Oil States International, Inc. — FY 2017 Form 10-K
Business context and reporting period
Reports the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. Oil States supplies products and services to the oil and gas industry through Offshore/Manufactured Products and Well Site Services. Results remained exposed to the prolonged industry downturn, although U.S. shale activity improved during 2017. GEODynamics was acquired after year-end and was not included in 2017 results; it is to be reported as a separate Downhole Technologies segment beginning in 2018.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $670.6 million | $694.4 million |
| Gross profit / margin | $149.9 million / 22% | $167.7 million / 24% |
| Operating loss | $73.9 million | $69.3 million |
| Net loss | $84.9 million; diluted EPS $(1.69) | $46.4 million; diluted EPS $(0.92) |
| Cash from operations | $95.4 million | $149.3 million |
| Capital expenditures | $35.2 million | $29.7 million |
Fourth-quarter 2017 revenue was $183.7 million, gross profit $42.9 million, and net loss from continuing operations $37.9 million, or $(0.76) per diluted share. The comparable 2016 quarter recorded revenue of $169.9 million and a continuing-operations net loss of $10.6 million.
At year-end, cash was $53.5 million, current assets $455.9 million, current liabilities $115.3 million, total assets $1.30 billion, and stockholders’ equity $1.13 billion. Debt and capital leases totaled $5.3 million; there were no revolving-credit borrowings at December 31, 2017, though covenant restrictions limited availability to $159.3 million. Operating, investing, and financing cash flows were respectively +$95.4 million, -$47.6 million, and -$65.1 million. Cash declined $15.3 million during the year.
Material changes versus prior periods
- Revenue fell 3% year over year as Offshore/Manufactured Products declined 25% to $381.9 million, partly offset by a 56% increase in Well Site Services to $288.7 million.
- Within Offshore/Manufactured Products, project-driven revenue fell 57% to $127.0 million; short-cycle product revenue rose 67% to $147.5 million. Year-end backlog declined to $168 million from $199 million in 2016 and $340 million in 2015; approximately 80% was expected to be recognized in 2018.
- Well Site Services improved with higher U.S. activity: Completion Services revenue rose 44%, and Drilling Services revenue rose 141%. Drilling-rig utilization increased from 12% to 29%.
- Consolidated gross margin decreased from 24% to 22%, as the loss of higher-margin project-driven sales outweighed Well Site Services margin improvement. Operating loss widened despite the recovery in Well Site Services.
- Brent crude averaged $54 per barrel in 2017 versus $44 in 2016; management noted activity and prices remained below pre-downturn levels.
Outlook, risks, contingencies, and unusual items
- Management expected 2018 capital expenditures of $60–$70 million and stated that cash, operating cash flows, and available revolver borrowings should cover liquidity needs for the next 12 months. This is not earnings guidance; spending depends on industry conditions, project timing, cash generation, and liquidity.
- On January 12, 2018, Oil States acquired GEODynamics for approximately $615 million: $295 million cash, approximately 8.66 million shares valued at about $295 million at closing, and a $25 million promissory note. GEODynamics reported 2017 revenue of $166.4 million and net income of $24.4 million. Preliminary pro forma combined 2017 results were revenue of $837.1 million and net loss of $78.9 million; these unaudited figures are not a forecast.
- On January 30, 2018, the company issued $200 million of 1.50% convertible notes due 2023, receiving approximately $194 million net proceeds to repay revolver borrowings. Its amended revolver provides up to $350 million of capacity and matures in January 2022. At January 31, 2018, $97 million was drawn and $21.2 million of letters of credit were outstanding. Debt covenants include leverage and interest-coverage tests.
- FY 2017 net loss included $28.2 million of non-cash tax expense associated with U.S. tax reform and a further $1.0 million tax charge related to carrying back 2016 losses, as well as $3.4 million of severance, downsizing, and other charges. Management estimated loss excluding these items at $53.3 million. Tax estimates were provisional and could be revised during 2018.
- Hurricane Harvey adversely affected third-quarter results through lower revenue, manufacturing under-absorption, and field downtime. No goodwill or long-lived-asset impairment was recorded; goodwill was $268.0 million at year-end and management cautioned a prolonged downturn could lead to impairment.
- Key risks include volatile commodity prices and customer spending, low offshore project activity and backlog cancellations, customer credit and concentration (Halliburton represented 16% of 2017 revenue), covenant capacity, acquisition integration and dilution, environmental and regulatory changes, foreign exchange, and operational, litigation, and safety exposures. The filing states pending claims were not expected to have a material adverse effect, but outcomes are uncertain.
Important facts for investors to verify
- Whether U.S. activity and service pricing continue to improve enough to offset further offshore project and backlog weakness.
- GEODynamics integration, final purchase-price allocation, acquired earnings contribution, and the effect of the 8.66 million issued shares and convertible notes.
- Post-acquisition revolver usage, covenant headroom, and compliance as EBITDA and interest costs evolve.
- Final tax-reform accounting and any subsequent adjustments to the provisional tax estimates.
- Backlog conversion, cancellations, and the assumptions underlying the $60–$70 million 2018 capital-spending plan.