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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, 2018
 
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: 001-16337
 
OIL STATES INTERNATIONAL, INC.
______________
(Exact name of registrant as specified in its charter)
Delaware
76-0476605
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
Three Allen Center, 333 Clay Street, Suite 4620,
77002
Houston, Texas
(Zip Code)
(Address of principal executive offices)
 
(713) 652-0582
(Registrant’s telephone number, including area code)
 
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 “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
[X]
 
Accelerated filer
[   ]
 
 
 
 
 
Non-accelerated filer
[   ]
 
Smaller reporting company
[   ]
 
 
 
 
 
 
 
 
Emerging growth 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]
 
As of October 29, 2018, the number of shares of common stock outstanding was 59,978,949.



OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
 
Page No.
Part I -- FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1. Financial Statements:
 
 
 
 
 
 
 
Condensed Consolidated Financial Statements
 
 
 
Unaudited Consolidated Statements of Operations
Unaudited Consolidated Statements of Comprehensive Loss
Consolidated Balance Sheets
Unaudited Consolidated Statement of Stockholders’ Equity
Unaudited Consolidated Statements of Cash Flows
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
 
Cautionary Statement Regarding Forward-Looking Statements
 
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 4. Controls and Procedures
 
 
 
 
Part II -- OTHER INFORMATION
 
 
 
 
 
 
 
Item 1. Legal Proceedings
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
Item 5. Other Information
 
 
 
 
Item 6. Exhibits
 
 
 
 
Signature Page

2


PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Products
$
120,271

 
$
67,339

 
$
385,279

 
$
223,269

Services
154,323

 
96,709

 
428,736

 
263,648

 
274,594

 
164,048

 
814,015

 
486,917

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Product costs
87,822

 
50,593

 
276,122

 
160,252

Service costs
127,836

 
78,596

 
342,829

 
219,697

Cost of revenues (exclusive of depreciation and amortization expense presented below)
215,658

 
129,189

 
618,951

 
379,949

Selling, general and administrative expense
32,285

 
26,843

 
102,399

 
84,055

Depreciation and amortization expense
30,586

 
26,788

 
90,698

 
82,552

Other operating (income) expense, net
(213
)
 
(589
)
 
(2,097
)
 
374

 
278,316

 
182,231

 
809,951

 
546,930

Operating income (loss)
(3,722
)
 
(18,183
)
 
4,064

 
(60,013
)
 
 
 
 
 
 
 
 
Interest expense
(4,913
)
 
(1,147
)
 
(14,359
)
 
(3,370
)
Interest income
70

 
73

 
272

 
243

Other income
709

 
207

 
1,927

 
477

Loss before income taxes
(7,856
)
 
(19,050
)
 
(8,096
)
 
(62,663
)
Income tax benefit
3,837

 
4,019

 
3,327

 
15,708

Net loss
$
(4,019
)
 
$
(15,031
)
 
$
(4,769
)
 
$
(46,955
)
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.07
)
 
$
(0.30
)
 
$
(0.08
)
 
$
(0.94
)
Diluted
(0.07
)
 
(0.30
)
 
(0.08
)
 
(0.94
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
59,026

 
49,978

 
58,606

 
50,190

Diluted
59,026

 
49,978

 
58,606

 
50,190

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

3


OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(4,019
)
 
$
(15,031
)
 
$
(4,769
)
 
$
(46,955
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments
(2,539
)
 
4,857

 
(11,238
)
 
13,490

Comprehensive loss
$
(6,558
)
 
$
(10,174
)
 
$
(16,007
)
 
$
(33,465
)
 
The accompanying notes are an integral part of these financial statements.

4


OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
 
September 30,
2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
36,261

 
$
53,459

Accounts receivable, net
296,713

 
216,139

Inventories, net
210,783

 
168,285

Prepaid expenses and other current assets
21,872

 
18,054

Total current assets
565,629

 
455,937

 
 
 
 
Property, plant, and equipment, net
544,653

 
498,890

Goodwill, net
656,753

 
268,009

Other intangible assets, net
247,876

 
50,265

Other noncurrent assets
29,885

 
28,410

Total assets
$
2,044,796

 
$
1,301,511

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capitalized leases
$
25,535

 
$
411

Accounts payable
78,621

 
49,089

Accrued liabilities
65,700

 
45,889

Income taxes payable
2,514

 
1,647

Deferred revenue
13,489

 
18,234

Total current liabilities
185,859

 
115,270

 
 
 
 
Long-term debt and capitalized leases
328,876

 
4,870

Deferred income taxes
54,141

 
24,718

Other noncurrent liabilities
26,245

 
23,940

Total liabilities
595,121

 
168,798

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $.01 par value, 200,000,000 shares authorized, 71,767,764 shares and 62,721,698 shares issued, respectively
718

 
627

Additional paid-in capital
1,091,663

 
754,607

Retained earnings
1,043,854

 
1,048,623

Accumulated other comprehensive loss
(69,731
)
 
(58,493
)
Treasury stock, at cost, 11,784,242 and 11,632,276 shares, respectively
(616,829
)
 
(612,651
)
Total stockholders’ equity
1,449,675

 
1,132,713

Total liabilities and stockholders’ equity
$
2,044,796

 
$
1,301,511

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

5


OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Stockholders'
Equity
Balance, December 31, 2017
$
627

 
$
754,607

 
$
1,048,623

 
$
(58,493
)
 
$
(612,651
)
 
$
1,132,713

Net loss

 

 
(4,769
)
 

 

 
(4,769
)
Currency translation adjustments (excluding intercompany advances)

 

 

 
(9,053
)
 

 
(9,053
)
Currency translation adjustments on intercompany advances

 

 

 
(2,185
)
 

 
(2,185
)
Stock-based compensation expense:
 
 
 
 
 
 
 
 
 
 
 
Restricted stock
4

 
16,154

 

 

 

 
16,158

Stock options

 
396

 

 

 

 
396

Issuance of common stock in connection with GEODynamics acquisition
87

 
294,823

 

 

 

 
294,910

Issuance of 1.50% convertible senior notes, net of income taxes of $7,744

 
25,683

 

 

 

 
25,683

Surrender of stock to settle taxes on restricted stock awards

 

 

 

 
(4,178
)
 
(4,178
)
Balance, September 30, 2018
$
718

 
$
1,091,663

 
$
1,043,854

 
$
(69,731
)
 
$
(616,829
)
 
$
1,449,675

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

6


OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(4,769
)
 
$
(46,955
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
90,698

 
82,552

Stock-based compensation expense
16,554

 
17,023

Amortization of debt discount and deferred financing costs
5,504

 
608

Deferred income tax expense (benefit)
1,061

 
(2,224
)
Provision for bad debt
1,083

 
257

Gain on disposals of assets
(5,046
)
 
(526
)
Other, net
(92
)
 
62

Changes in operating assets and liabilities, net of effect from acquired businesses:
 
 
 
Accounts receivable
(25,454
)
 
26,909

Inventories
(7,867
)
 
5,912

Accounts payable and accrued liabilities
18,311

 
11,811

Income taxes payable
524

 
(4,789
)
Other operating assets and liabilities, net
(10,406
)
 
(14,323
)
Net cash flows provided by operating activities
80,101

 
76,317

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures (see Note 14)
(71,286
)
 
(20,331
)
Acquisitions of businesses, net of cash acquired
(379,676
)
 
(12,859
)
Proceeds from disposition of property, plant and equipment
1,812

 
1,125

Proceeds from flood insurance claims
3,589

 

Other, net
(1,218
)
 
(631
)
Net cash flows used in investing activities
(446,779
)
 
(32,696
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of 1.50% convertible senior notes
200,000

 

Revolving credit facility borrowings
769,147

 
167,183

Revolving credit facility repayments
(608,565
)
 
(193,761
)
Other debt and capital lease repayments, net
(405
)
 
(403
)
Payment of financing costs
(7,368
)
 

Purchase of treasury stock

 
(16,283
)
Shares added to treasury stock as a result of net share settlements
due to vesting of restricted stock
(4,178
)
 
(5,305
)
Net cash flows provided by (used in) financing activities
348,631

 
(48,569
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
849

 
2,012

Net change in cash and cash equivalents
(17,198
)
 
(2,936
)
Cash and cash equivalents, beginning of period
53,459

 
68,800

Cash and cash equivalents, end of period
$
36,261

 
$
65,864

 
 
 
 
Cash paid for:
 
 
 
Interest
$
7,730

 
$
3,448

Income taxes, net of refunds
2,369

 
8,590

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

7

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

 
1.
Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Oil States International, Inc. and its subsidiaries (referred to in this report as “we” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year. Certain prior-year amounts in the Company’s unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.
The preparation of condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Our industry is cyclical and this cyclicality impacts our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows including our determination of whether a decline in value of our long-lived assets, including definite-lived intangibles, and/or goodwill has occurred.
The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10‑K”).
2.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
In May 2014, the FASB issued guidance on revenue from contracts with customers that superseded most then-current revenue recognition guidance, including industry-specific guidance (often referred to as "ASC 606"). The underlying principle is that an entity recognizes revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to receive in exchange for those goods or services. The Company adopted this guidance on January 1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of that date. On January 1, 2018, we were required to recognize any cumulative effect of adopting this guidance as an adjustment to our opening balance of retained earnings. Prior periods were not retrospectively adjusted. Based on our analysis of existing contracts with customers, the Company concluded the cumulative impact of the new standard was not material to our consolidated financial statements through January 1, 2018. In accordance with the guidance, we have expanded our revenue recognition disclosures to address the new qualitative and quantitative requirements. See Note 12, "Segments, Revenue Recognition and Related Information."
In February 2016, the FASB issued guidance on leases which, as amended, introduces the recognition of lease assets and lease liabilities by lessees for all leases which are not short-term in nature. In connection with the required adoption of this guidance on January 1, 2019, the Company will use the optional transition method of recognizing any cumulative effect of adopting this guidance as an adjustment to our opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Company is evaluating various specific other implementation options allowed under the standard and is populating its lease portfolio into a software system to meet the reporting requirements of this standard. The Company believes the key change upon adoption will be the balance sheet recognition of our operating leases when the Company is the lessee. The income statement recognition appears similar to the Company's current methodology.

8

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

3.
Business Acquisitions, Goodwill and Other Intangible Assets
GEODynamics Acquisition
On January 12, 2018, the Company acquired GEODynamics, Inc. ("GEODynamics") for a purchase price consisting of (i) $295.4 million in cash (net of cash acquired), which we funded through borrowings under the Company's Revolving Credit Facility (as defined in Note 6, "Long-term Debt"), (ii) approximately 8.66 million shares of the Company's common stock (having a market value of approximately $295 million as of the closing date of the acquisition) and (iii) an unsecured $25 million promissory note that bears interest at 2.5% per annum and matures on July 12, 2019 (the “GEODynamics Acquisition”). Under the terms of the purchase agreement, the Company may be entitled to indemnification in respect of certain matters occurring prior to acquisition and amounts payable under the promissory note may be subject to set-off, in part or in full, in respect of such indemnified matters. See Note 13, "Commitments and Contingencies."
GEODynamics’ results of operations have been included in the Company’s financial statements subsequent to the closing of the acquisition on January 12, 2018. The acquired GEODynamics operations, reported as the Downhole Technologies segment, contributed revenues of $161.6 million and operating income of $26.1 million for the period from January 12, 2018 through September 30, 2018. See Note 12, "Segments, Revenue Recognition and Related Information" for further information with respect to the Downhole Technologies segment operations.
With respect to the approximately 8.66 million shares of the Company's common stock issued in the GEODynamics Acquisition, the Company also entered into a registration rights agreement. The Company filed a shelf registration statement for the resale of shares in accordance with the agreement on January 19, 2018 and the selling stockholder sold approximately 5.93 million shares of the Company's common stock through an underwritten offering in late February 2018. As of September 30, 2018, the Company does not expect to have any further material obligations under the registration rights agreement.
Falcon Acquisition
On February 28, 2018, the Company acquired Falcon Flowback Services, LLC (“Falcon”), a full service provider of flowback and well testing services for the separation and recovery of fluids, solid debris and proppant used during hydraulic fracturing operations. Falcon provides additional scale and diversity to our Completion Services well testing operations in key shale plays in the United States. The purchase price was $84.2 million (net of cash acquired), which is subject to customary post-closing purchase price adjustments. The Falcon acquisition was funded by borrowings under the Company's Amended Revolving Credit Facility (as defined in Note 6, "Long-term Debt"). Under the terms of the purchase agreement, the Company may be entitled to indemnification in respect of certain matters occurring prior to acquisition. Falcon’s results of operations have been included in the Company’s financial statements and has been reported within the Completion Services business subsequent to the closing of the acquisition on February 28, 2018.
Transaction-Related Costs
During the nine months ended September 30, 2018, the Company expensed transaction-related costs of $2.6 million, which are included within selling, general and administrative expense and within other operating income. No material transaction-related costs were incurred during the three months ended September 30, 2018.

9

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

The GEODynamics and Falcon acquisitions have been accounted for using the acquisition method of accounting. The following table summarizes the Company's preliminary estimates of the fair value of assets acquired and liabilities assumed in the acquisitions, as of their respective dates of acquisitions (in thousands):
 
GEODynamics
 
Falcon
 
Accounts receivable, net
$
37,282

 
$
21,180

 
Inventories
36,135

 
242

 
Property, plant and equipment
25,769

 
30,000

 
Intangible assets
 
 
 
 
Customer relationships
100,000

 
13,500

 
Patents/Technology/Know-how
47,000

 

 
Tradenames
34,000

 
1,500

 
Noncompete agreements
18,000

 
1,100

 
Other assets
1,627

 
664

 
Accounts payable and accrued liabilities
(21,174
)
 
(10,200
)
 
Deferred income taxes
(23,627
)
(a)

 
Other liabilities
(2,276
)
 
(167
)
 
Total identifiable net assets
252,736

 
57,819

 
Goodwill
362,604

(b)
26,427

(c)
Total net assets
$
615,340

 
$
84,246

 
Consideration consists of:
 
 
 
 
Cash, net of cash acquired
$
295,430

 
$
84,246

 
Oil States common stock
294,910

 

 
Promissory note
25,000

 

 
Total consideration
$
615,340

 
$
84,246

 
Intangible asset weighted-average useful lives (years):
 
 
 
 
Customer relationships
20
 
15
 
Patents/Technology/Know-how
17
 
n.a.
 
Tradenames
20
 
20
 
Noncompete agreements
3
 
3
 
a.
In connection with the acquisition accounting for GEODynamics, the Company provided deferred taxes related to, among other items, the estimated fair value adjustments for acquired property, plant and equipment, intangible assets and U.S. tax net operating loss carryforwards.
b.
The goodwill recognized is primarily attributable to expected synergies that will result from combining the operations of the Company and GEODynamics, as well as intangible assets which do not qualify for separate recognition. The amount of goodwill that is deductible for income tax purposes is not significant.
c.
The goodwill recognized is primarily attributable to expected synergies that will result from combining the operations of the Company and Falcon, as well as intangible assets which do not qualify for separate recognition. All goodwill is deductible for income tax purposes.
The Company has not completed the purchase price allocation for the GEODynamics and Falcon acquisitions and these preliminary estimates of fair value and intangible asset useful lives are subject to revision. The final purchase price allocation will be determined when the Company has finalized the opening balance sheet of each acquisition and completed the detailed valuations and necessary calculations. The final allocations and intangible asset useful lives could differ materially from the preliminary estimates. The final allocations may include (1) changes in identifiable net assets, (2) changes in allocations to intangible assets such as tradenames, patents/technology/know-how and customer relationships as well as goodwill, (3) changes in fair values of property, plant and equipment and deferred taxes (4) changes in useful lives and (5) other changes to assets and liabilities.

10

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

Supplemental Unaudited Pro Forma Financial Information
The following supplemental unaudited pro forma results of operations data for the Company gives pro forma effect to the consummation of the GEODynamics and Falcon acquisitions as if they had occurred on January 1, 2017. The supplemental unaudited pro forma financial information for the Company was prepared based on historical financial information, adjusted to give pro forma effect to fair value adjustments on depreciation and amortization expense, interest expense, and related tax effects, among others. The pro forma results for the nine months ended September 30, 2018 reflect adjustments to exclude the after-tax impact of transaction costs of $2.0 million. The supplemental pro forma financial information is unaudited and may not reflect what the results of the combined operations would have been were the acquisitions to have occurred on January 1, 2017. As such, it is presented for informational purposes only (in thousands, except per share amounts):
 
Pro Forma Information
 
Nine Months Ended September 30,
 
2018
 
2017
Revenue
$
840,639

 
$
663,046

Net loss
$
(2,909
)
 
$
(46,157
)
Diluted net loss per share
$
(0.05
)
 
$
(0.78
)
Diluted weighted average common shares outstanding
59,132

 
58,851

This supplemental unaudited pro forma results of operations data reflects adjustments required for business combinations and is based upon, among other things, preliminary estimates of the fair value of assets acquired and liabilities assumed and certain assumptions that the Company believes are reasonable. Revisions to the preliminary estimates of fair value may have a significant impact on the pro forma amounts of depreciation and amortization expense and income tax benefit.
Goodwill
Changes in the carrying amount of goodwill for the nine-month period ended September 30, 2018 were as follows (in thousands):
 
Well Site Services
 
Downhole Technologies
 
Offshore/
Manufactured Products
 
Total
Completion Services
 
Drilling Services
 
Subtotal
Balance as of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
199,631

 
$
22,767

 
$
222,398

 
$

 
$
162,906

 
$
385,304

Accumulated impairment losses
(94,528
)
 
(22,767
)
 
(117,295
)
 

 

 
(117,295
)
 
105,103

 

 
105,103

 

 
162,906

 
268,009

Goodwill acquired
26,427

 

 
26,427

 
362,604

 

 
389,031

Foreign currency translation

 

 

 

 
(287
)
 
(287
)
Balance as of September 30, 2018
$
131,530

 
$

 
$
131,530

 
$
362,604

 
$
162,619

 
$
656,753

 
 
 
 
 
 
 
 
 
 
 
 
Balance as of September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
226,058

 
$
22,767

 
$
248,825

 
$
362,604

 
$
162,619

 
$
774,048

Accumulated impairment losses
(94,528
)
 
(22,767
)
 
(117,295
)
 

 

 
(117,295
)
 
$
131,530

 
$

 
$
131,530

 
$
362,604

 
$
162,619

 
$
656,753


11

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

Other Intangible Assets
The following table presents the total gross carrying amount of intangibles and the total accumulated amortization for major intangible asset classes as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Other intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
159,557

 
$
29,396

 
$
44,557

 
$
22,661

Patents/Technology/Know-how
83,672

 
20,818

 
35,762

 
15,844

Noncompete agreements
23,689

 
7,441

 
4,899

 
2,799

Tradenames and other
42,937

 
4,324

 
10,801

 
4,450

Total other intangible assets
$
309,855

 
$
61,979

 
$
96,019

 
$
45,754

The weighted average remaining amortization period for all intangible assets, other than goodwill, was 15.4 years as of September 30, 2018 and 7.8 years as of December 31, 2017. Amortization expense is expected to total $6.5 million over the last three months of 2018, $25.1 million in 2019, $23.1 million in 2020, $17.1 million in 2021 and $16.2 million in 2022. Such amounts are subject to revision and are based upon preliminary estimates of fair value and intangible asset useful lives for the GEODynamics and Falcon acquisitions. For the three months ended September 30, 2018 and 2017, amortization expense was $6.4 million and $2.2 million, respectively. Amortization expense was $18.4 million and $6.4 million for the nine months ended September 30, 2018 and 2017, respectively.
4.
Details of Selected Balance Sheet Accounts
Additional information regarding selected balance sheet accounts at September 30, 2018 and December 31, 2017 is presented below (in thousands):
 
September 30,
2018
 
December 31,
2017
Accounts receivable, net:
 
 
 
Trade
$
223,341

 
$
153,912

Unbilled revenue
37,957

 
21,638

Contract assets (see Note 12)
34,687

 
41,195

Other
9,287

 
6,710

Total accounts receivable
305,272

 
223,455

Allowance for doubtful accounts
(8,559
)
 
(7,316
)
 
$
296,713

 
$
216,139

 
September 30,
2018
 
December 31,
2017
Inventories, net:
 
 
 
Finished goods and purchased products
$
96,439

 
$
82,990

Work in process
23,988

 
30,689

Raw materials
108,653

 
70,255

Total inventories
229,080

 
183,934

Allowance for excess or obsolete inventory
(18,297
)
 
(15,649
)
 
$
210,783

 
$
168,285


12

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

 
September 30,
2018
 
December 31,
2017
Prepaid expenses and other current assets:
 
 
 
Income taxes receivable
$
9,728

 
$
5,927

Prepayments to vendors
3,578

 
2,962

Prepaid insurance
1,896

 
5,007

Other
6,670

 
4,158

 
$
21,872

 
$
18,054

 
Estimated
Useful Life (years)
 
September 30,
2018
 
December 31,
2017
Property, plant and equipment, net:
 
 
 
 
 
 
 
 
 
Land
 
$
37,246

 
$
35,808

Buildings and leasehold improvements
2
 
 
40
 
244,401

 
235,330

Machinery and equipment
1
 
 
28
 
475,307

 
458,458

Completion Services equipment
2
 
 
10
 
482,571

 
431,714

Office furniture and equipment
3
 
 
10
 
43,077

 
43,664

Vehicles
2
 
 
10
 
122,543

 
118,198

Construction in progress
 
49,922

 
34,557

Total property, plant and equipment
 
1,455,067

 
1,357,729

Accumulated depreciation
 
(910,414
)
 
(858,839
)
 
 
 
 
 
 
 
$
544,653

 
$
498,890


During the second quarter of 2018, the Company and its insurance carriers reached final settlement with respect to flood insurance claims resulting from Hurricane Harvey in 2017. In connection with this settlement, the Company's Offshore/Manufactured Products segment recognized a gain of $3.6 million following the remediation and repair of buildings and equipment and, to a lesser extent, the disposal of equipment damaged beyond repair. This gain is reported within other income in the accompanying consolidated statement of operations for the nine months ended September 30, 2018.
 
September 30,
2018
 
December 31,
2017
Other noncurrent assets:
 
 
 
Deferred compensation plan
$
23,201

 
$
20,988

Deferred income taxes
748

 
519

Other
5,936

 
6,903

 
$
29,885

 
$
28,410

 
September 30,
2018
 
December 31,
2017
Accrued liabilities:
 
 
 
Accrued compensation
$
30,870

 
$
25,794

Insurance liabilities
9,393

 
6,831

Accrued taxes, other than income taxes
9,472

 
3,591

Accrued commissions
2,348

 
1,335

Accrued claims
3,192

 
1,320

Other
10,425

 
7,018

 
$
65,700

 
$
45,889


13

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

5.
Net Loss Per Share
The table below provides a reconciliation of the numerators and denominators of basic and diluted net loss per share for the three and nine months ended September 30, 2018 and 2017 (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerators:
 
 
 
 
 
 
 
Net loss
$
(4,019
)
 
$
(15,031
)
 
$
(4,769
)
 
$
(46,955
)
Less: Income attributable to unvested restricted stock awards

 

 

 

Numerator for basic net loss per share
(4,019
)
 
(15,031
)
 
(4,769
)
 
(46,955
)
Effect of dilutive securities:
 
 
 
 
 
 
 
Unvested restricted stock awards

 

 

 

Numerator for diluted net loss per share
$
(4,019
)
 
$
(15,031
)
 
$
(4,769
)
 
$
(46,955
)
 
 
 
 
 
 
 
 
Denominators:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
59,977

 
51,089

 
59,585

 
51,310

Less: Weighted average number of unvested restricted stock awards outstanding
(951
)
 
(1,111
)
 
(979
)
 
(1,120
)
Denominator for basic net loss per share
59,026

 
49,978

 
58,606

 
50,190

Effect of dilutive securities:
 
 
 
 
 
 
 
Unvested restricted stock awards

 

 

 

Assumed exercise of stock options

 

 

 

1.50% convertible senior notes (see Note 6)

 

 

 

 

 

 

 

Denominator for diluted net loss per share
59,026

 
49,978

 
58,606

 
50,190

 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.07
)
 
$
(0.30
)
 
$
(0.08
)
 
$
(0.94
)
Diluted
(0.07
)
 
(0.30
)
 
(0.08
)
 
(0.94
)
The calculation of diluted net loss per share for the three and nine months ended September 30, 2018 excluded 694 thousand shares and 696 thousand shares, respectively, issuable pursuant to outstanding stock options, due to their antidilutive effect. The calculation of diluted net loss per share for the three and nine months ended September 30, 2017 excluded 701 thousand shares and 712 thousand shares, respectively, issuable pursuant to outstanding stock options, due to their antidilutive effect. Additionally, shares issuable upon conversion of the 1.50% convertible senior notes were not convertible and therefore excluded for the three and nine months ended September 30, 2018, due to their antidilutive effect.

14

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

6.
Long-term Debt
As of September 30, 2018 and December 31, 2017, long-term debt consisted of the following (in thousands):
 
September 30,
2018
 
December 31,
2017
Revolving credit facility(1)
$
158,370

 
$

1.50% convertible senior notes(2)
165,364

 

Promissory note
25,000

 

Capital lease obligations and other debt
5,677

 
5,281

Total debt
354,411

 
5,281

Less: Current portion
(25,535
)
 
(411
)
Total long-term debt and capitalized leases
$
328,876

 
$
4,870

(1)
Presented net of $2.2 million of unamortized debt issuance costs as of September 30, 2018. Unamortized debt issuance costs of $1.6 million as of December 31, 2017 are classified in other noncurrent assets.
(2)
The principal amount of the 1.50% convertible senior notes is $200.0 million. See "Issuance of 1.50% Convertible Senior Notes" below.
Revolving Credit Facility
Prior to January 30, 2018, the Company's senior secured revolving credit facility (the "Revolving Credit Facility") was governed by a credit agreement with Wells Fargo Bank, N.A., as administrative agent for the lenders party thereto and collateral agent for the secured parties thereunder, and the lenders and other financial institutions from time to time party thereto, dated as of May 28, 2014, as amended (the "Credit Agreement"), that was scheduled to mature on May 28, 2019. On January 30, 2018, and subsequently on May 14, 2018, the Company amended the Revolving Credit Facility and amended and restated the Credit Agreement (the "Amended Revolving Credit Facility" and "Amended Credit Agreement", respectively), to extend the maturity to January 2022 and permit the issuance of convertible senior notes as discussed below. The Amended Credit Agreement governs our Amended Revolving Credit Facility. The Amended Revolving Credit Facility provides for $350 million in lender commitments with an option to increase the maximum borrowings to $500 million subject to additional lender commitments prior to its maturity on January 30, 2022. Under the Amended Revolving Credit Facility, $50 million is available for the issuance of letters of credit.
As of September 30, 2018, the Company had $160.6 million of borrowings outstanding under the Amended Credit Agreement and $23.0 million of outstanding letters of credit, leaving $149.8 million available to be drawn. The total amount available to be drawn under our Amended Revolving Credit Facility was less than the lender commitments as of September 30, 2018, due to limits imposed by maintenance covenants in the Amended Credit Agreement.
Amounts outstanding under the Amended Revolving Credit Facility bear interest at LIBOR plus a margin of 1.75% to 3.00%, or at a base rate plus a margin of 0.75% to 2.00%, in each case based on a ratio of the Company's total net funded debt to consolidated EBITDA (as defined in the Amended Credit Agreement). The Company must also pay a quarterly commitment fee of 0.25% to 0.50%, based on the Company's ratio of total net funded debt to consolidated EBITDA, on the unused commitments under the Amended Credit Agreement. In connection with the amendment and restatement of the Credit Agreement, the Company expensed $0.4 million of previously deferred financing costs in the first quarter of 2018, which is included in interest expense.
The Amended Credit Agreement contains customary financial covenants and restrictions. Specifically, we must maintain an interest coverage ratio, defined as the ratio of consolidated EBITDA to consolidated interest expense, of at least 3.00 to 1.0, a maximum senior secured leverage ratio, defined as the ratio of senior secured debt to consolidated EBITDA, of no greater than 2.25 to 1.0 and a total net leverage ratio, defined as the ratio of total net funded debt to consolidated EBITDA, of no greater than 4.0 to 1.0 through the fiscal quarter ending December 31, 2018 and no greater than 3.75 to 1.0 thereafter. The amended financial covenants give pro forma effect to the issuance of the convertible senior notes discussed below, acquired businesses and the annualization of EBITDA for acquired businesses.
Each of the factors considered in the calculation of these ratios are defined in the Amended Credit Agreement. Consolidated EBITDA and consolidated interest, as defined, exclude goodwill impairments, losses on extinguishment of debt, debt discount amortization, stock-based compensation expense and other non-cash charges.

15

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

Borrowings under the Amended Credit Agreement are secured by a pledge of substantially all of the Company's assets and the assets of its domestic subsidiaries. The Company's obligations under the Amended Credit Agreement are guaranteed by its significant domestic subsidiaries. The Amended Credit Agreement also contains negative covenants that limit the Company's ability to borrow additional funds, encumber assets, pay dividends, sell assets and enter into other significant transactions.
Under the Amended Credit Agreement, the occurrence of specified change of control events involving the Company would constitute an event of default that would permit the banks to, among other things, accelerate the maturity of the facility and cause it to become immediately due and payable in full.
As of September 30, 2018, the Company was in compliance with its debt covenants.
Issuance of 1.50% Convertible Senior Notes
On January 30, 2018, the Company issued $200 million aggregate principal amount of its 1.50% convertible senior notes due 2023 (the "Notes") pursuant to an indenture, dated as of January 30, 2018 (the “Indenture”), between the Company and Wells Fargo Bank, National Association, as trustee. Net proceeds from the Notes, after deducting issuance costs, were approximately $194 million, which was used by the Company to repay a portion of the outstanding borrowings under the Revolving Credit Facility.
The initial carrying amount of the Notes recorded in the condensed consolidated balance sheet as of January 30, 2018 was less than the $200 million in principal amount of the Notes, in accordance with applicable accounting principles, reflective of the estimated fair value of a similar debt instrument that does not have a conversion feature. The Company recorded the value of the conversion feature of $34.4 million as a debt discount, which is amortized as interest expense over the term of the Notes, with a similar amount allocated to additional paid-in capital ($25.7 million, net of issuance costs and deferred taxes). As a result of this amortization, the interest expense the Company recognizes related to the Notes for accounting purposes is based on an effective interest rate of approximately 6.0% which is greater than the cash interest payments the Company will pay on the Notes. Interest expense associated with the Notes for the three and nine months ended September 30, 2018 was $2.5 million and $6.6 million, respectively, while the related cash interest expense totaled $0.8 million and $2.0 million, respectively.
The following table presents the carrying amount of the Notes in the condensed consolidated balance sheets (in thousands):
 
September 30,
2018
Principal amount of the liability component
$
200,000

Less: Unamortized discount
30,370

Less: Unamortized issuance costs
4,266

Net carrying amount of the liability
$
165,364

The Notes bear interest at a rate of 1.50% per year until maturity. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. In addition, additional interest and special interest may accrue on the Notes under certain circumstances as described in the Indenture. The Notes will mature on February 15, 2023, unless earlier repurchased, redeemed or converted. The initial conversion rate is 22.2748 shares of the Company's common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $44.89 per share of common stock). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the Indenture. The Company’s intent is to repay the principal amount of the Notes in cash and the conversion feature in shares of the Company’s common stock.
Noteholders may convert their Notes, at their option only in the following circumstances: (1) if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock, as described in the Indenture; or (4) if the Company calls the Notes for redemption, or at any time from, and including, November 15, 2022 until the close of business on the second scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of common stock or a combination of cash and

16

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

shares of common stock, at the Company's election, based on the applicable conversion rate(s). If the Company elects to deliver cash or a combination of cash and shares of common stock, then the consideration due upon conversion will be based on a defined observation period.
The Notes will be redeemable, in whole or in part, at the Company's option at any time, and from time to time, on or after February 15, 2021, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of common stock exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice.
If specified change in control events involving the Company as defined in the Indenture occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. Additionally, the Notes contain certain events of default as set forth in the indenture. As of September 30, 2018, none of the conditions allowing holders of the Notes to convert, or requiring us to repurchase the Notes, had been met.
Because it is the Company's intent to settle the principal portion of the Notes in cash, the Company uses the treasury stock method when calculating the diluted earnings per share effect for the variable number of shares that would be issued upon conversion to settle the conversion feature.
Promissory Note
In connection with the GEODynamics Acquisition, the Company issued a $25.0 million promissory note that bears interest at 2.50% per annum and is scheduled to mature on July 12, 2019. Payments due under the promissory note may be set off against certain claims, if any, related to matters occurring prior to the Company's acquisition of GEODynamics. See Note 13, "Commitments and Contingencies."
7.
Fair Value Measurements
The Company’s financial instruments consist of cash and cash equivalents, investments, receivables, payables and debt instruments. The Company believes that the carrying values of these instruments, other than the Notes, on the accompanying condensed consolidated balance sheets approximate their fair values. The estimated fair value of the Notes as of September 30, 2018 was approximately $215 million, based on quoted market prices (a Level 1 fair value measurement), which compares to the $200 million in principal amount of the Notes.
8.
Stockholders' Equity
The following table provides details with respect to the changes to the number of shares of common stock, $0.01 par value, outstanding during the first nine months of 2018:
Shares of common stock outstanding – December 31, 2017
51,089,422

Acquisition of GEODynamics (see Note 3)
8,661,083

Restricted stock awards, net of forfeitures
384,983

Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury
(151,966
)
Shares of common stock outstanding – September 30, 2018
59,983,522

As of September 30, 2018 and December 31, 2017, the Company had 25,000,000 shares of preferred stock, $0.01 par value, authorized, with no shares issued or outstanding.
On July 29, 2015, the Company’s Board of Directors approved a share repurchase program providing for the repurchase of up to $150.0 million of the Company’s common stock, which, following extension, was scheduled to expire on July 29, 2018. On July 25, 2018, our Board of Directors extended the share repurchase program for one year to July 29, 2019. During the first nine months of 2018, the Company did not repurchase any shares of common stock under the program. The amount remaining under the Company's share repurchase authorization as of September 30, 2018 was $120.5 million. Subject to applicable securities laws, such purchases will be at such times and in such amounts as the Company deems appropriate.

17

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

9.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, reported as a component of stockholders’ equity, increased from $58.5 million at December 31, 2017 to $69.7 million at September 30, 2018, due to changes in currency exchange rates. Accumulated other comprehensive loss is primarily related to fluctuations in the currency exchange rates compared to the U.S. dollar which are used to translate certain of the international operations of our reportable segments. For the nine months ended September 30, 2018 and 2017, currency translation adjustments recognized as a component of other comprehensive loss were primarily attributable to the United Kingdom and Brazil. As of September 30, 2018, the exchange rate for the British pound and the Brazilian real compared to the U.S. dollar weakened by 4% and 17%, respectively, compared to the exchange rate at December 31, 2017, contributing to other comprehensive loss of $11.2 million reported for the nine months ended September 30, 2018. During the first nine months of 2017, the exchange rates for the British pound and the Brazilian real strengthened by 8% and 3%, compared to the U.S. dollar, contributing to other comprehensive income of $13.5 million.
10.
Stock-based Compensation
The following table presents a summary of activity for stock options, service-based restricted stock awards and performance-based stock unit awards for the nine months ended September 30, 2018.
 
Stock Options
 
Service-based Restricted Stock
 
Performance-based Stock Units
Outstanding – December 31, 2017
693,277

 
1,088,519

 
159,553

Granted

 
409,512

 
46,378

Vested/Exercised

 
(529,246
)
 

Forfeited
(6,239
)
 
(24,529
)
 

Outstanding – September 30, 2018
687,038

 
944,256

 
205,931

Weighted average grant date fair value (2018 awards)
$

 
$
29.43

 
$
28.75

The restricted stock program consists of a combination of service-based restricted stock and performance-based stock units. The service-based restricted stock awards generally vest on a straight-line basis over their term, which is generally three to four years. The number of performance-based restricted shares ultimately issued under the program is dependent upon our achievement of predefined specific performance measures generally measured over a three-year period. In the event the predefined targets are exceeded for any performance-based award, additional shares up to a maximum of 200% of the target award may be granted. Conversely, if actual performance falls below the predefined target, the number of shares vested is reduced. If the actual performance falls below the threshold performance level, no restricted shares will vest. The performance measure for outstanding awards as of December 31, 2017 is relative total stockholder return compared to our peer group of companies.
The performance measure for performance-based stock units granted during the first quarter of 2018 is based on the Company's EBITDA growth rate over a three-year period. Additionally, the Company issued conditional phantom units totaling 46,378 units, with the ultimate number of phantom units to be awarded ranging from zero to a maximum of 92,756 units. These phantom units represent a hypothetical interest in the Company’s common stock, and, once vested, are settled in cash. The performance measure for these phantom units is relative stockholder return compared to our peer group of companies. The obligation related to the phantom units is classified as a liability and remeasured at the end of each reporting period.
Stock-based compensation pre-tax expense recognized in the three-month periods ended September 30, 2018 and 2017 totaled $5.9 million and $6.1 million, respectively. Stock based compensation pre-tax expense recognized in the nine-month periods ended September 30, 2018 and 2017 totaled $17.1 million and $17.1 million, respectively. As of September 30, 2018, there was $23.3 million of pre-tax compensation costs related to service-based and performance-based stock awards and unvested stock options, which will be recognized in future periods as vesting conditions are satisfied.
On May 8, 2018 (the "Effective Date"), the Company’s stockholders approved the Oil States International, Inc. 2018 Equity Participation Plan (the “Plan”). The maximum number of shares of common stock reserved and available for issuance under the Plan is the sum of 2,000,000 shares, plus (i) any shares of common stock that, as of the Effective Date, were available for issuance under the Oil States International, Inc. 2001 Equity Participation Plan (as amended from time to time, the “Prior Plan”) (and that were not subject to outstanding awards under the Prior Plan as of the Effective Date), and (ii) any shares of common stock subject to outstanding awards under the Prior Plan as of the Effective Date that are not vested and/or subsequently expired or forfeited and canceled, for

18

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

any reason, subject to certain adjustment as provided under the Plan. To the extent any additional shares of common stock remain subject to outstanding awards under the Prior Plan that otherwise would have been returned to the Prior Plan after May 8, 2018 on account of the expiration, forfeiture or cancellation without a delivery of shares of such outstanding awards, those shares of common stock instead will be included in the reserve of shares of common stock for issuance under the Plan. The Company filed a registration statement on Form S-8, which became effective on May 17, 2018, with respect to shares of common stock reserved for issuance under the Plan. As of September 30, 2018, approximately 2.5 million shares were available for grant under the Plan.
11.
Taxes
Income Taxes
The income tax provision for interim periods is based on estimates of the effective tax rate for the entire fiscal year. For the three months ended September 30, 2018, the Company's income tax benefit was $3.8 million on a pre-tax loss of $7.9 million, which reflects the impact of a discrete net tax benefit of $5.8 million (discussed below). For the nine months ended September 30, 2018, the Company’s income tax benefit was $3.3 million on a pre-tax loss of $8.1 million, reflecting the impact of the $5.8 million discrete net tax benefit discussed below as well as other discrete tax attributes. This compares to an income tax benefit of $4.0 million, or 21.1% of pre-tax losses and $15.7 million, or 25.1% of pre-tax losses, respectively, for the three and nine months ended September 30, 2017.
On December 22, 2017, the United States enacted legislation commonly known as the Tax Cuts and Jobs Act (“Tax Reform Legislation”) which resulted in significant changes to U.S. tax and related laws, including certain key federal income tax provisions applicable to multinational companies such as the Company. These changes include, among others, the implementation of a territorial tax system with a one-time mandatory tax on undistributed foreign earnings of subsidiaries and a reduction in the U.S. corporate income tax rate to 21% from 35% effective January 1, 2018.
As a result of these U.S. tax law changes, during the fourth quarter of 2017 the Company recorded a net provisional charge of $28.2 million within income tax expense, consisting primarily of incremental income tax expense of $41.4 million related to the one-time, mandatory transition tax on the Company’s unremitted foreign subsidiary earnings (the "Transition Tax") and a valuation allowance established against the Company’s foreign tax credit carryforwards which were recorded as assets prior to Tax Reform Legislation, offset by a tax benefit of $13.2 million related the remeasurement of the Company’s U.S. net deferred tax liabilities based on the new 21% U.S. corporate income tax rate. The Company did not incur a material cash tax payable with respect to the Transition Tax.
During the third quarter of 2018, the Company adjusted its December 2017 provisional estimates with respect to Tax Reform Legislation resulting in an income tax benefit of $5.8 million during the period. This adjustment is primarily attributable to guidance issued by the Internal Revenue Service in 2018 allowing taxpayers, including the Company, to elect to carryback or carryforward 2017 U.S. net operating losses rather than requiring that such tax losses be used to offset the Transition Tax. Based on this guidance which was clarified in the third quarter of 2018, the Company has elected to utilize available foreign tax credits to fully satisfy the Transition Tax and plans to file a carryback claim against its 2015 U.S. federal income tax return and receive approximately $5.5 million in cash.
The Tax Reform Legislation also includes many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, and potential incremental taxes related to certain foreign earnings. Many of these provisions did not apply to the Company until January 1, 2018. The Company continues to assess the impact of these and other provisions of the Tax Reform Legislation. The net deferred tax liability as of September 30, 2018 has not been materially impacted by any of these provisions. The Company’s net deferred tax liability, as of December 31, 2017, excluded the impact, if any, of potential future U.S. income taxes related to certain foreign activities and transactions as described in the Tax Reform Legislation.
The Company continues to examine the implications arising from the Transition Tax and other provisions of these new tax laws but believes the provisional estimates recorded through the third quarter of 2018 reflect a reasonable estimate of the impact based on the information available as of September 30, 2018. As additional regulatory and accounting guidance becomes available and further information is obtained in connection with the preparation of the Company’s various foreign income tax returns, the Company will record, if necessary, adjustments to these provisional estimates in the fourth quarter of 2018.

19

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

The ultimate impact of Tax Reform Legislation may differ from the Company’s provisional estimates, possibly materially, due to changes in the interpretations and assumptions made by the Company as well as additional regulatory and accounting guidance that may be issued and actions the Company may take as a result of the Tax Reform Legislation. The Company will monitor regulatory guidance and other information related to this matter as it becomes available to allow the Company to reasonably estimate the impact of any change in its provisional estimates in future periods.
Tariffs and Duties
The Company uses a variety of domestically produced and imported raw materials and component products, including steel, in the manufacture of its products. The United States recently imposed tariffs on a variety of imported products, including steel and aluminum. In response to the U.S. tariffs on steel and aluminum, the European Union and several other countries, including Canada and China, have threatened and/or imposed retaliatory tariffs. The effect of these new tariffs and the application and interpretation of existing trade agreements and customs, anti-dumping and countervailing duty regulations continues to evolve, and the Company continues to monitor these matters. If the Company encounters difficulty in procuring these raw materials and component products, or if the prices the Company has to pay for these products increase as a result of customs, anti-dumping and countervailing duty regulations or otherwise and the Company is unable to pass corresponding cost increases on to its customers, the Company's financial position and results of operations could be adversely affected. Furthermore, uncertainty with respect to potential costs in the drilling and completion of oil and gas wells could cause customers to delay or cancel planned projects which, if this occurred, would adversely affect the Company's financial position and results of operations. See Note 13, "Commitments and Contingencies."
12.
Segments, Revenue Recognition and Related Information
As further discussed in Note 3, “Business Acquisitions, Goodwill and Other Intangible Assets,” on January 12, 2018 the Company completed the GEODynamics Acquisition, which, beginning with the first quarter of 2018, is reported as a separate business segment under the name “Downhole Technologies.” Following this acquisition, the Company operates through three reportable segments: Well Site Services, Downhole Technologies and Offshore/Manufactured Products. The Company’s reportable segments represent strategic business units that generally offer different products and services. They are managed separately because each business often requires different technologies and marketing strategies. Recent acquisitions, except for the GEODynamics Acquisition, have been direct extensions to our business segments.
The Well Site Services segment provides a broad range of equipment and services that are used to drill for, establish and maintain the flow of oil and natural gas from a well throughout its life cycle. In this segment, operations primarily include completion-focused equipment and services as well as land drilling services. The Completion Services operations provide solutions to its customers using our completion tools and highly trained personnel throughout its service offerings which include: wireline support, frac stacks, isolations tools, extended reach tools, ball launchers, well testing and flowback operations, thru tubing activity and sand control. Drilling Services provides land drilling services for shallow to medium depth wells in West Texas and the Rocky Mountain region of the United States. Separate business lines within the Well Site Services Segment have been disclosed to provide additional detail with respect to its operations. Substantially all of the revenue generated by the Well Site Services segment are classified as service revenues in the unaudited condensed consolidated statements of operations.
Following the closing of the GEODynamics Acquisition on January 12, 2018, the Downhole Technologies segment provides oil and gas perforation systems and downhole tools in support of completion, intervention, wireline and well abandonment operations. This segment designs, manufactures and markets its consumable engineered products to oilfield service as well as exploration and production companies, which are completing complex wells with longer lateral lengths, increased frac stages and more perforation clusters to increase unconventional well productivity. Substantially all of the revenue generated by the Downhole Technologies segment are classified as product revenue in the unaudited condensed consolidated statements of operations.
The Offshore/Manufactured Products segment designs, manufactures and markets capital equipment utilized on floating production systems, subsea pipeline infrastructure, and offshore drilling rigs and vessels, along with short-cycle and other products. Driven principally by longer-term customer investments for offshore oil and natural gas projects, project-driven product revenues include: flexible bearings, advanced connector systems, high-pressure riser systems, deepwater mooring systems, cranes, subsea pipeline products and blow-out preventer stack integration. Short-cycle products manufactured by the segment include: valves, elastomers and other specialty products generally used in the land-based completion and drilling markets. Other products manufactured and offered by the segment include a variety of products for use in industrial, military and other applications outside the oil and gas industry. The segment also offers a broad line of complementary, value-added services including: specialty welding, fabrication, cladding and machining services, offshore installation services, and inspection and repair services.

20

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

Corporate activities include corporate expenses, including those related to corporate governance, stock-based compensation and other infrastructure support, as well as the impact of company-wide decisions for which the individual operating units are not being evaluated.
Financial information by business segment for the three and nine months ended September 30, 2018 and 2017 is summarized in the following tables (in thousands).
 
Revenues
 
Depreciation and
amortization
 
Operating income (loss)
 
Capital
expenditures
 
Total assets
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
Well Site Services –
 
 
 
 
 
 
 
 
 
Completion Services
$
111,669

 
$
16,884

 
$
(3,271
)
 
$
17,915

 
$
540,203

Drilling Services
16,920

 
3,479

 
(2,206
)
 
2,711

 
68,444

Total Well Site Services
128,589

 
20,363

 
(5,477
)
 
20,626

 
608,647

Downhole Technologies
56,571

 
4,582

 
6,485

 
8,727

 
691,974

Offshore/Manufactured Products
89,434

 
5,426

 
7,069

 
3,475

 
703,203

Corporate

 
215

 
(11,799
)
 
197

 
40,972

Total
$
274,594

 
$
30,586

 
$
(3,722
)
 
$
33,025

 
$
2,044,796

 
Revenues
 
Depreciation and
amortization
 
Operating income (loss)
 
Capital
expenditures
 
Total assets
Three months ended September 30, 2017
 
 
 
 
 
 
 
 
 
Well Site Services –
 
 
 
 
 
 
 
 
 
Completion Services
$
61,015

 
$
15,679

 
$
(9,933
)
 
$
2,447

 
$
427,207

Drilling Services
16,162

 
4,454

 
(3,235
)
 
1,693

 
74,991

Total Well Site Services
77,177

 
20,133

 
(13,168
)
 
4,140

 
502,198

Downhole Technologies

 

 

 

 

Offshore/Manufactured Products
86,871

 
6,404

 
7,334

 
2,846

 
782,651

Corporate

 
251

 
(12,349
)
 
54

 
44,506

Total
$
164,048

 
$
26,788

 
$
(18,183
)
 
$
7,040

 
$
1,329,355

 
Revenues
 
Depreciation and
amortization
 
Operating income (loss)
 
Capital
expenditures
 
Total assets
Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
Well Site Services –
 
 
 
 
 
 
 
 
 
Completion Services
$
302,877

 
$
49,082

 
$
(6,538
)
 
$
40,430

 
$
540,203

Drilling Services
51,235

 
10,898

 
(7,474
)
 
5,737

 
68,444

Total Well Site Services
354,112

 
59,980

 
(14,012
)
 
46,167

 
608,647

Downhole Technologies
161,626

 
12,998

 
26,139

 
13,793

 
691,974

Offshore/Manufactured Products
298,277

 
17,026

 
32,185

 
10,606

 
703,203

Corporate

 
694

 
(40,248
)
 
720

 
40,972

Total
$
814,015

 
$
90,698

 
$
4,064

 
$
71,286

 
$
2,044,796


21

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

 
Revenues
 
Depreciation and
amortization
 
Operating income (loss)
 
Capital
expenditures
 
Total assets
Nine months ended September 30, 2017
 
 
 
 
 
 
 
 
 
Well Site Services –
 
 
 
 
 
 
 
 
 
Completion Services
$
167,577

 
$
48,400

 
$
(38,960
)
 
$
8,560

 
$
427,207

Drilling Services
39,120

 
14,283

 
(11,239
)
 
2,800

 
74,991

Total Well Site Services
206,697

 
62,683

 
(50,199
)
 
11,360

 
502,198

Downhole Technologies

 

 

 

 

Offshore/Manufactured Products
280,220

 
19,091

 
27,460

 
8,775

 
782,651

Corporate

 
778

 
(37,274
)
 
196

 
44,506

Total
$
486,917

 
$
82,552

 
$
(60,013
)
 
$
20,331

 
$
1,329,355

One customer individually accounted for 10% and 16% of the Company’s consolidated product and service revenue for the nine months ended September 30, 2018 and 2017, respectively, and individually represented 10% of the Company’s consolidated total accounts receivable as of September 30, 2018. For the Company’s Well Site Services segment, substantially all depreciation and amortization expense relates to cost of services while substantially all depreciation and amortization expense for the Downhole Technologies segment relates to cost of products. The Offshore/Manufactured Products segment has numerous facilities around the world that generate both product and service revenues, and it is common for the segment to provide both installation and other services for products that we manufacture in this segment. While substantially all depreciation and amortization expense for the Offshore/Manufactured Products segment relates to cost of revenues, it does not segregate or capture depreciation or amortization of intangible assets between product and service cost. Operating income (loss) excludes equity in net income of unconsolidated affiliates, which is immaterial and not reported separately herein.
As further discussed in Note 2, "Recent Accounting Pronouncements," the Company accounts for revenue in accordance with FASB issued guidance on revenue from contracts with customers, which we adopted on January 1, 2018. While the new guidance did not have a material impact on the Company's recognition of revenues, we have expanded our revenue recognition disclosures to address the new qualitative and quantitative disclosure requirements. Contractual terms may vary by contract and customer, which may impact the timing of revenue recognition under the standard in future periods.

22

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

The following table provides supplemental disaggregated revenue from contracts with customers by business segment for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Well Site Services
 
Downhole Technologies
 
Offshore/Manufactured Products
 
Total
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Three months ended September 30
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Major revenue categories -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Project-driven products
$

 
$

 
$

 
$

 
$
22,277

 
$
22,698

 
$
22,277

 
$
22,698

Short-cycle:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Completion products and services
111,669

 
61,015

 
56,571

 

 
27,463

 
29,873

 
195,703

 
90,888

Drilling services
16,920

 
16,162

 

 

 

 

 
16,920

 
16,162

Other products

 

 

 

 
6,707

 
7,908

 
6,707

 
7,908

Total short-cycle
128,589

 
77,177

 
56,571

 

 
34,170

 
37,781

 
219,330

 
114,958

Other products and services

 

 

 

 
32,987

 
26,392

 
32,987

 
26,392

 
$
128,589

 
$
77,177

 
$
56,571

 
$

 
$
89,434

 
$
86,871

 
$
274,594

 
$
164,048

Percentage of total revenue by type -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
%
 
%
 
98
%
 
%
 
73
%
 
78
%
 
44
%
 
41
%
Services
100
%
 
100
%
 
2
%
 
%
 
27
%
 
22
%
 
56
%
 
59
%
 
Well Site Services
 
Downhole Technologies
 
Offshore/Manufactured Products
 
Total
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Nine months ended September 30
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Major revenue categories -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Project-driven products
$

 
$

 
$

 
$

 
$
98,301

 
$
89,615

 
$
98,301

 
$
89,615

Short-cycle:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Completion products and services
302,877

 
167,577

 
161,626

 

 
90,218

 
86,840

 
554,721

 
254,417

Drilling services
51,235

 
39,120

 

 

 

 

 
51,235

 
39,120

Other products

 

 

 

 
21,718

 
24,032

 
21,718

 
24,032

Total short-cycle
354,112

 
206,697

 
161,626

 

 
111,936

 
110,872

 
627,674

 
317,569

Other products and services

 

 

 

 
88,040

 
79,733

 
88,040

 
79,733

 
$
354,112

 
$
206,697

 
$
161,626

 
$

 
$
298,277

 
$
280,220

 
$
814,015

 
$
486,917

Percentage of total revenue by type -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
%
 
%
 
98
%
 
%
 
76
%
 
80
%
 
47
%
 
46
%
Services
100
%
 
100
%
 
2
%
 
%
 
24
%
 
20
%