Civeo Corporation — Q3 2015 Form 10-Q
Business context and period. Civeo provides workforce accommodations and related services in Canada, Australia and the United States. This unaudited report covers the quarter and nine months ended September 30, 2015. The company redomiciled to British Columbia, Canada, on July 17, 2015. Comparisons for the nine months ended September 30, 2014 include five months of the former Oil States accommodations business before the May 2014 spin-off, so they are not fully like-for-like.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $106.5 million | $243.3 million | $420.7 million | $723.2 million |
| Operating income (loss) | $(122.8) million | $46.0 million | $(132.1) million | $115.1 million |
| Net income (loss) attributable to Civeo | $(107.7) million | $32.4 million | $(121.2) million | $82.6 million |
| Diluted EPS | $(1.01) | $0.30 | $(1.14) | $0.77 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $174.9 million | $208.3 million |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $43.7 million | $208.3 million |
Margins and segment trends. Q3 Canada gross margin was 30.6%, down from 41.0%; Australia was 52.1%, down from 58.0%; and the U.S. was negative 4.2%, versus 22.9%. Occupancy declined year over year to 57% in Canadian lodges and 50% in Australian villages. Revenue fell 56% in Q3 and 42% for the nine-month period, reflecting lower occupancy and weaker Canadian and Australian currencies. Q3 impairments drove the consolidated operating loss.
Cash, debt and liquidity at September 30, 2015. Cash was $12.6 million, total debt was $416.1 million, and total available liquidity was $312.2 million, including $299.6 million of unused revolver availability. Nine-month operating cash flow declined from $208.3 million to $174.9 million; the filing attributes the decrease primarily to lower revenue, partly offset by working-capital cash inflows. Capital spending fell substantially year over year. The company reported covenant compliance at quarter-end; its leverage covenant maximum was 3.50:1.00 for September 30, 2015. Debt bears variable rates, and management estimated a 1 percentage-point rate rise would increase annual interest expense by about $4.2 million.
Material changes and unusual items
- Q3 impairment expense was $110.7 million, including $43.2 million of Canadian goodwill impairment and $67.5 million of long-lived asset impairment. Nine-month impairment expense totaled $122.9 million. The company also corrected in Q3 an asset impairment error relating to Q4 2014, which it said was immaterial to the 2014 financial statements.
- The Canadian and Australian dollars weakened significantly against the U.S. dollar. Nine-month foreign-currency translation losses were $172.0 million, increasing accumulated other comprehensive loss to $370.0 million.
- The July credit amendment included a new $325 million Canadian term loan and partial repayment of $725 million of the former U.S. term loan; the amendment also changed facility capacity, pricing and leverage covenant limits. Civeo recorded a $1.5 million loss on extinguishment of debt.
- A $22.7 million Q3 income tax benefit included a valuation allowance on remaining U.S. deferred tax assets because management concluded realization of the U.S. net operating loss was not more likely than not. The filing also reports tax expense related to unrecognized tax benefits and non-deductible goodwill impairment.
- The quarterly dividend was suspended in late 2014 and none was paid in the 2015 periods presented. The company reported no off-balance-sheet arrangements.
Outlook, commentary and risks
Management expected 2015 capital expenditures of approximately $60–$70 million, subject to customer commitments, project approvals and industry conditions. It said Canadian revenue and earnings weakness was expected to continue through the rest of 2015 and into 2016; Australian occupancy pressure was also expected to continue into 2016. The company described the outlook for additional major oil-sands construction projects as limited. It had been awarded an LNG Canada contract and was developing Sitka Lodge, initially planned for 436 rooms, with potential for expansion. Management believed cash on hand and operating cash flow would meet liquidity needs over the next 12 months.
Key risks include sustained low oil, metallurgical coal and natural-gas prices; lower customer capital spending, project delays and mine closures; weaker occupancy and pricing; currency movements; impairment risk; floating-rate debt and covenant constraints; and the possibility of needing additional capital. The company disclosed a material weakness in controls over depreciable lives assigned to asset retirement obligation assets. Disclosure controls were therefore deemed ineffective at the reasonable-assurance level as of September 30, 2015. Management planned remediation and expected completion before year-end 2015, subject to successful operation and testing of the controls.
Important facts for investors to verify
- Whether occupancy, room rates and customer demand stabilize or deteriorate further, especially in Canadian oil sands and Australian coal regions.
- Progress and economics of the LNG Canada/Sitka Lodge contract, including committed rooms, timing and required investment.
- Available liquidity, borrowing-base availability, covenant headroom and compliance as commodity conditions affect earnings.
- Whether the impairment assumptions and deferred-tax valuation judgments remain appropriate, and whether further charges arise.
- Whether management remediates and tests the disclosed material weakness as planned, and whether any additional control deficiencies emerge.
- The timing and amount of actual 2015 capital spending versus the $60–$70 million forecast, and any change in dividend policy.