Oil States International, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unless stated otherwise, dollar amounts below are in millions. The company’s continuing segments were well site services, accommodations and offshore products; tubular services is reported as discontinued operations following its sale.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Continuing-operations revenue | $684.5 | $644.5 | $1,995.0 | $1,944.2 |
| Operating income | $122.0 | $144.1 | $379.7 | $472.0 |
| Continuing net income attributable to Oil States | $77.1 | $97.0 | $237.0 | $314.5 |
| Diluted EPS from continuing operations | $1.38 | $1.75 | $4.27 | $5.68 |
| Net income attributable to Oil States, including discontinued operations | $167.7 | $103.8 | $346.5 | $350.1 |
| Diluted EPS, including discontinued operations | $3.01 | $1.87 | $6.24 | $6.32 |
- Continuing revenue increased 6% in Q3 and 3% year to date, while operating income declined 15% and 20%, respectively.
- Consolidated gross margin was 37% in Q3 versus 39% a year earlier, and 37% for the first nine months versus 40%. The filing attributes the declines mainly to weaker accommodations margins, a prior-year favorable contract settlement and a greater mix of lower-margin offshore products revenue.
- Segment revenue in Q3: well site services $195.9 million (+8%); accommodations $246.3 million (−10%); offshore products $242.3 million (+28%). Accommodations operating income fell to $56.8 million from $85.1 million; offshore products operating income rose to $41.0 million from $28.0 million.
- Cash provided by operating activities was $582.7 million for nine months, versus $445.5 million. Capital expenditures were $355.6 million versus $331.8 million. Cash flow figures include discontinued operations.
Balance sheet, debt and liquidity
- At September 30, cash and equivalents were $776.0 million; total debt and capital leases were $1,007.3 million, down from $1,310.3 million at December 31, 2012. Cash exceeded reported debt by approximately $231 million.
- Current assets were $1,683.0 million and current liabilities $403.5 million. Total assets were $4,273.5 million and stockholders’ equity $2,710.6 million.
- The company repaid its U.S. and Canadian term loans and repaid borrowings under its Australian facility during 2013. It reported no floating-rate borrowings under its credit facilities at quarter-end.
- U.S. and Canadian revolving facilities had $716.8 million available after $33.2 million of letters of credit. The Australian facility had A$300 million available. The company reported compliance with debt covenants.
- Nine-month net interest expense was $58.4 million, up from $51.6 million, primarily reflecting the 5⅛% notes issued in December 2012. Debt at quarter-end included $600 million of 6½% notes due 2019 and $400 million of 5⅛% notes due 2023.
Material changes and unusual items
- On September 6, 2013, Oil States sold Sooner, which comprised its tubular services segment, to Marubeni-Itochu for $600 million, subject to customary post-closing adjustments. The sale produced a reported pretax gain of $128.6 million, or $84.2 million after tax. Q3 discontinued-operations income of $90.7 million includes this gain; continuing earnings provide a clearer view of ongoing operations.
- Sooner’s discontinued operations generated $273.6 million of revenue and $6.5 million of net income before the disposal gain for the two months ended August 31, 2013. Comparative periods were reclassified.
- Q3 continuing results included a $4.6 million pretax gain on a land and building disposal, a $3.3 million debt-extinguishment loss, and $2.6 million of costs related to the proposed accommodations spin-off. Nine-month results also included a $4.0 million gain from reduced acquisition-contingent consideration and a $3.0 million charge from increased contingent consideration.
- Foreign-currency translation drove a $125.5 million other comprehensive loss for the first nine months, compared with $40.1 million of other comprehensive income in 2012.
Outlook, management commentary and risks
- Management forecast 2013 capital expenditures of approximately $500–$550 million, with about two-thirds allocated to accommodations. Spending remained subject to industry conditions, project approvals, schedules and vendor delivery; management expected to fund it with cash and internally generated funds.
- Offshore products backlog was $569 million at September 30, compared with $561 million at both December 31, 2012 and June 30, 2013. Management anticipated robust deepwater spending and award opportunities over the following 12 months.
- The company was pursuing a tax-free spin-off of accommodations, expected in or before summer 2014. Completion depended on market conditions, tax treatment, SEC review, separation agreements and board approval. The company expected to separately capitalize the business and anticipated refinancing existing debt; refinancing could be costly, less favorable or unavailable, delaying the transaction.
- Key demand risks include commodity-price volatility, weaker natural-gas and metallurgical-coal markets, a widening Western Canadian Select discount to WTI, lower Canadian and Australian occupancy or project spending, and foreign-exchange movements. Management also identified competition, customer capital-spending decisions and industry cyclicality as relevant factors.
- Management stated that cash, operating cash flow and available credit were expected to meet liquidity needs for the next 12 months. Pending legal matters were not expected by management to have a material adverse effect, although outcomes could not be assured.
Important facts for investors to verify
- Final working-capital adjustments and other post-closing terms for the $600 million Sooner sale.
- Continuing-operations earnings and segment profitability excluding disposal gains and other identified unusual items.
- Progress, conditions, financing structure and potential debt-refinancing costs for the accommodations spin-off.
- Execution of the $500–$550 million capital-spending plan and its effects on cash generation and liquidity.
- Changes in accommodations occupancy, contract rates, commodity-linked customer spending, offshore backlog conversion and Canadian and Australian currency rates.