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2: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
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4: EX-32.1 Certification -- §906 - SOA'02 HTML 20K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 20K
11: R1 Cover HTML 73K
12: R2 Unaudited Consolidated Statements of Operations HTML 124K
13: R3 Unaudited Consolidated Statements of Comprehensive HTML 51K
Income (Loss)
14: R4 Unaudited Consolidated Statements of Comprehensive HTML 21K
Income (Loss) (Parentheticals)
15: R5 Consolidated Balance Sheets HTML 152K
16: R6 Consolidated Balance Sheets (Parentheticals) HTML 40K
17: R7 Unaudited Consolidated Statements of Changes in HTML 83K
Shareholders' Equity
18: R8 Unaudited Consolidated Statements of Cash Flows HTML 106K
19: R9 Description of Business and Basis of Presentation HTML 26K
20: R10 Revenue HTML 65K
21: R11 Impairment Charges HTML 20K
22: R12 Fair Value Measurements HTML 23K
23: R13 Details of Selected Balance Sheet Accounts HTML 69K
24: R14 Assets and Liabilities Held for Sale HTML 36K
25: R15 Earnings Per Share HTML 60K
26: R16 Debt HTML 42K
27: R17 Income Taxes HTML 25K
28: R18 Commitments and Contingencies HTML 21K
29: R19 Accumulated Other Comprehensive Loss HTML 21K
30: R20 Share Repurchases HTML 22K
31: R21 Share-Based Compensation HTML 30K
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(Tables)
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39: R29 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION HTML 20K
- Narrative (Details)
40: R30 REVENUE - Narrative (Details) HTML 19K
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categories (Details)
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obligations (Details)
43: R33 Impairment Charges (Details) HTML 26K
44: R34 DETAILS OF SELECTED BALANCE SHEET ACCOUNTS - HTML 32K
Accounts Receivable (Details)
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Inventories (Details)
46: R36 DETAILS OF SELECTED BALANCE SHEET ACCOUNTS - HTML 56K
Property, Plant and Equipment (Details)
47: R37 DETAILS OF SELECTED BALANCE SHEET ACCOUNTS - HTML 27K
Accrued Liabilities (Details)
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Deferred Revenue (Details)
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Amount of Assets Held for Sale (Details)
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Share (Details)
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Securities Excluded from Computation of Earnings
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52: R42 DEBT - Long-term Debt (Details) HTML 50K
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Information by Business Segment (Details)
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(Exact name of registrant as specified in its charter)
iBritish Columbia, Canada
i98-1253716
(State
or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
iThree Allen Center, i333
Clay Street, iSuite 4980,
i77002
iHouston,
iTexas
(Zip Code)
(Address of principal executive offices)
(i713) i510-2400
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
iCommon Shares, no par value
iCVEO
iNew
York Stock Exchange
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.
iYes
☒
No
☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
iYes
☒
No
☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "accelerated filer,""large accelerated filer,""smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☐
iAccelerated
Filer
☒
Emerging Growth Company
i☐
Non-Accelerated Filer
☐
Smaller
Reporting Company
i☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Preferred shares (Class A Series 1, iino/
par value; ii50,000,000/ shares
authorized, iiii9,042///
shares issued and outstanding, aggregate liquidation preference of $i98,907,587 and $i97,438,687 as of September
30, 2022 and December 31, 2021, respectively)
i63,410
i61,941
Common
shares (iino/ par value; ii46,000,000/
shares authorized, i14,079,336 shares and i14,431,819 shares issued, respectively, and i13,712,661
shares and i14,111,221 shares outstanding, respectively)
i—
i—
Additional
paid-in capital
i1,585,303
i1,582,442
Accumulated
deficit
(i911,934)
(i912,951)
Common
shares held in treasury at cost, i366,675 and i320,598 shares, respectively
(i9,063)
(i8,050)
Accumulated
other comprehensive loss
(i394,408)
(i361,883)
Total
Civeo Corporation shareholders’ equity
i333,308
i361,499
Noncontrolling
interest
i2,889
i1,612
Total
shareholders’ equity
i336,197
i363,111
Total
liabilities and shareholders’ equity
$
i583,329
$
i672,734
The
accompanying notes are an integral part of these financial statements.
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
i65,818
i62,928
Impairment
charges
i—
i7,935
Loss
on extinguishment of debt
i—
i416
Deferred
income tax expense
i6,930
i2,105
Non-cash
compensation charge
i2,861
i2,933
Gains
on disposals of assets
(i4,069)
(i2,305)
Provision
(benefit) for credit losses, net of recoveries
(i23)
i155
Other,
net
i2,397
i2,436
Changes
in operating assets and liabilities:
Accounts receivable
(i19,138)
(i21,516)
Inventories
(i1,557)
(i193)
Accounts
payable and accrued liabilities
i3,515
i9,836
Taxes
payable
(i62)
i61
Other
current and noncurrent assets and liabilities, net
(i12,701)
i6,843
Net
cash flows provided by operating activities
i62,372
i63,241
Cash
flows from investing activities:
Capital expenditures
(i17,466)
(i9,645)
Proceeds
from dispositions of property, plant and equipment
i11,975
i7,545
Other,
net
i190
i—
Net
cash flows used in investing activities
(i5,301)
(i2,100)
Cash
flows from financing activities:
Revolving credit borrowings
i204,951
i367,622
Revolving
credit repayments
(i219,775)
(i305,148)
Term
loan repayments
(i23,059)
(i117,595)
Debt
issuance costs
i—
(i4,407)
Repurchases
of common shares
(i14,209)
(i445)
Taxes
paid on vested shares
(i1,013)
(i1,120)
Net
cash flows used in financing activities
(i53,105)
(i61,093)
Effect
of exchange rate changes on cash
(i1,887)
(i1,255)
Net
change in cash and cash equivalents
i2,079
(i1,207)
Cash
and cash equivalents, beginning of period
i6,282
i6,155
Cash
and cash equivalents, end of period
$
i8,361
$
i4,948
Non-cash
financing activities:
Preferred dividends paid-in-kind
$
i1,469
$
i1,440
The
accompanying notes are an integral part of these financial statements.
8
CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1.iDESCRIPTION
OF BUSINESSAND BASIS OF PRESENTATION
Description of the Business
We provide hospitality services to the natural resources industry in Canada, Australia and the U.S. Our full suite of hospitality services for our guests includes lodging, catering and food service, housekeeping and maintenance at accommodation facilities that we or our customers own. In many cases, we provide services that support the day-to-day operations, such as laundry, facility management and maintenance, water and wastewater treatment, power generation, communication systems, security and logistics. We also offer development activities for workforce accommodation facilities, including site selection, permitting, engineering and design, manufacturing management and site construction,
along with providing hospitality services once the facility is constructed. We primarily operate in some of the world’s most active oil, metallurgical (met) coal, liquefied natural gas (LNG) and iron ore producing regions, and our customers include major and independent oil companies, mining companies, engineering companies and oilfield and mining service companies. We operate in ithree principal reportable business segments – Canada, Australia and the U.S.
Basis of Presentation
Unless
otherwise stated or the context otherwise indicates: (i) all references in these consolidated financial statements to “Civeo,”“us,”“our” or “we” refer to Civeo Corporation and its consolidated subsidiaries; and (ii) all references in this report to “dollars” or “$” are to U.S. dollars.
The accompanying unaudited consolidated financial statements of Civeo have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) has been condensed or omitted pursuant to those rules and regulations. The unaudited
financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which Civeo considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of Civeo 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, 2021.
9
CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL
STATEMENTS
(Continued)
2.iREVENUE
i
The
following table disaggregates our revenue by our ithree reportable segments: Canada, Australia and the U.S., and major categories for the periods indicated (in thousands):
Our
payment terms vary by the type and location of our customer and the products or services offered. The time between invoicing and when our performance obligations are satisfied is not significant. Payment terms are generally within 30 days and in most cases do not extend beyond 60 days. We do not have significant financing components or significant payment terms.
i
As of September 30, 2022, for contracts
that are greater than one year, the table below discloses the estimated revenues related to performance obligations that are unsatisfied (or partially unsatisfied) and when we expect to recognize the revenue. The table only includes revenue expected to be recognized from contracts where the quantity of service is certain (in thousands):
We
applied the practical expedient and do not disclose consideration for remaining performance obligations with an original expected duration of one year or less. In addition, we do not estimate revenues expected to be recognized related to unsatisfied performance obligations for contracts without minimum room commitments. The table above represents only a portion of our expected future consolidated revenues and it is not necessarily indicative of the expected trend in total revenues.
3.iIMPAIRMENT
CHARGES
Quarter ended June 30, 2021. During the second quarter of 2021, we recorded impairment expense of $i7.9 million related to various undeveloped land positions and related permitting costs in Australia. At June 30, 2021, we identified an impairment trigger related to certain of these properties due to the cancellation of a significant thermal coal project in
Australia and our negative expectations related to other possible Australian thermal coal projects becoming viable in the near term. Accordingly, the assets were written down to their estimated fair value of $i2.4 million.
10
CIVEO CORPORATION
NOTES
TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
4.iFAIR 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 on the accompanying consolidated balance sheets approximate their fair values.
As
of September 30, 2022 and December 31, 2021, we believe the carrying value of our floating-rate debt outstanding under our term loans and revolving credit facilities approximates fair value because the terms include short-term interest rates and exclude penalties for prepayment. We estimated the fair value of our floating-rate term loan and revolving credit facilities using significant other observable inputs, representative of a Level 2 fair value measurement, including terms and credit spreads for these loans. In addition, the estimated fair value of our assets held for sale is based upon Level 2 fair value measurements, which include appraisals and previous negotiations with third parties.
During the second quarter of 2021, we wrote down certain long-lived assets to fair value. Our estimate
of the fair value of undeveloped land positions in Australia that were impaired was based on appraisals from third parties.
See Note 3 – Impairment Charges for further information.
5.iDETAILS OF SELECTED BALANCE SHEET ACCOUNTS
i
Additional
information regarding selected balance sheet accounts at September 30, 2022 and December 31, 2021 is presented below (in thousands):
Deferred
revenue consists of contract liabilities resulting from upfront payments related to the mobilization of mobile assets to service pipeline projects in our Canadian business segment. The decrease in deferred revenue from December 31, 2021 to September 30, 2022 was primarily due to the recognition of deferred revenue over the contracted terms of these pipeline projects in Canada.
6.iASSETS
AND LIABILITIES HELD FOR SALE
As of September 30, 2022, assets and liabilities held for sale included certain assets and liabilities in our U.S. business segment. As of December 31, 2021, assets and liabilities held for sale included certain assets in our U.S. business segment and undeveloped land holdings in our Australia business segment. These assets and liabilities were recorded at the estimated fair value less costs to sell, which exceeded their carry values.
i
The
following table summarizes the carrying amount as of September 30, 2022 and December 31, 2021 of the assets and liabilities classified as held for sale (in thousands):
(1)Liabilities held for sale are classified as a current liability on the unaudited consolidated balance sheets, under the caption "Other current liabilities."
7.iEARNINGS
PER SHARE
We use the two-class method to calculate basic and diluted earnings per share because we have participating securities in the form of Class A preferred shares. The two-class method requires a proportional share of net income to be allocated between common shares and participating securities. The proportional share to be allocated to participating securities is determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities.
Basic earnings per share is computed under the two-class method by dividing the net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Net income attributable to common shareholders represents our net income reduced
by an allocation of current period earnings to participating securities as described above. No such adjustment is made during periods with a net loss, as the adjustment would be anti-dilutive.
Diluted earnings per share is computed under the two-class method by dividing diluted net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of share-based awards. In addition, we calculate the potential dilutive effect of any outstanding dilutive security under both the two-class method and the “if-converted” method, and we report the more dilutive of the methods as our diluted earnings per share. We also apply the treasury stock method with respect to certain share-based awards in the calculation of diluted earnings per share,
if dilutive.
i
The calculation of earnings per share attributable to Civeo common shareholders is presented below for the periods indicated (in thousands, except per share amounts):
Net income (loss) attributable to Civeo common shareholders
$
i5,225
$
i62
$
i15,226
$
(i10,367)
Less:
income allocated to participating securities
(i794)
(i9)
(i2,297)
i—
Basic
net income (loss) attributable to Civeo Corporation common shareholders
$
i4,431
$
i53
$
i12,929
$
(i10,367)
Add:
undistributed income attributable to participating securities
i794
i9
i2,297
i—
Less:
undistributed income reallocated to participating securities
(i788)
(i9)
(i2,275)
i—
Diluted
net income (loss) attributable to Civeo Corporation common shareholders
$
i4,437
$
i53
$
i12,951
$
(i10,367)
Denominator:
Weighted
average shares outstanding - basic
i13,932
i14,277
i14,058
i14,255
Dilutive
shares - share-based awards
i132
i84
i162
i—
Weighted
average shares outstanding - diluted
i14,064
i14,361
i14,220
i14,255
Basic
net income (loss) per share attributable to Civeo Corporation common shareholders (1)
$
i0.32
$
i—
$
i0.92
$
(i0.73)
Diluted
net income (loss) per share attributable to Civeo Corporation common shareholders (1)
$
i0.32
$
i—
$
i0.91
$
(i0.73)
/
(1)Computations
may reflect rounding adjustments.
iThe following common share equivalents have been excluded from the calculation of weighted-average common shares outstanding because the effect is anti-dilutive for the periods presented (in millions of shares):
Canadian term loan; weighted average interest rate
of i4.7% for the nine month period ended September 30, 2022
$
i36,480
$
i63,104
U.S.
revolving credit facility; weighted average interest rate of i6.3% for the nine month period ended September 30, 2022
i—
i—
Canadian
revolving credit facility; weighted average interest rate of i5.0% for the nine month period ended September 30, 2022
i83,904
i111,300
Australian
revolving credit facility; weighted average interest rate of i3.8% for the nine month period ended September 30, 2022
i5,832
i726
i126,216
i175,130
Less:
Unamortized debt issuance costs
i1,525
i1,952
Total
debt
i124,691
i173,178
Less:
Current portion of long-term debt, including unamortized debt issuance costs, net
i27,964
i30,576
Long-term
debt, less current maturities
$
i96,727
$
i142,602
/
CreditAgreement
As of September 30, 2022, our Credit Agreement (as then amended to date, the Credit Agreement) provided for: (i) a $i200.0 million revolving credit facility scheduled to mature on September 8, 2025, allocated as follows: (A) a $i10.0
million senior secured revolving credit facility in favor of one of our U.S. subsidiaries, as borrower; (B) a $i155.0 million senior secured revolving credit facility in favor of Civeo, as borrower; and (C) a $i35.0
million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower; and (ii) a C$i100.0 million term loan facility scheduled to be fully repaid on December 31, 2023 in favor of Civeo.
U.S. dollar amounts outstanding under the facilities provided by the Credit Agreement bear interest at a variable rate equal to the London Inter-Bank Offered Rate (LIBOR) plus
a margin of i3.00% to i4.00%, or a base rate plus i2.00%
to i3.00%, in each case based on a ratio of our total net debt to Consolidated EBITDA (as defined in the Credit Agreement). Canadian dollar amounts outstanding bear interest at a variable rate equal to a Bankers’ Acceptance Discount Rate (as defined in the Credit Agreement) based on the Canadian Dollar Offered Rate (CDOR) plus a margin of i3.00%
to i4.00%, or a Canadian Prime rate plus a margin of i2.00% to i3.00%,
in each case based on a ratio of our total debt to Consolidated EBITDA. Australian dollar amounts outstanding under the Credit Agreement bear interest at a variable rate equal to the Bank Bill Swap Bid Rate plus a margin of i3.00% to i4.00%,
based on a ratio of our total net debt to Consolidated EBITDA. The future transitions from LIBOR and CDOR as interest rate benchmarks are addressed in the Credit Agreement and at such time the transition from (i) LIBOR takes place, an alternate benchmark will be established based on the first alternative of the following, plus a benchmark replacement adjustment, Term Secured Overnight Financing Rate (SOFR), Daily Simple SOFR and an alternative benchmark selected by the administrative agent and the applicable borrowers giving due consideration to any selection or recommendation by a government body or any evolving or then-prevailing market convention for determining a benchmark rate as a replacement for the then-current Benchmark for U.S. dollar-denominated syndicated credit facilities at such time or (ii) CDOR takes place, we will endeavor with the administrative agent to establish an alternate rate of interest to CDOR that gives due consideration to any evolving or
then existing convention for similar Canadian Dollar denominated syndicated credit facilities for the replacement of CDOR.
The Credit Agreement contains customary affirmative and negative covenants that, among other things, limit or restrict: (i) indebtedness, liens and fundamental changes; (ii) asset sales; (iii) acquisitions of margin stock; (iv) specified acquisitions; (v) certain restrictive agreements; (vi) transactions with affiliates; and (vii) investments and other restricted payments, including dividends and other distributions. In addition, we must maintain a minimum interest coverage ratio, defined as the ratio of Consolidated EBITDA to consolidated interest expense, of at least i3.00
to 1.00 and our maximum net leverage ratio, defined as
15
CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
the ratio of total net debt to Consolidated EBITDA, of no greater than i3.00 to 1.00. Following a qualified offering of indebtedness, we will be required to
maintain a maximum leverage ratio of no greater than i3.50 to 1.00 and a maximum senior secured ratio less than i2.00 to 1.00. Each of the factors considered in the calculations of these ratios are defined in the Credit Agreement. EBITDA and consolidated interest, as defined, exclude goodwill and asset impairments,
debt discount amortization, amortization of intangibles and other non-cash charges. We were in compliance with our covenants as of September 30, 2022.
Borrowings under the Credit Agreement are secured by a pledge of substantially all of our assets and the assets of our subsidiaries subject to customary exceptions. The obligations under the Credit Agreement are guaranteed by our significant subsidiaries. As of September 30, 2022, we had iseven
lenders that were parties to the Credit Agreement, with total commitments (including both revolving commitments and term commitments) ranging from $i22.5 million to $i52.0
million. As of September 30, 2022, we had outstanding letters of credit of $i0.3 million under the U.S. facility, izero under the Australian facility
and $i1.1 million under the Canadian facility. We also had outstanding bank guarantees of A$i0.8 million under the Australian facility.
9.iINCOME
TAXES
Our operations are conducted through various subsidiaries in a number of countries throughout the world. We have provided for income taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned.
We operate in ithree jurisdictions, Canada, Australia and the U.S., where statutory tax rates range from i15%
to i30%. Our effective tax rate will vary from period to period based on changes in earnings mix between these different jurisdictions.
We compute our quarterly taxes under the effective tax rate method by applying an anticipated annual effective rate to our year-to-date income, except for significant unusual or extraordinary transactions. Income taxes for any significant and unusual or extraordinary transactions are computed and recorded in the period in which the specific transaction occurs. As of September 30,
2022, the U.S. was considered a loss jurisdiction for tax accounting purposes and was removed from the annual effective tax rate computation for purposes of computing the interim tax provision. As of September 30, 2021, Canada and the U.S. were considered loss jurisdictions for tax accounting purposes and were removed from the annual effective tax rate computation for purposes of computing the interim tax provision.
Our income tax expense for the three months ended September 30, 2022 totaled $i3.7
million, or i37.2% of pretax income, compared to income tax expense of $i1.8 million, or i63.4%
of pretax income, for the three months ended September 30, 2021. Our effective tax rate for the three months ended September 30, 2022 was impacted by considering the U.S. a loss jurisdiction that was removed from the annual effective tax rate computation for purposes of computing the interim tax provision. For the three months ended September 30, 2021, our effective tax rate was impacted by considering Canada and the U.S. loss jurisdictions that were removed from the annual effective tax rate computation for purposes of computing the interim tax provision. Additionally, under Accounting Standards Codification 740-270, “Accounting for Income Taxes,” the quarterly tax provision is based on our current estimate of the annual effective tax rate less the prior quarter’s year to date provision.
Our
income tax expense for nine months ended September 30, 2022 totaled $i7.1 million, or i27.8% of pretax income, compared
to income tax expense of $i2.4 million, or (i39.0)% of pretax loss, for the nine months ended September
30, 2021. Our effective tax rate for the nine months ended September 30, 2022 was impacted by considering the U.S. a loss jurisdiction that was removed from the annual effective tax rate computation for the purposes of computing the interim tax provision. Our effective tax rate for the nine months ended September 2021 was impacted by considering Canada and the U.S. loss jurisdictions that were removed from the annual effective tax rate computation for the purposes of computing the interim tax provision.
10.iCOMMITMENTS
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.
16
CIVEO
CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
11.iACCUMULATED OTHER COMPREHENSIVE LOSS
Our accumulated other comprehensive loss increased $i32.5
million from $i361.9 million at December 31, 2021 to $i394.4
million at September 30, 2022, as a result of foreign currency exchange rate fluctuations. Changes in other comprehensive loss during the first nine months of 2022 were primarily driven by the Australian dollar and Canadian dollar decreasing in value compared to the U.S. dollar. Excluding intercompany balances, our Canadian dollar and Australian dollar functional currency net assets totaled approximately C$i232 million and A$i232
million, respectively, at September 30, 2022.
12.iSHARE REPURCHASES
In August 2021, our Board of Directors (Board) authorized a common share repurchase program (the 2021 Share Repurchase Program) to repurchase up
to i5.0% of our total common shares which are issued and outstanding, or approximately i715,000
common shares, over a itwelve month period. In August 2022, our Board authorized a new common share repurchase program (the 2022 Share Repurchase Program) to repurchase up to i5.0% of our total common shares which
are issued and outstanding, or approximately i685,000 common shares, over a itwelve month period. The 2022 Share Repurchase Program
and the 2021 Share Repurchase Program are collectively referred to as the "Share Repurchase Programs."
The repurchase authorization allows repurchases from time to time in open market transactions, including pursuant to trading plans adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. We have funded, and intend to continue to fund, repurchases through cash on hand and cash generated from operations. The common shares repurchased under the Share Repurchase Programs are cancelled in the periods they are acquired and the payment is accounted for as an increase to accumulated deficit in our Unaudited Consolidated Statements of Changes in Shareholders’ Equity in the period the payment is made.
Pursuant to our 2021 Share Repurchase Program, during the nine months ended September
30, 2022, we repurchased an aggregate of i123,882 of our common shares outstanding at a weighted average price of $i28.54 per share, for a total of approximately
$i3.5 million. We repurchased an aggregate of i341,061 of our common shares outstanding at a weighted average price of $i23.98
per share for a total cost of $i8.2 million during the twelve month period comprising the 2021 Share Repurchase Program. We have not repurchased any shares under the 2022 Share Repurchase Program as of September 30, 2022.
In addition to the Share Repurchase Programs, we repurchased i374,753
common shares from a shareholder for approximately $i10.7 million during the three months ended September 30, 2022.
13.iSHARE-BASED
COMPENSATION
Certain key employees and non-employee directors participate in the Amended and Restated 2014 Equity Participation Plan of Civeo Corporation (the Civeo Plan). The Civeo Plan authorizes our Board and the Compensation Committee of our Board to approve grants of options, awards of restricted shares, performance awards, phantom share awards and dividend equivalents, awards of deferred shares, and share payments to our employees and non-employee directors. No more than i2.4
million Civeo common shares are authorized to be issued under the Civeo Plan.
Outstanding Awards
Restricted Share Awards / Restricted Share Units / Deferred ShareAwards. On May 18, 2022, we granted i39,032
restricted share awards to our non-employee directors, which vest in their entirety on May 17, 2023.
Compensation expense associated with restricted share awards, restricted share units and deferred share awards recognized in the three months ended September 30, 2022 and 2021 totaled $i0.3 million and $i0.4
million, respectively. Compensation expense associated with restricted share awards, restricted share units and deferred share awards recognized in the nine months ended September 30, 2022 and 2021 totaled $i0.9 million and $i1.2
million, respectively. The total fair value of restricted share awards, restricted share units and deferred share awards that vested during both the three months ended September 30, 2022 and 2021 was less than $ii0.1/
million. The total fair value of restricted share awards, restricted share units and deferred share awards that vested during the nine months ended September 30, 2022 and 2021 was $i2.1 million and $i1.5
million, respectively.
17
CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
At September 30, 2022, unrecognized compensation cost related to restricted share awards, restricted share units and deferred share awards was $i0.6
million, which is expected to be recognized over a weighted average period of i0.6 years.
Phantom ShareAwards. On February 25, 2022, we granted i255,034
phantom share awards under the Civeo Plan, which vest in three equal annual installments beginning on February 25, 2023. We also granted i77,574 phantom share awards under the Canadian Long-Term Incentive Plan, which vest in three equal annual installments beginning on February
25, 2023. Phantom share awards are settled in cash upon vesting.
During the three months ended September 30, 2022 and 2021, we recognized compensation expense associated with phantom shares totaling $i2.3 million and $i2.1
million, respectively. During the nine months ended September 30, 2022 and 2021, we recognized compensation expense associated with phantom shares totaling $i7.2 million and $i5.0
million, respectively. At September 30, 2022, unrecognized compensation cost related to phantom shares was $i11.7 million, as remeasured at September 30, 2022, which is expected to be recognized over a weighted average period of i1.9
years.
Performance Awards. On February 25, 2022, we granted i122,555 performance awards under the Civeo Plan, which cliff vest in ithree
years on February 25, 2025 subject to attainment of applicable performance criteria. These awards will be earned in amounts between i0% and i200%
of the participant’s target performance share award, based equally on (i) the payout percentage associated with Civeo’s relative total shareholder return rank among a peer group that includes i17 other companies and (ii) the payout percentage associated with Civeo's cumulative operating cash flow over the performance period relative to a preset target. The portion of the performance awards tied to cumulative operating cash flow includes a performance-based vesting requirement. The fair value of these awards is based on the closing market price of our common shares on the date of grant. We evaluate the probability
of achieving the performance criteria throughout the performance period and will adjust share-based compensation expense based on the number of shares expected to vest based on our estimate of the most probable performance outcome.
During the three months ended September 30, 2022 and 2021, we recognized compensation expense associated with performance awards totaling $i0.6
million and $i0.6 million, respectively. During the nine months ended September 30, 2022 and 2021, we recognized compensation expense associated with performance awards totaling $i1.9
million and $i1.7 million, respectively. iiNo/
performance share awards vested during the three months ended September 30, 2022 and 2021. The total fair value of performance share awards that vested during the nine months ended September 30, 2022 and 2021 was $i2.4
million and $i1.9 million, respectively. At September 30, 2022, unrecognized compensation cost related to performance shares was $i4.6
million, which is expected to be recognized over a weighted average period of i2.0 years.
18
CIVEO CORPORATION
NOTES
TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
14.iSEGMENT 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: Canada, Australia and
the U.S., which represent our strategic focus on hospitality services and workforce accommodations.
i
Financial information by business segment for each of the three and nine months ended September 30, 2022 and 2021 is summarized in the following table (in thousands):
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).ThePrivateSecuritiesLitigationReformActof 1995 provides safe harbor provisions for forward-looking information. 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.The forward-looking statements in this report include, but are not limited to, the statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” relating to our expectations about the macroeconomic environment and industry conditions, including the impact of COVID-19 and the response thereto and the volatility in the price of and demand for commodities, as well as our expectations about capital expenditures in 2022 and beliefs with respect to liquidity
needs. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of importantfactors. For a discussion of known material factors that could affect our results, please refer to “Risk Factors,”“Cautionary Statement Regarding Forward-Looking Statements,” and“Management’s Discussion and Analysis of Financial Condition and Results of Operations”included in our Annual Report on Form 10-K for the year ended December 31, 2021 and our subsequent SEC filings.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, except to the extent required by applicable law.
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. We do so for the convenience of our shareholders and in an
effort to provide information available in the market that will assist our investors in a better understanding of the market environment in which we operate. However, we specifically disclaim any responsibility for the accuracy and completeness of such information and undertake 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 consolidated financial statements and the notes to those statements included elsewhere in this quarterly report
on Form 10-Q.
Overview and Macroeconomic Environment
We provide hospitality services to the natural resources industry in Canada, Australia and the U.S. Demand for our services can be attributed to two phases of our customers’ projects: (1) the development or construction phase; and (2) the operations or production phase. Historically, initial demand for our hospitality services has been driven by our customers’ capital spending programs related to the construction and development of natural resource projects and associated infrastructure, as well as the exploration for oil and natural gas. Long-term demand for our services has been driven by natural resource production, maintenance and operation of those facilities as well as expansion of those sites. In general, industry capital spending programs are based on the outlook for commodity prices, economic growth,
global commodity supply/demand, estimates of resource production and shareholder expectations. As a result, demand for our hospitality services is largely sensitive to expected commodity prices, principally related to oil, metallurgical (met) coal, liquefied natural gas (LNG) and iron ore. Other factors that can affect our business and financial results include the general global economic environment and regulatory changes in Canada, Australia, the U.S. and other markets, including governmental measures introduced to fight climate change or to help slow the spread or mitigate the impact of COVID-19.
Our business is predominantly located in northern Alberta, Canada; British Columbia, Canada; Queensland, Australia; and Western Australia. We derive most of our business from natural resource companies who are developing and producing oil sands, met coal, LNG and iron ore resources and, to a lesser extent, other hydrocarbon and
mineral resources. In the third quarter of 2022, approximately 60% of our revenue was generated by our lodges in Canada and our villages in Australia. Where traditional accommodations and infrastructure are insufficient, inaccessible or cost ineffective, our lodge and village facilities provide comprehensive hospitality services similar to those found in an urban hotel. We typically contract our facilities to our customers on a fee-per-person-per-day basis that covers lodging and meals and is based on the duration of customer needs,
20
which can range from several weeks to several years. The remainder of our revenue is generated by our hospitality services at customer-owned
locations in Canada and Australia, mobile assets in Canada and the U.S and our lodges in the U.S.
Generally, our core Canadian oil sands and Australian mining customers make significant, upfront capital investments to develop their prospects, which have estimated reserve lives ranging from ten years to in excess of 30 years. Consequently, these investments are primarily dependent on those customers’ long-term views of commodity demand and prices.
The spread of COVID-19 and the response thereto have negatively impacted the global economy. The actions taken by governments and the private-sector to mitigate the spread of COVID-19 and the risk of infection, including government-imposed or voluntary social distancing and quarantining, reduced travel and remote work policies, evolved with the introduction of vaccination efforts in 2021, and may continue to evolve as virus variants have
added uncertainty to the continuing global impact. Since the COVID-19 pandemic began, we have been impacted by increased staff costs as a result of hospitality labor shortages in Australia. This labor shortage has been exacerbated by significantly reduced foreign labor availability and reduced labor mobility in Australia, which has subsequently led to an increased reliance on more expensive temporary labor resources. We continue to closely monitor the COVID-19 situation and have taken measures to help ensure the health and well-being of our employees, guests and contractors, including screening of individuals that enter our facilities, social distancing practices, enhanced cleaning and sanitization efforts, the suspension of nonessential employee travel and implementation of work-from-home policies, where applicable.
In part due to the impact of COVID-19 on the global economy and governmental responses thereto, increasing
inflationary pressures are being experienced worldwide. These price increases have, and are expected to continue to have, a negative impact on our labor and food costs, as well as consumable costs such as fuel. We are managing inflation risk with negotiated service scope changes and contractual protections.
Global oil prices dropped to historically low levels in March and April 2020 due to severely reduced global oil demand, high global crude inventory levels, uncertainty around timing and slope of worldwide economic recovery after COVID-19 related economic shut-downs and effectiveness of production cuts by major oil producing countries, such as Saudi Arabia, Russia and the U.S. Since this trough in early 2020, global oil prices increased later in 2020 and throughout 2021 primarily due to improved global oil demand and lagging global oil supply due to oil production discipline from publicly traded oil producers and OPEC+ countries.
These supply/demand dynamics have continued in 2022 and have been exacerbated by the recent conflict between Russia and Ukraine and related sanctions on Russia as well as actions taken by OPEC+ to adjust production levels, which are decreasing global fossil fuel supply even further. This led to a significant increase in global oil prices to above $100 per barrel. In response, several governments, including the U.S. government under the Biden administration, have begun to release oil from the government controlled strategic reserves.
Alberta, Canada. In Canada, Western Canadian Select (WCS) crude is the benchmark price for our oil sands customers. Pricing for WCS is driven by several factors, including the underlying price for West Texas Intermediate (WTI) crude, the availability of transportation infrastructure (consisting of pipelines and crude by railcar), refinery blending requirements and governmental
regulation. Historically, WCS has traded at a discount to WTI, creating a “WCS Differential,” due to transportation costs and capacity restrictions to move Canadian heavy oil production to refineries, primarily along the U.S. Gulf Coast. The WCS Differential has varied depending on the extent of transportation capacity availability.
Certain expansionary oil pipeline projects have the potential to both drive incremental demand for mobile assets and to improve take-away capacity for Canadian oil sands producers over the longer term. The Enbridge Line 3 replacement project was completed at the end of 2021 and the Trans Mountain Pipeline (TMX) is currently under construction and continues to progress towards completion. The Canadian federal government acquired the TMX pipeline in 2018, approved the expansion of the project and is currently working through a revised construction timeline to adjust for recent delays related
to legal challenges, the COVID-19 pandemic, flooding along certain sections of the pipeline corridor and seasonal wildfires. As a result, the TMX pipeline construction has been delayed, and there is a risk that there could be future delays. Recent legal issues between the Canadian government and First Nation groups have been resolved for the time being and construction has resumed.
WCS prices in the third quarter of 2022 averaged $70.70 per barrel compared to an average of $57.58 in the third quarter of 2021. The WCS Differential increased from $14.12 per barrel at the end of the fourth quarter of 2021 to $21.72 at the end of the third quarter of 2022. As of October 21, 2022, the WTI price was $86.65 and the WCS price was $58.72, resulting in a WCS Differential of $27.93.
Together with the initial spread of COVID-19, depressed price
levels of both WTI and WCS materially impacted 2020 maintenance and production spending and activity by Canadian operators and, therefore, demand for our hospitality services. Customers began increasing production activity in the fourth quarter of 2020 and production capacity has approached pre-
21
pandemic levels in 2022. Although oil prices reached multi-year highs in the first half of 2022, there is continued uncertainty around commodity price levels, including the impact of COVID-19, inflationary pressures, actions taken by OPEC+ to adjust production levels and regulatory implications on such prices, which could cause our Canadian oil sands and pipeline customers to reduce production, delay expansionary and maintenance spending and defer additional investments
in their oil sands assets.
British Columbia, Canada. Our Sitka Lodge supports the LNG Canada project and related pipeline projects (see discussion below). From a macroeconomic standpoint, LNG demand continued to grow despite the spread of COVID-19, reinforcing the need for the global LNG industry to expand access to natural gas. Evolving government energy policies around the world have amplified support for cleaner energy supply, creating more opportunities for natural gas and LNG. The conflict between Russia and Ukraine has further highlighted the need for secure natural gas supply globally, particularly in Europe. Accordingly, additional investment in LNG supply will be needed to meet the resulting expected long-term LNG demand growth.
Currently, Western Canada does not have any operational LNG export facilities. LNG Canada (LNGC), a joint venture among
Shell Canada Energy, an affiliate of Shell plc (40 percent), and affiliates of PETRONAS, through its wholly-owned entity, North Montney LNG Limited Partnership (25 percent), PetroChina (15 percent), Mitsubishi Corporation (15 percent) and Korea Gas Corporation (5 percent), is currently constructing a liquefaction and export facility in Kitimat, British Columbia (Kitimat LNG Facility). British Columbia LNG activity and related pipeline projects are a material driver of activity for our Sitka Lodge, as well as for our mobile assets, which are contracted to serve designated portions of the related pipeline construction activity. The actual timing of when revenue is realized from the Coastal GasLink (CGL) pipeline and Sitka Lodge contracts could be impacted by any delays in the construction of the Kitimat LNG Facility or the pipeline, such as protest blockades or COVID-19. Our current
expectation is that our contracted commitments associated with the CGL pipeline project will be completed in 2023. Any new delays in facility or pipeline construction may result in extensions to these dates.
In late March 2020, LNGC announced steps being taken to reduce the spread of COVID-19, including reduction of the workforce at the project site to essential personnel only. In late December 2020, British Columbia’s public health officer issued a health order limiting workforce size at all large industrial projects across the province, including LNGC. These actions resulted in reduced occupancy at our Sitka Lodge beginning in the second quarter of 2020. British Columbia's public health order was phased out in the second quarter of 2021. It was replaced with less restrictive requirements focused on monitoring, allowing workforces to return to their optimal sizes, which increased occupancy at our Sitka Lodge in the second
half of 2021 and into 2022.
Australia. In Australia, 82% of our rooms are located in the Bowen Basin of Queensland, Australia and primarily serve met coal mines in that region. Met coal pricing and production growth in the Bowen Basin region is predominantly influenced by the level of global steel production, which decreased by 5.1% through August 2022 compared to the same period of 2021. Analysts forecast steel production for 2022 to remain subdued for the full year when compared to 2021, as a result of weakness in the Chinese residential sector and slowing global growth due to inflationary pressures. As of October 21, 2022, met coal spot prices were $285 per metric tonne. Steel output is forecast to improve marginally through 2024, with large infrastructure rollouts in a number of major economies including the U.S. and India.
The
Chinese embargo on Australian coal continues. However, Australian met coal producers have found new markets, including India and Europe, for their premium product. This led to a rebalancing of the market globally in 2021, with China relying on domestic production along with increased met coal imports from the U.S., Canada and Mongolia. With the historical backdrop of strong steel demand and met coal supply constraints, the spot price for met coal surged to record highs through the second half of 2021 into early 2022. Since the historic highs in early 2022, prices have stabilized with weather-related supply interruptions in Australia offset by weakening steel demand. Analysts forecast the current stable prices to rise in the fourth quarter 2022 due to higher demand in India and supply pressure related La Niña impacts in Australia’s production. Analysts are forecasting prices to remain close to $250 into 2023, though volatility with both supply and demand drivers could
impact prices and drive them higher or lower.
Civeo's activity in Western Australia is driven primarily by iron ore production, which is a key steel-making ingredient. Through the second half of 2021, with forced cuts in Chinese steel production, prices retreated from the peaks experienced in mid-2021. Iron ore prices remained stable through early 2022 and fell to just below $100 during the third quarter of 2022 with a slowdown in steel production. As of October 20, 2022, iron ore spot prices were $87.84 per metric tonne. Analysts anticipate that infrastructure-led construction activity in China and other large world economies will continue to stabilize prices at current levels, though residential activity in China remains subdued. Analysts forecast pricing through 2023 to remain between $90 and $110.
22
U.S.
In September, we sold our wellsite services business. Our remaining U.S. business supports offshore oil and gas activities in the Gulf of Mexico, completion activity in the Bakken and construction and turnaround work in the Louisiana industrial area. All these activities are primarily tied to WTI oil prices in the U.S. market. In 2020, the U.S. oil rig count and associated completion activity decreased due to COVID-19 and the global oil price decline discussed above. Only 267 oil rigs were active at the end of 2020. With the recovery of oil prices, oil rig count and drilling activity have recovered substantially, with 604 oil rigs active at the end of the third quarter 2022. The increase in the U.S. rig count and oil prices has only resulted in slight increases to U.S. oil production from an average of 11.3 million barrels per day in 2021 to an average of 11.8 million barrels per day at the end of July 2022. As of October 21,
2022, there were 612 active oil rigs in the U.S. (as measured by Bakerhughes.com). U.S. oil drilling and completion activity will continue to be impacted by oil prices, pipeline capacity, federal energy policies and availability of capital to support exploration and production (E&P) drilling and completion plans. In addition, consolidation among our E&P customer base in the U.S. has historically created short-term spending and activity dislocations. Should the current trend of industry consolidation continue, we may see activity, utilization and occupancy declines in the near term.
Recent Commodity Prices. Recent WTI crude, WCS crude, met coal and iron ore pricing trends are as follows:
(1)Source:
WTI crude prices are from U.S. Energy Information Administration (EIA), WCS crude prices and iron ore prices are from Bloomberg and hard coking coal prices are from IHS Markit.
Foreign Currency Exchange Rates. Exchange rates between the U.S. dollar and each of the Canadian dollar and the Australian dollar influence our U.S. dollar reported financial results. Our business has historically derived the vast majority of its revenues and operating income (loss) in Canada and Australia. These revenues and profits/losses are translated into U.S. dollars for U.S. GAAP financial reporting purposes. The following tables summarize the fluctuations in the exchange rates between the U.S. dollar and each of the Canadian dollar and the Australian dollar:
These fluctuations of the Canadian and Australian dollars have had and will continue to have an impact
on the translation of earnings generated from our Canadian and Australian subsidiaries and, therefore, our financial results.
23
Capital Expenditures. We continue to monitor the global economy, commodity prices, demand for crude oil, met coal, LNG and iron ore, inflation, the COVID-19 global pandemic and the responses thereto and the resultant impact on the capital spending plans of our customers in order to plan our business activities. We currently expect that our 2022 capital expenditures will be in the range of approximately $24 million to $29 million, compared to 2021 capital expenditures of $15.6 million. We previously increased
2022 capital expenditures estimates primarily as a result of recently awarded contracts for our Wapasu Lodge in Canada and our Australian integrated services business in Western Australia. We may adjust our capital expenditure plans in the future as we continue to monitor customer activity.
We have agreed to not renew an expiring land lease associated with our McClelland Lake Lodge in Alberta, Canada, which currently expires in June 2023, to support our customer’s intent to mine the land where the lodge currently resides. We are currently working with the customer to (i) secure an alternative site for the lodge and (ii) obtain a contract to economically justify the cost of moving and reinstalling the lodge
assets. However, we can provide no assurances that we will reach an agreement on a satisfactory contract to support the future utilization of the McClelland assets and the resulting impact could negatively affect our results of operations, financial condition and cash flows. We are in preliminary discussions with potential strategic joint venture partners that would participate in both the economics of relocating the lodge and its ongoing ownership. We expect to have further clarity on any potential contract associated with our McClelland Lake Lodge in the first half of 2023.
See “Liquidity and Capital Resources” below for further discussion of our 2022 capital
expenditures.
24
Results of Operations
Unless otherwise indicated, discussion of results for the three and nine monthsendedSeptember 30, 2022, is based on a comparisontothe corresponding periodsof 2021.
Less:
Net income attributable to noncontrolling interest
546
478
68
Net income attributable to Civeo Corporation
5,717
544
5,173
Less: Dividends attributable to preferred shares
492
482
10
Net
income attributable to Civeo common shareholders
$
5,225
$
62
$
5,163
We reported net income attributable to Civeo for the quarter ended September 30, 2022 of $5.2 million, or $0.32 per diluted share compared to net income attributable to Civeo for the quarter ended September 30, 2021 of $0.1 million, or $0.00 per diluted share.
Revenues.
Consolidated revenues increased $29.2 million, or 19%, in the third quarter of 2022 compared to the third quarter of 2021. This increase was primarily due to (i) higher billed rooms at our Canadian lodges related to turnaround activities by a number of customers, (ii) higher average daily rate at our Canadian lodges largely due to occupancy mix, (iii) increased mobile asset activity from pipeline projects in Canada, (iv) increased activity at our Civeo owned villages in the Australian Bowen and Gunnedah Basins and (v) increased activity at our Australian integrated services villages in Western Australia. These items were partially offset by a weaker Australian and Canadian dollar relative to the U.S. dollar in the third quarter of 2022 compared to the third quarter of 2021. See the discussion of segment results of operations below for further information.
Cost of Sales and Services. Our consolidated
cost of sales and services increased $22.1 million, or 20%, in the third quarter of 2022 compared to the third quarter of 2021. This increase was primarily due to (i) higher billed rooms at our Canadian lodges, (ii) increased mobile asset activity from pipeline projects in Canada, (iii) increased activity at our Civeo owned villages in the Australian Bowen and Gunnedah Basins and (iv) increased activity at our Australian integrated services villages in Western Australia. These items were partially offset by a weaker Australian and Canadian dollar relative to the U.S.
25
dollar in the third quarter of 2022 compared to the third quarter of 2021. See the discussion of segment results of operations below for further information.
Selling,
General and Administrative Expenses. SG&A expense increased $0.4 million, or 2%, in the third quarter of 2022 compared to the third quarter of 2021. This increase was primarily due to higher information technology expense and travel and entertainment expense. This increase in information technology expense was related to set-up costs incurred in a cloud computing arrangement for our newly implemented human capital management system, which are being amortized through SG&A expense instead of depreciation and amortization expense. The increase in travel and entertainment expenses was largely a result of a return to more normalized travel expenses with the lifting of travel restrictions associated with COVID-19. These items were partially offset by lower incentive compensation costs and a weaker Australian and Canadian dollar relative to the U.S. dollar in the third quarter of 2022 compared to the third quarter of 2021.
Depreciation
and Amortization Expense. Depreciation and amortization expense increased $2.3 million, or 11%, in the third quarter of 2022 compared to the third quarter of 2021. The increase was primarily due to shortening the lives on certain assets in Canada, partially offset by certain assets in Canada becoming fully depreciated during 2021 and the disposal of our West Permian Lodge in the U.S. during 2021. In addition, depreciation and amortization expense decreased due to a weaker Australian and Canadian dollar relative to the U.S. dollar in the third quarter of 2022 compared to the third quarter of 2021.
Operating Income. Consolidated operating income increased $4.8 million, or 79%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to higher activity levels in Canada and Australia in the third quarter of 2022 compared to the third quarter of 2021.
Interest
Expense, net. Net interest expense decreased by $0.6 million, or 17%, in the third quarter of 2022 compared to the third quarter of 2021, primarily related to lower average debt levels on credit facility borrowings during 2022 compared to 2021, partially offset by higher interest rates on credit facility borrowings.
Other Income. Consolidated other income increased $1.8 million in the third quarter of 2022 compared to the third quarter of 2021 primarily due to higher gain on the sale of assets related to the sale of our Kambalda village and an undeveloped land holding in Australia, our wellsite business in the U.S. and various mobile assets and unused corporate office space in Canada in the third quarter of 2022 compared to the third quarter of 2021.
Income
Tax (Expense) Benefit. Our income tax expense for the three months ended September 30, 2022 totaled $3.7 million, or 37.2% of pretax income, compared to an income tax expense of $1.8 million, or 63.4% of pretax income, for the three months ended September 30, 2021. Our effective tax rate for the three months ended September 30, 2022 was impacted by considering the U.S. a loss jurisdiction that was removed from the annual effective tax rate computation for purposes of computing the interim tax provision. For the three months ended September 30, 2021, our effective tax rate was impacted by considering Canada and the U.S. loss jurisdictions that were removed from the annual effective tax rate computation for purposes of computing the interim tax provision.
Additionally, under Accounting Standards Codification 740-270, “Accounting for Income Taxes,” the quarterly tax provision is based on our current estimate of the annual effective tax rate less the prior quarter’s year to date provision.
Other Comprehensive (Loss)Income. Other comprehensive loss increased $8.5 million in the third quarter of 2022 compared to the third quarter of 2021, primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar decreased 6% in the third quarter of 2022 compared to a 3% decrease in the third quarter of 2021. The Australian dollar exchange rate compared to the U.S. dollar decreased 6% in the third quarter of 2022 compared
to a 4% decrease in the third quarter of 2021.
(1)Includes
revenues related to lodge rooms and hospitality services for owned rooms for the periods presented.
(2)Includes revenues related to mobile assets for the periods presented.
(3)Includes revenues related to food services, laundry and water and wastewater treatment services for the periods presented.
(4)Average daily rate is based on billed rooms and accommodation revenue.
(5)Billed rooms represents total billed days for owned assets for the periods presented.
Our Canadian segment reported revenues in the third quarter of 2022 that were $19.0 million, or 23%, higher than the third quarter of 2021. The weakening of the average
exchange rate for the Canadian dollar relative to the U.S. dollar by 3% in the third quarter of 2022 compared to the third quarter of 2021 resulted in a $3.7 million period-over-period decrease in revenues. Excluding the impact of the weaker Canadian exchange rate, the increase was driven by (i) higher billed rooms at our lodges related to turnaround activities by a number of customers, (ii) a higher average daily rate at our lodges largely due to occupancy mix and (iii) increased mobile asset activity from pipeline projects.
Our Canadian segment cost of sales and services increased $13.7 million, or 23%, in the third quarter of 2022 compared to the third quarter of 2021. The weakening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 3% in the third quarter of 2022 compared to the third quarter of 2021 resulted in a $2.6 million period-over-period decrease
in cost of sales and services. Excluding the impact of the weaker Canadian exchange rate, the increase in cost of sales and services was driven by increased occupancy at our lodges and by increased mobile asset activity from pipeline projects.
Our Canadian segment gross margin as a percentage of revenues was largely unchanged, decreasing from 29.6% in the third quarter of 2021 to 29.3% in the third quarter of 2022.
(1)Includes revenues related to village rooms and hospitality services for owned rooms for the periods presented.
(2)Includes revenues related to food services and other services, including facilities management for the periods presented.
(3)Average daily rate is based on billed rooms and accommodation revenue.
(4)Billed rooms represent total billed days for owned assets for the periods presented.
Our Australian segment reported revenues in the third quarter of 2022 that were $8.7 million, or 13%, higher than the third quarter of 2021. The weakening of the average exchange rate for Australian
dollars relative to the U.S. dollar by 7% in the third quarter of 2022 compared to the third quarter of 2021 resulted in a $5.5 million period-over-period decrease in revenues. On a constant currency basis, the Australian segment experienced a 22% period-over-period increase in revenues. Excluding the impact of the weaker Australian exchange rate, the increase in the Australian segment was driven by increased activity at our Civeo owned villages in the Bowen and Gunnedah Basins and our integrated services sites in Western Australia.
Our Australian segment cost of sales and services increased $7.0 million, or 15%, in the third quarter of 2022 compared to the third quarter of 2021. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 7% in the third quarter of 2022 compared to the third quarter of 2021 resulted in a $4.0 million period-over-period
decrease in cost of sales and services. Excluding the impact of the weaker Australian exchange rate, the increase in cost of sales and services was largely driven by increased activity at our Civeo owned villages in the Bowen and Gunnedah Basins and our integrated services sites in Western Australia.
Our Australian segment gross margin as a percentage of revenues decreased to 27.7% in the third quarter of 2022 from 28.8% in the third quarter of 2021. This was primarily driven by a higher proportion of revenue from our integrated services business, which has a service-only business model and therefore generates lower overall gross margins than our accommodation business.
Our U.S. segment reported revenues in the third quarter of 2022 that were $1.5 million, or 26%, higher than the third quarter of 2021. This increase was due to greater U.S. drilling activity positively impacting our wellsite business in July and August, partially offset by reduced revenue due to the sale of this business on September 1, 2022. In addition, the offshore business had increased activity from completed projects and
unit sales in the third quarter of 2022 that did not occur to the same extent in the third quarter of 2021. These increases were partially offset by the reduced revenue from our former West Permian Lodge, which operated in the third quarter of 2021 and was sold in the fourth quarter of 2021.
Our U.S. segment cost of sales and services increased $1.4 million, or 25%, in the third quarter of 2022 compared to the third quarter of 2021. This increase was due to greater U.S. drilling activity impacting our wellsite business in July and August.
Our U.S. segment gross margin as a percentage of revenues increased from 0.8% in the third quarter of 2021 to 1.7% in the third quarter of 2022 primarily due to improved margins in our wellsite business due to operating efficiencies at higher activity levels and
increased margins from product sales in our offshore business. These were partially offset by our former West Permian Lodge, which generated a 79% gross margin as a percentage of revenues in the third quarter of 2021 and was sold in the fourth quarter of 2021.
Less: Net income attributable to noncontrolling interest
1,706
534
1,172
Net
income (loss) attributable to Civeo Corporation
16,695
(8,927)
25,622
Less: Dividends attributable to preferred shares
1,469
1,440
29
Net income (loss) attributable to Civeo common shareholders
$
15,226
$
(10,367)
$
25,593
We
reported net income attributable to Civeo for the nine months ended September 30, 2022 of $15.2 million, or $0.91 per diluted share compared to net loss attributable to Civeo for the nine months ended September 30, 2021 of $10.4 million, or $0.73 per diluted share. As further discussed below, net loss for the nine months ended September 30, 2021 included a $7.9 million pre-tax loss resulting from the impairment of fixed assets included in Impairment expense.
Revenues. Consolidated revenues increased $100.2 million, or 23%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This increase was primarily driven by
(i) higher billed rooms at our Canadian lodges as occupancy in the first nine months of 2021 was negatively impacted by the COVID-19 pandemic, (ii) higher average daily rate at our Canadian lodges largely due to occupancy mix, (iii) increased mobile asset activity from pipeline projects in Canada, (iv) increased activity at our Australian Civeo owned villages in the Bowen and Gunnedah Basins and (v) increased activity at our integrated services villages in Western Australia. These items were partially offset by a weaker Australian and Canadian dollar relative to the U.S. dollar in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. See the discussion of segment results of operations below for further information.
Cost of Sales and Services. Our consolidated cost
of sales and services increased $70.2 million, or 22%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This increase was primarily due to (i) higher billed rooms at our Canadian lodges, (ii) increased mobile asset activity from pipeline projects in Canada, (iii) increased activity at our Australian Civeo owned villages in the Bowen and Gunnedah Basins and (iv) increased activity at our integrated services villages in Western Australia These items were partially offset by a weaker Australian and Canadian dollar relative to the U.S. dollar in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. See the discussion of segment results of operations below for further information.
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Selling,
General and Administrative Expenses. SG&A expense increased $4.4 million, or 9%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This increase was primarily due to higher share-based compensation expense, travel and entertainment expense and information technology expense. The increase in share-based compensation expense was due to a relative increase in our stock price during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in information technology expense was related to set-up costs incurred in a cloud computing arrangement for our newly implemented human capital management system, which are being amortized through SG&A expense instead
of depreciation and amortization expense. The increase in travel and entertainment expenses was largely a result of a return to more normalized travel expenses with the lifting of travel restrictions associated with COVID-19.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $2.9 million, or 5%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to shortening the lives on certain assets in Canada, partially offset by assets in Canada becoming fully depreciated during 2021 and the disposal of our West Permian Lodge in the U.S. during 2021.
Impairment Expense. We recorded pre-tax impairment expense of $7.9 million in the nine
months ended September 30, 2021 associated with long-lived assets in our Australian reporting unit.
See Note 3 - Impairment Charges to the notes to the unaudited consolidated financial statements included in Item 1 of this quarterly report for further discussion.
Operating Income (Loss). Consolidated operating income increased $31.0 million, or 1,761%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to higher activity levels in Canada and Australia in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 and
lower impairment expense in Australia in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Interest Expense, net. Net interest expense decreased by $2.3 million, or 22%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily related to lower average debt levels on credit facility borrowings during 2022 compared to 2021.
Other Income. Consolidated other income decreased $1.8 million in the nine months ended September 30, 2022 compared to the nine months
ended September 30, 2021. The nine months ended September 30, 2022 included gains on the sale of assets primarily related to our Kambalda village and undeveloped land holdings in Australia, our wellsite business in the U.S. and various mobile assets across Canada, Australia and the U.S. The nine months ended September 30, 2021 included $3.5 million related to proceeds from the Canada Emergency Wage Subsidy (CEWS) and a lower gain on the sale of assets primarily related to the sale of a manufacturing facility and mobile assets in Canada.
Income Tax (Expense) Benefit. Our income tax expense for the nine months ended September 30, 2022 totaled $7.1 million, or
27.8% of pretax income, compared to an income tax expense of $2.4 million, or (39.0)% of pretax loss, for the nine months ended September 30, 2021. Our effective tax rate for the nine months ended September 30, 2022 was impacted by considering the U.S. a loss jurisdiction that was removed from the annual effective tax rate computation for the purposes of computing the interim tax provision. Our effective tax rate for the nine months ended September 30, 2021 was impacted by considering Canada and the U.S. loss jurisdictions that were removed from the annual effective tax rate computation for the purposes of computing the interim tax provision.
Other Comprehensive (Loss)Income.
Other comprehensive loss increased $17.3 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar decreased 8% in the nine months ended September 30, 2022 and was flat in the nine months ended September 30, 2021. The Australian dollar exchange rate compared to the U.S. dollar decreased 11% in the nine months ended September 30, 2022 compared to a 7% decrease in the nine months ended September 30, 2021.
(1)Includes revenues related to lodge rooms and hospitality services for owned rooms for the periods presented.
(2)Includes revenues related to mobile assets for the periods presented.
(3)Includes revenues related to food services, laundry and water and wastewater treatment services for the
periods presented.
(4)Average daily rate is based on billed rooms and accommodation revenue.
(5)Billed rooms represents total billed days for owned assets for the periods presented.
Our Canadian segment reported revenues in the nine months ended September 30, 2022 that were $78.8 million, or 34%, higher than the nine months ended September 30, 2021. The weakening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 3% in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 resulted in a $8.2
million period-over-period decrease in revenues. Excluding the impact of the weaker Canadian exchange rate, the increase was driven by (i) higher billed rooms at our lodges as occupancy in the first nine month of 2021 was negatively impacted by the COVID-19 pandemic, (ii) a higher average daily rate at our lodges largely due to occupancy mix and (iii) increased mobile asset activity from pipeline projects.
Our Canadian segment cost of sales and services increased $54.7 million, or 32%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The weakening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 3% in the nine months ended September 30, 2022 compared to the
nine months ended September 30, 2021 resulted in a $5.6 million period-over-period decrease in cost of sales and services. Excluding the impact of the weaker Canadian exchange rate, the increase in cost of sales and services was driven by increased occupancy at our lodges and increased mobile asset activity from pipeline projects.
Our Canadian segment gross margin as a percentage of revenues increased from 26.5% in the nine months ended September 30, 2021 to 27.6% in the nine months ended September 30, 2022. This was primarily driven by an increased relative contribution from mobile asset activity which generates higher gross margin.
(1)Includes revenues related to village rooms and hospitality services for owned rooms for the periods presented.
(2)Includes revenues related to food services and other services, including facilities management for the periods presented.
(3)Average daily rate is based on billed rooms and accommodation revenue.
(4)Billed rooms represent total billed days for owned assets for the periods presented.
Our Australian segment reported revenues in the nine months ended September 30, 2022 that were $16.4 million, or 9%, higher than the nine months
ended September 30, 2021. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 7% in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 resulted in a $15.1 million period-over-period decrease in revenues. Excluding the impact of the weaker Australian exchange rate, the increase in the Australian segment was driven by increased activity at our Civeo owned villages in the Bowen and Gunnedah Basins and our integrated services villages in Western Australia.
Our Australian segment cost of sales and services increased $11.4 million, or 8%, in the nine months ended September 30, 2022 compared to the nine
months ended September 30, 2021. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 7% in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 resulted in a $10.7 million period-over-period decrease in cost of sales and services. Excluding the impact of the weaker Australian exchange rate, the increase in cost of sales and services was largely driven by increased activity at our Civeo owned villages in the Bowen and Gunnedah Basins and our integrated services villages in Western Australia.
Our Australian segment gross margin as a percentage of revenues increased to 29.1% in the nine months ended September 30,
2022 from 28.9% in the nine months ended September 30, 2021. This was primarily driven by improved margins at Civeo owned villages in the Bowen and Gunnedah Basins as a result of increased activity, partially offset by increased relative revenue contribution from our integrated services business, which has a service-only business model, and therefore generates lower overall gross margins than our accommodation business.
Our
U.S. segment reported revenues in the nine months ended September 30, 2022 that were $5.0 million, or 30%, higher than the nine months ended September 30, 2021. This increase was due to greater U.S. drilling activity positively impacting our wellsite business that was sold on September 1, 2022, partially offset by reduced revenue from our former West Permian Lodge, which operated in the first nine months of 2021 and was sold in the fourth quarter of 2021.
Our U.S. segment cost of sales and services increased $4.1 million, or 25%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This increase
was due to greater U.S. drilling activity impacting our wellsite business that was sold on September 1, 2022, partially offset by reduced costs from our former West Permian Lodge, which operated in the first nine months of 2021 and was sold in the fourth quarter of 2021.
Our U.S. segment gross margin as a percentage of revenues increased 4.2% from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily due to improved margins in our wellsite business due to operating efficiencies at higher activity levels, partially offset by our former West Permian Lodge, which operated in the first nine months of 2021 and was sold in the fourth quarter of 2021.
LiquidityandCapital Resources
Our primary liquidity needs are to fund capital expenditures, which in the past have included expanding and improving our hospitality services, developing new lodges and villages, purchasing or leasing land, and for general working capital needs. In addition, capital has been used to repay debt, repurchase our common shares and fund strategic business acquisitions. In the future, capital may be required to move lodges from one site to another. Historically, our primary sources of funds have been available cash, cash flow from operations, borrowings under our Credit Agreement and proceeds from equity issuances. In the future, we may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity, fund acquisitions, refinance debt or retire preferred
shares.
Cash totaling $62.4 million was provided by
operations during the nine months ended September 30, 2022, compared to $63.2 million provided by operations during the nine months ended September 30, 2021. During the nine months ended September 30, 2022 and 2021, $29.9 million and $5.0 million was used in working capital, respectively. The increase in cash used in working capital in 2022 compared to 2021 is largely due to the timing of customer payments and revenue recognition as it relates to mobile asset activity in Canada during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Cash was used
in investing activities during the nine months ended September 30, 2022 in the amount of $5.3 million, compared to cash used in investing activities during the nine months ended September 30, 2021 in the amount of $2.1 million. The increase in cash used in investing activities was primarily due to higher capital expenditures. Capital expenditures totaled
34
$17.5 million and $9.6 million during the nine months ended September 30, 2022 and 2021, respectively. Capital expenditures in both periods were primarily maintenance related. Offsetting these capital expenditures,
we received proceeds from the sale of property, plant and equipment of $12.0 million during the nine months ended September 30, 2022 primarily related to the sale of our Kambalda village and undeveloped land holdings in Australia, unused corporate office space and various mobile assets in Canada and our wellsite business in the U.S., compared to $7.5 million during the nine months ended September 30, 2021 primarily related to the sale of our manufacturing facility and mobile assets in Canada.
We expect our capital expenditures for 2022 to be in the range of $24 million to $29 million, which excludes any unannounced and uncommitted projects, the spending for which is contingent on obtaining customer contracts
or commitments. Our 2022 capital expenditures estimate includes the capital expenditures associated with our recently announced 12-year contract renewal for our Wapasu Lodge in the Canadian oil sands. Whether planned expenditures will actually be spent in 2022 depends on industry conditions, project approvals and schedules, customer room commitments and project and construction timing. We expect to fund these capital expenditures with available cash, cash flow from operations and revolving credit borrowings under our Credit Agreement. The foregoing capital expenditure forecast does not include any funds for strategic acquisitions, which we could pursue should the transaction economics be attractive enough to us compared to the current capital allocation priorities of debt reduction and return of capital to shareholders. We continue to monitor the global economy, commodity prices,
demand for crude oil, met coal, LNG and iron ore, inflation, the COVID-19 global pandemic and the responses thereto and the resultant impact on the capital spending plans of our customers in order to plan our business activities, and we may adjust our capital expenditure plans in the future.
Net cash of $53.1 million was used in financing activities during the nine months ended September 30, 2022 primarily due to net repayments under our revolving credit facilities of $14.8 million, term loan repayments of $23.1 million, repurchases of our common shares of $14.2 million and payments to settle tax obligations on vested shares under our share-based compensation plans of $1.0 million. Net cash of $61.1 million was used in financing activities during the nine months ended September 30, 2021
primarily due to repayments of term loan borrowings of $117.6 million, payments to settle tax obligations on vested shares under our share-based compensation plans of $1.1 million, debt issuance costs of $4.4 million and repurchases of our common shares of $0.4 million, partially offset by net borrowings under our revolving credit facilities of $62.5 million.
The following table summarizes the changes in debt outstanding during the nine months ended September 30, 2022 (in thousands):
We
believe that cash on hand and cash flow from operations will be sufficient to meet our anticipated liquidity needs for the next 12 months. If our plans or assumptions change, including as a result of the impact of COVID-19 or changes in price of and demand for oil, or are inaccurate, or if we make acquisitions, we may need to raise additional capital. Acquisitions have been, and our management believes acquisitions will continue to be, an element of our long-term 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 or may issue equity directly to the sellers. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend on 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, any additional debt service requirements we take on 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 shareholders.
35
In August 2022, our Board authorized a common share repurchase program to repurchase up to 5.0% of our total common shares which are issued and outstanding, or 685,614 common shares, over a
twelve month period. See Note 12 – Share Repurchases to the notes to the unaudited consolidated financial statements included in Item 1 of this quarterly report for further discussion.
Credit Agreement
As of September 30, 2022, our Credit Agreement (as then amended to date, the Credit Agreement) provided for: (i) a $200.0 million revolving credit facility scheduled to mature on September 8, 2025, allocated as follows: (A) a $10.0 million senior secured revolving credit facility in favor of one of our U.S. subsidiaries, as borrower; (B) a $155.0 million senior secured revolving credit facility in favor of Civeo, as borrower;
and (C) a $35.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower; and (ii) a C$100.0 million term loan facility scheduled to be fully repaid on December 31, 2023 in favor of Civeo.
As of September 30, 2022, we had outstanding letters of credit of $0.3 million under the U.S. facility, zero under the Australian facility and $1.1 million under the Canadian facility. We also had outstanding bank guarantees of A$0.8 million under the Australian facility.
See Note 8 – Debt to the notes to the unaudited consolidated financial statements included in Item 1 of this
quarterly report for further discussion.
Dividends
The declaration and amount of all potential future dividends will be at the discretion of our Board and will depend upon many factors, including our financial condition, results of operations, cash flows, prospects, industry conditions, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors the Board deems relevant. In addition, our ability to pay cash dividends on common or preferred shares is limited by covenants in the Credit Agreement. Future agreements may also limit our ability to pay dividends, and we may incur incremental taxes if we are required to repatriate foreign earnings to pay such dividends. If we elect to pay dividends in
the future, the amount per share of our dividend payments may be changed, or dividends may be suspended, without advance notice. The likelihood that dividends will be reduced or suspended is increased during periods of market weakness. There can be no assurance that we will pay a dividend in the future.
The preferred shares we issued in the Noralta acquisition are entitled to receive a 2% annual dividend on the liquidation preference (initially $10,000 per share), paid quarterly in cash or, at our option, by increasing the preferred shares’ liquidation preference, or any combination thereof. Quarterly dividends were paid in-kind on September 30, 2022, thereby increasing the liquidation preference to $10,939 per share as of September 30, 2022. We currently expect to pay dividends on the
preferred shares through an increase in liquidation preference rather than cash until they mandatorily convert to Civeo common shares in April 2023.
Critical Accounting Policies
For a discussion of the critical accounting policies and estimates that we use in the preparation of our consolidated financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021. 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.
36
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk
Our principal market risks are our exposure to changes in interest rates and foreign currency exchange rates.
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 September 30, 2022, we had $126.2 million of outstanding floating-rate obligations 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 100 basis points, our consolidated interest expense would increase by approximately $1.3 million annually, based on our floating-rate debt obligations and interest rates in effect as of September 30, 2022.
Foreign Currency Exchange Rate Risk
Our operations are conducted in various countries around the world, and we receive revenue
and pay expenses 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 reporting currency, or (ii) the functional currency of our subsidiaries, which is not necessarily the U.S. dollar. Excluding intercompany balances, our Canadian dollar and Australian dollar functional currency net assets total approximately C$232 million and A$232 million, respectively, at September 30, 2022. We use a sensitivity analysis model to measure the impact of a 10% adverse movement of foreign currency exchange rates against the United States dollar. A hypothetical 10% adverse change in the value of the Canadian dollar and Australian dollar relative to the U.S. dollar as of
September 30, 2022 would result in translation adjustments of approximately $23 million and $23 million, respectively, recorded in other comprehensive loss. Although we do not currently have any foreign exchange agreements outstanding, in order to reduce our exposure to fluctuations in currency exchange rates, we may enter into foreign exchange agreements with financial institutions in the future.
ITEM 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the
end of the period covered by this report, 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) under 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 SEC. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of September 30, 2022, at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2022, 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) which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
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
For additional information about our risk factors, you should carefully read the section entitled "Risk Factors” included in our Annual Report on Form 10-K
for the year ended December 31, 2021.
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases of our common shares during the three months ended September 30, 2022.
Total
Number of Shares Purchased
Average Price Paid per Share
Total number of shares purchased as part of publicly announced plans or programs
Maximum number of shares that may yet be purchased under the plans or programs
(1)In
August 2021, our Board authorized a common share repurchase program (the 2021 Share Repurchase Program) to repurchase up to 5.0% of our total common shares which are issued and outstanding, or 715,814 common shares, over a twelve month period. We repurchased an aggregate of 100,971 of our common shares outstanding for approximately $3.0 million during the three months ended September 30, 2022 under the 2021 Share Repurchase Program.
(2)In August 2022, our Board authorized a new common share repurchase program (the 2022 Share Repurchase Program and, together with the 2021 Share Repurchase Program, the "Share Repurchase Programs") to repurchase up to 5.0% of our total common shares which are issued and outstanding, or 685,614 common shares, over a twelve month period. We have not repurchased any shares under the 2022 Share Repurchase Program as
of September 30, 2022.
(3)In addition to the Share Repurchase Programs, we repurchased 374,753 common shares from a shareholder for approximately $10.7 million during the three months ended September 30, 2022.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the agreements referenced above as exhibits to this Quarterly Report on Form 10-Q. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about Civeo or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality
different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in our public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about Civeo or its business or operations on the
date hereof.
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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.
