positions will be removed in the coming year, expected to result in $6.3 million in restructuring costs.

Transfield says it plans to exit the minerals business within the next 12-24 months, and complete the sell down of the Middle-Eastern and Asian business within the next financial year.

Like many companies providing services to the resources sector, including MacMahon Holdings (ASX:MAH), Emeco Holdings (ASX:EHL) and Boart Longyear (ASX:BLY), Transfield has seen its forward order book crunched, dropping 13.6% to $9.5 billion, and further falls could be coming.

Foolish takeaway

A poor business operating in a tough sector hit by a cyclical turndown, Transfield has a tough task ahead to savagely cut costs out of its business and re-position the company to become profitable. It remains to be seen whether the company can meet its forecast for net profit after tax (pre-amortisation) of between $65 million to $70 million.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.


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