UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2020
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
______________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
| (Zip Code) | ||||||||
| (Address of principal executive offices) | ||||||||
(713 ) 652-0582
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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.
| ☒ | 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).
| ☒ | 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):
| ☒ | 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 | ☒ | |||||||||
As of October 23, 2020, the number of shares of common stock outstanding was 61,031,053 .
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 Statements of Stockholders' Equity | |||||||||||
| Unaudited Consolidated Statements of Cash Flows | |||||||||||
| Notes to Unaudited Condensed Consolidated Financial Statements | – | 23 | |||||||||
| 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, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Services | |||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Product costs | |||||||||||||||||||||||
| Service costs | |||||||||||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization expense presented below) | |||||||||||||||||||||||
| Selling, general and administrative expense | |||||||||||||||||||||||
| Depreciation and amortization expense | |||||||||||||||||||||||
| Impairments of goodwill | |||||||||||||||||||||||
| Impairments of fixed assets | |||||||||||||||||||||||
| Other operating expense (income), net | ( | ( | |||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted | ( | ( | ( | ( | |||||||||||||||||||
| Weighted average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
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, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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, 2020 | December 31, 2019 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant, and equipment, net | |||||||||||
| Operating lease assets, net | |||||||||||
| Goodwill, net | |||||||||||
| Other intangible assets, net | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | |||||||||||
| Current operating lease liabilities | |||||||||||
| Income taxes payable | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders' equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost, | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these financial statements.
5
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
| Three Months Ended September 30, 2020 | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments (excluding intercompany advances) | — | — | — | — | |||||||||||||||||||||||||||||||
| Currency translation adjustments on intercompany advances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense: | |||||||||||||||||||||||||||||||||||
| Restricted stock | — | — | — | ||||||||||||||||||||||||||||||||
| Surrender of stock to settle taxes on restricted stock awards | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments (excluding intercompany advances) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments on intercompany advances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense: | |||||||||||||||||||||||||||||||||||
| Restricted stock | — | — | — | ||||||||||||||||||||||||||||||||
| Surrender of stock to settle taxes on restricted stock awards | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
6
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
| Three Months Ended September 30, 2019 | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||||||
| Balance, June 30, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments (excluding intercompany advances) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments on intercompany advances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense: | |||||||||||||||||||||||||||||||||||
| Restricted stock | — | — | — | ||||||||||||||||||||||||||||||||
| Stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Surrender of stock to settle taxes on restricted stock awards | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Nine Months Ended September 30, 2019 | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments (excluding intercompany advances) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments on intercompany advances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense: | |||||||||||||||||||||||||||||||||||
| Restricted stock | — | — | — | ||||||||||||||||||||||||||||||||
| Stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Surrender of stock to settle taxes on restricted stock awards | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
7
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization expense | |||||||||||
| Impairments of goodwill | |||||||||||
| Impairments of inventories | |||||||||||
| Impairments of fixed assets | |||||||||||
| Stock-based compensation expense | |||||||||||
| Amortization of debt discount and deferred financing costs | |||||||||||
| Deferred income tax benefit | ( | ( | |||||||||
Gains on extinguishment of | ( | ||||||||||
| Gains on disposals of assets | ( | ( | |||||||||
| Other, net | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ||||||||||
| Accounts payable and accrued liabilities | ( | ||||||||||
| Income taxes payable | |||||||||||
| Deferred revenue | |||||||||||
| Other operating assets and liabilities, net | |||||||||||
| Net cash flows provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from disposition of property, plant and equipment | |||||||||||
| Other, net | ( | ( | |||||||||
| Net cash flows used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Revolving credit facility borrowings | |||||||||||
| Revolving credit facility repayments | ( | ( | |||||||||
Purchases of | ( | ( | |||||||||
| Other debt and finance lease repayments, net | ( | ( | |||||||||
| Payment of financing costs | ( | ( | |||||||||
| Shares added to treasury stock as a result of net share settlements due to vesting of stock awards | ( | ( | |||||||||
| Purchases of treasury stock | ( | ||||||||||
| Net cash flows used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Cash paid (received) for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes, net | ( | ( | |||||||||
The accompanying notes are an integral part of these financial statements.
8
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 with 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 statement 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.
As further discussed in Note 13, "Commitments and Contingencies," the impact of the Coronavirus Disease 2019 ("COVID-19") pandemic and the related economic, business and market disruptions continues to evolve and its future effects remain uncertain. The actual impact of these developments on the Company will depend on many factors, many of which are beyond management's control and knowledge. It is therefore difficult for management to assess or predict with precision the broad future effect of this health crisis on the global economy, the energy industry or the Company. During the first nine months of 2020, the Company recorded asset impairments, severance and facility closure charges in response to these recent developments, as further discussed in Note 3, "Asset Impairments and Other Charges." As additional information becomes available, events or circumstances change and strategic operational decisions are made by management, further adjustments may be required which could have a material adverse impact on the Company's consolidated financial position, results of operations and cash flows.
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. Examples of such estimates include, but are not limited to, goodwill and other asset impairments, revenue and income recognized over time, valuation allowances recorded on deferred tax assets, reserves on inventory, allowances for doubtful accounts, and potential future adjustments related to contractual indemnification and other agreements. Actual results could materially differ from those estimates.
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, 2019.
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 August 2020, the FASB issued updated guidance to simplify the accounting for convertible instruments and contracts in an entity's own equity. This new guidance will eliminate the current requirement that the carrying value of convertible debt instruments, including the Company's 1.50 % convertible senior notes due 2023 (the "Notes"), be allocated between the debt and equity components. As permitted under the standard, the Company plans to adopt the new guidance on January 1, 2021 using the modified retrospective transition method. Upon initial evaluation, the Company believes the key changes upon adoption will be to increase the carrying value of the debt component of the Notes and reduce the reported level of interest expense recognized over the remaining life of the Notes. Based on the $157.4 million principal amount of the Notes outstanding as of September 30, 2020, the Company estimates that the adoption of the standard on January 1, 2021 will result in a $12.2 million increase in the net carrying value of the Notes, a $3.7 million decrease in deferred income taxes and an $8.5 million net decrease in stockholders' equity. Beginning on January 1, 2021, the effective interest rate associated with the Notes is expected to decrease from approximately 6 % to approximately 2 %, which compares to the contractual cash interest rate of 1.50 %.
9
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
3. Asset Impairments and Other Charges
In March of 2020, the spot price of West Texas Intermediate ("WTI") crude oil declined over 50 % in response to current and expected material reductions in global demand stemming from the global response to the COVID-19 pandemic, coupled with announcements by Saudi Arabia and Russia of plans to increase crude oil production. Following this unprecedented collapse in crude oil prices, the spot price of Brent and WTI crude oil closed at $15 and $21 per barrel, respectively, on March 31, 2020. Crude oil prices further declined in April of 2020 to record low levels, and while the spot price of Brent and WTI crude oil increased to an average of $43 and $41 per barrel, respectively, in the third quarter of 2020, these average prices continue to be depressed versus historical price levels.
Demand for most of the Company's products and services depends substantially on the level of capital expenditures by the oil and natural gas industry. The decline in oil prices has, and is expected to continue to, result in further near-term reductions to most of the Company's customers' drilling, completion and production activities and their related spending on products and services, particularly in the U.S. shale play regions. These conditions may also result in a material adverse impact on certain customers' liquidity and financial position, leading to further spending reductions, delays in the collection of amounts owed and in certain instances, non-payment of amounts owed.
Consistent with oilfield service industry peers, the Company's stock price declined dramatically during the first quarter of 2020, with its market capitalization falling substantially below the carrying value of stockholders' equity.
Following these March 2020 events, the Company immediately implemented significant cost reduction initiatives. The Company also assessed the carrying value of goodwill, long-lived and other assets based on the industry outlook regarding overall demand for and pricing of its products and services, other market considerations and the financial condition of the Company's customers. As a result of these events, actions and assessments, the Company recorded the following charges during the first quarter of 2020 (in thousands):
| Completion Services | Drilling Services | Downhole Technologies | Offshore/ Manufactured Products | Pre-tax Total | Tax | After-tax Total | |||||||||||||||||||||||||||||||||||
| Impairments of goodwill | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Impairments of fixed assets | |||||||||||||||||||||||||||||||||||||||||
Impairments of inventories (Note 4) | |||||||||||||||||||||||||||||||||||||||||
| Severance and facility closure costs | |||||||||||||||||||||||||||||||||||||||||
During the second and third quarters of 2020, the Company further reduced its workforce and closed additional facilities in the United States and continued to assess the carrying value of its assets based on the industry outlook regarding demand for and pricing of its products and services, and recorded the following charges (in thousands):
| Completion Services | Downhole Technologies | Offshore/ Manufactured Products | Corporate | Pre-tax Total | Tax | After-tax Total | |||||||||||||||||||||||||||||||||||
| Second quarter 2020 | |||||||||||||||||||||||||||||||||||||||||
| Impairments of fixed assets | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Severance and facility closure costs | |||||||||||||||||||||||||||||||||||||||||
| Third quarter 2020 | |||||||||||||||||||||||||||||||||||||||||
| Impairments of inventories (Note 4) | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Severance and facility closure costs | |||||||||||||||||||||||||||||||||||||||||
10
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
Goodwill
The Company has three reporting units – Completion Services, Downhole Technologies and Offshore/Manufactured Products – with goodwill balances totaling $482.3 million as of December 31, 2019. Goodwill is allocated to each reporting unit from acquisitions made by the Company. In accordance with current accounting guidance, the Company does not amortize goodwill, but rather assesses goodwill for impairment annually and when an event occurs or circumstances change that indicate the carrying amounts may not be recoverable. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and an impairment loss is recorded. Given the significance of the March 2020 events described above, the Company performed a quantitative assessment of goodwill for impairment as of March 31, 2020. This interim assessment indicated that the fair value of each of the reporting units was less than their respective carrying amounts.
Management utilizes, depending on circumstances, a combination of valuation methodologies including a market approach and an income approach, as well as guideline public company comparables. The valuation techniques used in the March 31, 2020 assessment were consistent with those used during the December 1, 2019 assessment, except for the Completion Services reporting unit where the income approach was used to estimate its fair value – with the market approach used only to validate the results in 2020. The fair values of each of the Company's reporting units were determined using significant unobservable inputs (Level 3 fair value measurements). This approach estimates fair value by discounting the Company's forecasts of future cash flows by a discount rate (expected return) that a market participant is expected to require.
Significant assumptions and estimates used in the income approach include, among others, estimated future net annual cash flows and discount rates for each reporting unit, current and anticipated market conditions, estimated growth rates and historical data. These estimates rely upon significant management judgment, particularly given the continued uncertainties regarding the COVID-19 pandemic and its impact on activity levels and commodity prices as well as future global economic growth.
Based on this quantitative assessment as of March 31, 2020, the Company concluded that goodwill recorded in the Completion Services and Downhole Technologies businesses was fully impaired while goodwill recorded in the Offshore/Manufactured Products business was partially impaired. The Company therefore recognized non-cash goodwill impairment charges totaling $406.1 million in the first quarter of 2020. These impairment charges did not impact the Company's liquidity position, debt covenants or cash flows.
The discount rates used to value the Company's reporting units as of March 31, 2020 ranged between 16.8 % and 18.5 %. Holding all other assumptions and inputs used in the discounted cash flow analysis constant, a 50 basis point increase in the discount rate assumption for the Offshore/Manufactured Products reporting unit would have increased the goodwill impairment charge by approximately $10 million.
A summary of changes in the carrying values of goodwill by reporting unit in the first nine months of 2020 is presented in Note 4, "Details of Selected Balance Sheet Accounts."
Long-lived Assets
The Company also assesses the carrying value of long-lived assets, including property, plant and equipment, operating lease assets and other intangible assets held by each of its four reporting units. As a result of the March 2020 assessment, the Company concluded that property and equipment held by the Drilling Services reporting unit was further impaired and recognized a non-cash fixed asset impairment charge of $5.2 million in the first quarter of 2020. During the second quarter of 2020, the Company concluded that certain facilities held for sale by the Completion Services reporting unit were impaired and recognized a non-cash fixed asset impairment charge of $3.0 million to reduce the carrying value of the facilities to their estimated realizable value based on the current market environment.
The Company performed a qualitative assessment of goodwill and long-lived assets as of September 30, 2020 and concluded that no further impairment evaluation was required. As a result, no material impairments of goodwill or long-lived assets were recorded in the third quarter of 2020.
Should, among other events and circumstances, global economic and industry conditions further deteriorate, the COVID-19 pandemic business and market disruptions worsen, the outlook for future operating results and cash flow for any of the Company's reporting units decline, income tax rates increase or regulations change, costs of equity or debt capital increase, valuations for comparable public companies or comparable acquisition valuations decrease, or management implement strategic decisions based on industry conditions, the Company may need to recognize additional impairment losses in future periods.
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
4. Details of Selected Balance Sheet Accounts
Additional information regarding selected balance sheet accounts as of September 30, 2020 and December 31, 2019 is presented below (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Accounts receivable, net: | |||||||||||
| Trade | $ | $ | |||||||||
| Unbilled revenue | |||||||||||
| Contract assets | |||||||||||
| Other | |||||||||||
| Total accounts receivable | |||||||||||
| Allowance for doubtful accounts | ( | ( | |||||||||
| $ | $ | ||||||||||
| Allowance for doubtful accounts as a percentage of total accounts receivable | % | % | |||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Deferred revenue (contract liabilities) | $ | $ | |||||||||
For the nine months ended September 30, 2020, the $0.8 million net decrease in contract assets was primarily attributable to $22.8 million transferred to accounts receivable, which was substantially offset by $22.0 million in revenue recognized during the period. Deferred revenue (contract liabilities) increased by $31.1 million in 2020, primarily reflecting $46.4 million in new customer billings which were not recognized as revenue during the period, partially offset by the recognition of $15.2 million of revenue that was deferred at the beginning of the period.
As of September 30, 2020, accounts receivable, net in the United States, the United Kingdom and Singapore represented 62 %, 17 % and 12 %, respectively, of the respective total. No other country or single customer accounted for more than 10% of the Company's total accounts receivable as of September 30, 2020.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company's customers to make required payments. Determination of the collectability of amounts due from customers requires us to make judgments regarding future events and trends. Allowances for doubtful accounts are established through an assessment of the Company's portfolio on an individual customer and consolidated basis taking into account current and expected future market conditions and trends. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, and financial condition of the Company's customers as well as political and economic factors in countries of operations and other customer-specific factors. Based on a review of these factors, the Company establishes or adjusts allowances for trade and unbilled receivables as well as contract assets. If a customer receivable is deemed to be uncollectible, the receivable is charged-off against allowance for doubtful accounts. If the financial condition of the Company's customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. The following provides a summary of activity in the allowance for doubtful accounts for the nine months ended September 30, 2020 and 2019 (in thousands):
| 2020 | 2019 | ||||||||||
| Allowance for doubtful accounts – January 1 | $ | $ | |||||||||
| Provisions | |||||||||||
| Write-offs | ( | ( | |||||||||
| Other | ( | ||||||||||
| Allowance for doubtful accounts – September 30 | |||||||||||
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| September 30, 2020 | December 31, 2019 | ||||||||||
| Inventories, net: | |||||||||||
| Finished goods and purchased products | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials | |||||||||||
| Total inventories | |||||||||||
| Allowance for excess or obsolete inventory | ( | ( | |||||||||
| $ | $ | ||||||||||
The Company recorded an impairment charge of $5.9 million in the third quarter of 2020 to reduce the carrying value of inventories within the Downhole Technologies segment to their estimated net realizable value based on changes in expectations regarding the near-term utility, customer demand and market pricing of certain goods.
The Company recorded impairment charges totaling $25.2 million in the first quarter of 2020 to reduce the carrying value of inventories to their estimated net realizable value following the March 2020 decline in crude oil prices, which reduced the near-term utility of certain goods within the Offshore/Manufactured Products and Completion Services operations.
| September 30, 2020 | December 31, 2019 | ||||||||||
| Property, plant and equipment, net: | |||||||||||
| Land | $ | $ | |||||||||
| Buildings and leasehold improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Completion Services equipment | |||||||||||
| Office furniture and equipment | |||||||||||
| Vehicles | |||||||||||
| Construction in progress | |||||||||||
| Total property, plant and equipment | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| $ | $ | ||||||||||
For the three months ended September 30, 2020 and 2019, depreciation expense was $18.0 million and $24.6 million, respectively. Depreciation expense was $56.6 million and $74.5 million for the nine months ended September 30, 2020 and 2019, respectively.
During the third quarter of 2019, the Company made the strategic decision to reduce the scope of its Drilling Services reporting unit (adjusting from 34 rigs to 9 rigs) due to the ongoing weakness in customer demand for vertical drilling rigs in the U.S. land market, particularly the Permian Basin, which resulted in the recognition of a $33.7 million non-cash fixed asset impairment charge.
As discussed in Note 3, "Asset Impairments and Other Charges," during the first quarter of 2020 the Drilling Services reporting unit recognized a non-cash impairment charge of $5.2 million to further reduce the carrying value of the business's fixed assets to their estimated realizable value. Additionally, in the second quarter of 2020, the Completion Services reporting unit recognized a non-cash impairment charge of $3.0 million to reduce the carrying value of certain facilities to their estimated realizable value.
| September 30, 2020 | December 31, 2019 | ||||||||||
| Other noncurrent assets: | |||||||||||
| Deferred compensation plan | $ | $ | |||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
13
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
| September 30, 2020 | December 31, 2019 | ||||||||||
| Accrued liabilities: | |||||||||||
| Accrued compensation | $ | $ | |||||||||
| Insurance liabilities | |||||||||||
| Accrued taxes, other than income taxes | |||||||||||
| Accrued interest | |||||||||||
| Accrued commissions | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
| Goodwill: | Well Site Services | Downhole Technologies | Offshore/ Manufactured Products | Total | |||||||||||||||||||||||||||||||
| Completion Services | Drilling Services | Subtotal | |||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Goodwill | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Accumulated impairment losses | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
Goodwill impairments(1) | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
________________
(1)See Note 3, "Asset Impairments and Other Charges" for discussion of first quarter 2020 goodwill impairments.
| Other Intangible Assets: | September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Patents/Technology/Know-how | |||||||||||||||||||||||||||||||||||
| Noncompete agreements | |||||||||||||||||||||||||||||||||||
| Tradenames and other | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
For the three months ended September 30, 2020 and 2019, amortization expense was $6.2 million and $6.8 million, respectively. Amortization expense was $18.7 million and $20.3 million for the nine months ended September 30, 2020 and 2019, respectively.
14
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)