Civeo Corporation — Q2 2014 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2014. Civeo provides workforce accommodations and related services, principally in Canada, Australia and the United States. Oil States completed Civeo’s spin-off on May 30, 2014; Civeo began regular-way NYSE trading on June 2. Comparisons require caution: 2014 periods combine Oil States’ accommodations business before the spin-off with Civeo’s standalone results afterward, while 2013 is entirely the predecessor business.
Financial results
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $227.1 | $243.0 | $479.9 | $537.5 |
| Operating income | $16.2 | $51.6 | $69.1 | $142.4 |
| Net income attributable to Civeo | $13.9 | $33.0 | $50.2 | $96.8 |
| Diluted EPS | $0.13 | $0.31 | $0.47 | $0.91 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $154.7 | $160.3 |
- Quarterly revenue declined 7%; operating income fell 69%. First-half revenue declined 11% and operating income fell 51%.
- First-half capital expenditures were $141.7 million, making operating cash flow less capital expenditures approximately $13.1 million. Investing activities used $141.1 million.
- At June 30, cash was $285.5 million; current assets were $527.8 million and current liabilities $114.4 million.
- Long-term debt was $775 million, all under a new floating-rate term loan; there were no revolving borrowings. Revolver capacity was $650 million, with $643.1 million unused after letters of credit. Reported total available liquidity was $928.6 million. The term loan’s weighted-average interest rate was 2.5% for the six-month period.
- Segment gross margins declined year over year: Canada 38.3% versus 41.1% in Q2 (38.8% versus 44.3% first half); Australia 54.1% versus 61.0% (58.1% versus 61.0%); U.S. 28% versus 29% in Q2 (26% versus 29% first half).
Material changes and unusual items
- Lower Canadian and Australian revenue reflected unfavorable currency translation and weaker room revenue, occupancy or pricing. Q2 Canadian RevPAR was $110 versus $129 and occupancy was 88% versus 90%; Australian RevPAR was $65 versus $80 and occupancy was 65% versus 84%.
- Q2 costs included $11.6 million of impairment charges: $9.0 million for the Australian MAC brand intangible after rebranding and $2.6 million for assets held by non-paying Mexican customers, with recovery considered unlikely. SG&A included $4.1 million of executive severance; spin-off and formation costs were $1.9 million in Q2 and $2.5 million for the first half.
- The company recorded a $3.5 million loss on extinguishment of debt related to unamortized issuance costs when prior facilities were terminated. Q2 included a $4.9 million income tax benefit, attributed to a lower estimated annual effective tax rate following corporate-structure changes. First-half income tax expense was $7.4 million versus $31.9 million.
- Foreign currency translation produced $54.1 million of other comprehensive income in the first half, compared with a $138.0 million loss in the 2013 period.
- In connection with the spin-off, Civeo borrowed $775 million under its new term loan and distributed $750 million in cash to Oil States. Oil States also settled approximately $336.8 million of affiliate debt through a non-cash capital contribution.
Outlook, risks and contingencies
- Management expects 2014 capital expenditures of approximately $300–$350 million, principally for Canadian room expansions, including McClelland Lake Lodge. Spending depends on industry conditions, project approvals, customer commitments and vendor schedules.
- Management believes cash, operating cash flow and available credit will meet liquidity needs over the next 12 months, and expected compliance with debt covenants for the remainder of 2014. Covenants require interest coverage of at least 3.0-to-1.0 and maximum leverage of 3.5-to-1.0.
- Demand is sensitive to commodity prices and customer investment. Management cited oil-sands project deferrals amid WCS pricing and transportation uncertainty; depressed met-coal prices, mine closures and project delays in Australia; and weak U.S. natural-gas economics and a declining gas-directed rig count. Increased U.S. competition also pressured mobile-camp occupancy and pricing.
- Currency exposure is material: a hypothetical 10% adverse move in the Canadian and Australian dollars would produce estimated translation losses of $94 million and $92 million, respectively, in other comprehensive income. A 1% rise in rates would add approximately $7.75 million of annual interest expense on the floating-rate debt.
- Management said pending claims and proceedings, to the extent not covered by insurance or indemnity, are not expected to materially affect financial position, results or liquidity. No off-balance-sheet arrangements were reported. A $0.13-per-share quarterly dividend was declared July 29, payable August 29, 2014.
Most important facts for investors to verify
- Whether the reported revenue and earnings declines persist after accounting for the predecessor-to-standalone reporting change, currency effects, occupancy and pricing.
- Canadian and Australian lodge/village occupancy, RevPAR, customer commitments and the impact of commodity-driven project delays.
- Execution and funding of the $300–$350 million capital program, and the resulting cash generation and liquidity.
- Debt covenant headroom, floating-rate exposure, and the financial effect of the $775 million term loan and spin-off distribution.
- Potential recovery on the impaired Mexican assets, effectiveness of the Australian rebrand, and any additional standalone or transition-service costs.