Oil States International, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. The company provides well site services and offshore products to the oil and gas industry.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $175.8 | $269.3 | $345.5 | $606.6 |
| Gross margin | 22% | 28% | 23% | 29% |
| Operating income (loss) | $(17.2) | $8.7 | $(37.3) | $42.5 |
| Net income (loss) | $(11.7) | $6.2 | $(24.9) | $25.8 |
| Diluted EPS | $(0.23) | $0.12 | $(0.50) | $0.50 |
| Operating cash flow | Not separately stated | Not separately stated | $82.1 | $221.5 |
| Capital expenditures | Not separately stated | Not separately stated | $18.4 | $68.7 |
Q2 revenue fell 35% year over year; first-half revenue fell 43%. For the first half, operating cash flow included $55.4 million from net working-capital reductions, principally lower receivables. Cash increased to $52.0 million at June 30 from $36.0 million at year-end. Total assets were $1,482.8 million and total liabilities $255.2 million. Debt and capital leases totaled $84.1 million on the balance sheet, compared with $126.4 million at December 31, 2015.
Q2 operating results included $1.1 million of severance and downsizing charges; first-half results included $2.7 million. Management reported Q2 net loss from continuing operations of $11.0 million, or $0.22 per diluted share, excluding the Q2 charges; first-half loss excluding charges was $23.2 million, or $0.46 per diluted share. The reported periods also included income tax benefits of $6.4 million in Q2 and $14.5 million in the first half.
Segments and material changes
- Well site services: Q2 revenue declined 53% to $40.7 million; first-half revenue declined 63% to $84.4 million. First-half segment operating loss was $59.9 million versus a $5.4 million loss in 2015. Completion services faced fewer jobs and competitive pricing; drilling-rig utilization fell to 8% in the first half from 39% a year earlier.
- Offshore products: Q2 revenue declined 26% to $135.2 million; first-half revenue declined 31% to $261.1 million. First-half operating income fell to $45.0 million from $71.4 million. Backlog was $268 million at June 30, down from $340 million at year-end 2015 and $409 million a year earlier, reflecting project deferrals and slower awards.
- Lower activity and pricing reduced consolidated gross margin. Well site services first-half gross margin fell to 3% from 26%; offshore products first-half gross margin was 30% versus 31%.
- First-half capital spending and cash used in investing activities decreased substantially from 2015, when the company also acquired Montgomery Machine Company for $33.4 million.
Liquidity, outlook, and risks
At June 30, the company had $80.4 million drawn under its $600 million revolving credit facility, $32.5 million of letters of credit, and $283.2 million available to draw. Availability was constrained by the facility’s leverage covenant and management expected it to decrease further as trailing-twelve-month EBITDA declined. The company was in compliance with its covenants: minimum interest coverage of 3.0 to 1.0 and maximum leverage of 3.25 to 1.0. Management said cash, operating cash flow, and available borrowings were expected to cover liquidity needs for the next 12 months.
Management forecast 2016 capital expenditures of approximately $35 million to $40 million, subject to industry conditions, project timing, cash generation, and liquidity. It expected well site services demand to remain low during 2016 unless commodity prices improved. Management highlighted persistent oil and gas price volatility, weak customer spending, deferred well completions, customer credit and insolvency risks, possible asset or goodwill impairment, and foreign-exchange exposure. A 1% increase in floating interest rates was estimated to increase annual interest expense by approximately $0.8 million.
Other notable items: the board extended the share repurchase authorization to July 29, 2017; no shares were repurchased under the program in the first half. The company acquired the Guiberson product line in June 2016; the purchase price was allocated to inventory and intangible assets, but the filing text does not provide a clear purchase price. The chief accounting officer resigned effective July 25, 2016. The company stated that the FLSA class settlement had been approved and most related claims settled, with remaining individual claims not expected to be significant.
Investor verification priorities
- Track oil and gas prices, customer capital spending, North American activity, and whether deferred well completions resume.
- Monitor offshore backlog conversion, project delays, new awards, and margin trends in both segments.
- Verify cash generation and working-capital dependence, capex against the $35–$40 million forecast, and the effect of declining EBITDA on revolver availability and covenant headroom.
- Assess potential impairment exposure, customer payment or bankruptcy risk, and remaining litigation and other contingencies.
- Review the Guiberson acquisition terms and integration, the leadership transition following the controller’s resignation, and any subsequent changes to the share repurchase program.