Civeo Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013. Amounts below are in U.S. dollars. The statements are combined historical statements of Oil States International’s accommodations business, prepared on a stand-alone basis, not post-spin-off results.
Business context
Civeo provides workforce accommodations and related services in remote resource regions, principally in Canada, Australia and the United States. Its demand is linked to customer investment and activity in oil sands, mining, oil and gas, and other natural-resource projects. Oil States completed the spin-off on May 30, 2014; Civeo began regular-way NYSE trading as CVEO on June 2.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $252.8 million | $294.5 million | Down 14% |
| Operating income | $52.9 million | $90.8 million | Down 42% |
| Operating margin | 20.9% | 30.8% | Down 9.9 percentage points |
| Net income | $36.6 million | $64.2 million | Down 43% |
| Net income attributable to Civeo | $36.2 million | $63.8 million | Down 43% |
| Operating cash flow | $90.7 million | $59.4 million | Up $31.3 million |
| Capital expenditures | $63.5 million | $69.9 million | Down $6.4 million |
Service and other revenue was $238.9 million, versus $289.0 million; product revenue was $13.9 million, versus $5.5 million. Net interest expense was $4.2 million, down from $6.4 million. The effective tax rate increased to 25.2% from 24.3%. The filing does not present earnings per share for the periods because Civeo was not then a public company.
At March 31, cash was $264.8 million, current assets were $481.7 million and current liabilities were $107.3 million (current ratio approximately 4.5). Total liabilities were $531.6 million. Debt was $322.5 million, all long-term affiliate debt to Oil States; no borrowings were outstanding under the Canadian or Australian revolving facilities. Cash increased $40.6 million during the quarter. Comprehensive income was $49.7 million, including $13.1 million of foreign-currency translation income.
Material changes and operating drivers
- Canadian revenue declined 13% to $180.3 million. Weaker Canadian-dollar translation reduced revenue by an estimated $16.6 million; lower contracted room rates also reduced lodge revenue. Average lodge occupancy was 90%, versus 92%, while average available rooms increased 5%. Segment gross margin fell to 39.2% from 46.7%.
- Australian revenue declined 18% to $55.5 million, including an estimated $8.8 million currency-translation impact. Lower mining activity reduced occupancy to 76% from 84%; average available rooms increased 6%. Segment gross margin was 62.1%, compared with 61.1%.
- U.S. revenue declined 11% to $17.0 million, primarily due to lower mobile-camp occupancy. Segment gross margin declined to 25% from 30%.
- Consolidated revenue fell $41.7 million, while total costs and expenses declined only $3.8 million. Operating income consequently fell $37.9 million. Q1 2013 included a $4.0 million pre-tax gain from a reduction in contingent acquisition consideration.
- Operating cash flow improved year over year; management attributed the comparison in part to working-capital use of $46.8 million in Q1 2013. Q1 2014 working capital provided $6.1 million. Q1 2013 also included a $22 million interest payment on affiliate debt.
Outlook, financing and risks
- Management estimated 2014 capital expenditures of $325 million to $375 million, compared with $292 million in 2013. Most planned spending related to Canadian room expansions, including McClelland Lake Lodge. Spending depends on industry conditions, project approvals and schedules, customer commitments and delivery timing.
- Management stated that cash on hand, operating cash flow and borrowing availability were expected to meet liquidity needs for the next 12 months, and expected compliance with debt covenants through the remainder of 2014.
- After quarter-end, Civeo paid Oil States a $750 million special distribution, funded by a new $775 million, five-year term loan. It also entered into a $650 million, five-year revolving credit facility. The new facilities have variable interest rates and covenants requiring interest coverage of at least 3.0x and maximum leverage of 3.5x. The prior Oil States and Australian facilities were terminated; a termination loss of less than $5 million was expected in Q2 2014. These post-quarter transactions are not reflected in March 31 balance-sheet debt and cash.
- Key exposures include customer spending sensitivity to oil, natural gas and metallurgical coal prices; weak Australian mining activity; currency translation; and execution of the planned standalone transition. The filing discusses oil-sands project deferrals, coal mine closures and delays, and low U.S. natural-gas rig activity.
- Q1 expenses include Oil States corporate and shared-service allocations; management cautioned these may not represent costs as an independent public company. Some services continued temporarily under a transition services agreement of up to nine months.
- Management said pending legal claims and proceedings were not expected to have a material adverse effect, while noting outcomes cannot be assured. Disclosure controls were assessed as effective at March 31; a new Australian accounting system was implemented during the quarter.
Important facts for investors to verify
- Actual post-spin-off term-loan borrowings, revolving-facility usage, interest expense, covenant headroom and the effect of the $750 million distribution on liquidity.
- Whether projected 2014 capital spending was incurred, and the resulting occupancy, customer commitments and returns from McClelland Lake Lodge and other expansions.
- Whether Canadian room-rate pressure and Australian mining-related occupancy declines continued, and how commodity prices and foreign exchange affected results.
- Standalone operating costs after transition services and other Oil States support ended, compared with costs allocated in these combined historical statements.
- The subsequent-quarter accounting impact of terminating the prior credit facilities and any developments in legal contingencies.