Oil States International, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results are compared with the corresponding 2021 periods. Oil States supplies manufactured products and services to energy, industrial and military customers through Offshore/Manufactured Products, Well Site Services and Downhole Technologies.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $181.8 million | $145.7 million | $345.9 million | $271.3 million |
| Operating loss | $1.1 million | $17.6 million | $5.4 million | $37.4 million |
| Net loss | $5.1 million | $15.3 million | $14.6 million | $31.1 million |
| Net loss per share | $0.08 | $0.25 | $0.24 | $0.52 |
Revenue increased 25% in Q2 and 27% for the first half. Gross profit, calculated as revenue less product and service costs before depreciation and amortization, was $39.7 million in Q2 (21.8% margin), versus $28.1 million (19.3%) a year earlier. Operating margin was approximately negative 0.6% in Q2, compared with negative 12.1% in Q2 2021. Six-month gross profit was $77.1 million (22.3% margin), versus $51.4 million (18.9%) in 2021.
- Segments, Q2 revenue / operating income (loss): Offshore/Manufactured Products $96.5 million / $9.4 million; Well Site Services $54.8 million / $0.6 million; Downhole Technologies $30.5 million / $(1.5) million. Corporate operating expense was $9.6 million.
- Cash flow, first half: Operating activities used $10.0 million, versus $13.9 million provided in 2021. Management attributed the 2022 use primarily to $37.4 million of working-capital increases, especially receivables and inventory. Investing activities used $13.0 million, including the E-Flow acquisition; financing activities used $7.7 million. Cash declined by $30.6 million to $22.2 million.
- Debt and liquidity at June 30: Total debt was $172.5 million, including $19.5 million principal amount of 1.50% convertible notes due February 2023, $135.0 million principal of 4.75% notes due 2026, and the $17.5 million GEO promissory note then outstanding. No ABL borrowings were outstanding; $61.8 million was available after letters of credit. The company reported compliance with ABL covenants. Current assets were $426.1 million and current liabilities $195.8 million.
- Other: Q2 comprehensive loss was $17.8 million, including $12.7 million of currency translation losses. First-half capital expenditures were $6.5 million.
Material changes versus the prior comparable period
- Higher customer activity and demand drove growth across all three segments. Q2 revenue rose 25%; first-half revenue rose 27%. Offshore/Manufactured Products led Q2 segment operating income, while Well Site Services moved from a substantial prior-year loss to modest operating income.
- First-half operating loss narrowed to $5.4 million from $37.4 million. Prior-year results included $3.4 million of asset impairment charges and $6.0 million of severance and restructuring costs; 2021 also included CARES Act payroll-tax credits and larger gains on repurchases of the 2023 notes.
- Depreciation and amortization declined 18% in Q2 and 17% for the first half, primarily reflecting lower past capital investment in Well Site Services. Cost of revenue increased in absolute terms with activity; the filing also cites inflation and supply-chain pressures.
- Cash fell from $52.9 million at year-end 2021 to $22.2 million at June 30, 2022, while working capital absorbed cash. Total debt decreased from $178.8 million at year-end.
Outlook, commentary, risks and unusual items
- Management expects approximately $20 million of 2022 capital expenditures, subject to industry conditions, project approvals, vendor timing, free cash flow and liquidity. It believes cash on hand, operating cash flow and ABL availability will meet liquidity needs for the next 12 months. No earnings or revenue guidance is provided.
- Offshore/Manufactured Products backlog was $241 million at June 30, up from $214 million a year earlier but down from $260 million at December 31, 2021. First-half bookings were $168 million, with a 0.9x book-to-bill ratio. Separately, backlog for contracts with original duration over one year was $141.6 million; the filing expects 26% to be recognized in the remainder of 2022 and 41% in 2023.
- Management described demand as improving, while emphasizing sensitivity to oil and gas prices, customer capital discipline, U.S. activity, and offshore project spending. Brent averaged $114 per barrel in Q2; the filing noted prices had declined after June 30 amid perceived recession risk.
- Risks cited include COVID-19 disruptions, Russia-Ukraine-related uncertainty and sanctions, supply-chain constraints, labor shortages, inflation, tariffs and duties, foreign-exchange movements, climate-related regulation, and volatility in customer spending. Russia-based customer receivables generated $0.8 million of bad-debt expense in Q1; the company reported no remaining material balance-sheet exposure to Russia at June 30.
- GEO Seller settlement: A $0.6 million non-cash charge was recognized in Q2. Under the June 28 settlement, the company paid $10.0 million cash and issued 1,909,722 shares valued at $10.3 million on July 1 to settle disputes and the GEO Note. The final settlement is to be reflected in Q3 2022.
- Income tax expense was recorded despite pre-tax losses: $1.8 million in Q2 and $5.2 million in the first half, affected by valuation allowances on U.S. tax assets, non-deductible expenses and discrete tax items. Management warns estimates and future impairment assessments may change with economic and industry conditions.
Important facts for investors to verify
- Whether revenue growth translates into sustained positive consolidated operating income and operating cash flow, especially as working-capital needs change.
- The status and repayment or refinancing of the $19.5 million 2023 convertible notes and the terms and impact of the July GEO Seller settlement, including share dilution.
- Whether the $61.8 million ABL availability and stated 12-month liquidity outlook remain adequate under the borrowing-base and covenant requirements.
- Backlog conversion, bookings and book-to-bill trends in Offshore/Manufactured Products, and profitability recovery in Well Site Services and Downhole Technologies.
- Exposure to cost inflation, supply-chain disruption, foreign-exchange movements, customer spending changes and the risks identified around geopolitical and climate-related developments.