Oil States International, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Oil States provides energy products and services through Offshore Products and Well Site Services; the 2014 accommodations spin-off and earlier tubular-services sale are reported as discontinued operations.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $694.4 million | $1,100.0 million |
| Gross profit / gross margin | $167.7 million / 24% | $314.3 million / 29% |
| Operating income (loss) | $(69.3) million | $55.0 million |
| Continuing-operations net income (loss) | $(46.4) million; $(0.92) diluted EPS | $28.4 million; $0.55 diluted EPS |
| Cash from continuing operating activities | $149.3 million | $255.8 million |
| Capital expenditures | $29.7 million | $114.7 million |
| Cash and cash equivalents at year-end | $68.8 million | $36.0 million |
| Total debt, including capital leases, at year-end | $45.9 million | $126.4 million |
| Stockholders’ equity at year-end | $1,204.3 million | $1,255.7 million |
Revenue fell 37% year over year. Well Site Services revenue declined 51% to $185.7 million, with a 6% gross margin; Offshore Products revenue declined 30% to $508.8 million, with a 31% gross margin. Operating results include $5.2 million of severance and downsizing charges. The 2016 income-tax benefit was $26.9 million, compared with $22.2 million of tax expense in 2015.
Fourth-quarter 2016 revenue was $169.9 million, gross profit was $44.1 million, and continuing-operations net loss was $10.6 million, or $0.21 per diluted share.
Changes versus prior periods
- Operating results worsened from $55.0 million of operating income in 2015 to a $69.3 million operating loss in 2016, amid lower activity and pricing pressure.
- Well Site Services gross margin contracted to 6% from 22%; Offshore Products margin was relatively stable at 31% versus 32%.
- Operating cash flow decreased by $106.5 million. Working-capital reductions contributed $90.3 million of cash in 2016; the filing cautions that activity and customer spending remained weak.
- Offshore Products backlog declined to $199 million from $340 million at year-end 2015 and $490 million at year-end 2014. About 70% of year-end 2016 backlog was expected to be recognized as revenue in 2017; orders may be delayed or cancelled.
- Drilling-rig utilization fell to 12% in 2016 from 33% in 2015. Company headcount was reduced by approximately 47% between year-end 2014 and year-end 2016.
Outlook, risks and unusual items
- Management forecast 2017 capital expenditures of approximately $40–$45 million, funded with cash, internally generated funds and revolver borrowings. It stated that available cash, operating cash flow and revolver availability should meet liquidity needs for the next 12 months, and expected covenant compliance during 2017.
- The $600 million revolving facility matures in May 2019. At year-end, borrowings were $42.2 million and letters of credit were $30.7 million; reported availability was $153.1 million, constrained by the maximum leverage covenant. The required interest coverage ratio is at least 3.0-to-1 and maximum leverage ratio is 3.25-to-1.
- Management described early improvement in U.S. shale activity and oil prices late in 2016, but expected near-term Well Site Services demand to remain tempered and offshore spending to remain exposed to project deferrals and slower awards. These expectations are not guaranteed.
- Key risks include oil and gas price volatility, customer capital-spending cuts or payment problems, backlog cancellations, competitive pricing, offshore project execution, regulatory and environmental requirements, foreign exchange movements, and potential impairment of goodwill or other assets. No goodwill or long-lived-asset impairment was recorded in 2016; goodwill was $263.4 million, or 19% of total assets.
- Other items: currency translation contributed to a $19.6 million comprehensive loss in 2016; the British pound weakened 16% against the U.S. dollar. The filing reports FLSA class-action settlement approval in 2015 and says most claims were settled, with remaining individual claims not expected to be significant. It also reports no off-balance-sheet arrangements and no material adverse effect expected from pending litigation, while noting outcomes remain uncertain.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether operating activity and margins recover, especially the 6% Well Site Services gross margin and low drilling-rig utilization.
- Whether the $199 million Offshore Products backlog converts to revenue as expected, and whether further deferrals or cancellations occur.
- Actual revolver availability and covenant headroom as trailing EBITDA changes; reported availability was already covenant-limited.
- Whether operating cash flow remains adequate after the unusually large working-capital contribution and planned 2017 capital spending.
- Recoverability of goodwill and other assets, customer credit quality, and changes in tax valuation allowances or foreign-exchange exposure.