Oil States International, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Dollar amounts below are in millions unless noted. Comparisons are year over year; results are unaudited.
Business context
Oil States completed the tax-free spin-off of its accommodations business, Civeo, on May 30, 2014, and reports that business as discontinued operations. Its tubular services business, Sooner, was sold in September 2013 and is also reported as discontinued. Continuing operations comprise well site services and offshore products.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $459.6 | $390.8 | $864.8 | $769.6 |
| Operating income | $67.5 | $57.3 | $126.8 | $109.6 |
| Gross margin | 33% | 32% | 33% | 31% |
| Continuing-operations net income (loss) attributable to Oil States | $(24.1) | $28.9 | $10.6 | $57.5 |
| Net income from discontinued operations | $16.2 | $47.7 | $53.0 | $121.3 |
| Net income (loss) attributable to Oil States | $(7.9) | $76.5 | $63.6 | $178.7 |
Q2 continuing-operations diluted EPS was $(0.45), versus $0.52 a year earlier; first-half diluted EPS was $0.20, versus $1.04. Q2 results included a $100.4 million debt-extinguishment loss (about $1.22 per diluted share after tax) and $9.6 million of spin-off-related transaction costs. Excluding these items, the comparison would differ materially; the filing does not present adjusted earnings as a formal non-GAAP measure in the data summarized here.
Q2 revenue increased 18%: well site services rose 12% and offshore products rose 23%. Offshore products benefited from stronger deepwater production-facility and subsea sales, the QCS acquisition, and higher service demand. Well site services benefited from activity and utilization gains; drilling-rig utilization increased to about 91% from 77%. Offshore products gross margin expanded to 31% from 28%, while well site services held at 36%. First-half revenue grew 12% and operating income grew 16%.
Operating cash flow was $208.7 million in the first half, compared with $359.0 million in 2013. Capital expenditures were $203.4 million, versus $240.4 million; cash used in investing was $200.6 million. Cash and cash equivalents were $64.9 million at June 30, down from $599.3 million at year-end, substantially reflecting the Civeo spin-off and related financing and cash transfers.
Debt, liquidity and capital allocation
At June 30, total debt and capital leases were $188.9 million, including $181.9 million drawn on a new $600 million secured revolving facility maturing in May 2019. After $32.3 million of letters of credit, $385.8 million remained available. The former 6.5% and 5.125% senior notes, totaling $966 million principal at the time of repayment, were repurchased in connection with the spin-off. The company reported covenant compliance; required minimum interest coverage is 3.0-to-1 and maximum leverage is 3.25-to-1. Management said cash, operating cash flow and facility availability should meet liquidity needs for the next 12 months.
The company spent $143.7 million on treasury-stock purchases in the first half. Through July 31, it reported further repurchases of $13.8 million and approximately $218.7 million remaining under the $500 million authorization, which expires September 1, 2014.
Outlook, commentary and risks
- Management expected 2014 continuing-operations capital expenditures of approximately $200–$250 million, compared with $165 million in 2013. First-half continuing-operations capital expenditures were $83.2 million. Spending depends on industry conditions, project approvals, schedules and vendor delivery.
- Offshore products backlog reached a record $599 million at June 30, versus $580 million at December 31, 2013 and $561 million a year earlier. Management anticipated robust deepwater spending and opportunities in Brazil, West Africa, the U.S. Gulf of Mexico and Southeast Asia. This is commentary, not quantified earnings guidance.
- Demand is cyclical and depends on customers’ capital spending and commodity-price expectations. Management cited oil-price volatility and geopolitical and economic uncertainty. Natural-gas prices remained vulnerable to production growth outpacing demand, potentially limiting gas-directed drilling.
- The spin-off is expected to increase Oil States’ effective tax rate in future periods because a significant share of prior foreign income came from accommodations. Transition services to Civeo may continue for up to ten months after the distribution.
- Floating-rate debt was $181.9 million; a 1% rate increase would raise annual interest expense by approximately $1.8 million. The company also disclosed foreign-exchange exposure and $1.7 million of foreign-exchange losses in the first half.
- Oil States reported pending or threatened claims, including warranty, product-liability and hazardous-material exposure matters, but stated that any ultimate liability not covered by indemnity or insurance was not expected to materially adversely affect financial position, results or liquidity. It reported no significant changes to the risk factors in its 2013 Form 10-K and no off-balance-sheet arrangements.
Most important facts for investors to verify
- How recurring continuing-operations earnings compare after separating the $100.4 million debt-extinguishment loss and spin-off transaction costs.
- Whether the $599 million offshore backlog converts to revenue and cash flow on the expected schedule, and whether margin improvement is sustained.
- Actual full-year capital spending versus the $200–$250 million estimate and the resulting effect on cash and revolver borrowings.
- Debt-facility covenant headroom and liquidity after repurchases, including the post-quarter repurchases and authorization expiration.
- Tax consequences, indemnification obligations and remaining transition-service arrangements related to the Civeo spin-off.