Oil States International, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; compared with the same periods in 2009. Amounts are in millions except per-share data. The company supplies accommodations, offshore products, tubular products and well-site services to the oil and gas industry.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $588.3 | $456.1 | $1,715.2 | $1,579.5 |
| Operating income | $70.4 | $38.5 | $187.9 | $60.2 |
| Net income attributable to Oil States | $46.3 | $26.6 | $124.1 | $19.2 |
| Diluted EPS | $0.88 | $0.53 | $2.37 | $0.39 |
| Gross margin | 24% | 22% | 23% | 22% |
| Operating margin | 12.0% | 8.4% | 11.0% | 3.8% |
Q3 revenue grew 29% and operating income 83% year over year. For the nine-month comparison, 2009 operating income and earnings included a $94.5 million pretax goodwill impairment charge ($82.7 million after tax, or about $1.65 per diluted share).
Segments and material changes
- Well Site Services: Q3 revenue rose 79% to $125.7 million; operating income was $14.9 million versus a $7.7 million loss. Higher rental-tool utilization, pricing and drilling activity improved results. Nine-month revenue increased 51% to $336.9 million.
- Accommodations: Q3 revenue grew 16% to $127.7 million and operating income rose to $37.7 million from $26.6 million. Oil-sands activity, facility expansions and a stronger Canadian dollar supported results. Nine-month revenue increased 16% to $395.2 million.
- Offshore Products: Q3 revenue declined 22% to $102.4 million and operating income fell to $14.6 million from $20.6 million, reflecting delayed or lower deepwater project spending. Nine-month revenue declined 19% to $311.4 million. Backlog was $264.4 million at September 30, up 28% from year-end 2009.
- Tubular Services: Q3 revenue increased 62% to $232.5 million as shipments rose 76%; revenue per ton fell 8%. Nine-month revenue increased 6% to $671.8 million as shipments rose 46%, partly offset by a 28% decline in revenue per ton. Gross margin was 7% in Q3 and 6% for nine months.
Q3 consolidated gross margin improved to 24%, principally on stronger rental-tool, Canadian accommodations and offshore-products margins; the higher share of lower-margin tubular revenue partly offset the improvement. Nine-month 2010 net income benefited from the absence of 2009’s goodwill impairment.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $153.4 million, versus $352.3 million in 2009. Working capital used $76.2 million, primarily due to increased tubular inventory; it provided $149.5 million in the prior-year period.
- Capital expenditures were $121.0 million, compared with $78.2 million. Operating cash flow less capital expenditures was $32.4 million; this is a simple comparison, not a company-defined free-cash-flow measure.
- Cash and cash equivalents were $138.4 million at September 30, up from $89.7 million at December 31, 2009. Current assets were $1,048.7 million and current liabilities $465.8 million.
- Total debt was $169.6 million, including $161.2 million carrying value of the 2⅜% contingent convertible notes. No revolving-credit borrowings were outstanding; $23.5 million of letters of credit left $476.5 million available under the existing $500 million facility.
- The notes’ $175 million principal amount was classified as current because stock-price conversion thresholds had been met. Holders could present notes for conversion during the subsequent quarter; management said it did not then expect significant conversions in the next 12 months.
Outlook, risks and significant events
- Management expected 2010 capital expenditures of approximately $200 million, funded from cash, operating cash flow and available borrowings. It said existing liquidity sources were expected to cover needs for the coming 12 months.
- The company agreed to acquire The MAC Services Group for approximately A$651 million (about $644 million at the cited exchange rate), subject to shareholder, court and regulatory approvals; closing was expected by the end of Q1 2011. Management expected the acquisition to be accretive in 2011 excluding one-time transaction costs. Financing was planned through cash and a committed, subject-to-syndication five-year $900 million secured facility. The company was assessing hedging for its Australian-dollar commitment.
- On October 5, 2010, after quarter-end, the company acquired Acute Technological Services for $30.3 million, funded with cash and credit-facility borrowings.
- The Macondo incident and related Gulf of Mexico regulatory changes and permitting delays were identified as risks to offshore, tubular and well-site activity. The drilling moratorium was lifted in October, but delays and regulatory uncertainty remained.
- Other key sensitivities include oil and natural-gas prices, customer capital spending, North American drilling activity, OCTG supply and pricing, and Canadian-dollar movements. Management reported pending claims and proceedings but believed any ultimate liability, net of provisions, insurance or indemnity, would not materially harm consolidated financial position, results or liquidity.
- The board authorized a new $100 million share-repurchase program in August 2010, expiring September 1, 2012; purchases were discretionary. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Investor verification priorities
- Track conversion eligibility and any conversion, cash settlement or share dilution from the $175 million principal amount of convertible notes classified as current.
- Verify completion, approvals, final financing terms, acquisition funding and realized earnings contribution for The MAC transaction; also monitor Acute integration and related borrowing.
- Assess whether working-capital investment—especially tubular inventory—and planned capital expenditures convert into operating cash flow and returns.
- Monitor offshore backlog conversion and the effect of Gulf of Mexico permitting, regulatory and insurance changes on demand and project timing.
- Check tubular margins and pricing alongside shipment volumes, OCTG inventory and steel supply; evaluate the effect of currency movements on Canadian and Australian operations.