Oil States International, Inc. — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; quarterly figures below include the fourth quarter. Oil States provides oilfield products and services through Well Site Services, Downhole Technologies, and Offshore/Manufactured Products. Results reflect acquisitions of GEODynamics (January 2018) and Falcon (February 2018), improving U.S. shale activity, and continued weakness in deepwater markets.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1,088.1 million | $670.6 million |
| Operating loss | $5.9 million | $73.9 million |
| Net loss | $19.1 million | $84.9 million |
| Diluted loss per share | $0.33 | $1.69 |
| Operating margin | (0.5)% | (11.0)% |
| Cash from operations | $103.2 million | $95.4 million |
| Capital expenditures | $88.0 million | $35.2 million |
| Cash and cash equivalents, year-end | $19.3 million | $53.5 million |
| Total debt, year-end | $331.7 million | $5.3 million |
Revenue rose 62%, largely reflecting the acquisitions and greater shale-related activity. Product and service costs excluding depreciation and amortization were $834.5 million, implying a 23.3% gross margin on that basis, versus 22.3% in 2017. The company remained loss-making; 2018 operating results included $8.4 million of patent-defense costs, $3.0 million of FLSA settlement reserves, $3.3 million of transaction expenses, and $1.6 million of severance and downsizing costs. A $3.9 million Hurricane Harvey insurance-settlement gain partly offset expenses.
Fourth quarter: Revenue was $274.1 million, compared with $183.7 million in Q4 2017. Continuing-operations net loss was $14.3 million, or $0.24 per diluted share, versus a $37.9 million loss, or $0.76 per share, a year earlier. Management attributed a moderate negative Q4 impact to the sharp decline in oil prices.
Segments and material changes
- Well Site Services: Revenue increased 66% to $480.3 million; operating loss narrowed to $17.0 million from $59.1 million. Completion Services benefited from Falcon and increased U.S. activity. Drilling rig utilization averaged 30%, versus 29% in 2017.
- Downhole Technologies: GEODynamics contributed $213.8 million in revenue and $26.7 million in operating income from acquisition through year-end. Segment results included $8.4 million of patent-defense costs; the related legal actions were settled in Q4, and the company did not expect those costs to recur in 2019.
- Offshore/Manufactured Products: Revenue increased 3% to $394.1 million and operating income was $38.9 million, broadly flat year over year. Project-driven revenue declined 5%. Year-end backlog increased to $179 million from $168 million; approximately 78% was expected to be recognized in 2019. Cancellations were $6.5 million in 2018, up from $3.5 million in 2017.
Investing cash outflow was $461.4 million, including $379.7 million for the acquisitions, net of cash acquired. Financing provided $324.1 million, including issuance of $200 million of convertible notes and net revolving-credit borrowings of $136.1 million. The revolving facility had $350 million in lender commitments, but covenant limits reduced year-end available borrowing capacity to $156.2 million. The company reported covenant compliance at December 31, 2018 and expected to remain compliant through 2019.
Outlook, risks, and unusual items
- Management expected customer-driven activity declines in early 2019 as customers reassessed budgets after oil prices fell about 40% in Q4 2018. It warned that sustained or lower commodity prices could further reduce customer spending, demand, pricing, cash flow, and liquidity.
- Planned 2019 capital expenditures were $65 million to $70 million, subject to industry conditions, project approvals, cash generation, and liquidity. Management expected cash, operating cash flow, and available revolver borrowings to cover liquidity needs for the next 12 months.
- Oilfield demand is cyclical and exposed to commodity-price volatility, customer capital budgets and credit quality, U.S. pipeline constraints, and deepwater project deferrals. Other material risks include tariffs and raw-material costs, environmental and hydraulic-fracturing regulation, offshore rules, foreign exchange, cybersecurity, litigation, and acquisition integration.
- Goodwill and other intangible assets were significant: $647.0 million and $255.3 million, respectively. No impairment was recorded; the December 2018 goodwill test found estimated fair-value headroom of 8% for Completion Services, 8% for Downhole Technologies, and 26% for Offshore/Manufactured Products. Further sustained deterioration could trigger impairment.
- The company identified potentially applicable anti-dumping and countervailing duties on certain Chinese steel products historically imported by GEODynamics, stopped further purchases, and voluntarily disclosed the matter to U.S. Customs and Border Protection. The seller provided certain indemnification, including potential set-off against the $25 million promissory note due July 2019.
- The $200 million 1.50% convertible notes mature in February 2023; their accounting effective interest rate was approximately 6%. The company also estimated that adopting the new lease standard in 2019 would add approximately $45 million of assets and liabilities to the balance sheet.
Most important facts for investors to verify
- How much of 2018’s revenue and operating improvement came from acquisitions versus organic activity, and whether acquired businesses meet expected integration and return objectives.
- Whether early-2019 activity declines, commodity prices, and Permian takeaway constraints affect revenue, margins, collections, and operating cash flow.
- Actual covenant headroom and available revolver capacity, especially under the 3.75-to-1.0 total net leverage limit applicable after 2018, and the maturity/refinancing profile of the debt.
- Progress and potential financial exposure concerning the GEODynamics import-duty review, indemnification, and promissory-note set-off.
- Backlog conversion, cancellation experience, and any impairment indicators for goodwill and intangible assets.