Oil States International, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Oil States provides oilfield products and services through Well Site Services, Downhole Technologies and Offshore/Manufactured Products. Results include GEODynamics from January 12 and Falcon from February 28; this limits direct comparison with Q1 2017.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $253.6 million | $151.5 million |
| Gross profit / margin | $63.7 million / 25% | $32.6 million / 21% |
| Operating loss | $0.9 million | $23.3 million |
| Net loss | $3.5 million; $0.06 per diluted share | $17.7 million; $0.35 per diluted share |
| Operating cash flow | $(12.3) million | $31.6 million |
| Capital expenditures | $14.2 million | $5.8 million |
Cash was $25.1 million at quarter-end, down from $53.5 million at December 31, 2017. Total debt was $378.5 million, versus $5.3 million at year-end; debt included $188.0 million drawn on the revolver, $200.0 million principal of convertible notes and a $25.0 million acquisition note. The filing reports $101.1 million of revolver availability and $126.2 million of combined availability and cash, constrained by maintenance covenants. The company was covenant-compliant at March 31.
Total assets were $2.05 billion, including $658.5 million of goodwill and $260.2 million of net intangible assets, increased substantially by acquisitions. Working-capital increases used $48.2 million of cash in the quarter. Net cash used in investing activities was $393.7 million, principally for acquisitions.
Changes versus prior year
- Revenue rose 67%; excluding GEODynamics, management reported growth of 37%, reflecting higher activity and Falcon’s partial-quarter contribution.
- Well Site Services revenue rose 67%, with segment operating loss narrowing to $6.8 million from $20.7 million. Offshore/Manufactured Products revenue rose 18%, while operating income increased to $12.5 million from $9.5 million. GEODynamics contributed $45.8 million of revenue and $8.1 million of operating income after acquisition.
- Management attributed improved gross margin and operating results to greater activity, Well Site Services margin recovery and the acquired GEODynamics business. Reported Q1 2018 results included $3.4 million of transaction-related and severance charges; excluding those charges, management stated operating income was $2.5 million, compared with a $22.5 million operating loss excluding specified charges in Q1 2017.
- Operating cash flow shifted from positive $31.6 million to negative $12.3 million, primarily reflecting working-capital use, including higher receivables and lower payables and accrued liabilities.
Outlook, risks and unusual items
- Management expected 2018 capital expenditures of $75–$80 million, subject to industry conditions, project schedules, liquidity and cash generation. It stated cash, operating cash flow and available revolver borrowings should meet liquidity needs for the coming 12 months; no specific revenue or earnings guidance was provided.
- Management described improving oil prices and U.S. activity, but emphasized the industry’s cyclicality and uncertainty in commodity prices and customer spending. Offshore/Manufactured Products backlog fell to $157 million at March 31, the lowest level reported by that segment since December 2005; Q1 book-to-bill was 0.9x.
- Key risks include commodity-price and activity declines, customer credit and bankruptcy risk, acquisition integration and retention, covenant-limited borrowing capacity, interest-rate and foreign-exchange exposure, and potential raw-material cost increases from U.S. steel and aluminum tariffs. A customer bankruptcy led to a $1.8 million receivables write-off/provision in Q1.
- The company acquired GEODynamics for approximately $615 million in cash, stock and a promissory note, and Falcon for $84.2 million in cash. Purchase-price allocations remained preliminary and could change materially. GEODynamics’ internal controls were excluded from the company’s Q1 disclosure-control assessment due to the acquisition timing; management concluded disclosure controls were effective at the reasonable-assurance level.
- The company adopted ASC 606 on January 1, 2018; it reported no material cumulative adoption impact. The filing notes pending assessment of certain Tax Cuts and Jobs Act provisions. Management did not expect pending litigation to have a material adverse effect, while acknowledging outcomes cannot be assured.
Important facts for investors to verify
- Whether acquisition-related growth and operating improvements persist, particularly as full-quarter results from GEODynamics and Falcon are reported.
- Progress in generating operating cash flow and managing receivables, working capital and the increased debt burden.
- Revolver availability and covenant headroom, given that covenant limits reduced drawable capacity below lender commitments.
- Offshore/Manufactured Products orders, backlog and book-to-bill trends, alongside the company’s planned capital spending.
- Final acquisition purchase-price allocations, integration outcomes, and any changes in tax estimates or tariff-related costs.