Oil States International, Inc. — 2011 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2011, not a standalone fourth-quarter filing. Oil States provides accommodations, offshore products, well site services and tubular services to energy and natural-resource customers. Results include The MAC, acquired at the end of 2010, for the full year 2011; accordingly, reported growth is not wholly organic.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $3.479 billion | $2.412 billion | +44% |
| Gross profit / margin | $879.9 million / 25% | $537.7 million / 22% | Margin +3 percentage points |
| Operating income / margin | $507.5 million / 14.6% | $255.6 million / 10.6% | +99% |
| Net income attributable to Oil States | $322.5 million | $168.0 million | +92% |
| Diluted EPS | $5.86 | $3.19 | +84% |
| Cash from operations | $215.9 million | $230.9 million | Down $15.0 million |
| Capital expenditures | $487.5 million | $182.2 million | +168% |
| Cash and cash equivalents at year-end | $71.7 million | $96.4 million | Down $24.6 million |
| Total debt, including capital leases and convertible notes | $1.177 billion | $912.9 million | +29% |
Cash from operations was below capital spending, implying approximately $271.6 million of negative operating-cash-flow-minus-capex funding. Working capital absorbed $340.3 million, principally from higher receivables and inventory. Year-end current assets were $1.490 billion and current liabilities $474.9 million. The company reported $656.8 million available under its U.S. and Canadian credit facilities, plus A$108 million available under its Australian facility.
Segment results
- Accommodations: Revenue $864.7 million, up 61%; operating income $249.0 million. Growth reflected The MAC and Mountain West acquisitions and added capacity; segment gross margin rose to 47% from 42%.
- Offshore products: Revenue $585.8 million, up 37%; operating income $94.7 million. Year-end backlog reached a record $535 million versus $354 million a year earlier.
- Well site services: Revenue $653.8 million, up 37%; operating income $141.2 million. Improved activity, pricing, equipment utilization and service mix supported higher margins.
- Tubular services: Revenue $1.375 billion, up 42%; operating income $64.4 million. Shipments increased 39% to 699,000 tons, while gross margin remained relatively low at 6%.
Fourth-quarter 2011 revenue was $995.8 million and net income was $94.3 million, compared with $696.8 million and $44.0 million, respectively, in fourth-quarter 2010.
Material changes versus prior year
- Revenue, operating income and earnings rose substantially across the year, with contributions from stronger North American drilling/completions, accommodations expansion and the full-year inclusion of The MAC.
- Gross margin improved from 22% to 25%, reflecting a larger mix of higher-margin accommodations and well site services and improved margins in those segments.
- Operating cash flow edged lower despite much higher net income, as receivables and inventories grew with activity. Capital expenditures increased sharply, largely for accommodations development.
- Debt increased following the 2010 acquisition financing and issuance of $600 million of 6.5% senior notes in 2011. The notes’ proceeds were primarily used to repay secured borrowings; overall debt nonetheless rose year over year.
Outlook, risks and unusual items
- Management estimated 2012 capital expenditures of approximately $600 million to $700 million, with about 65% allocated to accommodations, particularly Canadian oil sands and Australian mining capacity. Funding was expected from cash, operating cash flow and borrowings.
- Management anticipated continued global deepwater opportunities and improving oil sands and Australian resource-market activity. More than 85% of the offshore products backlog at year-end was expected to be recognized as 2012 revenue; backlog can be delayed, adjusted or cancelled, and is not a guarantee of revenue or profit.
- Management described oil prices as volatile and natural-gas prices as weak in early 2012. Demand remains sensitive to commodity prices, customer capital spending, economic conditions, offshore permitting and regulation, and Australian and Canadian resource activity.
- Key risks include the cyclical energy and mining markets; post-Macondo Gulf of Mexico regulatory delays; potential hydraulic-fracturing, environmental and climate regulation; weather and seasonal disruptions; project execution and fixed-price contract exposure; foreign-exchange movements; labor availability; and supplier concentration. Three suppliers provided 85% of tubular goods purchases, with one providing 58%.
- Total debt included $600 million of 6.5% notes due 2019 and $175 million principal amount of 2 3/8% contingent convertible notes. Conversion thresholds for the latter were met at year-end, and the company assumed conversion in 2012; the notes also had a July 2012 put date. Credit-facility covenants were satisfied at year-end, and management expected continued compliance in 2012.
- After year-end, a fire caused the constructive total loss of one Rocky Mountain drilling rig. The company reported pending claims and proceedings but believed their ultimate effect would not materially adversely affect its consolidated financial position, results or liquidity. It reported no off-balance-sheet arrangements and no goodwill impairment in 2011.
- The company had not declared or paid common dividends and did not expect to do so in the foreseeable future; credit agreements restrict dividends.
Important facts for investors to verify
- Separate organic growth from acquisition-related growth, especially the 2011 contribution from The MAC.
- Track working-capital conversion, receivables and inventory levels against rising revenue, and assess whether cash generation can support the planned 2012 investment program.
- Test the expected returns, utilization and contract coverage for the significant accommodations expansion, and monitor project costs and delivery timing.
- Review debt maturities and refinancing or conversion outcomes for the $175 million convertible notes, alongside covenant headroom and interest costs.
- Assess offshore backlog conversion, cancellations, margins and the pace of Gulf of Mexico permitting recovery; confirm whether the stated backlog timing is realized.