SEC Filing | Oil States International, Inc.

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ois-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________

FORM 10-Q

____________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐			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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

OIS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes			☒			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			☒			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

☐

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 April 21, 2023, the number of shares of common stock outstanding was 64,254,578.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


	Page
Part I – FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Financial Statements
Unaudited Consolidated Statements of Operations			3
Unaudited Consolidated Statements of Comprehensive Income (Loss)			4
Consolidated Balance Sheets			5
Unaudited Consolidated Statements of Stockholders' Equity			6
Unaudited Consolidated Statements of Cash Flows			7
Notes to Unaudited Condensed Consolidated Financial Statements	8	–	16

Cautionary Statement Regarding Forward-Looking Statements	17	–	18

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	18	–	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk			28

Item 4. Controls and Procedures			28

Part II – OTHER INFORMATION

Item 1. Legal Proceedings			30

Item 1A. Risk Factors			30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31

Item 3. Defaults Upon Senior Securities			31

Item 4. Mine Safety Disclosures			31

Item 5. Other Information			31

Item 6. Exhibits			32

Signature Page			33

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)


	Three Months Ended March 31,
		2023		2022
Revenues:
Products		$	99,840	$	85,761
Services		96,359		78,283
		196,199		164,044

Costs and expenses:
Product costs		78,677		64,801
Service costs		72,058		61,803
Cost of revenues (exclusive of depreciation and amortization expense presented below)		150,735		126,604
Selling, general and administrative expense		24,016		23,833
Depreciation and amortization expense		15,256		17,817


Other operating expense, net		317		126
		190,324		168,380
Operating income (loss)		5,875		(4,336)



Interest expense, net		(2,391)		(2,672)
Other income, net		276		1,025
Income (loss) before income taxes		3,760		(5,983)
Income tax provision		(1,602)		(3,441)
Net income (loss)		$	2,158	$	(9,424)

Net income (loss) per share:
Basic		$	0.03	$	(0.16)
Diluted		0.03		(0.16)

Weighted average number of common shares outstanding:
Basic		62,825		60,498
Diluted		63,072		60,498

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)


	Three Months Ended March 31,
		2023		2022
Net income (loss)		$	2,158	$	(9,424)

Other comprehensive income:
Currency translation adjustments		4,149		861



Comprehensive income (loss)		$	6,307	$	(8,563)

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)


	March 31, 2023		December 31, 2022
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	15,807	$	42,018
Accounts receivable, net	220,202		218,769
Inventories, net	196,278		182,658
Prepaid expenses and other current assets	18,130		19,317
Total current assets	450,417		462,762

Property, plant, and equipment, net	306,134		303,835
Operating lease assets, net	23,828		23,028
Goodwill, net	79,579		79,282
Other intangible assets, net	165,673		169,798
Other noncurrent assets	24,506		25,687
Total assets	$	1,050,137	$	1,064,392

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt	$	527	$	17,831
Accounts payable	73,478		73,251
Accrued liabilities	35,414		49,057
Current operating lease liabilities	6,528		6,142
Income taxes payable	3,719		2,605
Deferred revenue	48,969		44,790
Total current liabilities	168,635		193,676

Long-term debt	138,484		135,066
Long-term operating lease liabilities	20,912		20,658
Deferred income taxes	7,143		6,652
Other noncurrent liabilities	19,445		18,782
Total liabilities	354,619		374,834

Stockholders' equity:
Common stock, $.01 par value, 200,000,000 shares authorized, 77,143,220 shares and 76,587,920 shares issued, respectively	771		766
Additional paid-in capital	1,123,876		1,122,292
Retained earnings	274,185		272,027
Accumulated other comprehensive loss	(74,792)		(78,941)
Treasury stock, at cost, 12,888,342 and 12,684,101 shares, respectively	(628,522)		(626,586)
Total stockholders' equity	695,518		689,558
Total liabilities and stockholders' equity	$	1,050,137	$	1,064,392

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In Thousands)


Three Months Ended March 31, 2023	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Stockholders' Equity
Balance, December 31, 2022	$	766	$	1,122,292	$	272,027	$	(78,941)	$	(626,586)	$	689,558
Net income	—		—		2,158		—		—		2,158
Currency translation adjustments (excluding intercompany advances)	—		—		—		3,494		—		3,494
Currency translation adjustments on intercompany advances	—		—		—		655		—		655
Stock-based compensation expense	5		1,584		—		—		—		1,589
Surrender of stock to settle taxes on stock awards	—		—		—		—		(1,936)		(1,936)
Balance, March 31, 2023	$	771	$	1,123,876	$	274,185	$	(74,792)	$	(628,522)	$	695,518


Three Months Ended March 31, 2022	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Stockholders' Equity
Balance, December 31, 2021	$	739	$	1,105,135	$	281,567	$	(66,031)	$	(625,584)	$	695,826
Net loss	—		—		(9,424)		—		—		(9,424)
Currency translation adjustments (excluding intercompany advances)	—		—		—		(3,580)		—		(3,580)
Currency translation adjustments on intercompany advances	—		—		—		4,441		—		4,441
Stock-based compensation expense	7		1,828		—		—		—		1,835
Surrender of stock to settle taxes on stock awards	—		—		—		—		(990)		(990)
Balance, March 31, 2022	$	746	$	1,106,963	$	272,143	$	(65,170)	$	(626,574)	$	688,108

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	2,158	$	(9,424)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization expense	15,256		17,817




Stock-based compensation expense	1,589		1,835
Amortization of deferred financing costs	449		469
Deferred income tax provision (benefit)	396		(174)


Gains on disposals of assets	(210)		(543)
Other, net	17		550
Changes in operating assets and liabilities:
Accounts receivable	(745)		(9,086)
Inventories	(12,802)		(13,090)
Accounts payable and accrued liabilities	(18,329)		(4,555)

Deferred revenue	4,179		4,324
Other operating assets and liabilities, net	2,124		1,142
Net cash flows used in operating activities	(5,918)		(10,735)

Cash flows from investing activities:
Capital expenditures	(6,568)		(2,858)
Proceeds from disposition of property and equipment	223		869

Other, net	(48)		(67)
Net cash flows used in investing activities	(6,393)		(2,056)

Cash flows from financing activities:
Revolving credit facility borrowings	27,865		367
Revolving credit facility repayments	(22,865)		(367)


Repayment of 1.50% convertible senior notes	(17,315)		—
Other debt and finance lease repayments, net	(106)		(165)
Payment of financing costs	(21)		(68)
Shares added to treasury stock as a result of net share settlements due to vesting of stock awards	(1,936)		(990)
Net cash flows used in financing activities	(14,378)		(1,223)

Effect of exchange rate changes on cash and cash equivalents	478		320
Net change in cash and cash equivalents	(26,211)		(13,694)
Cash and cash equivalents, beginning of period	42,018		52,852
Cash and cash equivalents, end of period	$	15,807	$	39,158

Cash paid (received) for:
Interest	$	485	$	522
Income taxes, net	(2,465)		119

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

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 (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. Certain information in footnote disclosures normally included with financial statements prepared in accordance with 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.

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 long-lived asset impairments, revenue and income recognized over time, valuation allowances recorded on deferred tax assets, reserves on inventory, allowances for doubtful accounts, settlement of litigation and potential future adjustments related to contractual indemnification and other agreements. Actual results could materially differ from those estimates.

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, which are adopted by the Company as of the specified effective date. Management believes that recently issued standards, which are not yet effective, will not have a material impact on the Company's consolidated financial statements upon adoption.

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, 2022.

2. Details of Selected Balance Sheet Accounts

Additional information regarding selected balance sheet accounts as of March 31, 2023 and December 31, 2022 is presented below (in thousands):


	March 31, 2023			December 31, 2022
Accounts receivable, net:
Trade	$	163,360		$	145,540
Unbilled revenue	27,849			29,679
Contract assets	27,731			42,599
Other	6,621			6,177
Total accounts receivable	225,561			223,995
Allowance for doubtful accounts	(5,359)			(5,226)
	$	220,202		$	218,769

Allowance for doubtful accounts as a percentage of total accounts receivable	2		%	2		%


	March 31, 2023		December 31, 2022
Deferred revenue (contract liabilities)	$	48,969	$	44,790

As of March 31, 2023, accounts receivable, net in the United States and the United Kingdom represented 75% and 12%, respectively, of the total. No other country or single customer accounted for more than 10% of the Company's total accounts receivable as of March 31, 2023.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

For the three months ended March 31, 2023, the $14.9 million net decrease in contract assets was attributable to $27.8 million transferred to accounts receivable during the period, which was partially offset by $12.9 million in revenue recognized. Deferred revenue (contract liabilities) increased by $4.2 million in the first three months of 2023, reflecting $13.2 million in new customer billings which were not recognized as revenue during the period, partially offset by the recognition of $9.0 million of revenue that was deferred at the beginning of the period.

The following provides a summary of activity in the allowance for doubtful accounts for the three months ended March 31, 2023 and 2022 (in thousands):


	Three Months Ended March 31,
	2023		2022
Allowance for doubtful accounts – January 1	$	5,226	$	4,471
Provisions	133		943
Write-offs	(21)		(635)
Other	21		—
Allowance for doubtful accounts – March 31	$	5,359	$	4,779


	March 31, 2023		December 31, 2022
Inventories, net:
Finished goods and purchased products	$	95,094	$	90,443
Work in process	31,632		32,079
Raw materials	108,058		97,817
Total inventories	234,784		220,339
Allowance for excess or obsolete inventory	(38,506)		(37,681)
	$	196,278	$	182,658


			March 31, 2023			December 31, 2022
Property, plant and equipment, net:







Property, plant and equipment	$	1,139,138		$	1,128,834
Accumulated depreciation	(833,004)			(824,999)
							$	306,134	$	303,835

For the three months ended March 31, 2023 and 2022, depreciation expense was $11.0 million and $12.7 million, respectively.


	March 31, 2023						December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Other intangible assets:
Customer relationships	$	141,259	$	49,851	$	91,408	$	141,179	$	47,629	$	93,550
Patents/Technology/Know-how	69,925		30,537		39,388		69,830		29,214		40,616
Tradenames and other	52,497		17,620		34,877		52,488		16,856		35,632
	$	263,681	$	98,008	$	165,673	$	263,497	$	93,699	$	169,798

For the three months ended March 31, 2023 and 2022, amortization expense was $4.3 million and $5.2 million, respectively.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)


	March 31, 2023		December 31, 2022
Other noncurrent assets:
Deferred compensation plan	$	18,349	$	17,551
Deferred financing costs(1)	—		1,893
Deferred income taxes	1,518		1,517
Other	4,639		4,726
	$	24,506	$	25,687

____________________

(1)Unamortized deferred financing costs are presented as an offset to outstanding borrowing under the ABL Facility as of March 31, 2023.


	March 31, 2023		December 31, 2022
Accrued liabilities:
Accrued compensation	$	15,882	$	33,659
Accrued taxes, other than income taxes	3,175		1,865
Insurance liabilities	4,976		4,640
Accrued interest	3,324		1,784
Accrued commissions	2,432		2,302
Other	5,625		4,807
	$	35,414	$	49,057

3. Long-term Debt

As of March 31, 2023 and December 31, 2022, long-term debt consisted of the following (in thousands):


	March 31, 2023		December 31, 2022
Revolving credit facility(1)	$	3,305	$	—
2026 Notes(2)	132,379		132,164
2023 Notes	—		17,303
Other debt and finance lease obligations	3,327		3,430
Total debt	139,011		152,897
Less: Current portion	(527)		(17,831)
Total long-term debt	$	138,484	$	135,066

____________________

(1)Outstanding borrowings under the revolving credit facility are presented net of $1.7 million of unamortized deferred financing costs as of March 31, 2023. Unamortized deferred financing costs of $1.9 million as of December 31, 2022 are presented in other noncurrent assets.

(2)The outstanding principal amount of the 2026 Notes was $135.0 million as of March 31, 2023 and December 31, 2022.

Revolving Credit Facility

On February 10, 2021, the Company entered into a senior secured credit facility with certain lenders, which provides for a $125.0 million asset-based revolving credit facility (the "ABL Facility") under which credit availability is subject to a borrowing base calculation.

The ABL Facility is governed by a credit agreement, as amended, with Wells Fargo Bank, National Association, as administrative agent and the lenders and other financial institutions from time to time party thereto (the "ABL Agreement"). The ABL Agreement matures on February 10, 2025 with a springing maturity 91 days prior to the maturity of any outstanding indebtedness with a principal amount in excess of $17.5 million.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The ABL Agreement provides funding based on a borrowing base calculation that includes eligible U.S. customer accounts receivable and inventory and provides for a $50.0 million sub-limit for the issuance of letters of credit. Borrowings under the ABL Agreement are secured by a pledge of substantially all of the Company's domestic assets (other than real property) and the stock of certain foreign subsidiaries.

Since December 13, 2022, borrowings under the ABL Agreement bear interest at a rate equal to the Secured Overnight Financing Rate ("SOFR") rate (subject to a floor rate of 0%) plus a margin of 2.75% to 3.25%, or at a base rate plus a margin of 1.75% to 2.25%, in each case based on average borrowing availability. Quarterly, the Company must also pay a commitment fee of 0.375% to 0.50% per annum, based on unused commitments under the ABL Agreement.

The ABL Agreement places restrictions on the Company's ability to incur additional indebtedness, grant liens on assets, pay dividends or make distributions on equity interests, dispose of assets, make investments, repay other indebtedness (including the 2026 Notes discussed below), engage in mergers, and other matters, in each case, subject to certain exceptions. The ABL Agreement contains customary default provisions, which, if triggered, could result in acceleration of repayment of all amounts then outstanding. The ABL Agreement also requires the Company to satisfy and maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 (i) in the event that availability under the ABL Agreement is less than the greater of (a) 15% of the borrowing base and (b) $14.1 million; (ii) to complete certain specified transactions; or (iii) if an event of default has occurred and is continuing.

As of March 31, 2023, the Company had $5.0 million of outstanding ABL Facility borrowings and $15.9 million of outstanding letters of credit. The total amount available to be drawn as of March 31, 2023 was $92.8 million, calculated based on the current borrowing base less outstanding borrowings and letters of credit. As of March 31, 2023, the Company was in compliance with its debt covenants under the ABL Agreement.

2026 Notes

The Company issued $135.0 million aggregate principal amount of its 4.75% convertible senior notes due 2026 (the "2026 Notes") pursuant to an indenture, dated as of March 19, 2021 (the "2026 Indenture"), between the Company and Computershare Trust Company, National Association, as successor trustee. Net proceeds from the 2026 Notes offering, after deducting issuance costs, totaled $130.6 million. The Company used $120.0 million of the cash proceeds to purchase $125.0 million principal amount of the outstanding 2023 Notes (as defined below) at a discount, with the balance added to cash on-hand.

The 2026 Notes bear interest at a rate of 4.75% per year and will mature on April 1, 2026, unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears on April 1 and October 1 of each year. Additional interest and special interest may accrue on the 2026 Notes under certain circumstances as described in the 2026 Indenture. The initial conversion rate is 95.3516 shares of the Company's common stock per $1,000 principal amount of the 2026 Notes (equivalent to an initial conversion price of $10.49 per share of common stock). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the 2026 Indenture. The Company's intent is to repay the principal amount of the 2026 Notes in cash and settle the conversion feature (if any) in shares of the Company's common stock. As of March 31, 2023, none of the conditions allowing holders of the 2026 Notes to convert, or requiring us to repurchase the 2026 Notes, had been met.

2023 Notes

On February 15, 2023, the Company's 1.50% convertible senior notes due 2023 (the "2023 Notes") matured and the outstanding $17.3 million principal amount was repaid in full.

4. 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 2026 Notes, on the accompanying consolidated balance sheets approximate their fair values. The estimated fair value of the 2026 Notes as of March 31, 2023 was $151.1 million based on quoted market prices (a Level 2 fair value measurement), which compares to the principal amount of $135.0 million.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

5. Stockholders' Equity

Common and Preferred Stock

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 three months of 2023 (in thousands):







Shares of common stock outstanding – December 31, 2022															63,904
Restricted stock awards, net of forfeitures															555
Shares withheld for taxes on vesting of stock awards															(204)
Shares of common stock outstanding – March 31, 2023															64,255

As of March 31, 2023 and December 31, 2022, the Company had 25,000,000 shares of preferred stock, $0.01 par value, authorized, with no shares issued or outstanding.

On February 16, 2023, the Company's Board of Directors authorized $25.0 million for the repurchases of the Company's common stock, par value $0.01 per share, through February 2025. Subject to applicable securities laws, such purchases will be at such times and in such amounts as the Company deems appropriate. As of March 31, 2023, no repurchases were made under this authorization.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, reported as a component of stockholders' equity, primarily relates to fluctuations in currency exchange rates against the U.S. dollar as used to translate certain of the international operations of the Company's operating segments. Accumulated other comprehensive loss decreased from $78.9 million at December 31, 2022 to $74.8 million at March 31, 2023. For the three months ended March 31, 2023 and 2022, currency translation adjustments recognized as a component of other comprehensive income were primarily attributable to the United Kingdom and Brazil.

During the three months ended March 31, 2023, the exchange rates for the British pound and the Brazilian real strengthened by 3% and 2%, respectively, compared to the U.S. dollar, contributing to other comprehensive income of $4.1 million. During the three months ended March 31, 2022, the exchange rate for the British pound weakened by 3% compared to the U.S. dollar while the Brazilian real strengthened by 17% compared to the U.S. dollar, contributing to other comprehensive income of $0.9 million.

6. Income Taxes

The income tax expense for the three months ended March 31, 2023 was calculated using a discrete approach. This methodology was used because changes in the Company's results of operations and non-deductible expenses can materially impact the estimated annual effective tax rate. For the three months ended March 31, 2023, the Company's income tax expense was $1.6 million on pre-tax income of $3.8 million, which included certain non-deductible expenses and discrete tax items. This compares to an income tax expense of $3.4 million on a pre-tax loss of $6.0 million, which included the impact of valuation allowances recorded against tax assets as well as certain non-deductible expenses and discrete tax items, for the three months ended March 31, 2022.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

7. Net Income (Loss) Per Share

The table below provides a reconciliation of the numerators and denominators of basic and diluted net income (loss) per share for the three months ended March 31, 2023 and 2022 (in thousands, except per share amounts):


	Three Months Ended March 31,
		2023		2022
Numerators:
Net income (loss)		$	2,158	$	(9,424)
Less: Income attributable to unvested restricted stock awards		(42)		—
Numerator for basic net income (loss) per share		2,116		(9,424)
Effect of dilutive securities:
Unvested restricted stock awards		—		—
Numerator for diluted net income (loss) per share		$	2,116	$	(9,424)

Denominators:
Weighted average number of common shares outstanding		64,068		61,627
Less: Weighted average number of unvested restricted stock awards outstanding		(1,243)		(1,129)
Denominator for basic net income (loss) per share		62,825		60,498
Effect of dilutive securities:
Unvested restricted stock awards		—		—
Unvested performance share units		247		—


Denominator for diluted net income (loss) per share		63,072		60,498

Net income (loss) per share:
Basic		$	0.03	$	(0.16)
Diluted		0.03		(0.16)

The calculation of diluted earnings per share for the three months ended March 31, 2023 and 2022 excluded 209 thousand shares and 298 thousand shares, respectively, issuable pursuant to outstanding stock options, due to their antidilutive effect. Additionally, shares issuable upon conversion of the Company's convertible senior notes were excluded from each period due to, among other factors, the Company's share price.

8. Long-Term Incentive Compensation

The following table presents a summary of activity for stock options, service-based restricted stock and stock unit awards, and performance-based stock unit awards for the three months ended March 31, 2023 (in thousands):


	Stock Options	Service-based Restricted Stock		Performance- and Service-based Stock Units
Outstanding – December 31, 2022	245	1,222		494
Granted	—	555		168
Vested	—	(513)		—
Forfeited	(82)	—		—
Outstanding – March 31, 2023	163	1,264		662
Weighted average grant date fair value (2023 awards)		$	9.11	$	9.11

The restricted stock program consists of a combination of service-based restricted stock and stock units, as well as performance-based stock units. Service-based restricted stock awards generally vest on a straight-line basis over a term of three years. Service-based stock unit awards (39 thousand units outstanding as of March 31, 2023) vest over one-year, with the underlying shares issued at a specified future date. Performance-based stock unit awards generally vest at the end of a three-year period, with the number of shares ultimately issued under the program dependent upon achievement of predefined specific performance objectives based on the Company's cumulative EBITDA over a three-year period.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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 Company issued conditional long-term cash incentive awards ("Cash Awards") of $1.5 million in the first quarters of 2023 and 2022. The performance measure for each of these Cash Awards is relative total stockholder return compared to a peer group of companies over a three-year period. The ultimate dollar amount to be awarded for each annual grant may range from zero to a maximum of $3.1 million, limited to their targeted award value ($1.5 million) if the Company's total stockholder return were to be negative over the performance period. Obligations related to the Cash Awards are classified as liabilities and recognized over their respective vesting periods.

Stock-based compensation expense recognized during the three months ended March 31, 2023 and 2022 totaled $1.6 million and $1.8 million, respectively. As of March 31, 2023, there was $11.4 million of pre-tax compensation costs related to service-based and performance-based stock awards, which will be recognized in future periods as vesting conditions are satisfied.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

9. Segments and Related Information

The Company operates through three operating segments: Offshore/Manufactured Products, Well Site Services and Downhole Technologies. Financial information by operating segment for the three months ended March 31, 2023 and 2022 is summarized in the following tables (in thousands).


	Revenues		Depreciation and amortization		Operating income (loss)		Capital expenditures		Total assets
Three Months Ended March 31, 2023
Offshore/Manufactured Products	$	98,199	$	4,668	$	11,090	$	535	$	548,439
Well Site Services	67,058		6,146		6,966		5,772		212,415
Downhole Technologies	30,942		4,275		(1,519)		249		256,095
Corporate	—		167		(10,662)		12		33,188
Total	$	196,199	$	15,256	$	5,875	$	6,568	$	1,050,137


	Revenues		Depreciation and amortization		Operating income (loss)		Capital expenditures		Total assets
Three Months Ended March 31, 2022
Offshore/Manufactured Products	$	84,112	$	5,330	$	10,196	$	902	$	559,877
Well Site Services	48,172		7,932		(3,395)		1,548		197,077
Downhole Technologies	31,760		4,384		(1,505)		317		265,958
Corporate	—		171		(9,632)		91		55,053
Total	$	164,044	$	17,817	$	(4,336)	$	2,858	$	1,077,965

The following tables provide supplemental disaggregated revenue from contracts with customers by operating segment for the three months ended March 31, 2023 and 2022 (in thousands):


	Offshore/Manufactured Products				Well Site Services				Downhole Technologies				Total
	2023		2022		2023		2022		2023		2022		2023		2022
Three Months Ended March 31
Major revenue categories -
Project-driven products	$	39,132	$	33,844	$	—	$	—	$	—	$	—	$	39,132	$	33,844
Short-cycle:
Completion products and services	17,955		13,580		65,406		45,166		30,942		31,760		114,303		90,506
Drilling services	—		—		1,652		3,006		—		—		1,652		3,006
Other products	9,485		7,044		—		—		—		—		9,485		7,044
Total short-cycle	27,440		20,624		67,058		48,172		30,942		31,760		125,440		100,556
Other products and services	31,627		29,644		—		—		—		—		31,627		29,644
	$	98,199	$	84,112	$	67,058	$	48,172	$	30,942	$	31,760	$	196,199	$	164,044

Revenues from products and services transferred to customers over time accounted for approximately 66% and 62% of consolidated revenues for the three months ended March 31, 2023 and 2022, respectively. The balance of revenues for the respective periods relates to products and services transferred to customers at a point in time. As of March 31, 2023, the Company had $209.9 million of remaining backlog related to contracts with an original expected duration of greater than one year. Approximately 35% of this remaining backlog is expected to be recognized as revenue over the remaining nine months of 2023, with an additional 46% recognized in 2024 and the balance thereafter.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

10. Commitments and Contingencies

The Company is a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of the Company's products or operations. Some of these claims relate to matters occurring prior to the acquisition of businesses, and some relate to businesses the Company has sold. In certain cases, the Company is entitled to indemnification from the sellers of businesses and, in other cases, the Company has indemnified the buyers of businesses. Although the Company can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on the Company, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by indemnity or insurance, will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and other statements we make contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors, including incorrect or changed assumptions. For a discussion of known material factors that could affect our results, please refer to "Part I, Item 1. Business," "Part I, Item 1A. Risk Factors," "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk" included in our 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 17, 2023, as well as to "Part II, Item 1A. Risk Factors" included in this Quarterly Report on Form 10-Q.

You can typically identify "forward-looking statements" by the use of forward-looking words such as "may," "will," "could," "project," "believe," "anticipate," "expect," "estimate," "potential," "plan," "forecast," "proposed," "should," "seek," and other similar words. Such statements may relate to our future financial position, budgets, capital expenditures, projected costs, plans and objectives of management for future operations and possible future strategic transactions. Actual results frequently differ from assumed facts and such differences can be material, depending upon the circumstances.

While we believe we are providing forward-looking statements expressed in good faith and on a reasonable basis, there can be no assurance that actual results will not differ from such forward-looking statements. The following are important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, us:

•the impact of disruptions in the bank and capital markets, including the two U.S. bank failures which occurred in March 2023;

•the impact of the ongoing military action between Russia and Ukraine, that began in February 2022, including, but not limited to, energy market disruptions, supply chain disruptions and increased costs, government sanctions, and delays or potential cancellation of planned customer projects;

•the ability and willingness of the Organization of Petroleum Exporting Countries ("OPEC") and other producing nations to set and maintain oil production levels and pricing;

•the level of supply of and demand for oil and natural gas;

•fluctuations in the current and future prices of oil and natural gas;

•the level of exploration, drilling and completion activity;

•the cyclical nature of the oil and natural gas industry;

•the level of offshore oil and natural gas developmental activities;

•the financial health of our customers;

•the impact of environmental matters, including executive actions and regulatory or legislative efforts to adopt environmental or climate change regulations that may result in increased operating costs or reduced oil and natural gas production or demand globally;

•proposed new rules by the SEC relating to the disclosure of a range of climate-related information and risks;

•political, economic and litigation efforts to restrict or eliminate certain oil and natural gas exploration, development and production activities due to concerns over the threat of climate change;

•the availability of and access to attractive oil and natural gas field prospects, which may be affected by governmental actions or actions of other parties restricting drilling and completion activities;

•general global economic conditions;

•global weather conditions and natural disasters, including hurricanes in the Gulf of Mexico;

•changes in tax laws and regulations;

•supply chain disruptions;

•the impact of tariffs and duties on imported materials and exported finished goods;

•our ability to timely obtain and maintain critical permits for operating facilities;

•our ability to attract and retain skilled personnel;

•negative outcome of litigation, threatened litigation or government proceedings;

•our ability to develop new competitive technologies and products;

•inflation, including our ability to increase prices to our customers as our costs increase;

•fluctuations in currency exchange rates;

•physical, digital, cyber, internal and external security breaches and other incidents affecting information security and data privacy;

•the cost of capital in the bank and capital markets and our ability to access them;

•our ability to protect and enforce our intellectual property rights;

•our ability to complete the integration of acquired businesses and achieve the expected accretion in earnings; and

•the other factors identified in "Part I, Item 1A. Risk Factors" in our 2022 Annual Report on Form 10-K, as well as in "Part II, Item 1A. Risk Factors" included in this Quarterly Report on Form 10-Q.

Should one or more of these risks or uncertainties materialize, or should the assumptions on which our forward-looking statements are based prove incorrect or change, actual results may differ materially from those expected, estimated or projected. In addition, the factors identified above may not necessarily be all of the important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by us, or on our behalf. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no responsibility to publicly release the result of any revision of our forward-looking statements after the date they are made.

In addition, in certain places in this Quarterly Report on Form 10-Q, we refer to information and reports published by third parties that purport to describe trends or developments in the energy industry. We do so for the convenience of our stockholders and in an effort to provide information available in the market that will assist our investors in better understanding the market environment in which we operate. However, we specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read together with our condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and notes to those statements included in our 2022 Annual Report on Form 10-K in order to understand factors, such as charges and credits, financing transactions and changes in tax regulations, which may impact comparability from period to period.

We provide a broad range of manufactured products and services to customers in the energy, industrial and military sectors through our Offshore/Manufactured Products, Well Site Services and Downhole Technologies segments. Demand for our products and services is cyclical and substantially dependent upon activity levels in the oil and gas industry, particularly our customers' willingness to invest capital in the exploration for and development of crude oil and natural gas reserves. Our customers' capital spending programs are generally based on their cash flows and their outlook for near-term and long-term commodity prices, making demand for our products and services sensitive to expectations regarding future crude oil and natural gas prices, as well as economic growth, commodity demand and estimates of resource production and regulatory pressures related to environmental, social and governance ("ESG") considerations.

Recent Developments

Brent and West Texas Intermediate ("WTI") crude oil and natural gas pricing trends were as follows:


	Average Price(1) for quarter ended								Average Price(1) for year ended December 31
Year	March 31		June 30		September 30		December 31
Brent Crude (per bbl)
2023	$	81.01
2022	100.87		$	113.84	$	100.71	$	88.77	$	100.99
WTI Crude (per bbl)
2023	$	75.91
2022	95.18		$	108.83	$	93.06	$	82.79	$	94.90
Henry Hub Natural Gas (per MMBtu)
2023	$	2.64
2022	4.67		$	7.50	$	8.03	$	5.55	$	6.45

________________

(1)Source: U.S. Energy Information Administration (spot prices).

On April 21, 2023, Brent crude oil, WTI crude oil and natural gas spot prices closed at $83.36 per barrel, $77.86 per barrel and $2.20 per MMBtu, respectively. Additionally, as presented in more detail below, the U.S. drilling rig count reported on April 21, 2023 was 753 rigs – comparable to the first quarter 2023 average.

In February 2023, we repaid the $17.3 million principal amount, plus accrued interest, of outstanding 2023 Notes (as defined below). Additionally, our Board of Directors authorized a $25.0 million stock repurchase plan, which extends through February 2025. No repurchases have been made under the plan as of March 31, 2023.

Overview

Current and expected future pricing for WTI crude oil and inflationary costs increases, along with expectations regarding the regulatory environment in the regions in which we operate, are factors that will continue to influence our customers' willingness to invest capital in their businesses. Expectations for the longer-term price for Brent crude oil will continue to influence our customers' spending related to global offshore drilling and development and, thus, a significant portion of the activity of our Offshore/Manufactured Products segment.

Crude oil prices and levels of demand for crude oil are likely to remain highly volatile due to numerous factors, including: global uncertainties related to disruptions in the banking sector, geopolitical conflicts (such as the direction and outcome of Russia's invasion of Ukraine) and international tensions; sanctions; the perceived risk of a global economic recession; domestic or international crude oil production; changes in governmental rules and regulations; the willingness of operators to invest capital in the exploration for and development of resources; use of alternative fuels; improved vehicle fuel efficiency; a more sustained movement to electric vehicles; and the potential for ongoing supply/demand imbalances. Capital investment by our customers temporarily declined due to these factors and the desire to generate sustainable cash flows.

Customer spending in the natural gas shale plays has been limited due to technological advancements that have led to significant amounts of natural gas being produced from prolific basins in the Northeastern United States and from associated gas produced from the drilling and completion of unconventional oil wells in the United States.

U.S. drilling, completion and production activity and, in turn, our financial results, are sensitive to near-term fluctuations in commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of our U.S. operations.

Our Offshore/Manufactured Products segment provides technology-driven, highly-engineered products and services for offshore oil and natural gas production systems and facilities globally, as well as certain products and services to the offshore and land-based drilling and completion markets. This segment also produces a variety of products for use in industrial, military and other applications outside the traditional energy industry. Additionally, we are investing in research and product development related to, and have been awarded select contracts and are bidding on additional projects that facilitate, the development of alternative energy sources, including offshore wind and deepsea mineral gathering opportunities. This segment is particularly influenced by global spending on deepwater drilling and production, which is primarily driven by our customers' longer-term commodity demand forecasts and outlook for crude oil and natural gas prices. Approximately 40% of Offshore/Manufactured Products segment sales in the first three months of 2023 were driven by our customers' capital spending for products used in exploratory and developmental drilling, greenfield offshore production infrastructure, and subsea pipeline tie-

in and repair system applications, along with upgraded equipment for existing offshore drilling rigs and other vessels (referred to herein as "project-driven products"). Deepwater oil and gas development projects typically involve significant capital investments and multi-year development plans. Such projects are generally undertaken by larger exploration, field development and production companies (primarily international oil companies and state-run national oil companies) using relatively conservative crude oil and natural gas pricing assumptions. Given the long lead times associated with field development, we believe some of these deepwater projects, once approved for development, are generally less susceptible to change based on short-term fluctuations in the price of crude oil and natural gas.

Backlog reported by our Offshore/Manufactured Products segment increased to $326 million as of March 31, 2023 from $308 million as of December 31, 2022 and $265 million as of March 31, 2022. Bookings totaled $118 million in the first quarter of 2023, yielding a book-to-bill ratio of 1.2x. The following table sets forth backlog as of the dates indicated (in millions).


	Backlog as of
Year	March 31		June 30		September 30		December 31
2023	$	326
2022	265		$	241	$	258	$	308
2021	226		214		249		260

Our Well Site Services segment provides completion services and, to a much lesser extent, land drilling services, in the United States (including the Gulf of Mexico) and the rest of the world. U.S. drilling and completion activity and, in turn, our Well Site Services results, are sensitive to near-term fluctuations in commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of its operations. We primarily supply equipment and service personnel utilized in the completion of and initial production from new and recompleted wells in our U.S. operations, which are dependent primarily upon the level and complexity of drilling, completion and workover activity in our areas of operations. Well intensity and complexity have increased with the continuing transition to multi-well pads, the drilling of longer lateral wells and increased downhole pressures, along with the increased number of frac stages completed in horizontal wells.

Our Downhole Technologies segment provides oil and gas perforation systems, downhole tools and services 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. Product and service offerings for this segment include innovations in perforation technology through patented and proprietary systems combined with advanced modeling and analysis tools. This expertise has led to the optimization of perforation hole size, depth, and quality of tunnels, which are key factors for maximizing the effectiveness of hydraulic fracturing. Additional offerings include proprietary frac plug and toe valve products, which are focused on zonal isolation for hydraulic fracturing of horizontal wells, and a broad range of consumable products, such as setting tools and bridge plugs, that are used in completion, intervention and decommissioning applications. Demand drivers for the Downhole Technologies segment include continued trends toward longer lateral lengths, increased frac stages and more perforation clusters to target increased unconventional well productivity, which requires ongoing technological and product developments.

Demand for our completion-related products and services within each of our segments is highly correlated to changes in the total number of wells drilled in the United States, total footage drilled, the number of drilled wells that are completed and changes in the drilling rig count. The following table sets forth a summary of the U.S. and international drilling rig count, as measured by Baker Hughes Company, as of and for the periods indicated.


	As of April 21, 2023		Average for the
		Three Months Ended March 31,
			2023	2022
United States Rig Count:
Land – Oil	571		579	493
Land – Natural gas and other	161		155	123
Offshore	21		19	17
	753		753	633
International Rig Count:
Land			897	828
Offshore			226	193
			1,123	1,021
			1,876	1,654

The U.S. energy industry is primarily focused on crude oil and liquids-rich exploration and development activities in U.S. shale plays utilizing horizontal drilling and completion techniques. As of March 31, 2023, oil-directed drilling accounted for 78% of the total U.S. rig count – with the balance largely natural gas related. As can be derived from the table above, the average U.S. rig count for the first three months of 2023 increased by 120 rigs, or 19%, compared to the average for the first three months of 2022.

We use a variety of domestically produced and imported raw materials and component products, including steel, in the manufacture of our products. The United States has 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. In addition, in response to Russia's invasion of Ukraine, governments in the European Union, the United States, the United Kingdom, Switzerland and other countries have enacted sanctions against Russia and Russian interests. The effect of these sanctions and tariffs and the application and interpretation of existing trade agreements and customs, anti-dumping and countervailing duty regulations continue to evolve, and we continue to monitor these matters. If we encounter difficulty in procuring these raw materials and component products, or if the prices we have to pay for these products increase and we are unable to pass corresponding cost increases on to our customers, our financial position, cash flows 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 our customers to delay or cancel planned projects which, if this occurred, would adversely affect our financial position, cash flows and results of operations.

Other factors that can affect our business and financial results include but are not limited to: the general global economic environment (including disruptions in the banking sector); competitive pricing pressures; public health crises; natural disasters; labor market constraints; supply chain disruptions; inflation in wages, materials, parts, equipment and other costs; climate-related and other regulatory changes; geopolitical tensions; and changes in tax laws in the United States and international markets. We continue to monitor the global economy, the prices of and demand for crude oil and natural gas, and the resultant impact on the capital spending plans and operations of our customers in order to plan and manage our business.

Human Capital

For more information on our health and safety, diversity and other workforce policies, please see "Part I, Item 1. Business – Human Capital" in our Annual Report on Form 10-K for the year ended December 31, 2022.

Selected Financial Data

This selected financial data should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related notes included in "Part I, Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes included in "Part II, Item 8. Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended December 31, 2022 in order to understand factors which may impact comparability of the selected financial data.

Unaudited Consolidated Results of Operations

The following summarizes our consolidated results of operations for the three months ended March 31, 2023 and 2022 (in thousands, except per share amounts):


	Three Months Ended March 31,
		2023		2022		Variance
Revenues:
Products		$	99,840	$	85,761	$	14,079
Services		96,359		78,283		18,076
		196,199		164,044		32,155
Costs and expenses:
Product costs		78,677		64,801		13,876
Service costs		72,058		61,803		10,255
Cost of revenues (exclusive of depreciation and amortization expense presented below)		150,735		126,604		24,131
Selling, general and administrative expenses		24,016		23,833		183
Depreciation and amortization expense