Oil States International, Inc. — FY2010 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2010; it is not a quarterly filing, although unaudited fourth-quarter results are included. Oil States provides products and services to energy and natural-resources customers through accommodations, offshore products, well site services, and tubular services. The company’s results are cyclical and sensitive to commodity prices, customer spending, drilling activity, and regulation.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $2,412.0 million | $2,108.3 million |
| Operating income | $255.6 million | $118.7 million |
| Net income attributable to Oil States | $168.0 million | $59.1 million |
| Diluted earnings per share | $3.19 | $1.18 |
| Operating cash flow | $230.9 million | $453.4 million |
| Capital expenditures | $182.2 million | $124.5 million |
Consolidated gross margin was 22% in both years; operating margin was approximately 10.6% in 2010 versus 5.6% in 2009. EBITDA, as defined by the company and a non-GAAP measure, was $379.8 million versus $238.2 million. The 2010 effective tax rate was 29.9%, compared with 43.6% in 2009, when nondeductible goodwill impairment affected the rate.
At year-end, cash was $96.4 million, total current assets $1.10 billion, and total current liabilities $554.2 million. Total debt, including capital leases, was $912.9 million, compared with $164.5 million a year earlier. The company had $317.7 million available under its $1.05 billion senior credit facilities and $50.6 million available under its Australian facility. It reported compliance with debt covenants. The credit agreement includes leverage and interest-coverage tests and restricts dividends; the company reported no dividend plans for the foreseeable future.
Changes versus the prior comparable period
- Revenue rose 14%, driven by stronger well site services, accommodations, and tubular services; offshore products revenue declined 16%.
- Net income improved substantially, partly because 2009 included a $94.5 million pretax goodwill impairment charge. No goodwill impairment was recorded in 2010.
- Operating cash flow fell by $222.4 million, primarily as 2010 working capital used $100 million, while 2009 benefited from working-capital reductions.
- Well site services revenue rose 56%; segment gross margin increased to 32% from 25%, reflecting higher utilization, pricing, and a more favorable rental mix.
- Tubular services revenue rose 19% as shipment volume increased 52%, but segment gross margin declined to 5% from 7%, partly because of service costs on program work.
- Offshore products revenue fell 16% amid project delays and lower starting backlog. Year-end backlog increased to $354 million from $206 million a year earlier; the company expected more than 75% to be recognized as revenue in 2011.
Fourth-quarter 2010 revenue was $696.8 million, compared with $528.7 million in fourth-quarter 2009; quarterly net income was $44.0 million versus $39.9 million. Fourth-quarter 2010 results included $6.3 million of acquisition costs.
Outlook, management commentary, and notable items
- Management expected approximately $536 million of capital expenditures in 2011, primarily for Canadian oil sands and Australian mining accommodations, other offerings, and maintenance and upgrades. It expected to fund spending with cash, internally generated funds, and credit facilities, and said available liquidity should meet needs over the following 12 months.
- Management cited recovery in North American drilling, improving long-term oil demand expectations, increased offshore bidding activity, and customer investment announcements. It also noted continued weakness in natural-gas pricing and uncertainty around gas-directed drilling.
- The December 30 acquisition of The MAC Services Group expanded accommodations into Australia. Consideration was $638 million, net of cash acquired, plus $87 million of debt assumed; The MAC had 5,210 rooms. Its operating results were not included in 2010 consolidated income because of the acquisition date. Purchase accounting remained provisional. The company also acquired Mountain West for $47.1 million plus estimated contingent consideration of $4.0 million and Acute for $30.0 million.
- The MAC acquisition was funded in part through new five-year secured credit facilities. At year-end, $710.2 million was outstanding under those facilities, with $22.1 million of letters of credit. The company’s floating-rate debt exposure was approximately $735.6 million; a 1 percentage-point rate increase was estimated to raise annual interest expense by about $7.4 million.
- U.S. Gulf of Mexico drilling remained exposed to the effects of the Macondo incident, the 2010 moratorium, permitting delays, and additional safety and certification requirements. Other significant risks include commodity-price and activity cycles, customer project deferrals or cancellations, environmental and hydraulic-fracturing regulation, foreign-exchange movements, labor and skilled-worker availability, and supplier concentration in tubular goods.
- The company reported pending claims and proceedings in the ordinary course of business and believed any ultimate liability, net of reserves, insurance, or indemnification, would not materially affect its financial position, results, or liquidity. It reported no material off-balance-sheet arrangements and no 2010 goodwill impairment.
Important facts for investors to verify
- Review the complete audited financial statements and notes, especially acquisition accounting and the pro forma impact of The MAC; the filing says the purchase-price allocations were not final.
- Assess the sustainability of operating cash generation: 2010 operating cash flow declined despite higher earnings, while working capital and capital spending increased.
- Track debt repayment, covenant headroom, floating-rate exposure, and the treatment or conversion of the contingent convertible notes. The notes were classified as current at year-end after conversion thresholds were met, although management did not expect significant conversion over the next 12 months.
- Monitor 2011 capital expenditure execution and financing, offshore backlog conversion and cancellations, and integration and performance of the acquired Australian accommodations business.
- Evaluate tubular inventory, pricing, margins, and supplier concentration; one supplier accounted for 56% of 2010 tubular purchases and three suppliers for 72%.
- Consider exposure to Gulf of Mexico regulatory delays, environmental requirements, commodity demand, and Canadian and Australian currency movements. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.