Oil States International, Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed February 23, 2015. Oil States provides oilfield products and services through its offshore products and well site services segments. The 2014 results reflect the May 30 spin-off of accommodations business Civeo; the September 2013 sale of tubular services and Civeo are presented as discontinued operations.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Continuing-operations revenue | $1,819.6 million | $1,629.1 million |
| Operating income | $310.3 million | $247.3 million |
| Continuing-operations net income | $127.2 million | $129.1 million |
| Diluted EPS, continuing operations | $2.35 | $2.31 |
| Net income, including discontinued operations | $179.0 million | $421.3 million |
| Cash from continuing operating activities | $302.6 million | $235.1 million |
| Capital expenditures, continuing operations | $199.3 million | $164.9 million |
| Cash and cash equivalents at year-end | $53.3 million | $599.3 million |
| Total debt, including capital leases | $147.4 million | $973.2 million |
Consolidated gross margin increased to 34% from 32%; operating margin was approximately 17.1%, versus 15.2%. The 2014 continuing-operations result included a $100.4 million pre-tax debt-extinguishment loss and $11.2 million of spin-off-related transaction costs. Excluding debt-extinguishment and transaction costs, management reported that continuing-operations net income increased $63.0 million year over year.
Fourth-quarter 2014 revenue was $483.7 million and gross profit was $164.6 million. Continuing-operations net income was $58.3 million, or $1.09 diluted EPS, compared with $36.1 million and $0.65 diluted EPS in fourth-quarter 2013.
Segment results
- Offshore products: Revenue increased 9% to $961.6 million; operating income rose to $200.1 million from $156.9 million. Gross margin increased to 31% from 27%. Year-end backlog was $490 million, down from $580 million in 2013; approximately 90% was expected to be recognized in 2015.
- Well site services: Revenue increased 15% to $858.0 million; operating income was $178.4 million, compared with $149.6 million. Completion-services revenue rose 14%, while drilling-services revenue rose 18%. Segment gross margin remained 37%.
Financial position, liquidity and capital allocation
At year-end, Oil States had $53.3 million cash and $147.4 million total debt, including $140.7 million drawn on its $600 million secured revolving facility. After $35.5 million of letters of credit, $423.8 million remained available. The facility matures May 28, 2019; the company was in covenant compliance. Covenants require at least 3.0-to-1 interest coverage and no more than 3.25-to-1 leverage.
The company repurchased its remaining 6.5% and 5.125% senior notes in connection with the spin-off and recorded the related extinguishment loss. The $750 million special dividend received from Civeo helped fund the refinancing; $299 million of cash was transferred to Civeo. Continuing financing activities used $378.9 million in cash, including debt repayments and share repurchases. The company repurchased $350.1 million of shares under its authorization through year-end; an additional $70.0 million was repurchased through February 20, 2015.
Management expected 2015 capital expenditures of approximately $175 million to $225 million, including about $100 million carried over from 2014, funded with cash, operating cash flow and revolver borrowings. Management said cash, operating cash flow and available revolver capacity should meet liquidity needs for the next 12 months. No cash dividends had been paid on common stock, and the credit facility restricts dividends.
Material changes, outlook and risks
- Portfolio change: The Civeo spin-off made Oil States a more focused energy-services company. Civeo results are discontinued operations in all periods presented. Consequently, total net income fell sharply from 2013, which included substantial discontinued-operation earnings and the after-tax gain on the tubular-services sale; continuing operations are more indicative of the remaining business.
- Commodity downturn: Oil prices fell sharply in the fourth quarter. By February 20, 2015, WTI was about $50 per barrel and Brent about $60. Management warned that lower prices could lead customers to reduce capital spending, putting pressure on activity, pricing, revenue, cash flow and profitability.
- Activity and backlog: Offshore backlog declined by $90 million in 2014; fourth-quarter cancellations were $8.4 million. U.S. oil rig count fell from a 2014 peak of 1,609 in October to 1,019 by February 20, 2015. Drilling-rig utilization dropped from an 87% 2014 average to 50% on February 20, 2015, after standing at 65% at year-end.
- Acquisition: On January 2, 2015, the company acquired Montgomery Machine Company for approximately $34 million, funded from the revolver, to expand offshore subsea-component capabilities.
- Other risks and contingencies: The filing cites cyclical energy demand, project delays or cancellations, fixed-price contract cost overruns, customer credit risk, foreign-exchange exposure, environmental and hydraulic-fracturing regulation, offshore safety rules, litigation, and potential goodwill impairment. Two employee lawsuits alleging Fair Labor Standards Act violations were being defended; management did not expect pending matters to materially affect financial position, results or liquidity. Goodwill was $252.2 million, and the 2014 impairment test found reporting-unit fair values above carrying values.
Most important facts for investors to verify
- Whether post-year-end commodity prices, rig-count declines and customer spending cuts further reduce utilization, margins or offshore backlog.
- Whether the $490 million offshore backlog converts to revenue as expected, and the extent of subsequent cancellations, delays or contract losses.
- Whether 2015 operating cash flow can support the stated capital-expenditure plan, share repurchases and the MMC acquisition without materially increasing revolver borrowings.
- How the spin-off and discontinued-operations presentation affect comparisons with prior periods, especially reported total net income and cash balances.
- Whether customer receivables, goodwill valuations, environmental or employment claims, and spin-off tax and indemnity arrangements develop in ways that create material charges or liabilities.