Oil States International, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company provides energy products and services through its well site services and offshore products segments. The accommodations business was spun off as Civeo in May 2014 and is reported as discontinued operations.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2014 periods unless stated otherwise.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $258.9 | $471.0 | $865.5 | $1,335.9 |
| Operating income | $6.6 | $91.6 | $49.1 | $218.4 |
| Net income from continuing operations | $1.7 | $58.4 | $27.3 | $69.0 |
| Diluted EPS from continuing operations | $0.03 | $1.07 | $0.53 | $1.27 |
| Gross margin | 27% | 35% | 28% | 34% |
- Revenue and margins: Q3 revenue fell 45%; nine-month revenue fell 35%. Well site services revenue declined 63% in Q3 and 50% year to date; offshore products revenue declined 29% and 22%, respectively. Well site services gross margin fell to 20% in Q3 from 38%; offshore products margin was 31% versus 32%.
- Cash flow: Nine-month cash from continuing operating activities was $252.5, versus $141.4 in 2014. Total operating cash flow was $252.8, including $0.4 from discontinued operations. Continuing investing activities used $124.3, including $92.3 of capital expenditures and $33.4 for the MMC acquisition. Continuing financing activities used $95.8, primarily reflecting share repurchases.
- Liquidity and debt: At September 30, cash was $85.7, current assets $648.0 and current liabilities $184.9. Total debt and capital leases were $160.1, including $153.8 drawn on the revolving credit facility. After $39.5 of letters of credit, $406.7 remained available under the $600 million facility, which matures in May 2019. The company reported compliance with its financial covenants.
- Other balance-sheet items: Total assets were $1,648.3, down from $1,809.6 at December 31, 2014. Accumulated other comprehensive loss increased to $42.1, primarily due to foreign currency translation.
Changes, outlook and material items
- Management attributed the downturn to lower oil and gas prices, reduced customer capital spending, lower activity and pricing pressure. Average North American rig count for the first nine months fell 44% year over year; customers’ deferral of well completions also weighed on well site services.
- Offshore products backlog was $394 million at September 30, down about 20% from $490 million at December 31, 2014 and from $543 million a year earlier, reflecting project deferrals and delayed awards.
- Management expected 2015 capital expenditures of approximately $125–$130 million, subject to industry conditions, approvals, schedules, vendor timing and cash generation. It said cash, operating cash flow and available revolver borrowings should meet liquidity needs for the next 12 months. No revenue or earnings guidance is provided in the filing.
- Q3 included a $3.2 million tax valuation allowance and $0.7 million of pretax severance costs. Management stated that, excluding those items, Q3 continuing-operations net income would have been $5.6 million, or $0.11 per diluted share. Nine-month 2015 results included $4.5 million of severance and other downsizing charges, a $3.5 million tax valuation allowance and a $2.3 million deferred-tax adjustment.
- Comparability is affected by the 2014 Civeo spin-off and a $100.4 million debt-extinguishment loss in the first nine months of 2014. The 2014 continuing-operations result also included $11.0 million of spin-off transaction costs; 2014 discontinued operations included Civeo results before the spin-off.
- Key risks cited include continued weak or falling commodity prices, further customer spending reductions, customer credit deterioration, potential asset or goodwill impairment, foreign-currency movements and higher interest rates. A 1 percentage-point increase in floating rates would add approximately $1.5 million to annual interest expense at the reported debt level.
- The company was defending federal lawsuits alleging Fair Labor Standards Act employee-classification and overtime violations; it had recorded a liability in earlier periods for estimated expected settlements. Management did not expect pending proceedings, net of provisions, indemnities or insurance, to materially affect financial position, results or liquidity.
Important facts for investors to verify
- Whether oil and gas prices, rig activity, completion demand and customer pricing continue to pressure well site services revenue and margins.
- How offshore backlog converts to awarded work and revenue, given the disclosed project delays and lower backlog.
- Liquidity and covenant headroom under the credit agreement; the filing reports compliance but does not provide a clear numerical covenant cushion.
- Whether foreign deferred tax assets remain realizable and whether further tax valuation allowances or asset impairments are required.
- Developments and potential costs related to FLSA litigation, customer payment risk and the share-repurchase program.