Civeo Corp annual report, FY2019

Civeo Corporation — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. Amounts are in U.S. dollars unless noted. Civeo provides workforce lodging, catering and related hospitality services to natural-resource companies in Canada, Australia and the U.S. The filing is an annual report, not a standalone fourth-quarter filing.

Financial performance and liquidity

Revenue: $527.6 million, up 13% from $466.7 million in 2018. Canada contributed $325.7 million, Australia $156.1 million and the U.S. $45.8 million. Lodges and villages generated about 80% of revenue.
Profitability: Operating loss was $49.1 million, improved from an $88.1 million loss in 2018. Net loss was $58.3 million; net loss attributable to Civeo was $58.5 million. After $1.8 million of preferred dividends, loss attributable to common shareholders was $60.3 million, or $0.36 per diluted share, versus $131.8 million and $0.84 per share in 2018.
Margins: Canada gross margin was 26.4%, up from 23.2%; Australia was 42.9%, down from 48.8%; and the U.S. was 16.8%, up from 14.3%. Consolidated gross profit was approximately $160.7 million, or 30.5% of revenue, based on reported revenue and direct costs.
Cash flow and capital spending: Operating cash flow was $74.5 million, versus $54.4 million in 2018. Investing activities used $38.6 million, including $29.8 million of capital expenditures and $16.9 million for the Action acquisition. Financing activities used $44.6 million. Year-end cash was $3.3 million.
Debt and liquidity: Gross borrowings were $359.1 million at year-end, compared with $379.2 million a year earlier. Available liquidity was $124.1 million, comprising $120.8 million of unused revolving capacity and $3.3 million of cash. The company reported compliance with credit covenants at year-end; $6.6 million of borrowing capacity was unavailable to preserve leverage-covenant compliance.
Balance sheet: Total assets were $969.9 million, total liabilities $479.1 million and Civeo shareholders’ equity $490.1 million. Accounts receivable increased to $99.5 million from $70.2 million.

Changes from 2018 and unusual items

Revenue growth reflected the July 2019 acquisition of Action Industrial Catering, higher activity at Bowen Basin villages, Noralta’s inclusion for a full year, increased Canadian food-service activity and stronger demand at Sitka Lodge. Lower U.S. activity and weaker Canadian and Australian currencies partly offset growth.
Operating loss improved as revenue rose and impairment, selling, general and administrative, and depreciation expenses declined. The year-over-year common-shareholder loss comparison also benefited from the $49.6 million preferred-share deemed dividend recorded in 2018.
2019 impairment expense totaled $26.1 million, including a $19.9 million Canadian goodwill impairment, $5.5 million of Australian long-lived-asset impairment and $0.7 million of Canadian asset impairment. 2018 included $28.7 million of Canadian long-lived-asset impairment.
In the second quarter, Civeo corrected a prior-period Australian asset-retirement-obligation error it said was not material to previously issued statements. The correction included $0.9 million of accretion expense, $0.5 million of additional depreciation and amortization, and $1.0 million of impairment expense; a $2.3 million liability was recognized.
Other income included $2.6 million of insurance proceeds related to a lodge closure and gains associated with an Australian village sale, including release of a $2.2 million asset-retirement liability assumed by the buyer.
Fourth-quarter 2019 revenue was $148.7 million; gross profit was $46.2 million; and net loss attributable to Civeo was $32.1 million. The quarter included the $19.9 million goodwill impairment.

Outlook, risks and contingencies

Management expected 2020 capital expenditures, excluding acquisitions, of $18 million to $22 million, compared with $29.8 million in 2019. The filing does not provide a numerical 2020 revenue or earnings forecast. Management said it did not expect an immediate improvement in the business and emphasized operating quality, financial discipline and integration of Noralta and Action.
Demand depends heavily on commodity prices and customer spending, especially Canadian oil sands activity, Australian metallurgical coal and iron ore markets, and U.S. oil and gas drilling. Management cited continued market and price volatility, customer spending uncertainty and foreign-exchange exposure.
Canadian LNG and pipeline work supports Sitka Lodge and mobile camps, but contract revenue timing could be affected by construction delays, including blockades. Sitka’s expansion was completed in the third quarter of 2019, bringing capacity to 1,186 rooms.
Debt and covenant headroom are important risks. The maximum leverage covenant was scheduled to tighten from 4.00x at year-end 2019 to 3.75x during 2020 and 3.50x thereafter; term and revolving borrowings generally mature in November 2021, with certain non-extending lender amounts maturing in November 2020. Floating-rate debt was $359.1 million; a 100-basis-point rate increase was estimated to add about $3.6 million of annual interest expense.
Other material risks include customer and geographic concentration, contract renewals and cancellations, Canadian lodge lease and permit renewals, seasonal weather, environmental and climate regulation, impairment risk, currency movements, and the ability to refinance or maintain covenant compliance. Contract commitments covered 25% of rentable rooms for 2020 and 10% for 2021.
Management reported no legal proceeding expected to have a material adverse effect, while noting pending and threatened claims. The independent auditor gave unqualified opinions on the financial statements and internal control; Action’s internal controls were excluded from the 2019 control evaluation.

Important facts for investors to verify

How much of 2019 revenue and cash generation was recurring or acquisition-driven, and whether Action and Noralta are contributing as expected.
Current covenant headroom, lender commitments and refinancing plans ahead of the 2020 and 2021 maturity dates.
Customer room commitments, contract renewals and occupancy trends—particularly in Canadian oil sands and at Sitka Lodge.
Whether the impairment assumptions and asset-retirement estimates remain supportable, including the Australian prior-period correction.
Execution of the $18 million to $22 million 2020 capital-spending plan and the cash impact of preferred-share dividends, which were paid in kind during 2019.