Civeo Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter ended September 30, 2014; filed November 6, 2014. Unless otherwise stated, financial figures are in U.S. dollars. Civeo provides workforce accommodations and related services, primarily to natural-resource customers in Canada, Australia and the United States.
Business context and comparability
Civeo separated from Oil States International on May 30, 2014. Q3 2014 results reflect Civeo as a standalone company; Q3 2013 reflects the former Oil States accommodations business. The nine-month 2014 results combine five months of historical Oil States accommodations operations and four months of Civeo standalone operations, so nine-month comparisons are not fully like-for-like. Pre-spin-off expense allocations may also differ from costs as a standalone public company.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $243.3m | $245.1m | $723.2m | $782.6m |
| Operating income | $46.0m | $53.4m | $115.1m | $195.8m |
| Net income attributable to Civeo | $32.4m | $39.6m | $82.6m | $136.4m |
| Diluted earnings per share | $0.30 | $0.37 | $0.77 | $1.28 |
| Operating cash flow | Not separately provided | Not separately provided | $208.3m | $263.8m |
| Capital expenditures | Not separately provided | Not separately provided | $208.3m | $234.8m |
Q3 revenue was down less than 1%, but operating income fell 14% and attributable net income fell 18%. For the nine months, revenue declined 8% and operating income declined 41%; comparisons are affected by the reporting-basis differences noted above. The filing does not provide a clear consolidated gross-margin percentage.
Segments and material changes
- Canada: Q3 revenue rose 4% to $174.1m, supported by more available rooms and mobile, open-camp and product sales. Lodge occupancy declined to 84% from 92%, and RevPAR fell to $112 from $128. Gross margin declined to 41.0% from 42.3%.
- Australia: Q3 revenue fell 10% to $54.0m amid lower mining activity and occupancy. Occupancy declined to 65% from 80%, RevPAR to $63 from $71, and gross margin to 58.0% from 63.1%.
- United States and other: Q3 revenue fell 17% to $15.2m, reflecting lower mobile-camp occupancy and pricing, competition and lower fabrication sales. Gross margin declined to 22.9% from 24.7%.
- Foreign-exchange translation reduced reported results: the Canadian and Australian dollars weakened against the U.S. dollar over the first nine months. Q3 comprehensive loss attributable to Civeo was $80.5m, primarily from foreign-currency translation; net income remained positive.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $241.8m; current assets were $489.4m and current liabilities were $109.4m.
- Total debt was $775.0m, consisting of a floating-rate term loan; $9.7m was classified as current. The term loan matures May 2019. No revolving-facility borrowings were outstanding.
- The company reported $643.4m of unused revolving capacity after letters of credit and total available liquidity of $885.2m, including cash. Revolving commitments total $650m across U.S., Canadian and Australian facilities.
- Nine-month operating cash flow was $208.3m, down from $263.8m, primarily due to lower occupancy and greater working-capital use. Investing activities used $206.7m, mainly for capital expenditures.
- The credit agreement requires interest coverage of at least 3.0x and leverage no greater than 3.5x. Management expected covenant compliance over the next 12 months. Debt is floating-rate and secured by substantially all company and subsidiary assets.
Outlook, risks and unusual items
- Management expected materially lower Canadian revenue and earnings in Q4 2014 and full-year 2015, citing weaker oil prices, project delays or cancellations, high costs and reduced oil-sands construction prospects. It also expected low Australian occupancy in Q4 2014 and into 2015 amid weak met-coal demand and mining activity.
- Management forecast 2014 capital expenditures of approximately $280m–$300m, principally for Canadian room expansions, and stated that cash, operating cash flow and available borrowings should meet liquidity needs for the next 12 months.
- Management said it was evaluating shareholder returns and described a commitment to emphasize yield, including returning a substantial majority of after-tax free cash flow after maintenance capital spending, subject to debt covenants and law. Civeo paid a $0.13 per-share quarterly dividend in August 2014.
- Management announced a planned move of Civeo’s domicile to Canada, targeted for Q2 or Q3 2015. Completion and anticipated benefits were not assured.
- Nine-month results included $11.6m of impairment charges ($9.0m for the Australian MAC brand following rebranding and $2.6m for assets held by non-paying Mexican customers), $3.5m of spin-off and formation costs, and a $3.5m debt-extinguishment loss. The filing also cites $4.1m of severance costs in SG&A. Management reported no material adverse effect expected from pending legal matters, while noting outcomes cannot be assured.
- Commodity prices, customer capital spending, occupancy, foreign exchange, interest rates, customer concentration/project timing and the potential impairment of long-lived assets are significant risks. A 1% increase in floating rates would increase annual interest expense by about $7.75m, based on period-end debt.
Important facts for investors to verify
- Whether oil-sands project delays and lower commodity prices translate into the forecast decline in Canadian revenue and earnings, and whether Australian occupancy remains weak.
- Room occupancy, RevPAR, contracted rates and customer commitments by segment, particularly as new capacity and project schedules change.
- Cash conversion, receivables and working-capital trends, capital spending versus the $280m–$300m forecast, and resulting debt and liquidity.
- Compliance with credit covenants and sensitivity to floating interest rates; confirm current debt, available revolver capacity and any subsequent financing changes.
- Progress, tax treatment and costs of the proposed Canadian redomicile, and any changes to dividend policy or the stated shareholder-return objectives.
- Potential further impairments, especially if oil prices remain low, and the collectability or recovery of the Mexican customer assets.