Oil States International, Inc. — Q3 2017 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2017, compared with the same 2016 periods. The company operates Well Site Services and Offshore/Manufactured Products businesses. Results reflect a cyclical oil-and-gas downturn, with stronger U.S. shale activity but weaker offshore and international demand. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $164.0 | $179.0 | $486.9 | $524.5 |
| Gross profit | $34.9 | $43.2 | $107.0 | $123.5 |
| Gross margin | 21% | 24% | 22% | 24% |
| Operating loss | $(18.2) | $(15.6) | $(60.0) | $(52.9) |
| Net loss | $(15.0) | $(10.8) | $(47.0) | $(35.8) |
| Diluted loss per share | $(0.30) | $(0.22) | $(0.94) | $(0.71) |
| Cash from operations | Not provided for quarter | Not provided for quarter | $76.3 | $107.8 |
- Revenue mix: Q3 Well Site Services revenue grew 67% to $77.2 million, while Offshore/Manufactured Products revenue fell 35% to $86.9 million. For nine months, the respective changes were +58% to $206.7 million and −29% to $280.2 million.
- Segment operating results: Q3 Well Site Services reported an operating loss of $13.2 million, improved from $26.1 million; Offshore/Manufactured Products operating income was $7.3 million, down from $22.9 million. For nine months, segment operating losses/income were $(50.2) million and $27.5 million, respectively, versus $(85.9) million and $67.9 million in 2016.
- Margins: Q3 Well Site Services gross margin improved to 14% from 5%, while Offshore/Manufactured Products margin declined to 27% from 31%. Nine-month segment margins were 12% and 29%, compared with 4% and 30% in 2016.
- Balance sheet and liquidity: At September 30, cash was $65.9 million; current assets $476.0 million; current liabilities $116.5 million. Total debt and capital leases were $19.6 million, versus $45.9 million at December 31, 2016. The company reported $146.5 million available under its revolver; cash plus available borrowing totaled $212.4 million. Revolver availability was constrained by the maximum leverage covenant.
- Cash uses: Nine-month capital expenditures were $20.3 million; acquisitions used $12.9 million; financing activities used $48.6 million, including $26.6 million of net revolver repayments and $16.3 million of share repurchases. Cash declined $2.9 million to $65.9 million. Cash from continuing operations was lower year over year, partly because working-capital benefits were smaller.
Material changes and unusual items
- Offshore project-driven product revenue declined 70% in Q3 and 62% for nine months; short-cycle product revenue rose 59% and 76%, respectively. Offshore/Manufactured Products backlog was $198 million at September 30, down from $599 million in mid-2014, and approximately unchanged from year-end 2016; nine-month book-to-bill was 1.0x.
- Well Site Services benefited from U.S. activity: Q3 Completion Services job tickets increased 31% and revenue per job rose 20%; drilling-rig utilization increased to 34% from 15%. Nine-month utilization rose to 28% from 10%.
- Hurricane Harvey disrupted Houston operations, reducing revenue and manufacturing cost absorption and causing some field downtime. One flooded facility remained out of operation at filing time; it was reported fully insured, and work was shifted to other facilities.
- Q3 included $0.4 million of severance and downsizing charges and a $1.0 million discrete tax charge related to carrying back U.S. net operating losses. Nine-month severance and downsizing charges were $2.0 million. Management’s stated adjusted losses, excluding these items, were $13.7 million for Q3 and $44.5 million for nine months.
- The company recorded a $16.6 million income-tax receivable from planned carryback claims. Tax benefits were lower year over year, reflecting jurisdictional earnings mix and valuation allowances against certain deferred tax assets.
- Two Offshore/Manufactured Products acquisitions during 2017 added crane and riser inspection-related technology and assets; combined cash consideration was $12.9 million. Purchase-price allocations remained preliminary.
Outlook, risks and contingencies
- Management expected 2017 capital expenditures of $30–$35 million, subject to industry conditions, project timing, vendor delivery and liquidity monitoring. The filing does not provide earnings or revenue guidance.
- Management stated that cash, operating cash flow and available revolver borrowings should meet liquidity needs over the next 12 months. It expected revolver availability to remain limited by the leverage covenant into 2018. The company was in covenant compliance at September 30; covenants require interest coverage of at least 3.0x and leverage no greater than 3.25x.
- Key exposures include oil and gas price and activity volatility, delayed offshore project approvals and backlog conversion, customer financial health, competition and pricing, foreign exchange, interest rates, tax assumptions, and environmental or other regulatory changes. A 1% increase in floating rates was estimated to add approximately $0.2 million of annual interest expense.
- One customer represented 16% of Q3 revenue and 15% of nine-month revenue, and 12% of receivables at September 30. The company said remaining individual FLSA claims were not expected to be significant; it believed other pending or threatened proceedings would not materially affect its financial position, results or liquidity.
- The company planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method; impact on the financial statements was still under review. It expected to adopt the lease standard on January 1, 2019 and anticipated balance-sheet recognition of operating lease assets and liabilities.
Important facts for investors to verify
- Whether offshore project awards, backlog and book-to-bill stabilize or improve, and how much backlog converts to revenue and cash.
- Whether U.S. shale activity and Well Site Services margin gains persist, including the effect of labor, overtime, pricing and utilization.
- The duration and financial impact of the Harvey facility outage, insurance recovery and any remaining production disruption.
- Actual revolver availability under the leverage covenant, covenant headroom, and the sustainability of liquidity as operating cash flow changes.
- Collection and tax consequences of the $16.6 million carryback receivable, and any further valuation allowances or impairment indicators.
- Customer concentration, acquisition purchase-price allocations, and the financial effect of adopting revenue recognition and lease accounting standards.