Civeo Corporation — Q2 2018 Form 10-Q
Business context and period. Unaudited results for the three and six months ended June 30, 2018; amounts are U.S. dollars unless stated otherwise. Civeo provides workforce accommodations and related services to natural-resource industries across Canada, Australia and the United States. Results include Noralta from its April 2, 2018 acquisition.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $130.2 million | $92.0 million | $231.7 million | $183.4 million |
| Operating loss | $15.5 million | $13.4 million | $68.0 million | $31.1 million |
| Net income (loss), before preferred-share dividends | $0.3 million | $(14.7) million | $(55.0) million | $(35.6) million |
| Net loss attributable to common shareholders | $(48.3) million | $(14.8) million | $(103.8) million | $(35.8) million |
| Diluted loss per common share | $(0.29) | $(0.11) | $(0.70) | $(0.28) |
| Operating cash flow | Not separately provided | Not separately provided | $14.0 million | $14.4 million |
- Revenue grew 41% in Q2 and 26% in the first half. Growth reflected Noralta, increased Canadian mobile-facility rentals, stronger U.S. activity and, in part, currency translation.
- Operating losses widened. First-half results included a $28.7 million impairment charge; Q2 included $5.6 million of Noralta transaction costs. Higher SG&A and depreciation also weighed on Q2.
- The $48.5 million preferred-share dividend charged against common shareholders’ earnings was primarily a noncash deemed dividend from the preferred shares’ beneficial conversion feature; $0.5 million was paid in kind.
- First-half investing cash outflow was $187.6 million, mainly for Noralta and Acadian Acres acquisitions. Capital expenditures were $5.9 million. Financing provided $147.6 million, primarily from revolving-credit borrowings.
Financial position, margins and material changes
- At June 30, cash was $4.8 million; total debt carrying value was $427.2 million, including $27.6 million current debt. Gross borrowings before unamortized issuance costs were $430.2 million.
- Available liquidity was $83.0 million: $78.2 million of unused revolver capacity plus cash. This compared with $140.0 million at year-end 2017.
- The April credit amendment extended facility maturity to November 30, 2020 and reduced revolving commitments to $239.5 million. Civeo reported compliance with its covenants at June 30; the maximum leverage limit tightens over time, to 3.50:1 from March 31, 2019 onward.
- Segment gross margin rates weakened year over year: Canada was 27% in Q2 versus 33% and 24% in the first half versus 31%; Australia was 50% versus 51% in Q2 and 48% versus 51% in the first half. U.S. gross margin improved to 19% from negative 18% in Q2 and to 10% from negative 22% in the first half.
- Noralta was acquired for approximately $161.1 million cash, 32.8 million common shares and preferred shares with an initial $96.8 million liquidation preference. The preferred shares are initially convertible into approximately 29.3 million common shares. Acadian Acres was acquired for $28.0 million, including cash and common shares.
- First-half foreign-currency translation reduced other comprehensive income by $24.3 million. The Canadian oil-sands lodge impairment followed weaker expected customer commitments; the affected lodge was written down to zero.
Outlook, risks and contingencies
- Management forecast 2018 capital expenditures, excluding acquisitions, of $20 million to $25 million. It said cash, operating cash flow and revolver borrowings should meet anticipated liquidity needs over the next 12 months.
- Management did not expect an immediate improvement in the business despite improved commodity prices. Demand remains exposed to oil and metallurgical-coal prices, customer spending, pipeline capacity, regulatory delays and project approvals.
- LNG Canada’s final investment decision was expected in the second half of 2018, but remained uncertain. If LNG and related projects do not proceed, Civeo warned that Canadian assets, including Sitka Lodge, could face impairment; the relevant long-lived assets had a net book value of approximately $74 million.
- All $430.2 million of debt was floating rate; a 100-basis-point rate increase would add an estimated $4.3 million to annual interest expense. Management also disclosed material foreign-currency translation exposure.
- Pending legal matters were not expected by management to have a material adverse effect. A shareholder suit related to the Noralta acquisition was dismissed after a nominal mootness fee.
Important facts for investors to verify
- Whether Noralta delivers expected operating performance and whether acquisition purchase-price allocations or escrowed consideration change materially.
- Common-share dilution and the preferred shares’ conversion, dividend and redemption terms, including the accounting effect of preferred dividends on reported common-share losses.
- Debt covenant headroom as leverage limits tighten, and the company’s ability to preserve liquidity and service floating-rate debt.
- Progress on LNG Canada and pipeline decisions, customer commitments, and the risk of additional Canadian asset impairments.
- Whether the $20 million–$25 million capital-spending forecast and management’s 12-month liquidity assessment remain achievable as market conditions evolve.