Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from _________________________ to _________________________
Commission file number: 001-36246
Civeo Corporation
 
(Exact name of registrant as specified in its charter)
British Columbia, Canada
98-1253716
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
Three Allen Center, 333 Clay Street, Suite 4980,
77002
Houston, Texas
(Zip Code)
(Address of principal executive offices)
 
(713) 510-2400
(Registrant’s telephone number, including area code)
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Shares, no par value
CVEO
New 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.
YES [X]
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).
YES [X]
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 [  ]
Accelerated Filer [X]
Emerging Growth Company [  ]
 
 
 
Non-Accelerated Filer [  ]  
Smaller Reporting Company [  ]
 

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).
YES [  ]
NO [X ]

The Registrant had 169,549,135 common shares outstanding as of October 21, 2019.



CIVEO CORPORATION
INDEX
 
Page No.
Part I -- FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements:
 
 
 
Consolidated Financial Statements
 
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 
Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018
Consolidated Balance Sheets – as of September 30, 2019 (unaudited) and December 31, 2018
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 
Notes to Unaudited Consolidated Financial Statements
 
 
Cautionary Statement Regarding Forward-Looking Statements
 
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4.   Controls and Procedures
 
 
 
 
Part II -- OTHER INFORMATION
 
 
 
Item 1.     Legal Proceedings
 
 
Item 1A.  Risk Factors
 
 
Item 6.     Exhibits
 
 
(a) Index of Exhibits
 
 
Signature Page


2


PART I -- FINANCIAL INFORMATION
 
ITEM 1. Financial Statements

CIVEO CORPORATION
 
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Service and other
$
140,349

 
$
112,243

 
$
353,147

 
$
327,395

Rental
6,942

 
6,019

 
21,057

 
13,757

Product
872

 
2,229

 
4,662

 
11,020

 
148,163

 
120,491

 
378,866

 
352,172

Costs and expenses:
 
 
 
 
 
 
 
Service and other costs
93,642

 
74,546

 
243,945

 
225,046

Rental costs
5,072

 
5,441

 
16,579

 
15,281

Product costs
766

 
2,240

 
3,826

 
9,056

Selling, general and administrative expenses
14,334

 
16,854

 
42,960

 
55,189

Depreciation and amortization expense
31,196

 
34,468

 
92,974

 
99,502

Impairment expense

 

 
5,546

 
28,661

Other operating expense (income)
277

 
(163
)
 
109

 
348

 
145,287

 
133,386

 
405,939

 
433,083

Operating income (loss)
2,876

 
(12,895
)
 
(27,073
)
 
(80,911
)
 
 
 
 
 
 
 
 
Interest expense
(7,315
)
 
(6,404
)
 
(20,670
)
 
(19,329
)
Loss on extinguishment of debt

 

 

 
(748
)
Interest income
17

 
16

 
66

 
92

Other income
2,849

 
412

 
6,882

 
2,923

Loss before income taxes
(1,573
)
 
(18,871
)
 
(40,795
)
 
(97,973
)
Income tax benefit
6,629

 
5,330

 
13,963

 
29,386

Net income (loss)
5,056

 
(13,541
)
 
(26,832
)
 
(68,587
)
Less: Net income attributable to noncontrolling interest
60

 
97

 
60

 
341

Net income (loss) attributable to Civeo Corporation
4,996

 
(13,638
)
 
(26,892
)
 
(68,928
)
Less: Dividends attributable to Class A preferred shares
464

 
612

 
1,384

 
49,100

Net income (loss) attributable to Civeo common shareholders
$
4,532

 
$
(14,250
)
 
$
(28,276
)
 
$
(118,028
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per Share Data (see Note 9) 
 
 
 
 
 
 
 
Basic net income (loss) per share attributable to Civeo Corporation common shareholders
$
0.02

 
$
(0.09
)
 
$
(0.17
)
 
$
(0.76
)
 
 
 
 
 
 
 
 
Diluted net income (loss) per share attributable to Civeo Corporation common shareholders
$
0.02

 
$
(0.09
)
 
$
(0.17
)
 
$
(0.76
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
167,640

 
165,855

 
166,842

 
154,411

Diluted
167,642

 
165,855

 
166,842

 
154,411

The accompanying notes are an integral part of these financial statements.


3


CIVEO CORPORATION
 
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income (loss)
$
5,056

 
$
(13,541
)
 
$
(26,832
)
 
$
(68,587
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of taxes of zero
(12,096
)
 
(1,343
)
 
(5,633
)
 
(25,598
)
Total other comprehensive loss
(12,096
)
 
(1,343
)
 
(5,633
)
 
(25,598
)
 
 
 
 
 
 
 
 
Comprehensive loss
(7,040
)
 
(14,884
)
 
(32,465
)
 
(94,185
)
Less: Comprehensive income attributable to noncontrolling interest
60

 
100

 
60

 
342

Comprehensive loss attributable to Civeo Corporation
$
(7,100
)
 
$
(14,984
)
 
$
(32,525
)
 
$
(94,527
)
The accompanying notes are an integral part of these financial statements.


4


CIVEO CORPORATION
 
CONSOLIDATED BALANCE SHEETS
(In Thousands, excluding share amounts)
 
 
September 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,072

 
$
12,372

Accounts receivable, net
106,792

 
70,223

Inventories
6,823

 
4,313

Prepaid expenses
8,478

 
7,036

Other current assets
5,898

 
3,556

Assets held for sale
8,132

 
10,297

Total current assets
144,195

 
107,797

 
 
 
 
Property, plant and equipment, net
599,950

 
658,905

Goodwill
128,077

 
114,207

Other intangible assets, net
111,888

 
119,409

Operating lease right-of-use assets
25,034

 

Other noncurrent assets
1,679

 
1,359

Total assets
$
1,010,823

 
$
1,001,677

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,266

 
$
28,334

Accrued liabilities
19,355

 
15,956

Income taxes
910

 
310

Current portion of long-term debt
34,372

 
33,329

Deferred revenue
4,442

 
3,035

Other current liabilities
9,098

 
5,719

Total current liabilities
103,443

 
86,683

 
 
 
 
Long-term debt, less current maturities
356,704

 
342,908

Deferred income taxes
6,085

 
18,442

Operating lease liabilities
20,992

 

Other noncurrent liabilities
18,081

 
18,220

Total liabilities
505,305

 
466,253

 
 
 
 
Commitments and contingencies (Note 12)

 

 
 
 
 
Shareholders’ Equity:
 
 
 
Preferred shares (Class A Series 1, no par value; 50,000,000 shares authorized, 9,042 shares issued and outstanding, respectively; aggregate liquidation preference of $93,161,584 as of September 30, 2019)
57,664

 
56,280

Common shares (no par value; 550,000,000 shares authorized, 171,648,771 shares and 166,392,479 shares issued, respectively, and 169,549,135 shares and 165,932,334 shares outstanding, respectively)

 

Additional paid-in capital
1,569,734

 
1,562,133

Accumulated deficit
(739,526
)
 
(710,551
)
Common shares held in treasury at cost, 2,099,636 and 460,145 shares, respectively
(5,472
)
 
(1,189
)
Accumulated other comprehensive loss
(376,882
)
 
(371,249
)
Total Civeo Corporation shareholders’ equity
505,518

 
535,424

Noncontrolling interest

 

Total shareholders’ equity
505,518

 
535,424

Total liabilities and shareholders’ equity
$
1,010,823

 
$
1,001,677

The accompanying notes are an integral part of these financial statements.

5


CIVEO CORPORATION
 
UNAUDITED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands)
 
 
Attributable to Civeo
 
 
 
 
 
Preferred
Shares
 
Common
Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount
 
Par Value
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Shareholders’
Equity
Balance, June 30, 2018
$
55,305

 
$

 
$
1,555,994

 
$
(682,497
)
 
$
(990
)
 
$
(352,466
)
 
$
119

 
$
575,465

Net income (loss)

 

 

 
(13,638
)
 

 

 
97

 
(13,541
)
Currency translation adjustment

 

 

 

 

 
(1,346
)
 
3

 
(1,343
)
Dividends paid

 

 

 

 

 

 
(121
)
 
(121
)
Issuance of shares for acquisitions

 

 
(10
)
 

 

 

 

 
(10
)
Dividends attributable to Class A preferred shares
486

 

 
126

 
(612
)
 

 

 

 

Share-based compensation

 

 
2,791

 

 

 

 

 
2,791

Balance, September 30, 2018
$
55,791

 
$

 
$
1,558,901

 
$
(696,747
)
 
$
(990
)
 
$
(353,812
)
 
$
98

 
$
563,241

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
$
57,200

 
$

 
$
1,567,162

 
$
(744,058
)
 
$
(5,472
)
 
$
(364,786
)
 
$

 
$
510,046

Net income (loss)

 

 

 
4,996

 

 

 
60

 
5,056

Currency translation adjustment

 

 

 

 

 
(12,096
)
 

 
(12,096
)
Dividends paid

 

 

 

 

 

 
(60
)
 
(60
)
Dividends attributable to Class A preferred shares
464

 

 

 
(464
)
 

 

 

 

Share-based compensation

 

 
2,572

 

 

 

 

 
2,572

Balance, September 30, 2019
$
57,664

 
$

 
$
1,569,734

 
$
(739,526
)
 
$
(5,472
)
 
$
(376,882
)
 
$

 
$
505,518

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$

 
$

 
$
1,383,934

 
$
(579,113
)
 
$
(358
)
 
$
(328,213
)
 
$
117

 
$
476,367

Net income (loss)

 

 

 
(68,928
)
 

 

 
341

 
(68,587
)
Currency translation adjustment

 

 

 

 

 
(25,599
)
 
1

 
(25,598
)
Dividends paid

 

 

 

 

 

 
(361
)
 
(361
)
Cumulative effect of implementation of ASU 2014-09

 

 

 
394

 

 

 

 
394

Issuance of shares for acquisitions
6,972

 

 
166,882

 

 

 

 

 
173,854

Dividends attributable to Class A preferred shares
48,819

 

 
281

 
(49,100
)
 

 

 

 

Share-based compensation

 

 
7,804

 

 
(632
)
 

 

 
7,172

Balance, September 30, 2018
$
55,791

 
$

 
$
1,558,901

 
$
(696,747
)
 
$
(990
)
 
$
(353,812
)
 
$
98

 
$
563,241

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
56,280

 
$

 
$
1,562,133

 
$
(710,551
)
 
$
(1,189
)
 
$
(371,249
)
 
$

 
$
535,424

Net income (loss)

 

 

 
(26,892
)
 

 

 
60

 
(26,832
)
Currency translation adjustment

 

 

 

 

 
(5,633
)
 

 
(5,633
)
Dividends paid

 

 

 

 

 

 
(60
)
 
(60
)
Cumulative effect of implementation of ASU 2016-02

 

 

 
(699
)
 

 

 

 
(699
)
Dividends attributable to Class A preferred shares
1,384

 

 

 
(1,384
)
 

 

 

 

Share-based compensation

 

 
7,601

 

 
(4,283
)
 

 

 
3,318

Balance, September 30, 2019
$
57,664

 
$

 
$
1,569,734

 
$
(739,526
)
 
$
(5,472
)
 
$
(376,882
)
 
$

 
$
505,518

 
Preferred
Shares (in
thousands)
 
Common
Shares (in
thousands)
Balance, December 31, 2018
9,042

 
165,932

Stock-based compensation

 
3,617

Balance, September 30, 2019
9,042

 
169,549

The accompanying notes are an integral part of these financial statements.

6


CIVEO CORPORATION
 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
 
Nine Months Ended
September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(26,832
)
 
$
(68,587
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
92,974

 
99,502

Impairment charges
5,546

 
28,661

Loss on extinguishment of debt

 
748

Deferred income tax benefit
(14,732
)
 
(29,272
)
Non-cash compensation charge
7,601

 
7,804

Gains on disposals of assets
(4,095
)
 
(2,714
)
Provision for loss on receivables, net of recoveries
(39
)
 
(106
)
Other, net
2,530

 
3,959

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(30,227
)
 
89

Inventories
(1,175
)
 
1,342

Accounts payable and accrued liabilities
4,958

 
(10,787
)
Taxes payable
345

 
939

Other current and noncurrent assets and liabilities, net
(3,328
)
 
(5,716
)
Net cash flows provided by operating activities
33,526

 
25,862

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(25,517
)
 
(8,666
)
Payments related to acquisitions, net of cash acquired
(16,439
)
 
(181,589
)
Proceeds from disposition of property, plant and equipment
5,482

 
4,038

Other, net
1,762

 
111

Net cash flows used in investing activities
(34,712
)
 
(186,106
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Revolving credit borrowings
340,494

 
289,450

Revolving credit repayments
(310,946
)
 
(134,040
)
Term loan repayments
(26,085
)
 
(18,177
)
Debt issuance costs
(1,950
)
 
(2,742
)
Taxes paid on vested shares
(4,283
)
 
(632
)
Net cash flows provided by (used in) financing activities
(2,770
)
 
133,859

 
 
 
 
Effect of exchange rate changes on cash
(344
)
 
(1,722
)
Net change in cash and cash equivalents
(4,300
)
 
(28,107
)
Cash and cash equivalents, beginning of period
12,372

 
32,647

 
 
 
 
Cash and cash equivalents, end of period
$
8,072

 
$
4,540

 
 
 
 
Non-cash investing activities:
 
 
 
Value of common shares issued as consideration for acquisitions
$

 
$
119,797

Value of preferred shares issued as consideration for acquisition
$

 
$
54,821

 
 
 
 
Non-cash financing activities:
 
 
 
Preferred dividends paid-in-kind
$
1,384

 
$
971

The accompanying notes are an integral part of these financial statements.


7

CIVEO CORPORATION
 
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS



1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
Description of the Business
 
We are a hospitality company servicing the natural resources industry in Canada, Australia and the U.S. We provide a full suite of hospitality services for our guests, including lodging, food service, housekeeping and maintenance at accommodation facilities that we or our customers own. We also, in many cases, provide services that support the day-to-day operations of accommodation facilities, such as laundry, facility management and maintenance, water and wastewater treatment, power generation, communication systems, security and group 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 operate in some of the world’s most active oil, coal and iron ore producing regions, and our customers include major and independent oil companies, mining companies and oilfield and mining service companies. We operate in three principal reportable business segments – Canada, Australia and 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. Certain reclassifications have been made to the consolidated statements of operations for the three and nine months ended September 30, 2018 to conform to current year presentation.
 
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, 2018.

2.
RECENT ACCOUNTING PRONOUNCEMENTS
 
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards or other guidance updates, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption. 

In January 2017, the FASB issued Accounting Standards Update (ASU) 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The standard simplifies the accounting for goodwill impairment by requiring a goodwill impairment to be measured using a single step impairment model, whereby the impairment equals the difference between the carrying amount and the fair value of the specified reporting units in their entirety. This eliminates the second step of the current impairment model that requires companies to first estimate the fair value of all assets in a reporting unit and measure impairments based on those fair values and a residual measurement approach. It also specifies that any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective prospectively for public business entities for annual reporting periods beginning after December 15, 2019, and early adoption is

8

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


permitted. We will adopt this new standard no later than January 1, 2020. The impact of the new standard will be dependent on the specific facts and circumstances of future individual goodwill impairments, if any.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” (ASU 2016-13). This new standard changes how companies will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 is effective for financial statements issued for reporting periods beginning after December 15, 2019 and interim periods within the reporting periods. We anticipate adopting ASU 2016-13 as of January 1, 2020. We are currently evaluating the impact of this new standard but do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
 
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), which replaces the existing guidance for lease accounting. The guidance is effective for financial statements issued for reporting periods beginning after December 15, 2018 and interim periods within the reporting periods. We have adopted this standard effective January 1, 2019 using the optional transition method, which allows us upon adoption to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit for the application of the standard to our existing leases. Upon adoption of this standard, we recognized a cumulative effect adjustment of $0.7 million (net of $0.2 million of taxes) to increase accumulated deficit in the accompanying unaudited consolidated balance sheet as of September 30, 2019. ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for certain leases. We elected the package of practical expedients, which among other things, allowed us to carry forward the historical lease identification and classification. In addition, we have elected the short-term lease recognition exemption for all leases that qualify. Accordingly, we did not recognize right-of-use assets or lease liabilities for leases with terms shorter than 12 months. Our evaluation process included reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the available practical expedients in order to determine the best implementation strategy. We determined that certain of our accommodation contracts with customers contain both a lease and non-lease or service component and in those instances concluded the service component was the predominant component. As a result, we elected the practical expedient under ASU 2018-11, which allows us to combine the lease and non-lease components of revenues as Service and other revenues for presentation purposes in accordance with Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers” (ASC 606). We also have identified certain arrangements with customers whereby we are a lessor for the rental of mobile camp assets primarily in our U.S. segment. For arrangements where we are the lessor, the adoption of the new lease standard did not have a material impact on our financial statements as all of our leases are operating leases, which will result in straight-line recognition of rental revenue. Adoption of the new standard resulted in $21.3 million of operating lease right-of-use assets and $22.4 million of operating lease liabilities as of January 1, 2019. Please see Note 14 – Leases for further information. 


9

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


3.
REVENUE
 
The following table disaggregates our revenue by our three reportable segments: Canada, Australia and U.S., and major categories for the periods indicated (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Canada
 
 
 
 
 
 
 
Accommodation revenues
$
79,939

 
$
72,991

 
$
203,774

 
$
204,258

Mobile facility rental revenues
3,048

 
135

 
5,648

 
10,036

Food service and other services revenues
8,084

 
3,627

 
25,507

 
11,082

Manufacturing revenues

 

 
1,014

 
1,285

Total Canada revenues
91,071

 
76,753

 
235,943

 
226,661

 
 
 
 
 
 
 
 
Australia
 
 
 
 
 
 
 
Accommodation revenues
$
33,056

 
$
30,679

 
$
92,473

 
$
88,343

Food service and other services revenues
14,687

 
411

 
14,687

 
1,199

Total Australia revenues
47,743

 
31,090

 
107,160

 
89,542

 
 
 
 
 
 
 
 
United States
 
 
 
 
 
 
 
Accommodation revenues
$
1,655

 
$
5,010

 
$
11,354

 
$
13,353

Mobile facility rental revenues
6,952

 
6,256

 
21,175

 
14,366

Manufacturing revenues
714

 
1,330

 
3,116

 
8,123

Food service and other services revenues
28

 
52

 
118

 
127

Total United States revenues
9,349

 
12,648

 
35,763

 
35,969

 
 
 
 
 
 
 
 
Total revenues
$
148,163

 
$
120,491

 
$
378,866

 
$
352,172

 
As of September 30, 2019, 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 (in thousands):

 
For the years ending December 31,
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Revenue expected to be recognized as of September 30, 2019
$
42,364

 
$
124,378

 
$
48,934

 
$
26,598

 
$
242,274


4.
FAIR VALUE MEASUREMENTS
 
Our financial instruments consist of cash and cash equivalents, receivables, payables and debt instruments. We believe that the carrying values of these instruments on the accompanying consolidated balance sheets approximate their fair values.
 
As of September 30, 2019 and December 31, 2018, 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.
 
During the second quarter of 2019 and the first quarter of 2018, we wrote down certain long-lived assets to fair value. Our estimates of fair value required us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain. These assumptions with respect to future circumstances included future oil, coal and natural gas prices, anticipated spending by our customers, the cost of capital, and industry and/or local market conditions. Please see Note 6 – Impairment Charges and Asset Retirement Obligations for further information.

10

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


 
During the third quarter of 2019 and the first and second quarter of 2018, we acquired certain assets and businesses and recorded them at fair value. Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the valuation are based on our best estimates of future sales, earnings and cash flows after considering factors such as general market conditions, expected future customer orders, contracts with suppliers, labor costs, changes in working capital, long term business plans and recent operating performance. Please see Note 7 – Acquisitions for further information. 

5.
DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
 
Additional information regarding selected balance sheet accounts at September 30, 2019 and December 31, 2018 is presented below (in thousands):
 
 
September 30, 2019
 
December 31, 2018
Accounts receivable, net:
 
 
 
Trade
$
70,093

 
$
48,875

Unbilled revenue
36,633

 
21,169

Other
301

 
555

Total accounts receivable
107,027

 
70,599

Allowance for doubtful accounts
(235
)
 
(376
)
Total accounts receivable, net
$
106,792

 
$
70,223


 
September 30, 2019
 
December 31, 2018
Inventories:
 
 
 
Finished goods and purchased products
$
3,737

 
$
2,461

Work in process
1,958

 
945

Raw materials
1,128

 
907

Total inventories
$
6,823

 
$
4,313

 
 
Estimated
Useful Life
(in years)
 
September 30, 2019
 
December 31, 2018
Property, plant and equipment, net:
 
 
 
 
 
 
 
 
 
Land
 
 
 
 
 
 
$
42,054

 
$
46,805

Accommodations assets
3
 
 
15
 
1,638,800

 
1,650,758

Buildings and leasehold improvements
7
 
 
20
 
25,850

 
25,168

Machinery and equipment
4
 
 
15
 
11,465

 
10,693

Office furniture and equipment
3
 
 
7
 
56,055

 
54,459

Vehicles
3
 
 
5
 
14,667

 
14,589

Construction in progress
 
 
 
 
 
 
22,276

 
7,119

Total property, plant and equipment
 
 
 
 
 
 
1,811,167

 
1,809,591

Accumulated depreciation
 
 
 
 
 
 
(1,211,217
)
 
(1,150,686
)
Total property, plant and equipment, net
 
 
 
 
 
 
$
599,950

 
$
658,905

 

11

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


 
September 30, 2019
 
December 31, 2018
Accrued liabilities:
 
 
 
Accrued compensation
$
14,385

 
$
13,545

Accrued taxes, other than income taxes
3,078

 
2,177

Accrued interest
76

 
5

Other
1,816

 
229

Total accrued liabilities
$
19,355

 
$
15,956

 
6.
IMPAIRMENT CHARGES AND ASSET RETIREMENT OBLIGATIONS
 
Quarter ended June 30, 2019. During the second quarter of 2019, we identified indicators that certain long-lived assets in Australia may be impaired due to market developments, including the non-renewal of certain land development approval agreements. We assessed the carrying values of the related assets to determine if they continued to be recoverable based on estimated future cash flows.  Based on the assessment, the carrying values were determined to not be fully recoverable, and we proceeded to compare the estimated fair value of the assets to their respective carrying values. Accordingly, the assets were written down to their estimated fair values of $0.5 million. As a result of the analysis described above, we recorded an impairment expense of $4.5 million.

Additionally, during the second quarter of 2019, we identified a liability related to an asset retirement obligation (ARO) at one of our villages in Australia that should have been recorded in 2011. We determined that the error was not material to our previously issued financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, and therefore, corrected the error in the second quarter of 2019. Specifically, we recorded the following amounts in our second quarter 2019 unaudited consolidated statement of operations related to prior periods: (1) additional accretion expense related to the ARO of $0.9 million, (2) additional depreciation and amortization expense of $0.5 million related to amortization of the related asset retirement cost and (3) additional impairment expense related to the impairment of the asset retirement cost of $1.0 million offset by recognition of an ARO liability totaling $2.3 million as of June 30, 2019.

Quarter ended March 31, 2018. During the first quarter of 2018, we identified an indicator that certain long-lived assets used in the Canadian oil sands may be impaired due to market developments, including expected customer commitments, occurring in the first quarter of 2018. For purposes of our impairment assessment, we separated two lodges that were previously treated as a single asset group due to the lodges no longer being used together to generate joint cash flows. We assessed the carrying value of the asset group to determine if it continued to be recoverable based on estimated future cash flows.  Based on the assessment, the carrying value was determined to not be fully recoverable, and we proceeded to compare the estimated fair value of the asset group to its respective carrying value.  Accordingly, the value of a Canadian lodge was written down to its estimated fair value of zero. As a result of the analysis described above, we recorded an impairment expense of $28.7 million.

7.
ACQUISITIONS

Action

On July 1, 2019, we acquired Action Industrial Catering (Action), located in Perth, Australia. We funded the purchase price of $16.9 million in cash through a combination of cash on hand and borrowings under our revolving credit facility. The acquisition expands our business by providing an entry point into the growing integrated services opportunities in the Western Australian remote mining market. Action's operations are reported as part of our Australian reportable business segment beginning on July 1, 2019, the date of acquisition, which is included in Food service and other services revenues.

This acquisition is accounted for in accordance with the acquisition method of accounting for business combinations, which requires us to record the assets acquired and the liabilities assumed at their fair values at July 1, 2019. Our estimates of the fair value for such assets and liabilities require significant assumptions and judgment. The purchase price allocation is preliminary and remains subject to adjustments, including, but not limited to, adjustments related to final working capital adjustments and the fair value of identifiable intangible assets acquired. Based on the preliminary purchase price allocation, intangible assets acquired totaled $7.8 million and consisted primarily of customer contracts and a trade name. In addition, we recognized goodwill of $8.1 million.


12

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


Noralta
 
Description of Transaction.  On April 2, 2018, we acquired the equity of Noralta Lodge Ltd. (Noralta), located in Alberta, Canada.  The total consideration, which is subject to adjustment in accordance with the terms of the definitive agreement, included (i) C$207.7 million (or approximately US$161.2 million) in cash, subject to customary post-closing adjustments for working capital, indebtedness and transactions expenses, (ii) 32.8 million of our common shares, and (iii) 9,679 Class A Series 1 Preferred Shares (the Preferred Shares) with an initial liquidation preference of $96.8 million and initially convertible into 29.3 million of our common shares. As a result of the Noralta acquisition, we expanded our existing accommodations business in the Canadian oil sands market. We funded the cash consideration with cash on hand and borrowings under our revolving credit facility.

During the first quarter of 2019, $2.1 million in cash was released to us from escrow to cover certain agreed upon indemnification claims.
 
The Noralta acquisition was accounted for in accordance with the acquisition method of accounting for business combinations and, accordingly, the results of operations of Noralta were reported in our financial statements as part of our Canadian reportable business segment beginning on April 2, 2018, the date of acquisition.

Purchase Price Allocation. The application of purchase accounting under ASC 805 requires that the total purchase price be allocated to the fair value of assets acquired and liabilities assumed based on their fair values at April 2, 2018, with amounts exceeding the fair values being recorded as goodwill. The allocation process requires an analysis of acquired fixed assets, contracts, and contingencies to identify and record the fair value of all assets acquired and liabilities assumed. Our allocation of the purchase price, which we finalized in the first quarter of 2019, to specific assets and liabilities is based, in part, upon outside appraisals using customary valuation procedures and techniques. The following table summarizes the fair values of the assets acquired and liabilities assumed at April 2, 2018 (in thousands): 

Cash and cash equivalents
$
24

Accounts receivable (1)
21,456

Inventories
839

Other current assets
4,266

Property, plant and equipment
129,424

Goodwill
123,569

Intangible assets
110,736

Total assets acquired
390,314

 
 
Accounts payable and accrued liabilities
15,023

Income taxes payable
1,038

Other current liabilities
2,027

Deferred income taxes
51,543

Other noncurrent liabilities
5,133

Total liabilities assumed
74,764

Net assets acquired
$
315,550


(1)
The aggregate fair value of the acquired accounts receivable approximated the aggregate gross contractual amount. 

Transaction Costs. During the three months ended September 30, 2018, we recognized $0.5 million of costs in connection with the Noralta acquisition that are included in Service and other costs ($0.2 million) and SG&A expenses ($0.3 million). During the nine months ended September 30, 2018, we recognized $7.0 million of costs in connection with the Noralta acquisition that are included in Service and other costs ($0.3 million) and SG&A expenses ($6.7 million).
 
Acadian Acres
 
On February 28, 2018, we acquired the assets of Lakeland, L.L.C. (Lakeland), located near Lake Charles, Louisiana, for total consideration of $28.0 million, composed of $23.5 million in cash and $4.5 million of our common shares. The asset

13

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


purchase agreement also includes potential future earn-out payments through December 2020 of up to 1.2 million Civeo common shares, based upon satisfaction of certain future revenue targets. The acquisition included a 400 room lodge, 40 acres of land and related assets. We funded the cash consideration with cash on hand. Lakeland’s operations are reported as a new lodge location, Acadian Acres, in our U.S. reportable business segment.
 
This acquisition was accounted for as an asset acquisition based on the principles described in ASC 805, which provides a screen to determine when a set of transferred assets is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similarly identifiable assets, the set of transferred assets is not a business. Accordingly, we allocated the excess consideration over the fair value of the assets acquired to the acquired assets, pro rata, on the basis of relative fair values to increase the related assets acquired. 

8.
ASSETS HELD FOR SALE
 
During the fourth quarter of 2017, we made the decision to dispose of our modular construction and manufacturing plant near Edmonton, Alberta, Canada due to changing geographic and market needs. Accordingly, the facility met the criteria of held for sale. Its estimated fair value (less the cost to sell) exceeded its carrying value. Additionally, we have discontinued depreciation of the facility. The facility is part of our Canadian reportable business segment. 
 
Certain undeveloped land positions in the British Columbia LNG market in our Canadian segment previously met the criteria of held for sale. During the first quarter of 2019, we received $4.0 million in proceeds from the sale of four different land positions. The remaining assets are recorded at the estimated fair value (less costs to sell) of approximately $1.7 million.
 
In addition, as a result of the Noralta acquisition, Noralta’s corporate offices located on two adjacent property titles in Nisku, Alberta, Canada were closed. During the fourth quarter of 2018, we sold one property. The remaining property is recorded at the estimated fair value (less costs to sell) of approximately $1.8 million and was the same value used in the purchase price allocation.
 
The following table summarizes the carrying amount as of September 30, 2019 and December 31, 2018 of the assets classified as held for sale (in thousands):
 
 
September 30, 2019
 
December 31, 2018
Assets held for sale:
 
 
 
Property, plant and equipment, net
$
8,132

 
$
10,297

Total assets held for sale
$
8,132

 
$
10,297



14

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


9.
EARNINGS PER SHARE
 
We calculate basic and diluted earnings per share by applying the two-class method because we have participating securities in the form of Preferred Shares. Participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities. We also apply the treasury stock method with respect to certain share based awards in the calculation of diluted earnings per share, if dilutive.

The calculation of earnings per share attributable to Civeo common shareholders is presented below for the periods indicated (in thousands, except per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to Civeo common shareholders
$
4,532

 
$
(14,250
)
 
$
(28,276
)
 
$
(118,028
)
Less: income allocated to participating securities
(653
)
 

 

 

Basic net income (loss) attributable to Civeo Corporation common shareholders
$
3,879

 
$
(14,250
)
 
$
(28,276
)
 
$
(118,028
)
Add: undistributed income attributable to participating securities
653

 

 

 

Less: undistributed income reallocated to participating securities
(653
)
 

 

 

Diluted net income (loss) attributable to Civeo Corporation common shareholders
$
3,879

 
$
(14,250
)
 
$
(28,276
)
 
$
(118,028
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
167,640

 
165,855

 
166,842

 
154,411

Dilutive shares - share based awards
2

 

 

 

Weighted average shares outstanding - diluted
167,642

 
165,855

 
166,842

 
154,411

 
 
 
 
 
 
 
 
Basic net income (loss) per share attributable to Civeo Corporation common shareholders (1)
$
0.02

 
$
(0.09
)
 
$
(0.17
)
 
$
(0.76
)
 
 
 
 
 
 
 
 
Diluted net income (loss) per share attributable to Civeo Corporation common shareholders (1)
$
0.02

 
$
(0.09
)
 
$
(0.17
)
 
$
(0.76
)
 
(1)
Computations may reflect rounding adjustments.

For the three months ended September 30, 2019, we excluded 6.2 million share based awards from the computation of diluted earnings per share because their effect was anti-dilutive. When an entity has a net loss from continuing operations, it is prohibited from including potential common shares in the computation of diluted per share amounts. For the three months ended September 30, 2018 and the nine months ended September 30, 2019 and 2018, we excluded from the computation of diluted loss per share 10.9 million, 6.9 million and 10.2 million share based awards, respectively, since the effect would have been anti-dilutive. Additionally, for the nine months ended September 30, 2019 and the three and nine months ended September 30, 2018, we excluded from the calculation the impact of converting the Preferred Shares into 28.2 million and 29.6 million common shares, since the effect would have been anti-dilutive.
 



15

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


10.
DEBT
 
As of September 30, 2019 and December 31, 2018, long-term debt consisted of the following (in thousands):
 
 
September 30, 2019
 
December 31, 2018
Canadian term loan, which matures on November 30, 2021 (except for non-extending lenders - see below); 3.125% of aggregate principal repayable per quarter; weighted average interest rate of 5.8% for the nine-month period ended September 30, 2019
$
229,325

 
$
247,910

 
 
 
 
U.S. revolving credit facility, which matures on November 30, 2021 (except for non-extending lenders - see below), weighted average interest rate of 7.5% for the nine-month period ended September 30, 2019

10,000

 

 
 
 
 
Canadian revolving credit facility, which matures on November 30, 2021 (except for non-extending lenders - see below), weighted average interest rate of 6.7% for the nine-month period ended September 30, 2019

152,530

 
114,348

 
 
 
 
Australian revolving credit facility, which matures on November 30, 2021 (except for non-extending lenders - see below), weighted average interest rate of 5.4% for the nine-month period ended September 30, 2019

1,688

 
16,918

 
393,543

 
379,176

Less: Unamortized debt issuance costs
2,467

 
2,939

Total debt
391,076

 
376,237

Less: Current portion of long-term debt, including unamortized debt issuance costs, net
34,372

 
33,329

Long-term debt, less current maturities
$
356,704

 
$
342,908

 
We did not have any capitalized interest to net against interest expense for the three or nine months ended September 30, 2019 or 2018.
 
Amended Credit Agreement
 
As of December 31, 2018, our Credit Agreement, as then amended, provided for: (i) a $239.5 million revolving credit facility scheduled to mature on November 30, 2020, allocated as follows: (A) a $20.0 million senior secured revolving credit facility in favor of certain of our U.S. subsidiaries, as borrowers; (B) a $159.5 million senior secured revolving credit facility in favor of Civeo and certain of our Canadian subsidiaries, as borrowers; and (C) a $60.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower; and (ii) a $285.4 million term loan facility scheduled to mature on November 30, 2020 in favor of Civeo.

On September 30, 2019, the second amendment to the Credit Agreement (as so amended, the Amended Credit Agreement) became effective, which, among other things:


16

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


increased the aggregate revolving loan commitments by $24.0 million under the Amended Credit Agreement, to a maximum principal amount of $183.5 million under the Canadian revolving credit facility until November 30, 2020, which will be reduced thereafter as described below;

extended the maturity date of the commitments and loans of certain lenders to November 30, 2021. Two lenders did not extend the maturity date of their commitments and loans. One non-extending lender has outstanding Canadian term loans of $6.9 million, a Canadian revolving commitment of $15.7 million and an Australian revolving commitment of $10.4 million that matures on November 30, 2020. The other non-extending lender has a U.S. revolving commitment of $7.4 million and a Canadian revolving commitment of $22.5 million that matures on November 30, 2020; and

adjusted the maximum leverage ratio financial covenant as follows:

If a qualified offering of indebtedness with gross proceeds in excess of $150 million has been consummated, a maximum leverage ratio of 4.00 to 1.00 and, if such qualified offering has not been consummated, a maximum leverage ratio not to exceed the ratios set forth in the following table:

Period Ended
Maximum Leverage Ratio
September 30, 2019
4.25 : 1:00
December 31, 2019
4.00 : 1:00
March 31, 2020, June 30, 2020 & September 30, 2020
3:75 : 1:00
December 31, 2020 & thereafter
3.50 : 1:00

U.S. dollar amounts outstanding under the facilities provided by the Amended Credit Agreement bear interest at a variable rate equal to LIBOR plus a margin of 2.25% to 4.00%, or a base rate plus 1.25% to 3.00%, in each case based on a ratio of our total debt to consolidated EBITDA (as defined in the Amended Credit Agreement). Canadian dollar amounts outstanding bear interest at a variable rate equal to a B/A Discount Rate based on the Canadian Dollar Offered Rate plus a margin of 2.25% to 4.00%, or a Canadian Prime rate plus a margin of 1.25% to 3.00%, in each case based on a ratio of our total debt to consolidated EBITDA. Australian dollar amounts outstanding under the Amended Credit Agreement bear interest at a variable rate equal to the Bank Bill Swap Bid Rate plus a margin of 2.25% to 4.00%, based on a ratio of our total debt to consolidated EBITDA.
 
The Amended 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 an interest coverage ratio, defined as the ratio of consolidated EBITDA to consolidated interest expense, of at least 3.0 to 1.0 and our maximum leverage ratio, defined as the ratio of total debt to consolidated EBITDA, of no greater than 4.25 to 1.0 (as of September 30, 2019).  As noted above, the permitted maximum leverage ratio changes over time.  Following a qualified offering of indebtedness with gross proceeds in excess of $150 million, we will be required to maintain a maximum senior secured ratio less than 2.50 to 1.0. Each of the factors considered in the calculations of these ratios are defined in the Amended 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, 2019.
 
Borrowings under the Amended Credit Agreement are secured by a pledge of substantially all of our assets and the assets of our subsidiaries. The obligations under the Amended Credit Agreement are guaranteed by our significant subsidiaries. As of September 30, 2019, we have ten lenders that were parties to the Amended Credit Agreement, with total commitments (including both revolving commitments and term commitments) ranging from $24.9 million to $85.4 million. As of September 30, 2019, we had outstanding letters of credit of $0.3 million under the U.S. facility, $0.5 million under the Australian facility and $1.2 million under the Canadian facility. 


17

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


11.
INCOME 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 primarily in three jurisdictions, Canada, Australia and the U.S., where statutory tax rates range from 21% to 30%. 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, 2019, the U.S. was considered a loss jurisdiction for tax accounting purposes and has been removed from the 2019 annual effective tax rate computation for purposes of computing the interim tax provision. As of September 30, 2018, the U.S. and Australia were considered loss jurisdictions for tax accounting purposes and were removed from the 2018 annual effective tax rate computation for purposes of computing the interim tax provision.
 
Our income tax benefit for the nine months ended September 30, 2019 totaled $14.0 million, or 34.2% of pretax loss, compared to a benefit of $29.4 million, or 30.0% of pretax loss, for the nine months ended September 30, 2018. Our effective tax rate for the nine months ended September 30, 2019 and 2018 was reduced approximately 3% and 5%, respectively, by the exclusion of loss jurisdictions for purposes of computing the interim tax provision. For the nine months ended September 30, 2019, the U.S. was considered a loss jurisdiction while for the nine months ended September 30, 2018, Australia and the U.S. were considered loss jurisdictions. Additionally, the effective tax rate for the three and nine months ended September 30, 2019 was impacted by a tax benefit of$3.0 million related to a reduction in the Alberta, Canada income tax rate, as well as, a $2.1 million tax benefit related to the change in the valuation allowance in Australia resulting from the acquisition of Action. The effective tax rate for the nine months ended September 30, 2018 was impacted by a tax benefit of $4.9 million that was recorded in the second quarter 2018 to reverse a valuation allowance previously recorded in Canada.

Our income tax benefit for the three months ended September 30, 2019 totaled $6.6 million, or 421.4% of pretax income, compared to a benefit of $5.3 million, or 28.2% of pretax loss, for the three months ended September 30, 2018. As discussed above, our effective tax rate for the three months ended September 30, 2019 was impacted by a reduction in the Alberta, Canada income tax rate, as well as, a change in the valuation allowance in Australia resulting from the acquisition of Action. Our effective rate in 2018 was impacted by the relative mix of losses between Canada, Australia and the U.S., as Australia and the U.S., for purposes of computing the interim tax provision, are considered loss jurisdictions for tax accounting purposes. Under ASC 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.

12.
COMMITMENTS AND CONTINGENCIES
 
We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including warranty and product liability claims as a result of our products or operations. Although we can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on us, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. 

13.
ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Our accumulated other comprehensive loss increased $5.6 million from $371.2 million at December 31, 2018 to $376.9 million at September 30, 2019, as a result of foreign currency exchange rate fluctuations. Changes in other comprehensive loss during the first nine months of 2019 were primarily driven by the Australian dollar decreasing in value compared to the U.S. dollar, partially offset by the Canadian dollar increasing in value compared to the U.S. dollar. Excluding intercompany balances, our Canadian dollar and Australian dollar functional currency net assets totaled approximately C$0.3 billion and
A$0.4 billion, respectively, at September 30, 2019. 


18

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


14.
LEASES

We have operating leases covering certain land locations and various office facilities and equipment in our three reportable business segments. Our leases have remaining lease terms of one year to nine years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 90 days.

The components of lease expense were $1.9 million and $1.8 million under operating leases during the three months ended September 30, 2019 and 2018, respectively. The components of lease expense were $5.6 million and $4.6 million under operating leases during the nine months ended September 30, 2019 and 2018, respectively. Included in the measurement of lease liabilities, we paid $1.9 million and $5.4 million in cash related to operating leases during the three and nine months ended September 30, 2019, respectively. Right-of-use assets obtained in exchange for new lease obligations related to operating leases during the three and nine months ended September 30, 2019 were zero and $3.4 million, respectively.

Supplemental balance sheet information related to leases were as follows (in thousands):

 
September 30, 2019
Operating leases
 
Operating lease right-of-use assets
$
25,034

 
 
Other current liabilities
$
5,866

Operating lease liabilities
20,992

Total operating lease liabilities
$
26,858

 
 
Weighted average remaining lease term
 
Operating leases
6.2 years

Weighted average discount rate
 
Operating leases
5.9
%

Maturities of operating lease liabilities at September 30, 2019, were as follows (in thousands):

For the years ending December 31,
 
2019
$
1,901

2020
6,987

2021
4,975

2022
3,893

2023
3,238

Thereafter
11,222

Total lease payments
32,216

Less imputed interest
5,358

Total
$
26,858


15.
SHARE-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 of Directors and the Compensation Committee of our Board of Directors 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 18.7 million Civeo common shares may be awarded under the Civeo Plan.
 
Outstanding Awards
 
Options. Compensation expense associated with options recognized in the three and nine month periods ended September 30, 2019 and 2018 totaled zero and less than $0.1 million, respectively. There was no unrecognized compensation cost related to options.

19

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


 
Restricted Share / Deferred Share Awards. On February 25, 2019, we granted 1,251,353 restricted share awards and deferred share awards under the Civeo Plan, which vest in three equal annual installments beginning on February 25, 2020. On May 16, 2019, we granted 449,100 restricted share awards and deferred share awards to our non-employee directors, which vest in their entirety on May 16, 2020.
 
Compensation expense associated with restricted share awards and deferred share awards recognized in the three months ended September 30, 2019 and 2018 totaled $1.5 million and $1.6 million, respectively. Compensation expense associated with restricted share awards and deferred share awards recognized in the nine months ended September 30, 2019 and 2018 totaled $4.3 million and $4.4 million, respectively. The total fair value of restricted share awards and deferred share awards that vested during the three months ended September 30, 2019 and 2018 was less than $0.1 million and $0.1 million, respectively.  The total fair value of restricted share awards and deferred share awards that vested during the nine months ended September 30, 2019 and 2018 was $4.0 million and $3.4 million, respectively.  
 
At September 30, 2019, unrecognized compensation cost related to restricted share awards and deferred share awards was $6.8 million, which is expected to be recognized over a weighted average period of 1.6 years.
 
Phantom Share Awards. On February 25, 2019, we granted 1,144,407 phantom share awards under the Civeo Plan, which vest in three equal annual installments beginning on February 25, 2020. We also granted 270,870 phantom share awards under the Canadian Long-Term Incentive Plan, which vest in three equal annual installments beginning on February 25, 2020.

During the three months ended September 30, 2019 and 2018, we recognized compensation expense associated with phantom shares totaling $0.1 million and $2.1 million, respectively. During the nine months ended September 30, 2019 and 2018, we recognized compensation expense associated with phantom shares totaling $3.5 million and $8.2 million, respectively. At September 30, 2019, unrecognized compensation cost related to phantom shares was $1.5 million, as remeasured at September 30, 2019, which is expected to be recognized over a weighted average period of 2.3 years.
 
Performance Awards. On February 25, 2019, we granted 1,184,599 performance awards under the Civeo Plan, which cliff vest in three years on February 25, 2022. These awards will be earned in amounts between 0% and 200% of the participant’s target performance share award, based on the payout percentage associated with Civeo’s relative total shareholder return rank among a peer group that includes 17 other companies.  
 
During the three months ended September 30, 2019 and 2018, we recognized compensation expense associated with performance awards totaling $1.1 million and $1.2 million, respectively. During the nine months ended September 30, 2019 and 2018, we recognized compensation expense associated with performance awards totaling $3.3 million and $3.4 million, respectively. The total fair value of performance share awards that vested during the three and nine months ended September 30, 2019 was zero and $10.1 million.

At September 30, 2019, unrecognized compensation cost related to performance shares was $6.1 million, which is expected to be recognized over a weighted average period of 1.9 years


20

CIVEO CORPORATION
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)


16.
SEGMENT AND RELATED INFORMATION
 
In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, we have identified the following reportable segments: Canada, Australia and U.S., which represent our strategic focus on hospitality services.
 
Financial information by business segment for each of the three and nine months ended September 30, 2019 and 2018 is summarized in the following table (in thousands):
 
 
Total
Revenues
 
Depreciation
and
amortization
 
Operating
income
(loss)
 
Capital
expenditures
 
 
Total assets
Three months ended September 30, 2019
 
 
 
 
 
 
 
 
 
Canada
$
91,071

 
$
18,219

 
$
2,919

 
$
2,851

 
$
843,818

Australia
47,743

 
9,576

 
4,662

 
675

 
279,386

United States
9,349

 
1,611

 
(2,167
)
 
576

 
51,376

Corporate and eliminations

 
1,790

 
(2,538
)
 
207

 
(163,757
)
Total
$
148,163

 
$
31,196

 
$
2,876

 
$
4,309

 
$
1,010,823

 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
Canada
$
76,753

 
$
19,198

 
$
(7,603
)
 
$
1,198

 
$
870,701

Australia
31,090

 
8,842

 
472

 
958

 
301,340

United States
12,648

 
3,015

 
(1,349
)
 
270

 
58,574

Corporate and eliminations

 
3,413

 
(4,415
)
 
297

 
(131,979
)
Total
$
120,491

 
$
34,468

 
$
(12,895
)
 
$
2,723

 
$
1,098,636

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2019
 
 
 
 
 
 
 
 
 
Canada
$
235,943

 
$
50,574

 
$
(14,437
)
 
$
19,294

 
$
843,818

Australia
107,160

 
29,401

 
(1,302
)
 
2,508

 
279,386

United States
35,763

 
7,713

 
(4,484
)
 
2,870

 
51,376

Corporate and eliminations

 
5,286

 
(6,850
)
 
845

 
(163,757
)
Total
$
378,866

 
$
92,974

 
$
(27,073
)
 
$
25,517

 
$
1,010,823

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
Canada
$
226,661

 
$
54,954

 
$
(55,342
)
 
$
3,679

 
$
870,701

Australia
89,542

 
30,608

 
(3,793
)
 
2,028

 
301,340

United States
35,969

 
7,482

 
(6,445
)
 
2,168

 
58,574

Corporate and eliminations

 
6,458

 
(15,331
)
 
791

 
(131,979
)
Total
$
352,172

 
$
99,502

 
$
(80,911
)
 
$
8,666

 
$
1,098,636








21



Cautionary Statement Regarding Forward-Looking Statements
 
This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. 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 factors expected to impact supply and demand, as well as our expectations about capital expenditures in 2019 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 important factors. For a discussion of known material factors that could affect our results, please refer to “Risk Factors,” “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, 2018 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.

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 oil sands and coal mines and associated infrastructure, as well as the exploration for oil and natural gas. Long-term demand for our services has been driven by continued development and expansion of natural resource production and operation of oil sands and mining facilities. In general, industry capital spending programs are based on the outlook for commodity prices, economic growth, global commodity supply/demand dynamics and estimates of resource production. As a result, demand for our hospitality services is largely sensitive to expected commodity prices, principally related to crude oil and metallurgical (met) coal.
 
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) and recent actions by the Alberta provincial government to limit oil production from the province. Historically, WCS has traded at a discount to WTI, creating a “WCS Differential,” due to transportation costs and limited capacity 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.

During the first quarter of 2016, global oil prices dropped to their lowest levels in over ten years due to concerns over global oil demand, global crude inventory levels, worldwide economic growth and price cutting by major oil producing countries, such as Saudi Arabia. Increasing global supply, including increased U.S. shale oil production, also negatively impacted pricing. Although prices began to increase in 2016 and continued to increase through the third quarter of 2018 due to

22



global oil production cuts rebalancing supply/demand dynamics, oil prices decreased again during the fourth quarter of 2018 as OPEC oil production ramped up once again despite more concerns of decreasing global oil demand. In the first half of 2019, positive oil price trends are primarily related to OPEC oil production falling faster than the markets expected, leading to a more positive oil environment throughout the first half of the year. Oil prices have fallen since early summer due to continued demand growth volatility and fear of a global economic slowdown.

WCS prices in the third quarter of 2019 averaged $43.88 per barrel compared to a low of $20.26 in the first quarter of 2016 and a high of $49.93 in the second quarter of 2018. The WCS Differential decreased from $15.75 per barrel at the end of the fourth quarter of 2018 to $12.62 at the end of the third quarter 2019. On December 2, 2018, the Government of Alberta announced it would mandate temporary curtailments of the province’s oil production and has extended the curtailment through 2020. This curtailment resulted in a narrowing WCS Differential in December 2018, which ended the year at $15.75 per barrel, that has continued throughout 2019. As of October 21, 2019, the WTI price was $53.31 and the WCS price was $36.68, resulting in a WCS Differential of $16.63.
 
There remains a risk that prices for Canadian oil sands crude oil related products could deteriorate for an extended period of time, and the discount between WCS crude prices and WTI crude prices could widen. The depressed price levels through the first quarter of 2016 negatively impacted exploration, development, maintenance and production spending and activity by Canadian operators and, therefore, demand for our hospitality services. Although we have seen an increase in oil prices since late 2016 through the third quarter of 2019, we are not expecting significant improvement in customer activity in the near-term, partially due to the volatility in the WCS Differential discussed above. The current outlook for expansionary projects in Canada is primarily related to proposed pipeline and in-situ oil sands projects. However, continued uncertainty and commodity price volatility and regulatory complications could cause our Canadian oil sands and pipeline customers to delay expansionary and maintenance spending and defer additional investments in their oil sands assets. Additionally, if oil prices decline, the resulting impact could negatively affect the value of our long-lived assets, including goodwill.

Our Sitka Lodge, within our Canadian business, supports the British Columbia liquefied natural gas (LNG) market and related pipeline projects. From a macroeconomic standpoint, global LNG imports set a record in 2018, reaching 308 million tonnes per annum, up from 284 million tonnes per annum in 2017, 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. Accordingly, the current view is additional investment in LNG supply will be needed to meet the expected long-term LNG demand growth.

Currently, Western Canada does not have any operational LNG export facilities. On October 1, 2018, LNG Canada (LNGC), a large LNG export project proposed by a joint venture between Shell Canada Energy, an affiliate of Royal Dutch 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), announced that a positive final investment decision (FID) had been reached on the proposed Kitimat liquefaction and export facility in Kitimat, British Columbia (Kitimat LNG Facility). With the project moving forward, British Columbia LNG activity and related pipeline projects could become a material driver of future activity for our Sitka Lodge, as well as for our mobile fleet assets, which are well suited for the related pipeline construction activity.

Our U.S. business supports oil shale drilling and completion activity and is primarily tied to WTI oil prices in the U.S. shale formations in West Texas, the mid Continent, the Bakken and the Rockies.  With the recovery in oil prices through the third quarter of 2018, coupled with ample capital availability for U.S. E&P companies, oil shale drilling and completion activity in the U.S. significantly increased in 2018.  The U.S. oil rig count has increased from its low of 316 rigs in May 2016 to over 885 during 2018, and 713 rigs were active at the end of the third quarter of 2019.  Further, this activity in the U.S. increased oil production from an average of 9.3 million barrels per day in 2017 to an average of 11.0 million barrels per day in 2018 and a year-to-date average of 11.9 million barrels per day through July 2019. With the fall in WTI oil prices in the fourth quarter of 2018 and a call by investors for U.S. E&P companies to generate free cash flow, the U.S. rig count has drifted lower. As of October 18, 2019, there were 713 active oil rigs in the U.S. (as measured by Bakerhughes.com).  U.S. oil shale drilling and completion activity will continue to be dependent on sustained higher WTI oil prices, pipeline capacity and sufficient capital to support E&P drilling and completion plans.

In Australia, approximately 80% of our rooms are located in the Bowen Basin 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 levels of global steel production, which increased by 4.4% during the first eight months of 2019 compared to the corresponding period in 2018. 

23



As of October 21, 2019, met coal spot prices were $153.95 per metric tonne. Current met coal pricing levels have not led our customers to approve many significant new projects.  We expect that customers will look for a period of sustained higher prices before the volume of new projects being approved increases.  Long-term demand for steel is expected to be driven by increased steel consumption per capita in developing economies, such as China and India, whose current consumption per capita is a fraction of developed countries.

On July 1, 2019, we completed the acquisition of Action Industrial Catering (Action), a provider of catering and managed services to the remote mining industry in Western Australia. The acquisition enhances our service offering, geographic footprint and exposure to new commodities in Australia and underlines our focus on pursuing growth opportunities that fit within our core competencies and strategic direction. Activity in Western Australia is driven primarily by iron ore production, which is a key steelmaking ingredient.  As of October 17, 2019, iron ore spot prices were $90.01 per metric tonne.

Recent WTI crude, WCS crude and met coal pricing trends are as follows:
 
 
 
Average Price (1)
Quarter
ended
 
WTI
Crude
(per bbl)
 
WCS
Crude
(per bbl)
 
Hard
Coking Coal
(Met Coal)
(per tonne)
Fourth Quarter through 10/21/2019
 
$
53.23

 
$
37.68

 
$
178.00

9/30/2019
 
56.40

 
43.88

 
178.00

6/30/2019
 
59.89

 
47.39

 
207.00

3/31/2019
 
54.87

 
44.49

 
210.00

12/31/2018
 
59.32

 
25.66

 
187.00

9/30/2018
 
69.61

 
41.58

 
196.00

6/30/2018
 
67.97

 
49.93

 
196.00

3/31/2018
 
62.89

 
37.09

 
235.00

12/31/2017
 
55.28

 
38.65

 
192.00

9/30/2017
 
48.16

 
37.72

 
170.00

6/30/2017
 
48.11

 
38.20

 
193.50

3/31/2017
 
51.70

 
38.09

 
285.00

12/31/2016
 
49.16

 
34.34

 
200.00

9/30/2016
 
44.88

 
30.67

 
92.50

                          
(1)
Source: WTI crude prices are from U.S. Energy Information Administration (EIA), and WCS crude prices and Seaborne hard coking coal contract prices are from Bloomberg.

Overview
 
As noted above, demand for our hospitality services is primarily tied to the outlook for crude oil and met coal prices. 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.
 
Our business is predominantly located in northern Alberta, Canada and Queensland, Australia, and we derive most of our business from natural resource companies who are developing and producing oil sands and met coal resources and, to a lesser extent, other hydrocarbon and mineral resources. More than 75% of our revenue is generated by our lodges and villages. 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-day basis that covers lodging and meals and is based on the duration of customer needs, which can range from several weeks to several years.
 
Generally, our customers are making multi-billion dollar investments to develop their prospects, which have estimated reserve lives ranging from ten years to in excess of 30 years. Consequently, these investments are dependent on those customers’ long-term views of commodity demand and prices.
 

24



During the period of low crude oil prices that extended through the first quarter of 2016, many of our customers in Canada curtailed their operations and spending, and most major oil sands mining operators began reducing their costs and limiting capital spending, thereby limiting the demand for hospitality services of the kind we provide.