Oil States International, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are also provided. Unless noted, financial amounts below are for continuing operations and in U.S. dollars.
Business context
Oil States supplied specialty products and services to oil, gas, and mining customers through accommodations, offshore products, and well site services. In September 2013, it sold Sooner, its entire tubular services segment; those results are classified as discontinued operations. The company also pursued a proposed spin-off of its accommodations business.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $2,670.2 million | $2,631.2 million | Up 1% |
| Operating income | $512.3 million | $610.3 million | Down 16% |
| Net income from continuing operations attributable to Oil States | $314.9 million; diluted EPS $5.63 | $401.5 million; diluted EPS $7.25 | Down |
| Net income attributable to Oil States, including discontinued operations | $421.3 million; diluted EPS $7.53 | $448.6 million; diluted EPS $8.10 | Down |
| Gross margin | 38% | 39% | Down 1 percentage point |
| Operating cash flow | $687.3 million | $637.2 million | Up |
| Capital expenditures | $457.5 million | $487.9 million | Down |
| Cash and cash equivalents at year-end | $599.3 million | $253.2 million | Up |
| Total debt, including capital leases | $973.2 million | $1,310.3 million | Down |
Year-end current assets were $1,525.9 million and current liabilities were $373.8 million. No borrowings were outstanding under the U.S./Canadian facilities; after $33.6 million of letters of credit, $716.4 million was available. The company reported compliance with debt covenants. Debt included $600 million of 6.5% notes due 2019 and $366 million of 5.125% notes due 2023. Management said cash, operating cash flow, and available borrowings should meet liquidity needs for the next 12 months.
Segment revenue and operating income were: accommodations, $1,041.0 million and $267.8 million; offshore products, $882.6 million and $156.9 million; and well site services, $746.5 million and $149.6 million. Segment operating income is before corporate charges. Offshore products backlog reached a year-end record $580 million, with approximately 90% expected to be recognized as revenue in 2014.
Fourth-quarter 2013 revenue was $675.2 million; continuing-operations income attributable to the company was $77.9 million, or $1.40 diluted EPS. Discontinued operations reported a $3.1 million loss for the quarter.
Material changes and unusual items
- Accommodations revenue declined 7% and segment operating income fell 27%, affected by weaker Canadian contract rates, lower Australian occupancy, weaker currencies, and the absence of a favorable $18.3 million U.S. contract settlement recognized in 2012.
- Offshore products revenue rose 10% and operating income rose 17%, reflecting higher drilling and subsea product sales and the Piper acquisition.
- Well site services revenue increased 5%: completion services grew 10%, while drilling services declined 11%; drilling-rig utilization fell from 88% to 75%.
- The Sooner sale generated $600 million cash consideration and a $128.4 million pretax disposal gain ($84.0 million after tax). Discontinued operations also included $1,073.1 million of revenue in 2013, versus $1,781.9 million in 2012, partly reflecting the September sale.
- Other notable 2013 items included a $7.4 million loss on debt extinguishment, $5.7 million of transaction costs primarily related to the proposed spin-off, and a $192.8 million other comprehensive loss, largely from Canadian- and Australian-dollar translation.
- The company repurchased $131.2 million of shares under its program by year-end. It does not plan to pay common dividends in the foreseeable future.
Outlook, risks, and contingencies
- Management forecast 2014 capital expenditures of approximately $600–$650 million, about half for accommodations, subject to industry conditions, project approvals, schedules, and supplier timing.
- The accommodations spin-off was expected in the second quarter of 2014, subject to market conditions, tax clearance or an opinion, SEC review of a Form 10, separation agreements, and final board approval. The company anticipated an accommodations-business cash dividend of $650–$850 million and planned to refinance its credit facilities and tender for its senior notes. Completion and terms were not assured.
- Management cited lower Australian metallurgical-coal prices, customer cost reductions and project delays, weaker Australian occupancy, and a customer renegotiation reducing forward room commitments beginning March 2014. A wider Canadian heavy-crude discount to WTI could also delay oil-sands investment.
- Results are cyclical and exposed to commodity prices, customer capital spending, foreign exchange, weather and seasonality, customer concentration, labor availability, and project execution. Fixed-price offshore contracts carry cost-overrun, delay, warranty, and cancellation risks.
- Regulatory risks include environmental and safety rules affecting oil, gas, mining, hydraulic fracturing, and Gulf of Mexico offshore activity. The company also described potential environmental liabilities and risks from foreign operations and currency movements.
- The company disclosed Iran-related activity by a Singapore subsidiary involving a prior sale for ultimate use at South Pars: approximately $4.2 million transaction value and $0.4 million estimated net profit. It said the business was wound down and voluntary disclosures were submitted to OFAC and the State Department.
- Management believed pending legal matters would not materially adversely affect consolidated financial position, results, or liquidity. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; QCS, acquired in December, was excluded from the internal-control assessment.
Important facts for investors to verify
- Whether the accommodations spin-off closed as planned, and its final tax, separation, debt-refinancing, and capitalization terms.
- Whether the $600–$650 million capex plan and $580 million offshore backlog converted into expected spending and revenue.
- Trends in accommodations occupancy, Canadian contract rates, Australian coal-market exposure, and the customer room-commitment reduction.
- Post-sale earnings and cash generation excluding Sooner and the disposal gain, including the impact of currency translation and continuing transaction costs.
- Debt and liquidity after any spin-off-related tenders, refinancing, and subsequent share repurchases.