Boart Longyear Limited (ASX: BLY), the world’s leading
supplier of drilling services, drilling equipment and performance
tooling for mining and drilling companies, today announces its
financial results for the half-year period ended 30 June 2013 and
progress on initiatives to reduce costs and improve financial
flexibility.
Summary:
- Additional cost reductions of
approximately US$90 million on an annual “run-rate” basis
underway
- US$315 million of restructuring charges
and asset impairments (of which US$297 million were non-cash) taken
as a result of continuing weakness in core markets
- Covenant compliant at 30 June 2013
- Pursuing debt restructuring and
alternate financing options to provide additional flexibility and
reduce risk.
2013 Half Year results:
- Revenue of US$719 million, down from
US$1,099 million in the first-half 2012
- Adjusted1 EBITDA of US$80 million, down
from US$209 million in the first-half 2012
- Statutory EBITDA of (US$235 million
loss), down from US$208 million in the first-half 2012
- Adjusted1 NPAT of (US$60 million loss),
down from US$98 million in the first-half 2012
- Statutory net profit after taxes (NPAT)
of (US$329 million loss), down from US$98 million in the first-half
2012
- Adjusted1 losses per share of US$0.133,
down from earnings per share of US$0.216 in the first-half
2012
- Statutory losses per share of US$0.725,
down from earnings per share of US$0.215 in the first-half
2012
- No interim dividend to be paid
ADJUSTED1
STATUTORY
1H 2012
1H 2013 % Change
1H 2012
1H 2013 % Change
Revenue 1,099 719 -35 %
Revenue 1,099 719 -35 %
Gross Margin 312 134 -57 %
Gross Margin 312 134 -57 % Gross
Margin as a % of Revenue 28 % 19 % Gross Margin as a % of Revenue
28 % 19 %
EBIT / Op Profit 149 8
-95 % EBIT / Op Profit 148 (307
) NMF EBIT / Op Profit % of Revenue 14 % 1 % EBIT /
Op Profit % of Revenue 13 % -43 %
EBITDA 209
80 -62 % EBITDA 208 (235
) NMF EBITDA as a % of Revenue 19 % 11 % EBITDA as a
% of Revenue 19 % -33 %
NPAT 98 (60
) NMF NPAT 98 (329 )
NMF NPAT as a % of Revenue 9 % -8 % NPAT as a % of Revenue 9
% -46 %
EPS (cents) 21.6 (13.3 )
NMF EPS (cents) 21.5 (72.5 )
NMF Cash from Operations2 62
34 -45 % Cash from Operations2
61 16 -74 % Net
Debt3 373 564 51 % Net
Debt3 373 564 51 %
Headcount 11,440 7,147 -38 %
Headcount 11,440 7,147 -38 %
Financial Overview
Boart Longyear’s first-half 2013 results reflect substantially
different market and operating conditions compared to the same
period in 2012. Commodity price weakness and slowing growth in
China affected the mining industry negatively throughout the first
half of 2013. The Company’s key customers responded to the market’s
volatility by significantly reducing their capital budgets and, as
a result, their demand for the Company’s drilling services and
products. With revenue down 35% from the record first-half of 2012,
the Company has focused its efforts on cost reductions, working
capital management and its capital structure to mitigate the risk
of non-compliance with its lending agreements and ensure access to
liquidity for future needs.
During the period, the Company undertook several major
restructuring initiatives to reduce overheads and operating costs,
including:
- Reduction of over 2,800 personnel since
1 January 2013, including approximately 25% of general and
administrative positions across the business;
- Consolidation of Drilling Services
zones into larger territories;
- Rationalisation of manufacturing,
inventory and administrative facilities;
- Consolidation of the Products
division’s aftermarket services group with the Drilling Services
maintenance group and the supply chain groups for both divisions;
and
- Sale of its non-core environmental and
infrastructure drilling services operations.
Costs linked to restructuring activities, including costs
associated with employee separations, exiting onerous leases, and
impairments of inventory and capital equipment related to
relocating certain manufacturing activities and resizing the
business, totaled US$98 million. The Company estimates that such
actions, and others it has more recently initiated, will reduce
annual run-rate costs by approximately US$90 million. The benefits
of these savings are expected to be realised during the course of
2013 and 2014. These cost reductions are in addition to the cost
reductions announced in December 2012.
The Company’s results for the half-year were also impacted by
impairment charges in the carrying value of certain assets,
including goodwill, intangibles and plant and equipment following
the Company’s mid-year review of asset carrying values. These
impairments include a $175 million write-down of goodwill and
intangible assets and a $42 million write-down of rigs and
ancillary equipment in the Drilling Services segment.
In total, the Company incurred US$315 million of charges related
to restructuring and impairments during the period. A significant
portion of the impairment of goodwill, a non-cash item, is
attributable to prior acquisitions in Australia and does not
reflect a change in the Company’s commitment to continue to operate
in Australia.
Operations
The Company’s Drilling Services division recorded revenue of
US$538 million for the first half of 2013, down 34% from the same
period last year. Market deterioration and lower rig utilisation
contributed to a 53% decline in Drilling Services EBITDA4 to US$84
million. This result also reflects the timing lag between declining
Drilling Service revenues and the take-out of costs. The Company
expects to see the positive impact of prior cost actions flow
through to margins, as cost reduction initiatives continue to be
implemented and completed.
Drilling Services 1H 2012
1H 2013 % Change
Revenue 817 538 -34 %
EBITDA4 177 84 -53 %
EBITDA as a % of Revenue 22 %
16 %
Overall, the demand for exploration drilling remains slow,
although demand for certain services, such as underground drilling,
continues to be strong. The Company’s drill rig utilisation
averaged approximately 55% during the first half of 2013, compared
to approximately 70% in the same period last year.
The Company also completed the divestiture of its non-core
US-based environmental and infrastructure drilling services
operations on 15 July 2013. The divestiture will allow the Company
to focus resources and efforts on its core mining markets and on
higher margin drilling services segments.
The performance of Boart Longyear’s Products division was also
impacted by low global drill rig utilisation rates, particularly in
South America and the Asia-Pacific region. With many of the
division’s key customers de-stocking and holding historically low
levels of inventory, revenues decreased by 36%, to US$181 million,
compared to the same period in 2012, while EBITDA4 declined 68% to
US$22 million.
Products 1H 2012
1H 2013 % Change
Revenue 282 181 -36 %
EBITDA4 68 22 -68 % EBITDA as a
% of Revenue 24 % 12 %
As a result of the market’s contraction, the Company’s
slow-moving inventory reserve is increasing. Based on current
estimates, the Company expects to incur an additional US$10 million
to US$15 million of non-cash expense related to its slow moving
inventory policy in the second half of 2013. More recently, the
business has seen slightly increased purchasing activity from some
of its key accounts, and its production tooling business remains
stable.
Financing and Liquidity
The Company is proactively taking steps to ensure it has
adequate liquidity to manage the business while market conditions
remain challenging and to meet capital needs when conditions
improve. Certain of the Company’s financial projections show that,
absent a refinancing or recapitalisation, the Company may breach
the gross-debt-to-EBITDA leverage covenant of its bank credit
agreement at the December 2013 and June 2014 compliance testing
dates.
The Company has requested and is evaluating detailed refinancing
and recapitalisation proposals and timelines that present as
credible and achievable in current market conditions. It has chosen
the restructuring of its debt as its preferred approach and does
not intend, at this time, to issue additional equity. The Company
will move expeditiously into the debt capital markets to complete a
refinancing.
The Company believes it will manage its business risks
successfully despite the current economic outlook and challenging
market environment. Those risks include the volatility of the
Company’s core mining markets and the continued challenging outlook
for those markets. Additionally, the Company has considered other
material risks to liquidity, including the potential for further
significant tax assessments from the Canadian Revenue Agency and
the possibility of additional collateral being required to appeal
those assessments. The Company has factored these contingencies
into its evaluation of refinancing alternatives and believes it can
adequately address such risks via the available refinancing options
and an ongoing ability to reduce costs associated with potentially
declining business conditions.
Dividend
In light of market conditions and the need to preserve
liquidity, the Company will not pay an interim dividend for the
first half of 2013. The Board will continue to evaluate the
Company’s financial position and key performance indicators on a
regular basis and intends to resume payment of dividends when
conditions allow.
Outlook
The Company reports the following key performance indicators,
which show that activity levels declined during a seasonal period
historically marked by increasing activity. Rig utilisation dropped
to approximately 50% in August from approximately 60% in May. The
current backlog in the Company’s Products business has also
decreased from May levels, consistent with declines in utilisation
rates of drilling services contractors.
2013
2012 2009
Mid-Aug
Mid-May Mid-Feb
June
June Rig Count ~1,035
~1,040 Nov-02
~1,200 ~1,200 Rig
Utilisation ~50% ~60%
Jan-00 ~70%
~50% Product Backlog
~$20M ~$35M
$51M ~$62M
~$18M Headcount ~6,300
~8,000 Oct-23
~11,400
~6,100 Net Debt1
~$545M
~$585M
$554M
~$373M
~$750M
Operating conditions and key performance indicators have
continued to deteriorate early in the second half of the year and
are similar to levels experienced during the previous market
downturn in 2009. As a consequence, the Company expects its
second-half 2013 result to be lower than the adjusted result for
the first half despite the benefit of restructuring initiatives.
The Company believes market expectations may not adequately reflect
the risk of price erosion in the second half and may assume larger
benefits in 2013 from the Company’s cost reduction efforts than are
likely to be achieved. Current analyst EBITDA expectations for 2013
range from US$116 million to US$159 million. Analyst estimates at
the low end of the range appear to be consistent with the Company’s
current view for the full year, but significant industry volatility
in the second half could materially impact performance.
Richard O’Brien, the Company’s President and Chief Executive
Officer, commented on the first-half 2013 results, stating, “Our
operating performance and the restructuring and impairment charges
we took during the first half reflect the very challenging
conditions in our markets since the beginning of 2013. The
magnitude and velocity of the market’s contraction during the year
has surprised many people in the industry. While we continue to be
challenged in implementing cost reductions quickly enough to keep
pace with the market’s decline, 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 net impact of these changes will be a US$75 million
reduction in 2013 SG&A expenses from 2012 levels. Substantially
all of these actions will be realized in 2014, resulting in an
additional US$40 million reduction to SG&A expenses from 2013
levels.”
Mr O’Brien added, “Management and the Board also have been
focused on ensuring the Company has adequate flexibility in its
capital structure over the next several years, not only to
withstand additional weakness in the market but also to fund new
opportunities. We believe we have identified an executable path
forward in current market conditions and implementing a more
flexible capital structure remains one of our top priorities.
“Historically, the Company has experienced significant
fluctuations in its enterprise value driven by the cyclicality of
the markets it serves, as well as the resulting risk aversion and
near-term uncertainty this creates for shareholders. The Board and
management believe that the current market enterprise value is
significantly below the fundamental value of the Company, and we
are committed to closing this gap by improving our capital
structure, running our business more efficiently, reducing costs
and prudently managing the risks in our business.”
About Boart Longyear
With over 120 years of expertise, Boart Longyear is the world’s
leading provider of drilling services, drilling equipment, and
performance tooling for mining and drilling companies globally. It
also has a substantial presence in aftermarket parts and service,
energy, mine de-watering, oil sands exploration, and production
drilling.
The Global Drilling Services division operates in over 40
countries for a diverse mining customer base spanning a wide range
of commodities, including copper, gold, nickel, zinc, uranium, and
other metals and minerals. The Global Products division designs,
manufactures and sells drilling equipment, performance tooling, and
aftermarket parts and services to customers in over 100
countries.
Boart Longyear is headquartered in Salt Lake City, Utah, USA,
and listed on the Australian Securities Exchange in Sydney,
Australia. More information about Boart Longyear can be found at
www.boartlongyear.com. To get Boart Longyear news direct, visit
http://www.boartlongyear.com/rssfeed.
1 Adjusted EBITDA and Adjusted NPAT are non-IFRS measures and
are used internally by management to assess the performance of the
business and have been derived from the Company’s financial
statements by adding back $315 million (or $269 million after-tax)
of restructuring charges and impairments.2 Before interest and tax
payments.3 Excludes contingent liabilities relevant to determining
bank covenant compliance. See footnote #1and #15 in Financial
Report.4 Does not include restructuring and impairment charges.5
Excludes contingent liabilities relevant to determining bank
covenant compliance. See footnotes #1 and #15 in the financial
statements.
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