Oil States International, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. The company reported continuing operations in well site services and offshore products. Its accommodations business was spun off in May 2014, so prior-period results include substantial discontinued-operation income that is not comparable with the current business.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $337.4 million | $405.2 million |
| Gross profit / margin | $99.7 million / 30% | $132.8 million / 33% |
| Operating income / margin | $33.8 million / 10.0% | $59.3 million / 14.6% |
| Net income from continuing operations | $19.4 million; $0.38 diluted EPS | $34.7 million; $0.64 diluted EPS |
| Total net income | $19.6 million | $71.5 million |
| Cash from continuing operating activities | $114.4 million | $21.9 million |
| Capital expenditures | $38.3 million | $39.9 million |
Q1 2015 net income included $2.1 million of severance and other downsizing costs and a higher effective tax rate, including a $2.3 million deferred-tax adjustment. Management said continuing-operations net income would have been $23.1 million, or $0.45 per diluted share, excluding those charges and the higher tax rate. Q1 2014 continuing results included $1.4 million of Spin-Off transaction costs.
Segments and material changes
- Well site services: Revenue fell 27% to $141.8 million; segment operating income declined to $9.9 million from $36.8 million. Completion-services revenue decreased 19%, reflecting lower revenue per job and fewer service tickets. Drilling-services revenue declined 49%, with average rig utilization down to 44% from 81%. Segment gross margin fell to 30% from 36%.
- Offshore products: Revenue decreased 8% to $195.6 million and operating income was $36.5 million versus $37.3 million. Lower subsea and drilling product sales were partly offset by higher services revenue. Segment gross margin was 29% versus 30%. Backlog was $474 million at quarter-end, down 3% sequentially and from $578 million a year earlier.
- Consolidated revenue declined 17% and operating income fell 43%. SG&A decreased 14% to $35.6 million. Net interest expense fell 80% to $1.6 million, primarily because the company repurchased its remaining high-coupon notes in 2014.
- Q1 2014 total net income included $36.8 million from discontinued operations, versus $0.2 million in Q1 2015. The prior-year comparison therefore overstates the decline in total net income relative to the continuing business.
Cash, debt and liquidity
- Cash and cash equivalents were $72.0 million at March 31, 2015, up from $53.3 million at year-end. Continuing operating cash flow of $114.4 million included $51.8 million from net working-capital reductions, primarily lower receivables.
- Total debt was $206.3 million, including $199.7 million drawn on a $600 million revolving facility; $43.8 million of letters of credit left $356.5 million available. The revolver matures May 2019. Cash less total debt was approximately negative $134 million.
- The company was in compliance with its financial covenants. Required minimum interest coverage is 3.0x and maximum leverage is 3.25x; management expected continued compliance during 2015.
- Financing cash flow included $77.4 million of share repurchases and $59.0 million of net revolving-credit borrowings. The company had approximately $71.5 million remaining under its repurchase authorization, which expires September 1, 2015.
Outlook, risks and contingencies
- Management expected 2015 capital expenditures of approximately $160–$180 million, subject to industry conditions, approvals, schedules, vendor timing and cash generation; funding was expected from cash, operating funds and revolver borrowings. The filing provides no revenue or earnings guidance.
- Management described sharp oil-price declines and reduced customer spending as pressures on activity. U.S. and North American rig counts had fallen materially, and customers were deferring well completions, further affecting well site services. Lower commodity prices could reduce demand further; offshore-project awards and negotiations were also slowing.
- Foreign-currency translation contributed to a $14.5 million other comprehensive loss in Q1. The company also disclosed floating-rate exposure: a 1 percentage-point rate increase would add approximately $2.0 million to annual interest expense.
- The January acquisition of Montgomery Machine Company cost $33.9 million net of cash acquired and was funded under the credit facility; purchase-price allocation remained preliminary.
- Current and former employees filed FLSA lawsuits alleging employee misclassification and unpaid overtime, seeking damages and class certification. The company said it was investigating and intended to defend the cases; it believed pending claims would not materially harm its financial position, results or liquidity. Other ordinary-course claims were also disclosed.
Important facts for investors to verify
- Whether commodity prices, customer capital spending and deferred completions further reduce well site activity, utilization and margins.
- Whether offshore backlog converts to revenue on schedule, given award delays and the year-over-year backlog decline.
- Cash-flow sustainability: Q1 continuing operating cash flow benefited substantially from working-capital reductions.
- Capacity to fund planned capital expenditures, acquisitions and repurchases while maintaining covenant compliance and liquidity.
- Developments and potential exposure in the FLSA litigation, and the final purchase-price allocation for MMC.