Oil States International, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with the three months ended March 31, 2010 unless otherwise noted. Amounts are in U.S. dollars; financial figures below are in millions except per-share data.
Business context and results
Oil States supplies products and services to the oil and gas industry through well site services, accommodations, offshore products and tubular services. Results are exposed to customer spending, drilling activity, commodity prices, steel and OCTG pricing, foreign exchange and regulation. Q1 growth also reflected the first full-quarter contribution from acquisitions completed in late 2010.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $760.4 | $532.3 | +43% |
| Gross profit | $186.0 | $125.8 | +48% |
| Gross margin | 24% | 24% | Flat |
| Operating income | $94.8 | $59.8 | +58% |
| Net income attributable to Oil States | $62.1 | $40.2 | +54% |
| Diluted EPS | $1.13 | $0.78 | +45% |
| Operating cash flow | $36.2 | $13.3 | +$22.9 |
| Capital expenditures | $92.6 | $37.2 | +$55.4 |
Segment revenue grew across all four businesses: tubular services +58% to $294.3 million; accommodations +35% to $197.1 million; well site services +44% to $140.6 million; and offshore products +25% to $128.4 million. Segment operating income was $49.0 million for accommodations, $26.6 million for well site services, $16.8 million for offshore products and $13.0 million for tubular services; corporate and eliminations were a $10.6 million loss.
Financial position and liquidity
- Cash and equivalents were $97.0 million at March 31, 2011, versus $96.4 million at year-end 2010. Total assets were $3.17 billion; stockholders’ equity was $1.73 billion.
- Total debt and capital lease obligations were $965.5 million, up from $912.9 million at December 31, 2010. Cash less total debt was approximately negative $868.5 million.
- Cash from operations was partly offset by working-capital investment; management cited $78.3 million used for working capital, primarily related to tubular services and seasonal Canadian accommodations receivables. Operating cash flow less capital expenditures was negative $56.4 million.
- At quarter-end, $246.6 million was available under the U.S. and Canadian facilities, and a further $77.3 million was available under the Australian facility. Management said cash, operating cash flow and available borrowing capacity should meet liquidity needs over the next 12 months.
- The $175 million principal amount of 2⅜% convertible notes, with a $165.0 million net carrying value, was classified as current because conversion thresholds were met. Holders could present notes for conversion in the following quarter; management did not expect significant conversions over the next 12 months.
Changes, outlook and risks
- Revenue and earnings improved substantially, with higher North American rig activity, stronger rental-tool utilization and pricing, increased tubular shipments, and improved accommodations demand. Offshore products backlog rose to $415.5 million from $220.6 million a year earlier.
- Acquisitions contributed materially: The MAC and Mountain West added $45.5 million in accommodations revenue in Q1; Acute added $6.1 million in offshore products revenue. Acquisition-related expense was $1.1 million.
- Management expected 2011 capital expenditures of approximately $600–$625 million, principally for Canadian oil sands and Australian accommodations expansion, rental tools, projects underway and maintenance. This was substantially above 2010 capital expenditures of $182 million. The filing does not provide earnings or revenue guidance.
- Management cited improved oil prices and customer investment plans as supportive of accommodations demand, and stronger bidding and quoting activity for offshore products. It also noted natural gas price weakness may pressure gas-directed drilling and that rising steel costs could affect tubular pricing and margins.
- Delays and added requirements following the Macondo incident continued to weigh on Gulf of Mexico drilling activity. Other stated exposures include commodity-price cycles, economic conditions, foreign exchange and interest rates. A 1% increase in floating rates was estimated to add approximately $8.6 million to annual interest expense.
- Q1 income tax rate was 27.3%, down from 29.3%, primarily due to a greater share of foreign income taxed at lower rates. Foreign-currency translation contributed $30.7 million of other comprehensive income. Management did not expect pending legal matters, after insurance or indemnification, to materially harm financial position, results or liquidity.
Important facts for investors to verify
- Whether operating cash generation can support the unusually high planned 2011 capital spending without materially increasing debt.
- Execution, utilization and returns from accommodations expansions and other growth projects, including the contribution of recent acquisitions.
- Conversion rights and potential cash requirements for the convertible notes, and the effect of interest-rate changes on floating-rate borrowings.
- Whether offshore backlog converts to revenue and how Gulf permitting delays, commodity prices, natural gas weakness, steel costs and OCTG pricing affect segment margins.
- Working-capital needs, particularly inventory and receivables, and the sustainability of improved segment performance.