UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2012
OR
For the transition period from to
Commission file number: 001-16337
OIL STATES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Three Allen Center, 333 Clay Street, Suite 4620,
Houston, Texas
(713) 652-0582
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ¨ NO x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The Registrant had 51,639,172 shares of common stock, par value $0.01, outstanding and 3,555,441 shares of treasury stock as of April 25, 2012.
INDEX
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements of Income for the Three Month Periods Ended March 31, 2012 and 2011
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Month Periods Ended March 31, 2012 and 2011
Consolidated Balance Sheets – March 31, 2012 (unaudited) and December 31, 2011
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
Notes to Unaudited Condensed Consolidated Financial Statements
Cautionary Statement Regarding Forward-Looking Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
(a) Index of Exhibits
Signature Page
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PART I—FINANCIAL INFORMATION
ITEM 1. Financial Statements
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Revenues
Costs and expenses:
Cost of sales and services
Selling, general and administrative expenses
Depreciation and amortization expense
Other operating expense
Operating income
Interest expense, net of capitalized interest
Interest income
Equity in earnings of unconsolidated affiliates
Other income
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Oil States International, Inc.
Net income per share attributable to Oil States International, Inc. common stockholders
Basic
Diluted
Weighted average number of common shares outstanding:
The accompanying notes are an integral part of
these financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Other comprehensive income:
Foreign currency translation adjustment
Total other comprehensive income
Comprehensive income
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Oil States International, Inc.
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CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Goodwill, net
Other intangible assets, net
Other noncurrent assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
Income taxes
Current portion of long-term debt and capitalized leases
Deferred revenue
Other current liabilities
Total current liabilities
Long-term debt and capitalized leases
Deferred income taxes
Other noncurrent liabilities
Total liabilities
Stockholders’ equity:
Oil States International, Inc. stockholders’ equity:
Common stock, $.01 par value, 200,000,000 shares authorized, 55,189,013 shares and 54,803,539 shares issued, respectively, and 51,633,572 shares and 51,288,750 shares outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost, 3,555,441 and 3,514,789 shares, respectively
Total Oil States International, Inc. stockholders’ equity
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income tax provision
Excess tax benefits from share-based payment arrangements
Gains on disposals of assets
Non-cash compensation charge
Accretion of debt discount
Amortization of deferred financing costs
Other, net
Changes in operating assets and liabilities, net of effect from acquired businesses:
Accounts receivable
Inventories
Taxes payable
Other current assets and liabilities, net
Net cash flows provided by operating activities
Cash flows from investing activities:
Capital expenditures, including capitalized interest
Acquisitions of businesses, net of cash acquired
Proceeds from sale of equipment
Net cash flows used in investing activities
Cash flows from financing activities:
Revolving credit borrowings and (repayments), net
Term loan repayments
Debt and capital lease repayments
Issuance of common stock from share-based payment arrangements
Net cash flows provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents from continuing operations
Net cash used in discontinued operations – operating activities
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
The accompanying notes are an integral part of these
financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Oil States International, Inc. and its wholly-owned subsidiaries (referred to in this report as we or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the Commission) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year.
The preparation of consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying condensed consolidated financial statements.
The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2011 (the 2011 Form 10-K).
2. RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
In June 2011, the FASB issued amendments to disclosure requirements for the presentation of comprehensive income. This guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments should be applied retrospectively. For public entities, the amendments were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments do not require any transition disclosures. In December 2011, the FASB issued an amendment deferring the effective date of the requirement to present reclassification adjustments out of accumulated other comprehensive income on the face of the consolidated statement of income. We adopted this standard in this Quarterly Report on Form 10-Q for the three month period ended March 31, 2012 and the adoption of this standard did not have a material effect on our consolidated financial statements.
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(Continued)
3. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
Additional information regarding selected balance sheet accounts is presented below (in thousands):
Accounts receivable, net:
Trade
Unbilled revenue
Other
Total accounts receivable
Allowance for doubtful accounts
Inventories, net:
Tubular goods
Other finished goods and purchased products
Work in process
Raw materials
Total inventories
Allowance for obsolescence
Property, plant and equipment, net:
Land
Buildings and leasehold improvements (1)
Machinery and equipment
Accommodations assets (1)
Rental tools
Office furniture and equipment
Vehicles
Construction in progress
Total property, plant and equipment
Accumulated depreciation
Accounts payable and accrued liabilities:
Trade accounts payable
Accrued compensation
Accrued interest
Insurance liabilities
Accrued taxes, other than income taxes
Liabilities related to discontinued operations
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4. EARNINGS PER SHARE
The calculation of earnings per share attributable to the Company is presented below (in thousands, except per share amounts):
Basic earnings per share:
Weighted average number of shares outstanding
Basic earnings per share
Diluted earnings per share:
Effect of dilutive securities:
Options on common stock
2 3/8% Convertible Senior Subordinated Notes
Restricted stock awards and other
Total shares and dilutive securities
Diluted earnings per share
Our calculation of diluted earnings per share for the three months ended March 31, 2012 and 2011 excludes 343,500 shares and 176,548 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect.
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5. GOODWILL
Changes in the carrying amount of goodwill for the three month period ended March 31, 2012 are as follows (in thousands):
Balance as of December 31, 2010
Goodwill
Accumulated Impairment Losses
Goodwill acquired and purchase price adjustments
Foreign currency translation and other changes
Balance as of December 31, 2011
75,439
—
101,102
470,990
Balance as of March 31, 2012
6. DEBT
As of March 31, 2012 and December 31, 2011, long-term debt consisted of the following (in thousands):
U.S. revolving credit facility, which matures December 10, 2015, with available commitments up to $500 million and with a weighted average interest rate of 3.4% for the three month period ended March 31, 2012
U.S. term loan, which matures December 10, 2015, of $200 million; 2.5% of aggregate principal repayable per quarter; weighted average interest rate of 2.6% for the three month period ended March 31, 2012
Canadian revolving credit facility, which matures on December 10, 2015, with available commitments up to $250 million and with a weighted average interest rate of 4.3% for the three month period ended March 31, 2012
Canadian term loan, which matures December 10, 2015, of $100 million; 2.5% of aggregate principal repayable per quarter; weighted average interest rate of 3.5% for the three month period ended March 31, 2012
Australian revolving credit facility, which matures November 30, 2013, with available commitments up to A$150 million and with a weighted average interest rate of 6.5% for the three month period ended March 31, 2012
6 1/2% senior unsecured notes—due June 2019
2 3/8% contingent convertible senior subordinated notes, net due 2025
Subordinated unsecured notes payable to sellers of businesses, fixed interest rate of 6%, which mature in December 2012
Capital lease obligations and other debt
Total debt
Less: Current portion
Total long-term debt and capitalized leases
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On June 1, 2011, the Company sold $600 million aggregate principal amount of 6 1/2% senior unsecured notes (6 1/2% Notes) due 2019 through a private placement to qualified institutional buyers.
The 6 1/2% Notes are senior unsecured obligations of the Company, are guaranteed by our material U.S. subsidiaries (the Guarantors), bear interest at a rate of 6 1/2% per annum and mature on June 1, 2019. At any time prior to June 1, 2014, the Company may redeem up to 35% of the 6 1/2% Notes at a redemption price of 106.500% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings. Prior to June 1, 2014, the Company may redeem some or all of the 6 1/2% Notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. On and after June 1, 2014, the Company may redeem some or all of the 6 1/2% Notes at redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to the redemption date. The optional redemption prices as a percentage of principal amount are as follows:
Twelve Month Period Beginning
June 1,
% of Principal
Amount
2014
2015
2016
2017
The Company utilized approximately $515 million of the net proceeds of the 6 1/2% Note offering in June 2011 to repay borrowings outstanding under its senior secured credit facilities. The remaining net proceeds of approximately $75 million were utilized for general corporate purposes.
As of March 31, 2012, we classified the $175.0 million principal amount of our 2 3/8% Contingent Convertible Senior Subordinated Notes (2 3/8% Notes), net of unamortized discount, as a noncurrent liability based on our ability and intent to refinance the 2 3/8% Notes utilizing borrowings available under our senior secured credit facilities. As of March 31, 2012, the contingent conversion thresholds were met and, as a result, 2 3/8% Note holders could present their notes for conversion during the quarter following the March 31, 2012 measurement date. As of March 31, 2012, the recent trading prices of the 2 3/8% Notes exceeded their conversion value due to the remaining imbedded conversion option of the holder. Should a 2 3/8% Note holder convert their notes, we would utilize our existing credit facilities to fund the cash portion of the conversion value.
The following table presents the carrying amount of our 2 3/8% Notes in our condensed consolidated balance sheets (in thousands):
Carrying amount of the equity component in additional paid-in capital
Principal amount of the liability component
Less: Unamortized discount
Net carrying amount of the liability component
Unamortized Discount – 2 3/8% Notes
The effective interest rate of 7.17% has been applied as of the issuance date for our 2 3/8% Notes in accordance with ASC 470-20 – Debt with Conversion and Other Options. Interest expense on the 2 3/8% Notes, excluding amortization of debt issue costs, was as follows (in thousands):
Interest expense
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Remaining period over which discount will be amortized
Conversion price
Number of shares to be delivered upon conversion (1)
Conversion value in excess of principal amount (in thousands) (1)
Derivative transactions entered into in connection with the convertible notes
On July 13, 2011, The MAC Services Group Limited (The MAC) entered into a A$150 million revolving loan facility governed by a Facility Agreement (the Facility Agreement) between The MAC and National Australia Bank Limited, which is guaranteed by the Company. The Facility Agreement amended The MAC’s existing A$75 million revolving loan facility on substantially the same terms, including the maturity date of the Facility Agreement of November 30, 2013. As of March 31, 2012, we had A$35 million outstanding under the Australian facility leaving A$115 million available to be drawn under this facility.
The Company’s financial instruments consist of cash and cash equivalents, investments, receivables, payables, and debt instruments. The Company believes that the carrying values of these instruments, other than our 2 3/8% Notes and our 6 1/2% Notes, on the accompanying consolidated balance sheets approximate their fair values.
The fair values of our 2 3/8% and 6 1/2 % Notes are estimated based on quoted prices in active markets (Level 1 fair value measurements). The carrying values and fair values of these notes were as follows (in thousands):
6 1/2% Notes
Principal amount due 2019
2 3/8% Notes
Principal amount due 2025
Less: unamortized discount
Net value
As of March 31, 2012, the estimated fair value of the Company’s debt outstanding under its credit facilities was estimated to be at fair value.
As March 31, 2012, the Company had approximately $70.7 million of cash and cash equivalents and $618.8 million of the Company’s U.S. and Canadian credit facilities available for future financing needs. The Company also had availability totaling A$115 million under its Australian credit facility. As of March 31, 2012, we had $29.8 million of outstanding letters of credit.
Interest expense on the condensed consolidated statements of income is net of capitalized interest of $1.2 million for the three months ended March 31, 2012 and $1.1 million for the same period in 2011.
7. CHANGES IN COMMON STOCK OUTSTANDING
Shares of common stock outstanding – January 1, 2012
Shares issued upon exercise of stock options and vesting of stock awards
Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury
Shares of common stock outstanding – March 31, 2012
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8. STOCK BASED COMPENSATION
During the first three months of 2012, we granted restricted stock awards totaling 274,378 shares valued at a total of $23.2 million. Of the restricted stock awards granted in the first quarter of 2012, a total of 203,000 awards vest in four equal annual installments beginning in February 2013, 47,625 awards are performance shares that may vest in February 2015 in an amount that will depend on the Company’s achievement of specified performance objectives and 23,625 awards vest 100% in February 2016. The performance based awards have a performance criteria that will be measured based upon the Company’s achievement levels of average after-tax annual return on invested capital for the three year period 2012 to 2014. During the three months ended March 31, 2012, the Company also granted 54,950 units of phantom shares under the newly created Canadian Long-Term Incentive Plan, which provides for the granting of units of phantom shares to key Canadian employees. These awards vest in three equal annual installments beginning in February 2013 and are accounted for as a liability. Participants granted units of phantom shares are entitled to a lump sum cash payment equal to the fair market value of a share of the Company’s common stock on the vesting date. A total of 155,250 stock options with a ten-year term were awarded in the three months ended March 31, 2012 with an average exercise price of $84.52 that will vest in four equal annual installments starting in February 2013.
Stock based compensation pre-tax expense recognized in the three month periods ended March 31, 2012 and 2011 totaled $4.4 million and $3.4 million, or $0.06 and $0.05 per diluted share after tax, respectively. The total fair value of restricted stock awards that vested during the three months ended March 31, 2012 and 2011 was $12.8 million and $10.6 million, respectively. At March 31, 2012, $48.6 million of compensation cost related to unvested stock options and restricted stock awards attributable to future performance had not yet been recognized.
9. INCOME TAXES
Income tax expense for interim periods is based on estimates of the effective tax rate for the entire fiscal year. The Company’s income tax provision for the three months ended March 31, 2012 totaled $53.3 million, or 28.2% of pretax income, compared to $23.4 million, or 27.3% of pretax income, for the three months ended March 31, 2011. The increase in the effective tax rate from the prior year was largely the result of a higher foreign effective tax rate in 2012 compared to 2011.
10. SEGMENT AND RELATED INFORMATION
In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, the Company has identified the following reportable segments: well site services, accommodations, offshore products and tubular services. The Company’s reportable segments represent strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were initially acquired as a unit, and the management at the time of the acquisition was retained. Subsequent acquisitions have been direct extensions to our business segments. The separate business lines within the well site services segment have been disclosed to provide additional detail for that segment. Results of a portion of our accommodations segment supporting traditional oil and natural gas drilling activities are impacted by seasonally higher activity during the Canadian winter drilling season occurring in the first calendar quarter.
Financial information by business segment for each of the three months ended March 31, 2012 and 2011 is summarized in the following table (in thousands):
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Three months ended March 31, 2012
Well site services –
Rental tools and services
Drilling services
Total well site services
Accommodations
Offshore products
Tubular services
Corporate and eliminations
Total
Three months ended March 31, 2011
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its commercial operations, products, employees and other matters, including warranty and product liability claims and occasional claims by individuals alleging exposure to hazardous materials as a result of its products or operations. Some of these claims relate to matters occurring prior to its acquisition of businesses, and some relate to businesses it has sold. In certain cases, the Company is entitled to indemnification from the sellers of businesses, and in other cases, it has indemnified the buyers of businesses from it. Although the Company can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on it, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Certain wholly-owned subsidiaries, as detailed below (the Guarantor Subsidiaries), have fully and unconditionally guaranteed all of the 6 1/2% Notes issued in 2011 and all of the 2 3/8% Notes issued in 2005.
The following condensed consolidating financial information is included so that separate financial statements of the Guarantor Subsidiaries are not required to be filed with the Commission. The condensed consolidating financial information presents investments in both consolidated and unconsolidated affiliates using the equity method of accounting.
The following condensed consolidating financial information presents: consolidating statements of income and comprehensive income for each of the three month periods ended March 31, 2012 and 2011, condensed consolidating balance sheets as March 31, 2012 and December 31, 2011 and the statements of cash flows for each of
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the three months ended March 31, 2012 and 2011 of (a) the Company, parent/guarantor, (b) Acute Technological Services, Inc., Capstar Holding, L.L.C., Capstar Drilling, Inc., General Marine Leasing, L.L.C., Oil States Energy Services L.L.C., Oil States Energy Services Holding, Inc., Oil States Energy Services International Holding, L.L.C., Oil States Management, Inc., Oil States Industries, Inc., Oil States Skagit SMATCO, L.L.C., PTI Group USA L.L.C., PTI Mars Holdco 1, L.L.C., Sooner Inc., Sooner Pipe, L.L.C., Sooner Holding Company, Specialty Rental Tools & Supply, L.L.C., Stinger Wellhead Protection, Incorporated, and Well Testing, Inc., (the Guarantor Subsidiaries), (c) the non-guarantor subsidiaries, (d) consolidating adjustments necessary to consolidate the Company and its subsidiaries and (e) the Company on a consolidated basis. Note: As of January 1, 2012, Specialty Rental Tools & Supply, L.L.C., Stinger Wellhead Protection, Incorporated, and Well Testing, Inc. were combined to form Oil States Energy Services L.L.C.
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Condensed Consolidating Statements of Income and Comprehensive Income
REVENUES
Operating revenues
Intercompany revenues
Total revenues
OPERATING EXPENSES
Intercompany cost of sales and services
Other operating (income) expense
Operating income (loss)
Equity in earnings (loss) of unconsolidated affiliates
Income tax provision
16
Other operating (income)expense
Other income (expense)
17
Condensed Consolidating Balance Sheets
Property, plant and equipment, net
Investments in unconsolidated affiliates
Long-term intercompany receivables (payables)
LIABILITIES AND EQUITY
Stockholders’ equity
Non-controlling interest
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19
Condensed Consolidating Statements of Cash Flows
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving credit borrowings (repayments), net
Debt and capital lease payments
Proceeds from (funding of) accounts and notes with affiliates, net
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents from continuing operations
Net cash used in discontinued operations operating activities
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Net cash used in investing activities
Net cash provided by financing activities
21
This quarterly report on Form 10-Q contains “certain forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the information in the quarterly report may contain “forward-looking statements.” The “forward-looking statements” can be identified by the use of forward-looking terminology including “may,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” or other similar words. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of known material factors. For a discussion of important factors that could affect our results, please refer to Part II, Item 1A. Risk Factors in this report and “Part I, Item 1A. Risk Factors” and the financial statement line item discussions set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2011 Form 10-K filed with the Commission on February 17, 2012. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may differ materially from those expected, estimated or projected. Our management believes these forward-looking statements are reasonable. However, you should not place undue reliance on these forward-looking statements, which are based only on our current expectations and are not guarantees of future performance. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any of them in light of new information, future events or otherwise.
In addition, in certain places in this quarterly report, we refer to reports published by third parties that purport to describe trends or developments in the energy industry. The Company does so for the convenience of our stockholders and in an effort to provide information available in the market that will assist the Company’s investors in a better understanding of the market environment in which the Company operates. However, the Company specifically disclaims any responsibility for the accuracy and completeness of such information and undertakes no obligation to update such information.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this quarterly report on Form 10-Q.
Macroeconomic Environment and Outlook
We provide a broad range of products and services to the oil and gas industry through our accommodations, offshore products, well site services and tubular services business segments. In our accommodations segment, we support both the oil and gas and mining industries. Demand for our products and services is cyclical and substantially dependent upon activity levels in the oil and gas and mining industries, particularly our customers’ willingness to spend capital on the exploration for and development of oil, natural gas, coal and mineral reserves. Our customers’ spending plans are generally based on their outlook for near-term and long-term commodity prices. As a result, demand for our products and services is highly sensitive to current and expected commodity prices, principally that of crude oil, coal and, to a lesser extent, natural gas.
In the first quarter of 2012, the price of crude oil increased as positive economic news related to growth rates projected in China and other emerging markets, consumer spending and U.S. consumer confidence indicated that an economic recovery continued. Despite signs of an improving economy in the United States, the world’s largest consumer of crude oil, global economic risks remain due to fiscal and financial uncertainty in various European countries, a prolonged level of relatively high unemployment in the U.S. and other advanced economies and inflation risks in certain emerging markets. The price of crude oil is currently trading at approximately $103 per barrel for West Texas Intermediates (WTI) crude and around $120 per barrel for Intercontinental Exchange (ICE) Brent crude. Increased prices and successful shale oil drilling are expected to drive very robust U.S. oil production. If U.S. oil production grows significantly, it could impact the global oil supply/demand balance, which could lead to lower oil prices and lower future U.S. drilling activity.
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Prices for natural gas in the United States continue to be weak due to the rise in production of unconventional gas resources in North America, largely due to increases in onshore shale production resulting from technological advancements in horizontal drilling and hydraulic fracturing. Natural gas prices are currently trading at or below $2.00 per Mcf. Natural gas inventories in the U.S. continue to be over-stocked, particularly given an unseasonably warm winter season. Increases in the supply of natural gas, whether the supply comes from conventional or unconventional production or associated gas production from oil wells, will likely constrain prices for natural gas and result in fewer rigs drilling for gas in the near-term.
Growing Chinese steel production is expected to support 2012 metallurgical coal pricing. After decreasing over the past year, metallurgical coal prices could increase as growing Chinese and Indian steel demand is expected to lift metallurgical coal prices during the remainder of the year. Urbanization and infrastructure investment from the Chinese government should fuel continued strength in steel demand in the foreseeable future. Beyond China, Indian steel consumption is expected to grow as India’s five-year growth plan calls for significant investments to expand its infrastructure.
Various oil and gas industry analysts have projected that 2012 global exploration and production expenditures are expected to increase over calendar year 2011 levels. North American capital spending plans are expected to be focused in onshore areas while international exploration and production budgets are expected to primarily be spent offshore.
Overview
Demand for our accommodations and offshore products segments is primarily tied to the long-term outlook for commodity prices. In contrast, demand for our well site services and tubular services segments responds to shorter-term movements in oil and natural gas prices and, specifically, changes in North American drilling and completion activity. Other factors that can affect our business and financial results include the general global economic environment and regulatory changes in the United States and internationally.
Our accommodations business is predominantly located in northern Alberta, Canada and Queensland, Australia and derives most of its business from resource companies who are developing and producing oil sands and coal resources and, to a lesser extent, other mineral resources. A significant portion of our accommodations revenues is generated by our large-scale lodge and village facilities. Where traditional accommodations and infrastructure are not accessible or cost effective, our semi-permanent lodge and village facilities provide comprehensive accommodations services similar to those found in an urban hotel. We typically contract our facilities to our customers on a fee per day covering lodging and meals that is based on the duration of their needs which can range from several months to several years. In addition, primarily in Canada and the U.S., we provide shorter-term remote site accommodations in smaller configurations utilizing our modular, mobile camp assets.
Generally, our oil sands and mining accommodations’ customers are making multi-billion dollar investments to develop their prospects, which have estimated reserve lives of 10 to in excess of 30 years and, consequently, these investments are dependent on those customers’ longer-term view of commodity demand and prices. Oil sands development activity has increased in the past year and has had a positive impact on our accommodations segment. Recent announcements of new and expanded oil sands projects will create the opportunity for extensions of existing accommodations contracts and incremental accommodations contracts for us in Canada. In addition, several major oil companies and national oil companies have announced joint ventures to develop oil sands leases that should bode well for future oil sands investment and, as a result, demand for oil sands accommodations. Our Australian accommodations business is significantly influenced by increased coal demand, especially from China, Japan and India. Despite coal prices weakening recently, we expect Chinese metallurgical coal demand to continue to increase in 2012 compared to 2011 as the country continues to industrialize. We are expanding our Australian accommodations capacity to meet this increasing demand. Accommodations deployed to support onshore U.S. drilling activity in several of the active shale play regions have also favorably contributed to our results.
Our offshore products segment provides highly engineered products for offshore oil and natural gas drilling and production systems and facilities. Sales of our offshore products and services depend primarily upon development of infrastructure for offshore production systems and subsea pipelines, repairs and upgrades of existing offshore drilling rigs and construction of new offshore drilling rigs and vessels. In this segment, we are particularly influenced by global deepwater drilling and production spending, which are driven largely by our customers’ longer-term outlook for oil and natural gas prices.
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The improvement in oil prices over the last two years, along with the outlook for long-term oil demand, resulted in increased bidding and quoting activity for our offshore products in the latter part of 2010 that continued throughout 2011 and early 2012. As a result of this increased activity, backlog in our offshore products segment increased from $416 million as of March 31, 2011 to $529 million as of March 31, 2012. Offshore products’ backlog totaled $535 million as of December 31, 2011. We anticipate global deepwater spending to continue including new award opportunities coming from Brazil, West Africa, the U.S. Gulf of Mexico, South East Asia and Australia over the next twelve months.
Our well site services businesses are significantly influenced by drilling and completion activity primarily in the U.S. and, to a lesser extent, Canada and the rest of the world. Until recently, overall industry activity has been primarily driven by spending for natural gas exploration and production, particularly in the shale play regions of the U.S. using horizontal drilling and completion techniques. However, with higher oil prices, lower natural gas prices and the advancement of horizontal drilling and completion techniques, activity in North America has shifted to a greater proportion of oil and liquids-rich drilling. According to rig count data published by Baker Hughes Incorporated, the oil rig count in the U.S. now totals approximately 1,300 rigs, the highest oil-related rig count in over 20 years, comprising approximately 67% of total U.S. drilling activity.
In our well site services business segment, we predominantly provide rental tools and services and, to a lesser extent, land drilling services. Our rental tools and services business provides equipment and service personnel utilized in the completion and initial production of new and recompleted wells. Activity for the rental tools and services business is dependent primarily upon the level and complexity of drilling, completion and workover activity throughout North America. Well complexity has increased as the number of productive zones completed in connection with horizontal drilling has increased. Demand for our drilling services is driven by land drilling activity in our primary drilling markets in West Texas, where we primarily drill oil wells, and in the Rocky Mountains area in the U.S., where we drill both liquids-rich and natural gas wells.
Our tubular services business is influenced by the overall level of U.S. drilling activity, the types of wells being drilled, movements in global steel and steel input prices and the overall industry level of oil country tubular goods (OCTG) inventory and pricing. Our tubular services business has historically been our most cyclical business segment. The continued recovery in U.S. drilling activity in 2011 and early 2012 and the return to drilling in the U.S. Gulf of Mexico has led to increased tubular services volumes and revenues.
Through our tubular services segment, we distribute a broad range of casing and tubing used in the drilling and completion of oil and natural gas wells primarily in North America. Accordingly, sales and gross margins in our tubular services segment depend upon the overall level of drilling activity, the types of wells being drilled, movements in global steel input prices and the overall industry level of OCTG inventory and pricing. Historically, tubular services’ gross margin generally expands during periods of rising OCTG prices and contracts during periods of decreasing OCTG prices.
We have a diversified product and service offering, which has exposure to activities conducted throughout the oil and gas cycle. Demand for our tubular services, land drilling and rental tools and services businesses is highly correlated to changes in the drilling rig count in the United States and, to a much lesser extent, Canada. The table below sets forth a summary of North American rig activity, as measured by Baker Hughes Incorporated, for the periods indicated.
U.S. Land – Oil
U.S. Land – Natural gas and other
U.S. Offshore
Total U.S.
Canada
Total North America
The average North American rig count for the three months ended March 31, 2012 increased by 280 rigs, or 12.2%, compared to the three months ended March 31, 2011 largely due to growth in the U.S. land rig count.
A factor that influences the financial results for our accommodations segment is the exchange rate between the U.S. dollar and the Canadian dollar and, to a lesser extent, the exchange rate between the U.S. dollar and the Australian dollar. Our accommodations segment has derived a majority of its revenues and operating income in
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Canada and, more recently, Australia. These revenues and profits are translated into U.S. dollars for U.S. GAAP financial reporting purposes. Although U.S. dollar and Canadian dollar exchange rates were comparable in the first quarter of 2012 and 2011, the Australian dollar was valued at an average exchange rate of U.S. $1.06 in the first three months of 2012 compared to U.S. $1.01 for the first three months of 2011, an increase of 5%. This strengthening of the Australian dollar had a positive impact on the translation of earnings generated from our Australian subsidiary and, therefore, the financial results of our accommodations segment.
Steel and steel input prices influence the pricing decisions of our OCTG suppliers, thereby impacting the pricing and margins of our tubular services segment. During 2011, OCTG marketplace supply and demand became more balanced compared to the previous two years. Increased supplies of OCTG have met the increased demand created by expanded drilling activity. During 2011, U.S. mills began increasing production. Throughout 2011 and into the first quarter of 2012, imports of steel increased, particularly goods imported from Canada and Korea followed by India, Mexico and Japan. Additionally, domestic OCTG mill capacity is expected to increase in 2012. This increase in supply has been in response to the 16% year-over-year increase in the drilling rig count in the United States. The OCTG Situation Report suggests that industry OCTG inventory levels peaked in the first quarter of 2009 at approximately twenty months’ supply on the ground and have trended down to approximately four to five months’ supply currently, which is considered closer to a normalized level when measured against historical levels. We remain focused on working capital management in our tubular services segment and will continue to monitor industry inventory levels, forecasted drilling and completion activity and OCTG prices.
While global demand for oil and natural gas are significant factors influencing our business generally, certain other factors also influence our business, such as the pace of worldwide economic growth and the recovery in U.S. Gulf of Mexico drilling following the lifting of the government imposed drilling moratorium.
The drilling rig count in the U.S. Gulf of Mexico remains below historical levels following the Macondo well incident and resultant oil spill in the U.S. Gulf of Mexico. A rescission of a moratorium on offshore drilling activity was effective in late 2010; however, substantial increases in activity were delayed by adjustments in operating procedures, compliance certifications, and lead times for permits and inspections, as a result of changes in the regulatory environment. In addition, there have been a variety of proposals to change existing laws and regulations that could affect offshore development and production. Uncertainties and delays caused by the new, more stringent regulatory environment continued to have an overall adverse effect on Gulf of Mexico drilling activity in 2011. Beginning in the third quarter of 2011, however, U.S. Gulf of Mexico drilling activity has shown signs of a slow but steady recovery as permitting levels have been steadily improving. New well permitting has increased from 20 permits issued in the first quarter of 2011 to 54 permits issued in the first quarter of 2012.
We continue to monitor the global economy, the demand for crude oil, coal and natural gas and the resultant impact on the capital spending plans and operations of our customers in order to plan our business. We currently expect that our 2012 capital expenditures will total approximately $600 to $700 million compared to 2011 capital expenditures of $487 million. Our 2012 capital expenditures include funding to expand our Canadian oil sands and Australian mining related accommodations facilities, to fund our other product and service offerings, and for maintenance and upgrade of our equipment and facilities. Approximately 65% of our total expected 2012 capital expenditures will be spent in our accommodations segment. In our well site services segment, we continue to monitor industry capacity additions and will make future capital expenditure decisions based on a careful evaluation of both the market outlook and industry fundamentals.
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Consolidated Results of Operations (in millions)
Well site services -
Gross margin
Gross margin as a percentage of revenues
THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011
We reported net income attributable to the Company for the quarter ended March 31, 2012 of $135.1 million, or $2.43 per diluted share, including a gain of $0.23 per diluted share after-tax from a favorable contract settlement reported in our U.S. accommodations business. These results compare to net income attributable to the Company of $62.1 million, or $1.13 per diluted share, reported for the quarter ended March 31, 2011.
Revenues. Consolidated revenues increased $338.6 million, or 45%, in the first quarter of 2012 compared to the first quarter of 2011.
Our well site services segment revenues increased $42.4 million, or 30%, in the first quarter of 2012 compared to the first quarter of 2011. This increase was due to increases in both rental tools and services revenues and drilling services revenues. Our rental tools and services revenues increased $28.1 million, or 26%, primarily due to increased demand for completion services supporting the increase in the U.S. rig count, a more favorable mix of higher value rentals and services, increased equipment utilization, additional capital investment in rental equipment and greater service intensity. Our drilling services revenues increased $14.3 million, or 43%, in the first quarter of 2012 compared to the first quarter of 2011 primarily as a result of increased utilization of our rigs from an average of approximately 71% in for the first quarter of 2011 to an average of approximately 88% for the first quarter of 2012, and increases in pricing, with average day rates rising to $17.8 thousand per day in the first quarter of 2012 from $15.3 thousand per day in the first quarter of 2011.
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Our accommodations segment reported revenues in the first quarter of 2012 that were $104.7 million, or 53%, above the first quarter of 2011. The increase in accommodations revenue resulted from increased revenues from expanded room capacity in Canada and Australia along with $18.3 million in revenue from a favorable contract settlement reported in our U.S. accommodations business. Revenues and average available rooms for lodges and villages increased 48% and 36%, respectively, in the first quarter of 2012 compared to the first quarter of 2011.
Our offshore products segment revenues increased $57.3 million, or 45%, in the first quarter of 2012 compared to the first quarter of 2011. This increase was primarily the result of a greater proportion of revenue derived from production equipment and connector products sales.
Our tubular services segment revenues increased $134.2 million, or 46%, in the first quarter of 2012 compared to the first quarter of 2011. This increase was a result of an increase in tons shipped from 154,400 in 2011 to 205,400 in 2012, an increase of 51,000 tons, or 33%, driven by the 16% increase in U.S. drilling and completion activity, particularly increased activity in the Permian, Eagle Ford and Gulf of Mexico markets coupled with a 9% increase in realized revenues per ton shipped in the first quarter of 2012 compared to the first quarter of 2011.
Cost of Sales and Service. Our consolidated cost of sales increased $221.4 million, or 39%, in the first quarter of 2012 compared to the first quarter of 2011 as a result of increased cost of sales at our tubular services segment of $124.5 million, or 45%, an increase at our offshore products segment of $39.5 million, or 41%, an increase at our accommodations segment of $31.2 million, or 29%, and an increase at our well site services segment of $26.2 million, or 28%. These cost of sales increases were directly related to the increases in segmental revenues. Our consolidated gross margin as a percentage of revenues increased from 24% in the first quarter of 2011 to 28% in the first quarter of 2012 primarily due to the increased proportion of relatively higher margin accommodations and well site services segments revenues and higher margins realized in our accommodations segment, partially offset by an increased proportion of relatively lower margin tubular services segment revenues in the first quarter of 2012 compared to the first quarter of 2011.
Our well site services segment cost of sales increased $26.2 million, or 28%, in the first quarter of 2012 compared to the first quarter of 2011 as a result of a $17.3 million, or 26%, increase in rental tools and services cost of sales and an $8.9 million, or 35%, increase in drilling services cost of sales. Our well site services segment gross margin as a percentage of revenues increased from 34% in the first quarter of 2011 to 35% in the first quarter of 2012. Our rental tools and services gross margin as a percentage of revenues increased from 37% in the first quarter of 2011 to 38% in the first quarter of 2012 primarily due to a more favorable mix of higher value rentals along with higher fixed cost absorption as a result of increased rental tool utilization. Our drilling services gross margin as a percentage of revenues increased from 24% in the first quarter of 2011 to 28% in the first quarter of 2012 primarily due to increased day rates, rig utilization and cost absorption.
Our accommodations segment cost of sales increased $31.2 million, or 29%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to increased revenues and room capacity in both Canada and Australia. Our accommodations segment gross margin as a percentage of revenues increased from 45% in the first quarter of 2011 to 54% in the first quarter of 2012 primarily due to the favorable contract settlement reported in our U.S. accommodations business and an 8% increase in revenue per available room in the first quarter of 2012 compared to the first quarter of 2011. The increase in the revenue per available room in 2012 compared to 2011 is primarily due to increased occupancy levels. Excluding the favorable contract settlement, our accommodations segment gross margin as a percentage of revenues would have been 51% in the first quarter of 2012.
Our offshore products segment cost of sales increased $39.5 million, or 41%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to increased revenues. Our offshore products segment gross margin as a percentage of revenues increased from 25% in the first quarter of 2011 to 27% in the first quarter of 2012 primarily due to the improved revenue mix of production equipment and connector products sales combined with improved cost absorption.
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Tubular services segment cost of sales increased by $124.5 million, or 45%, in the first quarter of 2012 compared to the first quarter of 2011 primarily as a result of an increase in tons shipped. Our tubular services segment gross margin as a percentage of revenues in the first quarter of 2012 increased to 6.3% from 5.9% in the first quarter of 2011 primarily due to product mix and industry pricing.
Selling, General and Administrative Expenses.Selling, general and administrative (SG&A) expense increased $4.0 million, or 9%, in the first quarter of 2012 compared to the first quarter of 2011 due primarily to increased employee-related costs and commissions expense.
Depreciation and Amortization. Depreciation and amortization expense increased $5.5 million, or 12%, in the first quarter of 2012 compared to the same period in 2011 due primarily to capital expenditures made during the previous twelve months largely related to investments made in our Canadian and Australian accommodations businesses.
Operating Income. Consolidated operating income increased $109.5 million, or 116%, in the first quarter of 2012 compared to the first quarter of 2011 primarily as a result of an increase in operating income from our accommodations segment of $70.1 million, or 143%, primarily as a result of expanded room capacity in Canada and Australia along with the favorable contract settlement reported in our U.S. accommodations business, an increase in operating income from our offshore products segment of $15.8 million, or 94%, and an increase in operating income from our well site services segment of $14.6 million, or 55%, largely due to a more favorable mix and increased activity in our rental tools and services business and increased rig utilization and dayrates in our drilling services business. In addition, operating income from our tubular services segment increased $9.4 million, or 72%, primarily as a result of the increase in tons shipped and modestly higher margins.
Interest Expense and Interest Income. Net interest expense increased by $8.4 million, or 91%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to interest expense on the newly issued 6 1/2% Notes due in 2019. The weighted average interest rate on borrowings outstanding under the Company’s revolving credit and term loan facilities was 3.4% in the first quarter of 2012 compared to 3.0% in the first quarter of 2011. Interest income decreased as a result of decreased cash balances in interest bearing accounts.
Income Tax Expense. Our income tax provision for the three months ended March 31, 2012 totaled $53.3 million, or 28.2% of pretax income, compared to income tax expense of $23.4 million, or 27.3% of pretax income, for the three months ended March 31, 2011. The increase in the effective tax rate from the prior year was largely the result of a higher foreign effective tax rate in 2012 compared to 2011.
Liquidity and Capital Resources
Our primary liquidity needs are to fund capital expenditures, which have in the past included expanding our accommodations facilities, expanding and upgrading our offshore products manufacturing facilities and equipment, replacing and increasing rental tool assets, funding new product development and general working capital needs. In addition, capital has been used to fund strategic business acquisitions. Our primary sources of funds have been cash flow from operations and proceeds from borrowings.
Cash totaling $67.2 million was provided by operations during the first three months of 2012 compared to cash totaling $36.2 million provided by operations during the first three months of 2011. During the first three months of 2012, $122.4 million was used to fund working capital, primarily due to increased investments in working capital for our tubular services business, seasonal increases in receivables in our Canadian accommodations business and increased receivables in our offshore products segment due to higher activity levels. During the first three months of 2011, $78.3 million was used to fund working capital, primarily due to increased investments in working capital for our tubular services business and seasonal increases in receivables in our Canadian accommodations business.
Cash was used in investing activities during the three months ended March 31, 2012 and 2011 in the amount of $101.0 million and $93.4 million, respectively. Capital expenditures totaled $101.4 million and $92.6 million during the three months ended March 31, 2012 and 2011, respectively. Capital expenditures in both years consisted principally of purchases and installation of assets for our accommodations and well site services segments, and in particular for accommodations investments made in support of Canadian oil sands developments and Australian mining related accommodations facilities.
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We currently expect to spend a total of approximately $600 million to $700 million for capital expenditures during 2012 to expand our Canadian oil sands and Australian mining related accommodations facilities, to fund our other product and service offerings, and for maintenance and upgrade of our equipment and facilities. Approximately 65% of our total estimated 2012 capital expenditures are expected to be spent in our accommodations segment. We expect to fund these capital expenditures with cash available, internally generated funds and borrowings under our revolving credit facilities. The foregoing capital expenditure budget does not include any funds for strategic acquisitions, which the Company could pursue depending on the economic environment in our industry and the availability of transactions at prices deemed to be attractive to the Company. At March 31, 2012, we had cash totaling $69.4 million held by foreign subsidiaries, primarily in Canada and the United Kingdom, where we have assumed permanent reinvestment of earnings and where we have not recorded a U.S. tax liability upon the assumed repatriation of foreign earnings. We believe these cash balances will be utilized for future investment outside the United States.
Net cash of $28.8 million was provided by financing activities during the three months ended March 31, 2012, primarily as a result of borrowings under our revolving credit facilities. A total of $54.7 million was provided by financing activities during the three months ended March 31, 2011, primarily as a result of borrowings under our revolving credit facilities.
We believe that cash on hand, cash flow from operations and available borrowings under our credit facilities will be sufficient to meet our liquidity needs in the coming twelve months. If our plans or assumptions change, or are inaccurate, or if we make further acquisitions, we may need to raise additional capital. Acquisitions have been, and our management believes acquisitions will continue to be, a key element of our business strategy. The timing, size or success of any acquisition effort and the associated potential capital commitments are unpredictable and uncertain. We may seek to fund all or part of any such efforts with proceeds from debt and/or equity issuances. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend upon our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets and other factors, many of which are beyond our control. In addition, such additional debt service requirements could be based on higher interest rates and shorter maturities and could impose a significant burden on our results of operations and financial condition, and the issuance of additional equity securities could result in significant dilution to stockholders.
Stock Repurchase Program. On August 27, 2010, the Company announced that its Board of Directors authorized $100 million for the repurchase of the Company’s common stock, par value $.01 per share. The authorization replaced the prior share repurchase authorization, which expired on December 31, 2009. The Company presently has approximately 51.6 million shares of common stock outstanding. The Board of Directors’ authorization is limited in duration and expires on September 1, 2012. Subject to applicable securities laws, such purchases will be at such times and in such amounts as the Company deems appropriate. Through March 31, 2012, a total of $12.6 million of our stock (209,300 shares) had been repurchased under the current authorization, leaving a total authorization of up to approximately $87.4 million remaining available under the current authorization.
Credit Facilities. Our current bank credit facilities consist of a U.S. revolving credit facility, a U.S. term loan, a Canadian revolving facility, and a Canadian term loan. The facilities contain total commitments available of $1.05 billion, including Total U.S. Commitments (as defined in the Credit Agreement) of U.S. $700 million (including $200 million in term loans), and Total Canadian Commitments (as defined in the Credit Agreement) of U.S. $350 million (including $100 million in term loans). The maturity date of the Credit Agreement is December 10, 2015. The current principal balance of the term loans is repayable at a rate of 2.5% per quarter of the aggregate principal amount until maturity on December 10, 2015 when the remaining principal is due. We currently have 19 lenders in our Credit Agreement with commitments ranging from $26.6 million to $150 million. While we have not experienced, nor do we anticipate, any difficulties in obtaining funding from any of these lenders at this time, the lack of or delay in funding by a significant member of our banking group could negatively affect our liquidity position.
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As of March 31, 2012, we had $383.4 million outstanding under the Credit Agreement and an additional $25.8 million of outstanding letters of credit, leaving $618.8 million available to be drawn under the facilities.
On July 13, 2011, The MAC entered into a A$150 million Facility Agreement with National Australia Bank Limited. The Facility Agreement amended The MAC’s existing A$75 million revolving loan facility on substantially the same terms, including the maturity date of the Facility Agreement of November 30, 2013. As of March 31, 2012, we had A$35 million outstanding under the Australian facility leaving A$115 million available to be drawn under this facility.
Our total debt represented 36.0% of our combined total debt and stockholders’ equity at March 31, 2012 compared to 37.5% at December 31, 2011 and 35.8% at March 31, 2011. As of March 31, 2012, the Company was in compliance with all of its debt covenants.
6 1/2% Notes. On June 1, 2011, the Company sold $600 million aggregate principal amount of 6 1/2% senior unsecured notes due 2019 through a private placement to qualified institutional buyers.
The Company utilized approximately $515 million of the net proceeds of the 6 1/2% Note offering in June 2011 to repay borrowings under its senior secured credit facilities. The remaining net proceeds of approximately $75 million were utilized for general corporate purposes.
On June 1, 2011, in connection with the issuance of the 6 1/2% Notes, the Company entered into an Indenture (the Indenture), among the Company, the Guarantors and Wells Fargo Bank, N.A., as trustee. The Indenture restricts the Company’s ability and the ability of the Guarantors to: (i) incur additional debt; (ii) pay distributions on, redeem or repurchase equity interests; (iii) make certain investments; (iv) incur liens; (v) enter into transactions with affiliates; (vi) merge or consolidate with another company; and (vii) transfer and sell assets. These covenants are subject to a number of important exceptions and qualifications. If at any time when the 6 1/2% Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services and no Default (as defined in the Indenture) has occurred and is continuing, many of such covenants will terminate and the Company and its subsidiaries will cease to be subject to such covenants. The Indenture contains customary events of default. As of March 31, 2012, the Company was in compliance with all covenants of the 6 1/2% Notes.
2 3/8% Notes. If certain contingent conversion thresholds based on the Company’s stock price are met and a 2 3/8% Note holder chooses to present its notes for conversion during a future quarter prior to the first put/call date in July 2012, then it will receive cash up to $1,000 for each 2 3/8% Note plus Company common stock for any excess valuation over $1,000 using the conversion rate of
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the 2 3/8% Notes of 31.496 multiplied by the Company’s average common stock price over a ten trading day period following presentation of the 2 3/8% Notes for conversion. As of March 31, 2012, the contingent conversion thresholds were met and, as a result, 2 3/8% Note holders could present their notes for conversion during the quarter following the March 31, 2012 measurement date. As of March 31, 2012, the recent trading prices of the 2 3/8% Notes exceeded their conversion value due to the remaining imbedded conversion option of the holder. Should a holder convert its 2 3/8% Notes, we would utilize our existing credit facilities to fund the cash portion of the conversion value. As of March 31, 2012, we had classified the $175.0 million principal amount of our 2 3/8% Notes, net of unamortized discount, as a noncurrent liability based on our ability and intent to refinance the 2 3/8% Notes utilizing borrowings available under our senior secured credit facilities.
Critical Accounting Policies
For a discussion of the critical accounting policies and estimates that we use in the preparation of our condensed consolidated financial statements, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2011 Form 10-K. These estimates require significant judgments, assumptions and estimates. We have discussed the development, selection and disclosure of these critical accounting policies and estimates with the audit committee of our board of directors. There have been no material changes to the judgments, assumptions and estimates, upon which our critical accounting estimates are based.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We have credit facilities that are subject to the risk of higher interest charges associated with increases in interest rates. As of March 31, 2012, we had floating-rate obligations totaling approximately $419.7 million drawn under our credit facilities. These floating-rate obligations expose us to the risk of increased interest expense in the event of increases in short-term interest rates. If floating interest rates increased by 1%, our consolidated interest expense would increase by a total of approximately $4.2 million annually based on our floating debt obligations as of March 31, 2012.
Foreign Currency Exchange Rate Risk
Our operations are conducted in various countries around the world and we receive revenue from these operations in a number of different currencies. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in (i) currencies other than the U.S. dollar, which is our functional currency or (ii) the functional currency of our subsidiaries, which is not necessarily the U.S. dollar. In order to mitigate the effects of exchange rate risks in areas outside the U.S. (primarily in our offshore products segment), we generally pay a portion of our expenses in local currencies and a substantial portion of our contracts provide for collections from customers in U.S. dollars. During the first three months of 2012, our reported foreign exchange losses were $1.0 million and are included in “Other operating expense” in the consolidated statements of income.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012 at the reasonable assurance level.
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Changes in Internal Control over Financial Reporting
Effective January 1, 2012, we reorganized our rental tools and services operations by merging several separate legal entities into one entity, realigning management and combining three formerly separate accounting groups into one accounting group with one accounting system. This reorganization resulted in changes in our disclosure controls and procedures that were implemented during the first quarter of 2012 to ensure that information required to be disclosed and reported by this business was recorded, processed, summarized and reported accurately and on a timely basis.
During the three months ended March 31, 2012, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) or in other factors, other than described above, which have materially affected our internal control over financial reporting, or are reasonably likely to materially affect our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of our products or operations. Some of these claims relate to matters occurring prior to our acquisition of businesses, and some relate to businesses we have sold. In certain cases, we are entitled to indemnification from the sellers of businesses, and in other cases, we have indemnified the buyers of businesses from us. Although we can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by indemnity or insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
ITEM 1A. Risk Factors
Item 1A. “Risk Factors” of our 2011 Form 10-K includes a detailed discussion of our risk factors. The risks described in this Quarterly Report on Form 10-Q and our 2011 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no significant changes to our risk factors as set forth in our 2011 Form 10-K except for the additional risk factor below:
We could be subject to additional regulatory initiatives in the U.S. Gulf of Mexico that could subject us to increased costs and liabilities.
Offshore U.S. Gulf of Mexico exploration and production operations have been subject to additional, more stringent environmental and safety-related regulations and other regulatory initiatives issued by the Bureau of Ocean Energy Management (BOEM), the Bureau of Safety and Environmental Enforcement (BSEE) and the Office of Natural Resource Revenue (ONRR), in addition to their regulatory predecessors, in the aftermath of the Macondo well incident in April 2010. In addition, governmental officials responsible for one or more of the aforementioned regulatory bodies have publically stated that their authority extends beyond oil and gas operators to include service and equipment contractors as well. This governmental assertion of broad legal authority to govern contractors’ activity is a new development, may be subject to future clarification and may result in the development and implementation of various regulatory compliance programs governing contractor activities. We are uncertain about the potential breadth of future regulatory initiatives, if implemented, or the specific responsibilities that may arise from these initiatives, but expect that the implementation of new or more stringent initiatives may subject us and other contractors to increased costs and liabilities to comply, which could have a significant adverse effect on our expectations. We believe that offshore contractors and service providers, including ourselves, will closely monitor rulemaking in this area to ensure ongoing compliance.
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ITEM 6. Exhibits
(a) INDEX OF EXHIBITS
Exhibit No.
Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 30, 2012
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Exhibit Index