Civeo Corp - Quarter Report: 2015 September (Form 10-Q)

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		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2015				2014				2015				2014
Revenues:
Service and other		$	101,258			$	233,314			$	398,241			$	696,154
Product			5,286				9,951				22,437				27,043
			106,544				243,265				420,678				723,197
Costs and expenses:
Service and other costs			63,732				126,998				240,581				389,486
Product costs			6,019				10,103				21,505				24,430
Selling, general and administrative expenses			16,691				13,216				51,796				51,069
Spin-off and formation costs			--				1,028				--				3,497
Depreciation and amortization expense			36,172				45,758				121,159				127,770
Impairment expense			110,715				--				122,926				11,610
Other operating expense (income)			(3,945	)			165				(5,188	)			252
			229,384				197,268				552,779				608,114
Operating income (loss)			(122,840	)			45,997				(132,101	)			115,083
Interest expense to affiliates			--				--				--				(6,980	)
Interest expense to third-parties, net of capitalized interest			(6,022	)			(5,335	)			(17,879	)			(8,445	)
Loss on extinguishment of debt			(1,474	)			--				(1,474	)			(3,455	)
Interest income			160				1,048				1,969				2,841
Other income			261				64				1,825				1,011
Income (loss) before income taxes			(129,915	)			41,774				(147,660	)			100,055
Income tax benefit (provision)			22,745				(9,011	)			27,451				(16,411	)
Net income (loss)			(107,170	)			32,763				(120,209	)			83,644
Less: Net income attributable to noncontrolling interest			515				360				953				1,053
Net income (loss) attributable to Civeo Corporation		$	(107,685	)		$	32,403			$	(121,162	)		$	82,591
Per Share Data (see Note 6)
Basic net income (loss) per share attributable to Civeo Corporation common shareholders		$	(1.01	)		$	0.30			$	(1.14	)		$	0.77
Diluted net income (loss) per share attributable to Civeo Corporation common shareholders		$	(1.01	)		$	0.30			$	(1.14	)		$	0.77
Weighted average number of common shares outstanding:
Basic			106,661				106,311				106,583				106,300
Diluted			106,661				106,495				106,583				106,474
Dividends per common share		$	--			$	0.13			$	--			$	0.13

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		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2015				2014				2015				2014
Net income (loss)		$	(107,170	)		$	32,763			$	(120,209	)		$	83,644
Other comprehensive loss:
Foreign currency translation adjustment, net of taxes of zero, zero, $1.9 million and zero, respectively			(79,262	)			(112,956	)			(171,985	)			(58,816	)
Total other comprehensive loss			(79,262	)			(112,956	)			(171,985	)			(58,816	)
Comprehensive income (loss)			(186,432	)			(80,193	)			(292,194	)			24,828
Comprehensive income attributable to noncontrolling interest			(117	)			(259	)			(429	)			(950	)
Comprehensive income (loss) attributable to Civeo Corporation		$	(186,549	)		$	(80,452	)		$	(292,623	)		$	23,878

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		SEPTEMBER 30, 2015				DECEMBER 31, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	12,635			$	263,314
Accounts receivable, net			63,681				160,253
Inventories			5,607				13,228
Prepaid expenses			20,404				20,670
Other current assets			7,200				6,491
Assets held for sale			8,923				--
Total current assets			118,450				463,956
Property, plant and equipment, net			950,642				1,248,430
Goodwill, net			--				45,260
Other intangible assets, net			35,756				50,882
Other noncurrent assets			12,953				20,633
Total assets		$	1,117,801			$	1,829,161
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	30,553			$	36,277
Accrued liabilities			17,042				22,512
Income taxes			4				61
Current portion of long-term debt			18,205				19,375
Deferred revenue			9,872				18,539
Other current liabilities			8,243				21,677
Total current liabilities			83,919				118,441
Long-term debt, less current maturities			397,879				755,625
Deferred income taxes			32,572				55,500
Other noncurrent liabilities			33,830				39,486
Total liabilities			548,200				969,052
Commitments and contingencies (Note 9)
Shareholders’ Equity:
Common shares (no par value; 550,000,000 shares authorized, 107,465,397 shares issued and outstanding at September 30, 2015)			--				--
Common stock ($0.01 par value; 550,000,000 shares authorized, 106,721,483 shares issued and outstanding at December 31, 2014)			--				1,067
Additional paid-in capital			1,304,928				1,300,042
Accumulated deficit			(365,779	)			(244,617	)
Accumulated other comprehensive loss			(369,952	)			(198,491	)
Total Civeo Corporation shareholders’ equity			569,197				858,001
Noncontrolling interest			404				2,108
Total shareholders’ equity			569,601				860,109
Total liabilities and shareholders’ equity		$	1,117,801			$	1,829,161

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						Attributable to Civeo
		Common Shares
		Par Value				Additional Paid-in Capital				Accumulated Deficit				Treasury Stock				Oil States Net Investment				Accumulated Other Comprehensive Income (Loss)				Noncontrolling Interest				Total Shareholders’ Equity / Net Investment
Balance, December 31, 2013		$	--			$	--			$	--			$	--			$	1,651,013			$	(59,979	)		$	1,711			$	1,592,745
Net income											40,910								41,681								1,053				83,644
Currency translation adjustment																							(58,713	)			(103	)			(58,816	)
Dividends paid											(13,893	)															(477	)			(14,370	)
Net transfers from Oil States International, Inc.																			369,219												369,219
Distribution to Oil States International, Inc.																			(750,000	)											(750,000	)
Reclassification of Oil States International, Inc. Net Investment to Additional Paid-in Capital							1,311,913												(1,311,913	)											--
Issuance of common stock at the Spin-Off			1,066				(1,066	)																							--
Stock-based compensation			1				1,976																								1,977
Balance, September 30, 2014		$	1,067			$	1,312,823			$	27,017			$	--			$	--			$	(118,692	)		$	2,184			$	1,224,399
Balance, December 31, 2014		$	1,067			$	1,300,042			$	(244,617	)		$	--			$	--			$	(198,491	)		$	2,108			$	860,109
Net income (loss)											(121,162	)															953				(120,209	)
Currency translation adjustment																							(171,461	)			(524	)			(171,985	)
Dividends paid																											(2,133	)			(2,133	)
Redomicile Transaction			(1,075	)			929								146																--
Stock-based compensation			8				3,957								(146	)															3,819
Balance, September 30, 2015		$	--			$	1,304,928			$	(365,779	)		$	--			$	--			$	(369,952	)		$	404			$	569,601

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		NINE MONTHS ENDED
		SEPTEMBER 30,
		2015				2014
Cash flows from operating activities:
Net income (loss)		$	(120,209	)		$	83,644
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			121,159				127,770
Impairment charges			122,926				11,610
Inventory write-down			1,015				--
Loss on extinguishment of debt			1,474				3,455
Deferred income tax benefit			(34,200	)			(1,989	)
Non-cash compensation charge			3,467				5,892
Gains on disposals of assets			(800	)			(776	)
Provision for loss on receivables			1,081				(1,196	)
Other, net			1,032				2,687
Changes in operating assets and liabilities:
Accounts receivable			79,763				(32,119	)
Inventories			5,556				13,897
Accounts payable and accrued liabilities			(5,094	)			10,957
Taxes payable			1,652				(17,340	)
Other current assets and liabilities, net			(3,889	)			1,773
Net cash flows provided by operating activities			174,933				208,265
Cash flows from investing activities:
Capital expenditures, including capitalized interest			(43,701	)			(208,297	)
Proceeds from disposition of property, plant and equipment			2,255				1,607
Net cash flows used in investing activities			(41,446	)			(206,690	)
Cash flows from financing activities:
Proceeds from issuance of common shares			500				--
Term loan borrowings			325,000				775,000
Term loan repayments			(725,000	)			--
Revolver borrowings			244,480				--
Revolver repayments			(187,772	)			--
Debt issuance costs			(4,555	)			(9,460	)
Dividends paid			--				(13,893	)
Distributions to Oil States			--				(750,000	)
Contributions from Oil States			--				28,257
Net cash flows provided by (used in) financing activities			(347,347	)			29,904
Effect of exchange rate changes on cash			(36,819	)			(13,793	)
Net change in cash and cash equivalents			(250,679	)			17,686
Cash and cash equivalents, beginning of period			263,314				224,128
Cash and cash equivalents, end of period		$	12,635			$	241,814

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1.	DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of the Business

 

We are one of North America’s and Australia’s largest integrated providers of accommodations services for people working in remote locations. Our scalable modular facilities provide long-term and temporary workforce accommodations where traditional infrastructure is insufficient, inaccessible or not cost effective. Once facilities are deployed in the field, we also provide catering and food services, housekeeping, laundry, facility management, water and wastewater treatment, power generation, communications and redeployment logistics. Our accommodations support workforces in the Canadian oil sands and in a variety of oil and natural gas drilling, mining and related natural resource applications as well as disaster relief efforts, primarily in Canada, Australia and the United States. We operate in three principal reportable business segments – Canadian, Australian and U.S.

 

On May 5, 2014, the Oil States International, Inc. (Oil States) board of directors approved the separation of its Accommodations Segment (Accommodations) into a standalone, publicly traded Delaware corporation, Civeo Corporation, now named Civeo USA Corp. (Civeo US). In accordance with the Separation and Distribution Agreement, the two companies were separated by Oil States distributing to its stockholders all 106,538,044 shares of common stock of Civeo US it held after the market closed on May 30, 2014 (the Spin-Off). Each Oil States stockholder received two shares of Civeo US common stock for every one share of Oil States stock held at the close of business on the record date of May 21, 2014. In conjunction with the Spin-Off, Oil States received a private letter ruling from the Internal Revenue Service to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, for U.S. federal income tax purposes, the distribution of Civeo US common stock was not taxable to Oil States or U.S. holders of Oil States common stock. Following the Spin-Off, Oil States retained no ownership interest in Civeo US, and each company now has separate public ownership, boards of directors and management. A registration statement on Form 10, as amended through the time of its effectiveness, describing the Spin-Off was filed by Civeo US with the U.S. Securities and Exchange Commission (SEC) and was declared effective on May 8, 2014. On June 2, 2014, Civeo US stock began trading the “regular-way” on the New York Stock Exchange (NYSE) under the “CVEO” stock symbol. Pursuant to the Separation and Distribution Agreement with Oil States, on May 28, 2014, we made a special cash distribution to Oil States of $750 million.

 

On July 17, 2015, we completed our change in place of incorporation, pursuant to which Civeo Corporation, a British Columbia, Canada limited company formerly named Civeo Canadian Holdings ULC (Civeo Canada), became the publicly traded parent company of the Civeo group of companies (the Redomicile Transaction). The Redomicile Transaction was effected pursuant to a previously announced Agreement and Plan of Merger, dated as of April 6, 2015, between Civeo US, Civeo US Merger Co, a Delaware corporation and wholly owned subsidiary of Civeo Canada (US Merger Co), and Civeo Canada. At the effective time of the merger, (i) US Merger Co was merged with Civeo US, with Civeo US surviving the merger as a wholly owned subsidiary of Civeo Canada, and (ii) each issued share of Civeo US common stock, other than those shares of Civeo US common stock held by Civeo US in treasury, was effectively transferred to Civeo Canada and converted into one common share, no par value, of Civeo Canada. An aggregate of approximately 107.5 million Civeo Canada common shares were issued at the effective time as merger consideration. The Civeo Canada common shares are listed on the NYSE under the symbol “CVEO”, the same symbol under which the Civeo US common stock traded prior to the effective time.

 

The Redomicile Transaction qualified as a “self-directed redomiciling” of the Company as permitted under the U.S. Internal Revenue Code. U.S. federal income tax laws permit a company to change its domicile to a foreign jurisdiction without corporate-level U.S. federal income taxes provided that such company has “substantial business activity” in the relevant jurisdiction. “Substantial business activity” is defined as foreign operations consisting of over 25% of the company’s total (i) revenues, (ii) assets, (iii) employees and (iv) employee compensation. With approximately 50% or more of our operations in Canada based on these metrics, we qualified for a self-directed redomiciling.

 

In connection with the Spin-Off, on May 28, 2014, we entered into a $650.0 million, 5-year revolving credit facility and a 5-year U.S. term loan facility totaling $775.0 million (collectively, the Credit Facility) for an aggregate borrowing capacity of $1.4 billion. On July 17, 2015, the First Amendment to the Credit Facility (the Amended Credit Facility) became effective. The Amended Credit Facility, among other things, (i) allows us to borrow under new Canadian tranches of the Credit Facility, (ii) substantially reduced both the existing U.S. term loan and the U.S. revolver and (iii) increased the maximum leverage ratio allowed under the Credit Facility. For further information, please see Note 7 – Debt to the Unaudited Consolidated Financial Statements.

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Basis of Presentation

 

Unless otherwise stated or the context otherwise indicates, all references in these consolidated financial statements to “Civeo,” “the Company,” “us,” “our” or “we” for the time period prior to the Spin-Off mean the Accommodations business of Oil States. For time periods after the Spin-Off but prior to July 17, 2015, these terms refer to Civeo US and its consolidated subsidiaries. For time periods after July 17, 2015, these terms refer to Civeo Canada and its consolidated subsidiaries.

 

Prior to the Spin-Off, our financial position, results of operations and cash flows consisted of the Oil States’ Accommodations business and an allocable portion of its corporate costs, which represented a combined reporting entity. The combined financial statements for periods prior to the Spin-Off have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Oil States. The combined financial statements reflect our historical financial position, results of operations and cash flows as we were historically managed, in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The combined financial statements include certain assets and liabilities that have historically been held at the Oil States corporate level, but are specifically identifiable or otherwise attributable to us.

 

All financial information presented after the Spin-Off represents the consolidated results of operations, financial position and cash flows of Civeo. Accordingly:

 

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Our consolidated statements of operations and comprehensive income (loss) for the three months ended September 30, 2014 consist entirely of the consolidated results of Civeo. Our consolidated statements of operations, comprehensive income (loss), cash flows and changes in stockholders’ equity / net investment for the nine months ended September 30, 2014 consist of (i) the combined results of the Oil States’ Accommodations business for the five months ended May 30, 2014 and (ii) the consolidated results of Civeo for the four months ended September30,2014.

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Our consolidated statements of operations, comprehensive income (loss), cash flows and changes in shareholders’ equity / net investment for the three and nine months ended September 30, 2015 consist entirely of the consolidated results of Civeo.

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Our consolidated balance sheets at September 30, 2015 and December 31, 2014 consist of the consolidated balances of Civeo.

 

The assets and liabilities in our consolidated financial statements have been reflected on a historical basis, as immediately prior to the Spin-Off all of the assets and liabilities presented were wholly owned by Oil States and were transferred within the Oil States consolidated group. All intercompany transactions and accounts have been eliminated. All affiliate transactions between Civeo and Oil States have been included in these consolidated financial statements.

 

The consolidated financial statements for periods prior to the Spin-Off included expense allocations for: (1) certain corporate functions historically provided by Oil States, including, but not limited to finance, legal, risk management, tax, treasury, information technology, human resources, and certain other shared services; (2) certain employee benefits and incentives; and (3) equity-based compensation. These expenses were allocated to us on the basis of direct usage when identifiable, with the remainder allocated based on estimated time spent by Oil States personnel, a pro-rata basis of headcount or other relevant measures of Oil States and its subsidiaries. We consider the basis on which the expenses were allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the periods presented. The allocations may not, however, reflect the expense we would have incurred as an independent, publicly traded company for the periods presented. Actual costs that may have been incurred if we had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, which functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Oil States used a centralized approach to the cash management and financing of its U.S. operations. Prior to February 2014, cash from our U.S. operations was transferred to Oil States daily and Oil States funded our U.S. operating and investing activities as needed. Accordingly, the cash and cash equivalents held by Oil States at the corporate level were not allocated to us for any of the periods presented prior to February 2014. We reflected the transfer of cash to and from Oil States as a component of “Net Investment of Oil States International, Inc.” on our consolidated balance sheet. We have not included interest expense for intercompany cash advances from Oil States, since historically Oil States has not allocated interest expense related to intercompany advances to any of its businesses. Beginning in February 2014, we established Civeo cash accounts and funded a portion of our U.S. operating and investing activities.

 

The accompanying unaudited consolidated financial statements of Civeo have been prepared pursuant to the rules and regulations of the SEC pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with GAAP has 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 consolidated financial statements.

 

The financial statements included in this report should be read in conjunction with our audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.

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 us 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 our consolidated financial statements upon adoption.

 

In April 2015, the FASB issued Accounting Standards Update (ASU) 2015-03 "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03).  ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that such costs be presented as a deduction from the corresponding debt liability.  The guidance is effective for financial statements issued for reporting periods beginning after December 15, 2015 and interim periods within the reporting periods and requires retrospective presentation.  Early adoption is permitted.  We plan to adopt the standard in the first quarter of 2016.  As of September 30, 2015, we had debt issuance costs totaling $9.9 million, which are included in Prepaid expenses and other current assets ($2.6 million) and Other non-current assets ($7.3 million) on the accompanying unaudited consolidated balance sheets. A portion of these costs relate to revolving lines of credit, and will accordingly continue to be included in Prepaid expenses and other current assets or Other non-current assets.

 

In February 2015, the FASB issued ASU 2015-02 "Amendments to the Consolidation Analysis" (ASU 2015-02).  ASU 2015-02 alters the models used to determine consolidation conclusions for certain entities, including limited partnerships, and may require additional disclosures.  ASU 2015-02 is effective for financial statements issued for reporting periods beginning after December 15, 2015 and interim periods within the reporting periods with either retrospective or modified retrospective presentation allowed.  We plan to adopt the standard in the first quarter of 2016 and are currently evaluating the impact of the new standard on our financial statements.

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

In May 2014, the FASB issued ASU 2014-09 establishing Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers" (ASC 606).  ASC 606 establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services and requires significantly enhanced revenue disclosures.  The standard is effective for annual reporting periods beginning after December 15, 2017.  Accordingly, we plan to adopt this standard in the first quarter of 2018.  ASC 606 allows either full retrospective or modified retrospective transition, and early adoption is not permitted.  We continue to evaluate both the impact of this new standard on our financial statements and the transition method we will utilize for adoption.

3.	FAIR VALUE MEASUREMENTS

 

Our financial instruments consist of cash and cash equivalents, receivables, payables and debt instruments. We believe that the carrying values of these instruments, other than our long-term debt to affiliates, on the accompanying consolidated balance sheets approximate their fair values.

 

As of September 30, 2015 and December 31, 2014, we believe the carrying value of our floating-rate debt outstanding under our term loans approximates its fair value because the term includes short-term interest rates and excludes penalties for prepayment. We estimated the fair value of our floating-rate term loan using significant other observable inputs, representative of a Level 2 fair value measurement, including terms and credit spreads for this loan.   

 

As a result of the sustained reduction of our share price throughout 2015, our market capitalization implies an enterprise value which is significantly less than the sum of the estimated fair values of our reporting units.  As a result of our market capitalization at September 30, 2015, coupled with (1) the continued depression of worldwide oil prices, including the substantial declines experienced in the third quarter of 2015, and (2) continued weakness in the Canadian dollar and Australian dollar in the third quarter 2015, we determined that an indicator of a goodwill impairment was present.  Our estimate of implied fair value (IFV) requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as industry and/or local market conditions that might directly impact each of the reporting units’ operations in the future, and are therefore uncertain. Accordingly, as a result of current macroeconomic conditions, we performed a goodwill impairment test as of September 30, 2015, and we reduced the value of our goodwill in our Canadian reporting unit to zero.  This resulted in an impairment charge in the third quarter 2015 which totaled $43.2 million.

  

During 2015, certain long-lived assets were written down to their fair value. As a result, we recorded impairment expense of $65.0 million and $77.2 million for the three and nine months ended September 30, 2015, respectively. In addition, certain indefinite-lived intangible assets were written down to their fair value, resulting in an impairment charge of $2.5 million for the three and nine months ended September 30, 2015. Our estimate of their fair value requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as future oil, coal and natural gas prices, anticipated spending by our customers, the cost of capital, and industry and/or local market conditions that might directly impact each of the asset groups’ operations in the future, and are therefore uncertain. For further information, please see Note 4 – Details of Selected Balance Sheet Accounts to the Unaudited Consolidated Financial Statements.

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4.	DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

 

Additional information regarding selected balance sheet accounts at September 30, 2015 and December 31, 2014 is presented below (in thousands):

 

 

 

 

During the third quarter of 2015, as a result of the sustained reduction of our share price throughout 2015, we reviewed the long-lived assets in our U.S. and Australia reportable segments to determine if an indicator of impairment had occurred that would indicate that the carrying values of the asset groups in these segments might not be recoverable. We determined that certain asset groups within the segments had experienced an indicator of impairment, and thus compared the carrying value of the respective asset group to estimates of undiscounted future cash flows. Based on the assessment, the carrying values of three of our assets groups were determined to not be recoverable, and we proceeded to compare the fair value of the asset groups to their carrying value. As a result, we recorded an impairment loss of $20.5 million related to our U.S. segment. Of the $20.5 million impairment, $18.0 million reduced the value of our fixed assets and $2.5 million reduced the value of our amortizable intangible assets. In addition, we recorded an impairment loss of $24.0 million related to our Australian segment that reduced the value of our fixed assets.

 

Furthermore, as a result of the goodwill impairment in our Canadian segment, we determined all asset groups within this segment had experienced a trigger that indicated that the carrying values might not be recoverable. Accordingly, we compared the carrying value of each asset group to estimates of undiscounted cash flows. Based on the assessment, carrying values of certain assets groups were determined to be unrecoverable, and we proceeded to compare the fair value of those assets groups to their respective carrying values. As a result, we recorded an impairment loss of $11.1 million related to our Canadian segment.

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Additionally, during the third quarter of 2015, we identified assets in our Canadian segment that should have been impaired in the fourth quarter of 2014. We determined that the error was not material to our financial statements for the year ended December 31, 2014 and therefore corrected the error in the third quarter of 2015. This resulted in an additional impairment expense of $11.9 million during the three and nine months ended September 30, 2015.

 

During the second quarter of 2015, we recorded an impairment expense of $9.5 million, resulting from the impairment of fixed assets in a village located in Western Australia, due to the continued downturn in gold mining activity and lack of contract renewals. We assessed the carrying value of the asset group to determine if it continued to be recoverable based on estimated future cash flows. Based on the assessment, the carrying value was determined to not be recoverable.

  

5.	ASSETS HELD FOR SALE

 

During the first quarter of 2015, we made the decision to dispose of our manufacturing facility in Johnstown, Colorado. Accordingly, the facility met the criteria of held for sale, and its carrying value was adjusted downward to $8.7 million, which represents its estimated fair value less the cost to sell. We recorded a pre-tax impairment expense of $2.7 million and an additional $1.1 million to write-down our inventory as a result. Additionally, we have discontinued depreciation of the facility. Depreciation expense related to the facility totaled approximately zero and $0.2 million during the three months ended September 30, 2015 and 2014, respectively, and approximately $0.2 million and $0.6 million during the nine months ended September 30, 2015 and 2014, respectively. The facility was part of our U.S. reportable business segment. 

 

The following table summarizes the carrying amount as of September 30, 2015 of the major classes of assets we classify as held for sale (in thousands):

 

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6.	EARNINGS PER SHARE

 

On May 30, 2014, 106,538,044 shares of our common stock were distributed to Oil States stockholders in connection with the Spin-Off. For comparative purposes, and to provide a more meaningful calculation of weighted-average shares outstanding, we have assumed these shares to be outstanding as of the beginning of each period prior to the Spin-Off presented in the calculation of weighted-average shares. In addition, we have assumed the dilutive securities outstanding at May 30, 2014 were also outstanding for each of the periods prior to the Spin-Off presented. Our calculation of diluted earnings per share excludes all shares issuable pursuant to outstanding stock options for the three and nine months ended September 30, 2015, due to their antidilutive effect.

 

The calculation of earnings per share attributable to the Company is presented below for the periods indicated (in thousands, except per share amounts):

 

7.

DEBT

 

As of September 30, 2015 and December 31, 2014, long-term debt consisted of the following (in thousands):

 

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Interest expense on the consolidated statements of operations is net of capitalized interest of $0.5 million and $0.8 million for the three month periods ended September 30, 2015 and 2014, respectively. Interest expense on the consolidated statements of operations is net of capitalized interest of $1.2 million and $2.1 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Amended Credit Facility

 

On July 17, 2015, our Credit Facility was amended to, among other things:

 

	●	Permit us to redomicile to Canada, make associated corporate restructurings and make certain changes to the collateral and guarantees, covenants, events of default and related definitions to reflect the Redomicile Transaction and the new credit facilities referred to below;

	●	Allow for the incurrence of new credit facilities under the Credit Facility, including (i) a new revolving credit facility in a maximum principal amount of US$125 million available to be borrowed by Civeo Canada after the effectiveness of the Amended Credit Facility (July 17, 2015) and (ii) a new term loan facility in the amount of US$325 million to be borrowed by Civeo Canada on the date of the effectiveness of the Amended Credit Facility;

	●	Provide for the partial prepayment of the existing U.S. term loan under the Credit Facility in the aggregate principal amount of US$725 million and the reduction of the aggregate U.S. revolving credit facility to a maximum principal amount of US$50 million;

	●	Increase the interest rate margin by 0.25% within existing levels of total leverage and add two additional levels to the total leverage-based grid such that the interest rates for the loans range from LIBOR +2.0% to LIBOR +4.0% and increase the undrawn commitment fee to range from 0.45% to 0.90% based on total leverage;

●

Make certain changes to the maximum leverage ratio financial covenant, as follows:

 

  

	●	Make certain changes to the application of prepayments and amortization schedules to reflect the new term loan facility and the prepayment of the U.S. term loans; and

●

Make other technical changes and amendments to the Credit Facility.

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 As a result of the amendment, we recognized a loss during the third quarter 2015 of approximately $1.5 million related to unamortized debt issuance costs, which is included in Loss on extinguishment of debt on the accompanying unaudited consolidated statements of income.

 

U.S. dollar amounts outstanding under the Amended Credit Facility bear interest at a variable rate equal to LIBOR plus a margin of 2.00% to 4.00%, or a base rate plus 1.00% to 3.00%, in each case based on a ratio of our total leverage to EBITDA (as defined in the Amended Credit Facility). Canadian dollar amounts outstanding under the Amended Credit Facility bear interest at a variable rate equal to CDOR plus a margin of 2.00% to 4.00%, or a base rate plus a margin of 1.00% to 3.00%, in each case based on a ratio of our consolidated total leverage to EBITDA (as defined in the Amended Credit Facility). Australian dollar amounts outstanding under the Amended Credit Facility bear interest at a variable rate equal to BBSY plus a margin of 2.00% to 4.00%, based on a ratio of our consolidated total leverage to EBITDA (as defined in the Amended Credit Facility).

 

The Amended Credit Facility contains customary affirmative and negative covenants that, among other things, limit or restrict (i) subsidiary indebtedness, liens and fundamental changes, (ii) asset sales, (iii) margin stock, (iv) specified acquisitions, (v) restrictive agreements, (vi) transactions with affiliates and (vii) investments and other restricted payments, including dividends and other distributions. Specifically, we must maintain an interest coverage ratio, defined as the ratio of consolidated EBITDA (as defined in the Amended Credit Facility) to consolidated interest expense, of at least 3.0 to 1.0 and our maximum leverage ratio, defined as the ratio of total debt to consolidated EBITDA, of no greater than 3.5 to 1.0 (as of September 30, 2015). As noted above, the permitted level of the maximum leverage ratio changes over time. Each of the factors considered in the calculations of these ratios are defined in the Amended Credit Facility. EBITDA and consolidated interest, as defined, exclude goodwill and asset impairments, debt discount amortization and other non-cash charges. We were in compliance with these covenants as of September 30, 2015.

 

We paid certain customary fees with respect to the Amended Credit Facility. We have 15 lenders in our Amended Credit Facility with commitments ranging from $1.6 million to $143.2 million.

8.	INCOME TAXES

  

We operate primarily in three jurisdictions, the U.S., Canada and Australia, where statutory tax rates range from 25% to 35%. Our effective tax rate will vary period to period based on changes in earnings mix between these different jurisdictions. We compute our quarterly taxes under the effective tax rate method based on applying an anticipated annual effective rate to our year-to-date income, except for significant unusual or extraordinary transactions. As the U.S. is now a loss jurisdiction for tax accounting purposes, the U.S. has been removed from the annual effective tax rate computation for purposes of computing the interim tax provision. Income taxes for significant unusual or extraordinary transactions are computed and recorded in the period that the specific transaction occurs.

 

Our income tax benefit for the nine months ended September 30, 2015 totaled $27.5 million, or 18.6% of pretax loss, compared to income tax expense of $16.4 million, or 16.4% of pretax income, for the nine months ended September 30, 2014. Our income tax benefit included the following non-U.S. items for the nine months ended September 30, 2015 which resulted in a net reduction to our effective tax rate: (1) an income tax expense of approximately $10 million related to unrecognized tax benefits; (2) an income tax expense of approximately $12 million resulting from the impairment of goodwill not deductible for tax purposes; and (3) an income tax expense of approximately $2.7 million related to an increase in statutory tax rates in Alberta, Canada included in our 2015 tax benefit.

 

Finally, during the third quarter of 2015, management determined that, based on evidence available as of September 30, 2015, it was not more likely than not that the U.S. net operating loss would be realized.  This evidence is largely comprised of the reversal of the U.S. jurisdiction from a net deferred tax liability as of December 31, 2014 to a net deferred tax asset as of September 30, 2015.   Deferred tax assets generated in 2015 were realized to the extent of the net deferred tax liabilities as of December 31, 2014, resulting in a tax benefit of approximately $20 million. A valuation allowance has been recorded discretely in the third quarter on the remaining deferred tax assets generated in 2015, with the result of no further tax benefit from the U.S. pretax losses.  

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

  

Our income tax benefit for the three months ended September 30, 2015 totaled $22.7 million, or 17.5% of pretax loss, compared to an expense of $9.0 million, or 21.6% of pretax income, for the three months ended September 30, 2014. The net reduction in our September 30, 2015 three month rate was largely driven by the reasons identified above for the nine month period.    

 

It is reasonably possible in the next twelve months that the resolution of examinations by taxing authorities may result in a change in liabilities for uncertain tax positions accrued ranging from an approximately decrease of $8 million to an increase of $2 million as of September 30, 2015.   

 

9.	COMMITMENTS AND CONTINGENCIES

 

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 warranty and product liability claims as a result of our products or operations. Although we can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on us, 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 our consolidated financial position, results of operations or liquidity.

 

In conjunction with, and effective as of, the Spin-Off, we entered into an Indemnification and Release Agreement with Oil States. This agreement governs the treatment between Oil States and us of all aspects relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation arising in connection with the Spin-Off. Generally, the agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of Oil States’ business with Oil States. The agreement also establishes procedures for handling claims subject to indemnification and related matters. Pursuant to the Indemnification and Release Agreement, we and Oil States will generally release the other party from all claims arising prior to the Spin-Off other than claims arising under the transaction agreements, including the indemnification provisions described above. We evaluated the impact of the indemnifications given and the Civeo indemnifications received as of the Spin-Off date and concluded those fair values were immaterial.

10.	ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Our accumulated other comprehensive loss increased $171.4 million from $198.5 million at December 31, 2014 to $369.9 million at September 30, 2015, as a result of foreign currency exchange rate differences. Changes in the other comprehensive loss during the first nine months of 2015 were primarily driven by the Canadian and Australian dollars decreasing in value compared to the U.S. dollar. Excluding intercompany balances, our Canadian dollar and Australian dollar functional currency net assets totaled approximately C$0.2 billion and A$0.5 billion, respectively, at September 30, 2015.

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11.	STOCK BASED COMPENSATION

 

Prior to the Spin-Off, certain employees of Civeo participated in Oil States’ Equity Participation Plan (the Oil States Plan). The expense associated with these employees is reflected in the accompanying consolidated statements of operations. Effective May 30, 2014, our employees and non-employee directors began participating in the 2014 Equity Participation Plan of Civeo Corporation (the Civeo Plan). The Civeo Plan authorizes the Board of Directors to grant options, awards of restricted shares, performance awards, dividend equivalents, awards of deferred shares, and share payments to our employees and non-employee directors. No more than 4.0 million Civeo common shares may be awarded under the Civeo Plan.

 

In connection with the Spin-Off, stock based compensation awards granted under the Oil States Plan and held by Civeo grantees as of May 30, 2014 were replaced with substitute Civeo awards. Stock options were replaced with options to purchase Civeo common stock. Unvested restricted stock awards were replaced with substitute Civeo restricted stock awards. Unvested deferred stock awards were replaced with substitute Civeo deferred stock awards. Additionally, phantom shares granted under the Canadian Long-Term Incentive Plan were converted to units that entitle the recipient to a lump sum cash payment equal to the fair market value of a share of Civeo’s common stock on the respective vesting date. These replacements were intended to preserve the intrinsic value of the awards as of May 30, 2014. The substitution of these awards did not cause us to recognize incremental compensation expense as an equitable adjustment was required to be made as a result of the Spin-Off.

 

Upon effectiveness of the Redomicile Transaction, Civeo Canada assumed the Civeo US employee equity plans and related award agreements, including all options and awards issued or granted under such plans, as well as certain Civeo US benefit plans and agreements. 

 

In connection with the assumption of these plans, each plan was amended or deemed amended to provide that, as of the effectiveness of the Redomicile Transaction, the plans would include provisions, as applicable, reflecting the Redomicile Transaction and its effects, including changes made to reflect the fact that Civeo Canada common shares will be issued to satisfy awards issued or granted under such plan. Additionally, the 2014 Equity Participation Plan of Civeo Corporation was further amended to comply with applicable Canadian law, including with respect to grants to Canadian employees. 

 

Outstanding Awards

 

Stock Options. Compensation expense associated with stock options recognized in the three month periods ended September 30, 2015 and 2014 totaled $0.1 million and $0.2 million, respectively. Compensation expense associated with stock options recognized in the nine month periods ended September 30, 2015 and 2014 totaled $0.2 million and $0.5 million, respectively. At September 30, 2015, unrecognized compensation cost related to stock options was $0.3 million, which is expected to be recognized over a weighted average period of 1.8 years.

 

Restricted Stock / Deferred Stock Awards. On February 11, 2015, we granted 1,006,528 restricted stock and deferred stock awards under the Civeo Plan, which vest in four equal annual installments beginning on February 11, 2016.

 

Compensation expense associated with restricted stock awards and deferred stock awards recognized in the three month periods ended September 30, 2015 and 2014 totaled $1.1 million and $1.1 million, respectively. Compensation expense associated with restricted stock awards and deferred stock awards recognized in the nine month periods ended September 30, 2015 and 2014 totaled $3.2 million and $2.9 million, respectively. The total fair value of restricted stock awards and deferred stock awards that vested during the three months ended September 30, 2015 and 2014 was de minimis. The total fair value of restricted stock awards and deferred stock awards that vested during the nine months ended September 30, 2015 and 2014 was $0.9 million and $2.5 million.    

 

At September 30, 2015, unrecognized compensation cost related to restricted stock awards and deferred stock awards was $8.1 million, which is expected to be recognized over a weighted average period of 2.6 years.

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Phantom Share Awards. On February 11, 2015, we granted 517,145 awards under the Civeo Plan, which vest in four equal annual installments beginning on February 11, 2016. We also granted 1,169,193 awards under the Canadian Long-Term Incentive Plan, which vest in three equal annual installments beginning on February 11, 2016. During the second quarter 2015, we granted an additional 192,876 awards under the Canadian Long-Term Incentive Plan.

 

Because of the decline in our stock price from June 30, 2014 to September 30, 2014, and June 30, 2015 to September 30, 2015, and because we remeasure these awards at each reporting date, we recognized income associated with phantom shares during the three month periods ended September 30, 2015 and 2014 totaling $0.0 million and $0.3 million, respectively. During the nine month periods ended September 30, 2015 and 2014, we recognized compensation expense associated with phantom shares totaling $0.8 million and $5.1 million, respectively. At September 30, 2015, unrecognized compensation cost related to phantom shares was $2.3 million, as remeasured at September 30, 2015, which is expected to be recognized over a weighted average period of 2.7 years.

12.	SEGMENT AND RELATED INFORMATION

 

In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, we have identified the following reportable segments: Canadian, Australian and U.S., which represent our strategic focus on workforce accommodations.

 

Financial information by business segment for each of the three and nine months ended September 30, 2015 and 2014 is summarized in the following table (in thousands):

 

 

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13.     PARENT COMPANY INVESTMENT

 

The combined financial statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Oil States.

 

All intercompany transactions between the combined operations have been eliminated. All affiliate transactions between Civeo and Oil States have been included in these combined financial statements. The total net effect of the settlement of these affiliate transactions is reflected in the combined balance sheets as “Oil States International, Inc. Net Investment.”

 

Parent Company Services Provided and Corporate Allocations

 

Prior to the Spin-Off, Oil States provided services to and funded certain expenditures of Civeo. The most significant of these services and expenditures were: (1) funding expenditures to settle domestic accounts payable; (2) funding and processing of domestic payroll; (3) share-based compensation; and (4) certain transaction-related expenditures. The consolidated financial statements of Civeo reflect these expenditures. During the three months ended September 30, 2014, no expenditures for services received from Oil States or funding for expenditures provided by Oil States were included in the consolidated financial statements. During the nine months ended September 30, 2014, $41.7 million of expenditures for services received from Oil States or funding for expenditures provided by Oil States were included in the consolidated financial statements.

  

Prior to the Spin-Off, the consolidated statements of operations also include general corporate expense allocations, which include costs incurred by Oil States for certain corporate functions such as executive management, finance, information technology, tax, internal audit, risk management, legal, human resources and treasury. During the three months ended September 30, 2014, we were not allocated any amounts in respect of these corporate expenses which would have been included within selling, general and administrative expenses in the consolidated statements of operations. During the nine months ended September 30, 2014, we were allocated $2.8 million in respect of these corporate expenses which are included within selling, general and administrative expenses in the consolidated statements of operations.

 

Oil States Net Investment

 

Net transfers to Oil States are included within Oil States net investment on the consolidated balance sheets. The components of the change in Oil States net investment for the nine months ended September 30, 2014 are as follows (in thousands):

 

 

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(1)

Corporate allocations includes the general corporate expense allocations of $2.8 million for the nine months ended September 30, 2014, the impact of the income tax provision, the allocation of corporate insurance premiums, and the attribution of certain assets and liabilities that have historically been held at the Oil States corporate level, but which are specifically identifiable or otherwise allocable to us. The attributed assets and liabilities are included in Civeo’s combined balance sheets.

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