OIL STATES INTERNATIONAL, INC - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - OIL STATES INTERNATIONAL, INC	ois_20180930xex322.htm
EX-32.1 - EXHIBIT 32.1 - OIL STATES INTERNATIONAL, INC	ois_20180930xex321.htm
EX-31.2 - EXHIBIT 31.2 - OIL STATES INTERNATIONAL, INC	ois_20180930xex312.htm
EX-31.1 - EXHIBIT 31.1 - OIL STATES INTERNATIONAL, INC	ois_20180930xex311.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2018



[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number: 001-16337

OIL STATES INTERNATIONAL, INC.

______________

(Exact name of registrant as specified in its charter)



Delaware	76-0476605
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Three Allen Center, 333 Clay Street, Suite 4620,	77002
Houston, Texas	(Zip Code)
(Address of principal executive offices)

(713) 652-0582

(Registrant’s telephone number, including area code)

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



YES [X]	NO [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).



YES [X]	NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	[X]	Accelerated filer	[ ]

Non-accelerated filer	[ ]	Smaller reporting company	[ ]

		Emerging growth company	[ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



YES [ ]	NO [X]

As of October 29, 2018, the number of shares of common stock outstanding was 59,978,949.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX



	Page No.
Part I -- FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Financial Statements
Unaudited Consolidated Statements of Operations			3
Unaudited Consolidated Statements of Comprehensive Loss			4
Consolidated Balance Sheets			5
Unaudited Consolidated Statement of Stockholders’ Equity			6
Unaudited Consolidated Statements of Cash Flows			7
Notes to Unaudited Condensed Consolidated Financial Statements	8	–	25

Cautionary Statement Regarding Forward-Looking Statements	27	–	28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28	–	44

Item 3. Quantitative and Qualitative Disclosures About Market Risk			45

Item 4. Controls and Procedures			46

Part II -- OTHER INFORMATION

Item 1. Legal Proceedings			47

Item 1A. Risk Factors			47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47

Item 3. Defaults Upon Senior Securities			47

Item 4. Mine Safety Disclosures			47

Item 5. Other Information			48

Item 6. Exhibits			48

Signature Page			49

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues:
Products	$	120,271		$	67,339		$	385,279		$	223,269
Services	154,323			96,709			428,736			263,648
	274,594			164,048			814,015			486,917

Costs and expenses:
Product costs	87,822			50,593			276,122			160,252
Service costs	127,836			78,596			342,829			219,697
Cost of revenues (exclusive of depreciation and amortization expense presented below)	215,658			129,189			618,951			379,949
Selling, general and administrative expense	32,285			26,843			102,399			84,055
Depreciation and amortization expense	30,586			26,788			90,698			82,552
Other operating (income) expense, net	(213		)	(589		)	(2,097		)	374
	278,316			182,231			809,951			546,930
Operating income (loss)	(3,722		)	(18,183		)	4,064			(60,013		)

Interest expense	(4,913		)	(1,147		)	(14,359		)	(3,370		)
Interest income	70			73			272			243
Other income	709			207			1,927			477
Loss before income taxes	(7,856		)	(19,050		)	(8,096		)	(62,663		)
Income tax benefit	3,837			4,019			3,327			15,708
Net loss	$	(4,019	)	$	(15,031	)	$	(4,769	)	$	(46,955	)

Net loss per share:
Basic	$	(0.07	)	$	(0.30	)	$	(0.08	)	$	(0.94	)
Diluted	(0.07		)	(0.30		)	(0.08		)	(0.94		)

Weighted average number of common shares outstanding:
Basic	59,026			49,978			58,606			50,190
Diluted	59,026			49,978			58,606			50,190

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In Thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net loss	$	(4,019	)	$	(15,031	)	$	(4,769	)	$	(46,955	)

Other comprehensive income (loss):
Currency translation adjustments	(2,539		)	4,857			(11,238		)	13,490
Comprehensive loss	$	(6,558	)	$	(10,174	)	$	(16,007	)	$	(33,465	)

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)



	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	36,261		$	53,459
Accounts receivable, net	296,713			216,139
Inventories, net	210,783			168,285
Prepaid expenses and other current assets	21,872			18,054
Total current assets	565,629			455,937

Property, plant, and equipment, net	544,653			498,890
Goodwill, net	656,753			268,009
Other intangible assets, net	247,876			50,265
Other noncurrent assets	29,885			28,410
Total assets	$	2,044,796		$	1,301,511

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt and capitalized leases	$	25,535		$	411
Accounts payable	78,621			49,089
Accrued liabilities	65,700			45,889
Income taxes payable	2,514			1,647
Deferred revenue	13,489			18,234
Total current liabilities	185,859			115,270

Long-term debt and capitalized leases	328,876			4,870
Deferred income taxes	54,141			24,718
Other noncurrent liabilities	26,245			23,940
Total liabilities	595,121			168,798

Stockholders’ equity:
Common stock, $.01 par value, 200,000,000 shares authorized, 71,767,764 shares and 62,721,698 shares issued, respectively	718			627
Additional paid-in capital	1,091,663			754,607
Retained earnings	1,043,854			1,048,623
Accumulated other comprehensive loss	(69,731		)	(58,493		)
Treasury stock, at cost, 11,784,242 and 11,632,276 shares, respectively	(616,829		)	(612,651		)
Total stockholders’ equity	1,449,675			1,132,713
Total liabilities and stockholders’ equity	$	2,044,796		$	1,301,511

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In Thousands)



	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders' Equity
Balance, December 31, 2017	$	627	$	754,607	$	1,048,623		$	(58,493	)	$	(612,651	)	$	1,132,713
Net loss	—		—		(4,769		)	—			—			(4,769		)
Currency translation adjustments (excluding intercompany advances)	—		—		—			(9,053		)	—			(9,053		)
Currency translation adjustments on intercompany advances	—		—		—			(2,185		)	—			(2,185		)
Stock-based compensation expense:
Restricted stock	4		16,154		—			—			—			16,158
Stock options	—		396		—			—			—			396
Issuance of common stock in connection with GEODynamics acquisition	87		294,823		—			—			—			294,910
Issuance of 1.50% convertible senior notes, net of income taxes of $7,744	—		25,683		—			—			—			25,683
Surrender of stock to settle taxes on restricted stock awards	—		—		—			—			(4,178		)	(4,178		)
Balance, September 30, 2018	$	718	$	1,091,663	$	1,043,854		$	(69,731	)	$	(616,829	)	$	1,449,675

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net loss	$	(4,769	)	$	(46,955	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense	90,698			82,552
Stock-based compensation expense	16,554			17,023
Amortization of debt discount and deferred financing costs	5,504			608
Deferred income tax expense (benefit)	1,061			(2,224		)
Provision for bad debt	1,083			257
Gain on disposals of assets	(5,046		)	(526		)
Other, net	(92		)	62
Changes in operating assets and liabilities, net of effect from acquired businesses:
Accounts receivable	(25,454		)	26,909
Inventories	(7,867		)	5,912
Accounts payable and accrued liabilities	18,311			11,811
Income taxes payable	524			(4,789		)
Other operating assets and liabilities, net	(10,406		)	(14,323		)
Net cash flows provided by operating activities	80,101			76,317

Cash flows from investing activities:
Capital expenditures (see Note 14)	(71,286		)	(20,331		)
Acquisitions of businesses, net of cash acquired	(379,676		)	(12,859		)
Proceeds from disposition of property, plant and equipment	1,812			1,125
Proceeds from flood insurance claims	3,589			—
Other, net	(1,218		)	(631		)
Net cash flows used in investing activities	(446,779		)	(32,696		)

Cash flows from financing activities:
Issuance of 1.50% convertible senior notes	200,000			—
Revolving credit facility borrowings	769,147			167,183
Revolving credit facility repayments	(608,565		)	(193,761		)
Other debt and capital lease repayments, net	(405		)	(403		)
Payment of financing costs	(7,368		)	—
Purchase of treasury stock	—			(16,283		)
Shares added to treasury stock as a result of net share settlements due to vesting of restricted stock	(4,178		)	(5,305		)
Net cash flows provided by (used in) financing activities	348,631			(48,569		)

Effect of exchange rate changes on cash and cash equivalents	849			2,012
Net change in cash and cash equivalents	(17,198		)	(2,936		)
Cash and cash equivalents, beginning of period	53,459			68,800
Cash and cash equivalents, end of period	$	36,261		$	65,864

Cash paid for:
Interest	$	7,730		$	3,448
Income taxes, net of refunds	2,369			8,590

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS


1.	Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Oil States International, Inc. and its subsidiaries (referred to in this report as “we” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year. Certain prior-year amounts in the Company’s unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.

The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Our industry is cyclical and this cyclicality impacts our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows including our determination of whether a decline in value of our long-lived assets, including definite-lived intangibles, and/or goodwill has occurred.

The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10‑K”).


2.	Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

In May 2014, the FASB issued guidance on revenue from contracts with customers that superseded most then-current revenue recognition guidance, including industry-specific guidance (often referred to as "ASC 606"). The underlying principle is that an entity recognizes revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to receive in exchange for those goods or services. The Company adopted this guidance on January 1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of that date. On January 1, 2018, we were required to recognize any cumulative effect of adopting this guidance as an adjustment to our opening balance of retained earnings. Prior periods were not retrospectively adjusted. Based on our analysis of existing contracts with customers, the Company concluded the cumulative impact of the new standard was not material to our consolidated financial statements through January 1, 2018. In accordance with the guidance, we have expanded our revenue recognition disclosures to address the new qualitative and quantitative requirements. See Note 12, "Segments, Revenue Recognition and Related Information."

In February 2016, the FASB issued guidance on leases which, as amended, introduces the recognition of lease assets and lease liabilities by lessees for all leases which are not short-term in nature. In connection with the required adoption of this guidance on January 1, 2019, the Company will use the optional transition method of recognizing any cumulative effect of adopting this guidance as an adjustment to our opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Company is evaluating various specific other implementation options allowed under the standard and is populating its lease portfolio into a software system to meet the reporting requirements of this standard. The Company believes the key change upon adoption will be the balance sheet recognition of our operating leases when the Company is the lessee. The income statement recognition appears similar to the Company's current methodology.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)


3.	Business Acquisitions, Goodwill and Other Intangible Assets

GEODynamics Acquisition

On January 12, 2018, the Company acquired GEODynamics, Inc. ("GEODynamics") for a purchase price consisting of (i) $295.4 million in cash (net of cash acquired), which we funded through borrowings under the Company's Revolving Credit Facility (as defined in Note 6, "Long-term Debt"), (ii) approximately 8.66 million shares of the Company's common stock (having a market value of approximately $295 million as of the closing date of the acquisition) and (iii) an unsecured $25 million promissory note that bears interest at 2.5% per annum and matures on July 12, 2019 (the “GEODynamics Acquisition”). Under the terms of the purchase agreement, the Company may be entitled to indemnification in respect of certain matters occurring prior to acquisition and amounts payable under the promissory note may be subject to set-off, in part or in full, in respect of such indemnified matters. See Note 13, "Commitments and Contingencies."

GEODynamics’ results of operations have been included in the Company’s financial statements subsequent to the closing of the acquisition on January 12, 2018. The acquired GEODynamics operations, reported as the Downhole Technologies segment, contributed revenues of $161.6 million and operating income of $26.1 million for the period from January 12, 2018 through September 30, 2018. See Note 12, "Segments, Revenue Recognition and Related Information" for further information with respect to the Downhole Technologies segment operations.

With respect to the approximately 8.66 million shares of the Company's common stock issued in the GEODynamics Acquisition, the Company also entered into a registration rights agreement. The Company filed a shelf registration statement for the resale of shares in accordance with the agreement on January 19, 2018 and the selling stockholder sold approximately 5.93 million shares of the Company's common stock through an underwritten offering in late February 2018. As of September 30, 2018, the Company does not expect to have any further material obligations under the registration rights agreement.

Falcon Acquisition

On February 28, 2018, the Company acquired Falcon Flowback Services, LLC (“Falcon”), a full service provider of flowback and well testing services for the separation and recovery of fluids, solid debris and proppant used during hydraulic fracturing operations. Falcon provides additional scale and diversity to our Completion Services well testing operations in key shale plays in the United States. The purchase price was $84.2 million (net of cash acquired), which is subject to customary post-closing purchase price adjustments. The Falcon acquisition was funded by borrowings under the Company's Amended Revolving Credit Facility (as defined in Note 6, "Long-term Debt"). Under the terms of the purchase agreement, the Company may be entitled to indemnification in respect of certain matters occurring prior to acquisition. Falcon’s results of operations have been included in the Company’s financial statements and has been reported within the Completion Services business subsequent to the closing of the acquisition on February 28, 2018.

Transaction-Related Costs

During the nine months ended September 30, 2018, the Company expensed transaction-related costs of $2.6 million, which are included within selling, general and administrative expense and within other operating income. No material transaction-related costs were incurred during the three months ended September 30, 2018.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

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



	GEODynamics				Falcon
Accounts receivable, net	$	37,282			$	21,180
Inventories	36,135				242
Property, plant and equipment	25,769				30,000
Intangible assets
Customer relationships	100,000				13,500
Patents/Technology/Know-how	47,000				—
Tradenames	34,000				1,500
Noncompete agreements	18,000				1,100
Other assets	1,627				664
Accounts payable and accrued liabilities	(21,174		)		(10,200		)
Deferred income taxes	(23,627		)	(a)	—
Other liabilities	(2,276		)		(167		)
Total identifiable net assets	252,736				57,819
Goodwill	362,604			(b)	26,427			(c)
Total net assets	$	615,340			$	84,246



Consideration consists of:
Cash, net of cash acquired	$	295,430	$	84,246
Oil States common stock	294,910		—
Promissory note	25,000		—
Total consideration	$	615,340	$	84,246



Intangible asset weighted-average useful lives (years):
Customer relationships	20	15
Patents/Technology/Know-how	17	n.a.
Tradenames	20	20
Noncompete agreements	3	3


a.	In connection with the acquisition accounting for GEODynamics, the Company provided deferred taxes related to, among other items, the estimated fair value adjustments for acquired property, plant and equipment, intangible assets and U.S. tax net operating loss carryforwards.


b.	The goodwill recognized is primarily attributable to expected synergies that will result from combining the operations of the Company and GEODynamics, as well as intangible assets which do not qualify for separate recognition. The amount of goodwill that is deductible for income tax purposes is not significant.


c.	The goodwill recognized is primarily attributable to expected synergies that will result from combining the operations of the Company and Falcon, as well as intangible assets which do not qualify for separate recognition. All goodwill is deductible for income tax purposes.

The Company has not completed the purchase price allocation for the GEODynamics and Falcon acquisitions and these preliminary estimates of fair value and intangible asset useful lives are subject to revision. The final purchase price allocation will be determined when the Company has finalized the opening balance sheet of each acquisition and completed the detailed valuations and necessary calculations. The final allocations and intangible asset useful lives could differ materially from the preliminary estimates. The final allocations may include (1) changes in identifiable net assets, (2) changes in allocations to intangible assets such as tradenames, patents/technology/know-how and customer relationships as well as goodwill, (3) changes in fair values of property, plant and equipment and deferred taxes (4) changes in useful lives and (5) other changes to assets and liabilities.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Supplemental Unaudited Pro Forma Financial Information

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



	Pro Forma Information
	Nine Months Ended September 30,
	2018			2017
Revenue	$	840,639		$	663,046
Net loss	$	(2,909	)	$	(46,157	)
Diluted net loss per share	$	(0.05	)	$	(0.78	)
Diluted weighted average common shares outstanding	59,132			58,851

This supplemental unaudited pro forma results of operations data reflects adjustments required for business combinations and is based upon, among other things, preliminary estimates of the fair value of assets acquired and liabilities assumed and certain assumptions that the Company believes are reasonable. Revisions to the preliminary estimates of fair value may have a significant impact on the pro forma amounts of depreciation and amortization expense and income tax benefit.

Goodwill

Changes in the carrying amount of goodwill for the nine-month period ended September 30, 2018 were as follows (in thousands):



	Well Site Services									Downhole Technologies		Offshore/ Manufactured Products			Total
	Completion Services			Drilling Services			Subtotal			Downhole Technologies		Offshore/ Manufactured Products			Total
Balance as of December 31, 2017
Goodwill	$	199,631		$	22,767		$	222,398		$	—	$	162,906		$	385,304
Accumulated impairment losses	(94,528		)	(22,767		)	(117,295		)	—		—			(117,295		)
	105,103			—			105,103			—		162,906			268,009
Goodwill acquired	26,427			—			26,427			362,604		—			389,031
Foreign currency translation	—			—			—			—		(287		)	(287		)
Balance as of September 30, 2018	$	131,530		$	—		$	131,530		$	362,604	$	162,619		$	656,753

Balance as of September 30, 2018
Goodwill	$	226,058		$	22,767		$	248,825		$	362,604	$	162,619		$	774,048
Accumulated impairment losses	(94,528		)	(22,767		)	(117,295		)	—		—			(117,295		)
	$	131,530		$	—		$	131,530		$	362,604	$	162,619		$	656,753

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Other Intangible Assets

The following table presents the total gross carrying amount of intangibles and the total accumulated amortization for major intangible asset classes as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018				December 31, 2017
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Other intangible assets:
Customer relationships	$	159,557	$	29,396	$	44,557	$	22,661
Patents/Technology/Know-how	83,672		20,818		35,762		15,844
Noncompete agreements	23,689		7,441		4,899		2,799
Tradenames and other	42,937		4,324		10,801		4,450
Total other intangible assets	$	309,855	$	61,979	$	96,019	$	45,754

The weighted average remaining amortization period for all intangible assets, other than goodwill, was 15.4 years as of September 30, 2018 and 7.8 years as of December 31, 2017. Amortization expense is expected to total $6.5 million over the last three months of 2018, $25.1 million in 2019, $23.1 million in 2020, $17.1 million in 2021 and $16.2 million in 2022. Such amounts are subject to revision and are based upon preliminary estimates of fair value and intangible asset useful lives for the GEODynamics and Falcon acquisitions. For the three months ended September 30, 2018 and 2017, amortization expense was $6.4 million and $2.2 million, respectively. Amortization expense was $18.4 million and $6.4 million for the nine months ended September 30, 2018 and 2017, respectively.


4.	Details of Selected Balance Sheet Accounts

Additional information regarding selected balance sheet accounts at September 30, 2018 and December 31, 2017 is presented below (in thousands):



	September 30, 2018			December 31, 2017
Accounts receivable, net:
Trade	$	223,341		$	153,912
Unbilled revenue	37,957			21,638
Contract assets (see Note 12)	34,687			41,195
Other	9,287			6,710
Total accounts receivable	305,272			223,455
Allowance for doubtful accounts	(8,559		)	(7,316		)
	$	296,713		$	216,139



	September 30, 2018			December 31, 2017
Inventories, net:
Finished goods and purchased products	$	96,439		$	82,990
Work in process	23,988			30,689
Raw materials	108,653			70,255
Total inventories	229,080			183,934
Allowance for excess or obsolete inventory	(18,297		)	(15,649		)
	$	210,783		$	168,285

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)



	September 30, 2018		December 31, 2017
Prepaid expenses and other current assets:
Income taxes receivable	$	9,728	$	5,927
Prepayments to vendors	3,578		2,962
Prepaid insurance	1,896		5,007
Other	6,670		4,158
	$	21,872	$	18,054



	Estimated Useful Life (years)			September 30, 2018			December 31, 2017
Property, plant and equipment, net:
Land				$	37,246		$	35,808
Buildings and leasehold improvements	2	–	40	244,401			235,330
Machinery and equipment	1	–	28	475,307			458,458
Completion Services equipment	2	–	10	482,571			431,714
Office furniture and equipment	3	–	10	43,077			43,664
Vehicles	2	–	10	122,543			118,198
Construction in progress				49,922			34,557
Total property, plant and equipment				1,455,067			1,357,729
Accumulated depreciation				(910,414		)	(858,839		)
				$	544,653		$	498,890

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



	September 30, 2018		December 31, 2017
Other noncurrent assets:
Deferred compensation plan	$	23,201	$	20,988
Deferred income taxes	748		519
Other	5,936		6,903
	$	29,885	$	28,410



	September 30, 2018		December 31, 2017
Accrued liabilities:
Accrued compensation	$	30,870	$	25,794
Insurance liabilities	9,393		6,831
Accrued taxes, other than income taxes	9,472		3,591
Accrued commissions	2,348		1,335
Accrued claims	3,192		1,320
Other	10,425		7,018
	$	65,700	$	45,889

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)


5.	Net Loss Per Share

The table below provides a reconciliation of the numerators and denominators of basic and diluted net loss per share for the three and nine months ended September 30, 2018 and 2017 (in thousands, except per share amounts):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Numerators:
Net loss	$	(4,019	)	$	(15,031	)	$	(4,769	)	$	(46,955	)
Less: Income attributable to unvested restricted stock awards	—			—			—			—
Numerator for basic net loss per share	(4,019		)	(15,031		)	(4,769		)	(46,955		)
Effect of dilutive securities:
Unvested restricted stock awards	—			—			—			—
Numerator for diluted net loss per share	$	(4,019	)	$	(15,031	)	$	(4,769	)	$	(46,955	)

Denominators:
Weighted average number of common shares outstanding	59,977			51,089			59,585			51,310
Less: Weighted average number of unvested restricted stock awards outstanding	(951		)	(1,111		)	(979		)	(1,120		)
Denominator for basic net loss per share	59,026			49,978			58,606			50,190
Effect of dilutive securities:
Unvested restricted stock awards	—			—			—			—
Assumed exercise of stock options	—			—			—			—
1.50% convertible senior notes (see Note 6)	—			—			—			—
	—			—			—			—
Denominator for diluted net loss per share	59,026			49,978			58,606			50,190

Net loss per share:
Basic	$	(0.07	)	$	(0.30	)	$	(0.08	)	$	(0.94	)
Diluted	(0.07		)	(0.30		)	(0.08		)	(0.94		)

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)


6.	Long-term Debt

As of September 30, 2018 and December 31, 2017, long-term debt consisted of the following (in thousands):



	September 30, 2018			December 31, 2017
Revolving credit facility⁽¹⁾	$	158,370		$	—
1.50% convertible senior notes⁽²⁾	165,364			—
Promissory note	25,000			—
Capital lease obligations and other debt	5,677			5,281
Total debt	354,411			5,281
Less: Current portion	(25,535		)	(411		)
Total long-term debt and capitalized leases	$	328,876		$	4,870


(1)	Presented net of $2.2 million of unamortized debt issuance costs as of September 30, 2018. Unamortized debt issuance costs of $1.6 million as of December 31, 2017 are classified in other noncurrent assets.


(2)	The principal amount of the 1.50% convertible senior notes is $200.0 million. See "Issuance of 1.50% Convertible Senior Notes" below.

Revolving Credit Facility

Prior to January 30, 2018, the Company's senior secured revolving credit facility (the "Revolving Credit Facility") was governed by a credit agreement with Wells Fargo Bank, N.A., as administrative agent for the lenders party thereto and collateral agent for the secured parties thereunder, and the lenders and other financial institutions from time to time party thereto, dated as of May 28, 2014, as amended (the "Credit Agreement"), that was scheduled to mature on May 28, 2019. On January 30, 2018, and subsequently on May 14, 2018, the Company amended the Revolving Credit Facility and amended and restated the Credit Agreement (the "Amended Revolving Credit Facility" and "Amended Credit Agreement", respectively), to extend the maturity to January 2022 and permit the issuance of convertible senior notes as discussed below. The Amended Credit Agreement governs our Amended Revolving Credit Facility. The Amended Revolving Credit Facility provides for $350 million in lender commitments with an option to increase the maximum borrowings to $500 million subject to additional lender commitments prior to its maturity on January 30, 2022. Under the Amended Revolving Credit Facility, $50 million is available for the issuance of letters of credit.

As of September 30, 2018, the Company had $160.6 million of borrowings outstanding under the Amended Credit Agreement and $23.0 million of outstanding letters of credit, leaving $149.8 million available to be drawn. The total amount available to be drawn under our Amended Revolving Credit Facility was less than the lender commitments as of September 30, 2018, due to limits imposed by maintenance covenants in the Amended Credit Agreement.

Amounts outstanding under the Amended Revolving Credit Facility bear interest at LIBOR plus a margin of 1.75% to 3.00%, or at a base rate plus a margin of 0.75% to 2.00%, in each case based on a ratio of the Company's total net funded debt to consolidated EBITDA (as defined in the Amended Credit Agreement). The Company must also pay a quarterly commitment fee of 0.25% to 0.50%, based on the Company's ratio of total net funded debt to consolidated EBITDA, on the unused commitments under the Amended Credit Agreement. In connection with the amendment and restatement of the Credit Agreement, the Company expensed $0.4 million of previously deferred financing costs in the first quarter of 2018, which is included in interest expense.

The Amended Credit Agreement contains customary financial covenants and restrictions. Specifically, we must maintain an interest coverage ratio, defined as the ratio of consolidated EBITDA to consolidated interest expense, of at least 3.00 to 1.0, a maximum senior secured leverage ratio, defined as the ratio of senior secured debt to consolidated EBITDA, of no greater than 2.25 to 1.0 and a total net leverage ratio, defined as the ratio of total net funded debt to consolidated EBITDA, of no greater than 4.0 to 1.0 through the fiscal quarter ending December 31, 2018 and no greater than 3.75 to 1.0 thereafter. The amended financial covenants give pro forma effect to the issuance of the convertible senior notes discussed below, acquired businesses and the annualization of EBITDA for acquired businesses.

Each of the factors considered in the calculation of these ratios are defined in the Amended Credit Agreement. Consolidated EBITDA and consolidated interest, as defined, exclude goodwill impairments, losses on extinguishment of debt, debt discount amortization, stock-based compensation expense and other non-cash charges.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Borrowings under the Amended Credit Agreement are secured by a pledge of substantially all of the Company's assets and the assets of its domestic subsidiaries. The Company's obligations under the Amended Credit Agreement are guaranteed by its significant domestic subsidiaries. The Amended Credit Agreement also contains negative covenants that limit the Company's ability to borrow additional funds, encumber assets, pay dividends, sell assets and enter into other significant transactions.

Under the Amended Credit Agreement, the occurrence of specified change of control events involving the Company would constitute an event of default that would permit the banks to, among other things, accelerate the maturity of the facility and cause it to become immediately due and payable in full.

As of September 30, 2018, the Company was in compliance with its debt covenants.

Issuance of 1.50% Convertible Senior Notes

On January 30, 2018, the Company issued $200 million aggregate principal amount of its 1.50% convertible senior notes due 2023 (the "Notes") pursuant to an indenture, dated as of January 30, 2018 (the “Indenture”), between the Company and Wells Fargo Bank, National Association, as trustee. Net proceeds from the Notes, after deducting issuance costs, were approximately $194 million, which was used by the Company to repay a portion of the outstanding borrowings under the Revolving Credit Facility.

The initial carrying amount of the Notes recorded in the condensed consolidated balance sheet as of January 30, 2018 was less than the $200 million in principal amount of the Notes, in accordance with applicable accounting principles, reflective of the estimated fair value of a similar debt instrument that does not have a conversion feature. The Company recorded the value of the conversion feature of $34.4 million as a debt discount, which is amortized as interest expense over the term of the Notes, with a similar amount allocated to additional paid-in capital ($25.7 million, net of issuance costs and deferred taxes). As a result of this amortization, the interest expense the Company recognizes related to the Notes for accounting purposes is based on an effective interest rate of approximately 6.0% which is greater than the cash interest payments the Company will pay on the Notes. Interest expense associated with the Notes for the three and nine months ended September 30, 2018 was $2.5 million and $6.6 million, respectively, while the related cash interest expense totaled $0.8 million and $2.0 million, respectively.

The following table presents the carrying amount of the Notes in the condensed consolidated balance sheets (in thousands):



	September 30, 2018
Principal amount of the liability component	$	200,000
Less: Unamortized discount	30,370
Less: Unamortized issuance costs	4,266
Net carrying amount of the liability	$	165,364

The Notes bear interest at a rate of 1.50% per year until maturity. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. In addition, additional interest and special interest may accrue on the Notes under certain circumstances as described in the Indenture. The Notes will mature on February 15, 2023, unless earlier repurchased, redeemed or converted. The initial conversion rate is 22.2748 shares of the Company's common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $44.89 per share of common stock). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the Indenture. The Company’s intent is to repay the principal amount of the Notes in cash and the conversion feature in shares of the Company’s common stock.

Noteholders may convert their Notes, at their option only in the following circumstances: (1) if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock, as described in the Indenture; or (4) if the Company calls the Notes for redemption, or at any time from, and including, November 15, 2022 until the close of business on the second scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of common stock or a combination of cash and

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

shares of common stock, at the Company's election, based on the applicable conversion rate(s). If the Company elects to deliver cash or a combination of cash and shares of common stock, then the consideration due upon conversion will be based on a defined observation period.

The Notes will be redeemable, in whole or in part, at the Company's option at any time, and from time to time, on or after February 15, 2021, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of common stock exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice.

If specified change in control events involving the Company as defined in the Indenture occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. Additionally, the Notes contain certain events of default as set forth in the indenture. As of September 30, 2018, none of the conditions allowing holders of the Notes to convert, or requiring us to repurchase the Notes, had been met.

Because it is the Company's intent to settle the principal portion of the Notes in cash, the Company uses the treasury stock method when calculating the diluted earnings per share effect for the variable number of shares that would be issued upon conversion to settle the conversion feature.

Promissory Note

In connection with the GEODynamics Acquisition, the Company issued a $25.0 million promissory note that bears interest at 2.50% per annum and is scheduled to mature on July 12, 2019. Payments due under the promissory note may be set off against certain claims, if any, related to matters occurring prior to the Company's acquisition of GEODynamics. See Note 13, "Commitments and Contingencies."


7.	Fair Value Measurements

The Company’s financial instruments consist of cash and cash equivalents, investments, receivables, payables and debt instruments. The Company believes that the carrying values of these instruments, other than the Notes, on the accompanying condensed consolidated balance sheets approximate their fair values. The estimated fair value of the Notes as of September 30, 2018 was approximately $215 million, based on quoted market prices (a Level 1 fair value measurement), which compares to the $200 million in principal amount of the Notes.


8.	Stockholders' Equity

The following table provides details with respect to the changes to the number of shares of common stock, $0.01 par value, outstanding during the first nine months of 2018:



Shares of common stock outstanding – December 31, 2017	51,089,422
Acquisition of GEODynamics (see Note 3)	8,661,083
Restricted stock awards, net of forfeitures	384,983
Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury	(151,966	)
Shares of common stock outstanding – September 30, 2018	59,983,522

As of September 30, 2018 and December 31, 2017, the Company had 25,000,000 shares of preferred stock, $0.01 par value, authorized, with no shares issued or outstanding.

On July 29, 2015, the Company’s Board of Directors approved a share repurchase program providing for the repurchase of up to $150.0 million of the Company’s common stock, which, following extension, was scheduled to expire on July 29, 2018. On July 25, 2018, our Board of Directors extended the share repurchase program for one year to July 29, 2019. During the first nine months of 2018, the Company did not repurchase any shares of common stock under the program. The amount remaining under the Company's share repurchase authorization as of September 30, 2018 was $120.5 million. Subject to applicable securities laws, such purchases will be at such times and in such amounts as the Company deems appropriate.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)


9.	Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, reported as a component of stockholders’ equity, increased from $58.5 million at December 31, 2017 to $69.7 million at September 30, 2018, due to changes in currency exchange rates. Accumulated other comprehensive loss is primarily related to fluctuations in the currency exchange rates compared to the U.S. dollar which are used to translate certain of the international operations of our reportable segments. For the nine months ended September 30, 2018 and 2017, currency translation adjustments recognized as a component of other comprehensive loss were primarily attributable to the United Kingdom and Brazil. As of September 30, 2018, the exchange rate for the British pound and the Brazilian real compared to the U.S. dollar weakened by 4% and 17%, respectively, compared to the exchange rate at December 31, 2017, contributing to other comprehensive loss of $11.2 million reported for the nine months ended September 30, 2018. During the first nine months of 2017, the exchange rates for the British pound and the Brazilian real strengthened by 8% and 3%, compared to the U.S. dollar, contributing to other comprehensive income of $13.5 million.


10.	Stock-based Compensation

The following table presents a summary of activity for stock options, service-based restricted stock awards and performance-based stock unit awards for the nine months ended September 30, 2018.



	Stock Options			Service-based Restricted Stock			Performance-based Stock Units
Outstanding – December 31, 2017	693,277			1,088,519			159,553
Granted	—			409,512			46,378
Vested/Exercised	—			(529,246		)	—
Forfeited	(6,239		)	(24,529		)	—
Outstanding – September 30, 2018	687,038			944,256			205,931
Weighted average grant date fair value (2018 awards)	$	—		$	29.43		$	28.75

The restricted stock program consists of a combination of service-based restricted stock and performance-based stock units. The service-based restricted stock awards generally vest on a straight-line basis over their term, which is generally three to four years. The number of performance-based restricted shares ultimately issued under the program is dependent upon our achievement of predefined specific performance measures generally measured over a three-year period. In the event the predefined targets are exceeded for any performance-based award, additional shares up to a maximum of 200% of the target award may be granted. Conversely, if actual performance falls below the predefined target, the number of shares vested is reduced. If the actual performance falls below the threshold performance level, no restricted shares will vest. The performance measure for outstanding awards as of December 31, 2017 is relative total stockholder return compared to our peer group of companies.

The performance measure for performance-based stock units granted during the first quarter of 2018 is based on the Company's EBITDA growth rate over a three-year period. Additionally, the Company issued conditional phantom units totaling 46,378 units, with the ultimate number of phantom units to be awarded ranging from zero to a maximum of 92,756 units. These phantom units represent a hypothetical interest in the Company’s common stock, and, once vested, are settled in cash. The performance measure for these phantom units is relative stockholder return compared to our peer group of companies. The obligation related to the phantom units is classified as a liability and remeasured at the end of each reporting period.

Stock-based compensation pre-tax expense recognized in the three-month periods ended September 30, 2018 and 2017 totaled $5.9 million and $6.1 million, respectively. Stock based compensation pre-tax expense recognized in the nine-month periods ended September 30, 2018 and 2017 totaled $17.1 million and $17.1 million, respectively. As of September 30, 2018, there was $23.3 million of pre-tax compensation costs related to service-based and performance-based stock awards and unvested stock options, which will be recognized in future periods as vesting conditions are satisfied.

On May 8, 2018 (the "Effective Date"), the Company’s stockholders approved the Oil States International, Inc. 2018 Equity Participation Plan (the “Plan”). The maximum number of shares of common stock reserved and available for issuance under the Plan is the sum of 2,000,000 shares, plus (i) any shares of common stock that, as of the Effective Date, were available for issuance under the Oil States International, Inc. 2001 Equity Participation Plan (as amended from time to time, the “Prior Plan”) (and that were not subject to outstanding awards under the Prior Plan as of the Effective Date), and (ii) any shares of common stock subject to outstanding awards under the Prior Plan as of the Effective Date that are not vested and/or subsequently expired or forfeited and canceled, for

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

any reason, subject to certain adjustment as provided under the Plan. To the extent any additional shares of common stock remain subject to outstanding awards under the Prior Plan that otherwise would have been returned to the Prior Plan after May 8, 2018 on account of the expiration, forfeiture or cancellation without a delivery of shares of such outstanding awards, those shares of common stock instead will be included in the reserve of shares of common stock for issuance under the Plan. The Company filed a registration statement on Form S-8, which became effective on May 17, 2018, with respect to shares of common stock reserved for issuance under the Plan. As of September 30, 2018, approximately 2.5 million shares were available for grant under the Plan.


11.	Taxes

Income Taxes

The income tax provision for interim periods is based on estimates of the effective tax rate for the entire fiscal year. For the three months ended September 30, 2018, the Company's income tax benefit was $3.8 million on a pre-tax loss of $7.9 million, which reflects the impact of a discrete net tax benefit of $5.8 million (discussed below). For the nine months ended September 30, 2018, the Company’s income tax benefit was $3.3 million on a pre-tax loss of $8.1 million, reflecting the impact of the $5.8 million discrete net tax benefit discussed below as well as other discrete tax attributes. This compares to an income tax benefit of $4.0 million, or 21.1% of pre-tax losses and $15.7 million, or 25.1% of pre-tax losses, respectively, for the three and nine months ended September 30, 2017.

On December 22, 2017, the United States enacted legislation commonly known as the Tax Cuts and Jobs Act (“Tax Reform Legislation”) which resulted in significant changes to U.S. tax and related laws, including certain key federal income tax provisions applicable to multinational companies such as the Company. These changes include, among others, the implementation of a territorial tax system with a one-time mandatory tax on undistributed foreign earnings of subsidiaries and a reduction in the U.S. corporate income tax rate to 21% from 35% effective January 1, 2018.

As a result of these U.S. tax law changes, during the fourth quarter of 2017 the Company recorded a net provisional charge of $28.2 million within income tax expense, consisting primarily of incremental income tax expense of $41.4 million related to the one-time, mandatory transition tax on the Company’s unremitted foreign subsidiary earnings (the "Transition Tax") and a valuation allowance established against the Company’s foreign tax credit carryforwards which were recorded as assets prior to Tax Reform Legislation, offset by a tax benefit of $13.2 million related the remeasurement of the Company’s U.S. net deferred tax liabilities based on the new 21% U.S. corporate income tax rate. The Company did not incur a material cash tax payable with respect to the Transition Tax.

During the third quarter of 2018, the Company adjusted its December 2017 provisional estimates with respect to Tax Reform Legislation resulting in an income tax benefit of $5.8 million during the period. This adjustment is primarily attributable to guidance issued by the Internal Revenue Service in 2018 allowing taxpayers, including the Company, to elect to carryback or carryforward 2017 U.S. net operating losses rather than requiring that such tax losses be used to offset the Transition Tax. Based on this guidance which was clarified in the third quarter of 2018, the Company has elected to utilize available foreign tax credits to fully satisfy the Transition Tax and plans to file a carryback claim against its 2015 U.S. federal income tax return and receive approximately $5.5 million in cash.

The Tax Reform Legislation also includes many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, and potential incremental taxes related to certain foreign earnings. Many of these provisions did not apply to the Company until January 1, 2018. The Company continues to assess the impact of these and other provisions of the Tax Reform Legislation. The net deferred tax liability as of September 30, 2018 has not been materially impacted by any of these provisions. The Company’s net deferred tax liability, as of December 31, 2017, excluded the impact, if any, of potential future U.S. income taxes related to certain foreign activities and transactions as described in the Tax Reform Legislation.

The Company continues to examine the implications arising from the Transition Tax and other provisions of these new tax laws but believes the provisional estimates recorded through the third quarter of 2018 reflect a reasonable estimate of the impact based on the information available as of September 30, 2018. As additional regulatory and accounting guidance becomes available and further information is obtained in connection with the preparation of the Company’s various foreign income tax returns, the Company will record, if necessary, adjustments to these provisional estimates in the fourth quarter of 2018.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

The ultimate impact of Tax Reform Legislation may differ from the Company’s provisional estimates, possibly materially, due to changes in the interpretations and assumptions made by the Company as well as additional regulatory and accounting guidance that may be issued and actions the Company may take as a result of the Tax Reform Legislation. The Company will monitor regulatory guidance and other information related to this matter as it becomes available to allow the Company to reasonably estimate the impact of any change in its provisional estimates in future periods.

Tariffs and Duties

The Company uses a variety of domestically produced and imported raw materials and component products, including steel, in the manufacture of its products. The United States recently imposed tariffs on a variety of imported products, including steel and aluminum. In response to the U.S. tariffs on steel and aluminum, the European Union and several other countries, including Canada and China, have threatened and/or imposed retaliatory tariffs. The effect of these new tariffs and the application and interpretation of existing trade agreements and customs, anti-dumping and countervailing duty regulations continues to evolve, and the Company continues to monitor these matters. If the Company encounters difficulty in procuring these raw materials and component products, or if the prices the Company has to pay for these products increase as a result of customs, anti-dumping and countervailing duty regulations or otherwise and the Company is unable to pass corresponding cost increases on to its customers, the Company's financial position and results of operations could be adversely affected. Furthermore, uncertainty with respect to potential costs in the drilling and completion of oil and gas wells could cause customers to delay or cancel planned projects which, if this occurred, would adversely affect the Company's financial position and results of operations. See Note 13, "Commitments and Contingencies."


12.	Segments, Revenue Recognition and Related Information

As further discussed in Note 3, “Business Acquisitions, Goodwill and Other Intangible Assets,” on January 12, 2018 the Company completed the GEODynamics Acquisition, which, beginning with the first quarter of 2018, is reported as a separate business segment under the name “Downhole Technologies.” Following this acquisition, the Company operates through three reportable segments: Well Site Services, Downhole Technologies and Offshore/Manufactured Products. The Company’s reportable segments represent strategic business units that generally offer different products and services. They are managed separately because each business often requires different technologies and marketing strategies. Recent acquisitions, except for the GEODynamics Acquisition, have been direct extensions to our business segments.

The Well Site Services segment provides a broad range of equipment and services that are used to drill for, establish and maintain the flow of oil and natural gas from a well throughout its life cycle. In this segment, operations primarily include completion-focused equipment and services as well as land drilling services. The Completion Services operations provide solutions to its customers using our completion tools and highly trained personnel throughout its service offerings which include: wireline support, frac stacks, isolations tools, extended reach tools, ball launchers, well testing and flowback operations, thru tubing activity and sand control. Drilling Services provides land drilling services for shallow to medium depth wells in West Texas and the Rocky Mountain region of the United States. Separate business lines within the Well Site Services Segment have been disclosed to provide additional detail with respect to its operations. Substantially all of the revenue generated by the Well Site Services segment are classified as service revenues in the unaudited condensed consolidated statements of operations.

Following the closing of the GEODynamics Acquisition on January 12, 2018, the Downhole Technologies segment provides oil and gas perforation systems and downhole tools in support of completion, intervention, wireline and well abandonment operations. This segment designs, manufactures and markets its consumable engineered products to oilfield service as well as exploration and production companies, which are completing complex wells with longer lateral lengths, increased frac stages and more perforation clusters to increase unconventional well productivity. Substantially all of the revenue generated by the Downhole Technologies segment are classified as product revenue in the unaudited condensed consolidated statements of operations.

The Offshore/Manufactured Products segment designs, manufactures and markets capital equipment utilized on floating production systems, subsea pipeline infrastructure, and offshore drilling rigs and vessels, along with short-cycle and other products. Driven principally by longer-term customer investments for offshore oil and natural gas projects, project-driven product revenues include: flexible bearings, advanced connector systems, high-pressure riser systems, deepwater mooring systems, cranes, subsea pipeline products and blow-out preventer stack integration. Short-cycle products manufactured by the segment include: valves, elastomers and other specialty products generally used in the land-based completion and drilling markets. Other products manufactured and offered by the segment include a variety of products for use in industrial, military and other applications outside the oil and gas industry. The segment also offers a broad line of complementary, value-added services including: specialty welding, fabrication, cladding and machining services, offshore installation services, and inspection and repair services.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Corporate activities include corporate expenses, including those related to corporate governance, stock-based compensation and other infrastructure support, as well as the impact of company-wide decisions for which the individual operating units are not being evaluated.

Financial information by business segment for the three and nine months ended September 30, 2018 and 2017 is summarized in the following tables (in thousands).



	Revenues		Depreciation and amortization		Operating income (loss)			Capital expenditures		Total assets
Three months ended September 30, 2018
Well Site Services –
Completion Services	$	111,669	$	16,884	$	(3,271	)	$	17,915	$	540,203
Drilling Services	16,920		3,479		(2,206		)	2,711		68,444
Total Well Site Services	128,589		20,363		(5,477		)	20,626		608,647
Downhole Technologies	56,571		4,582		6,485			8,727		691,974
Offshore/Manufactured Products	89,434		5,426		7,069			3,475		703,203
Corporate	—		215		(11,799		)	197		40,972
Total	$	274,594	$	30,586	$	(3,722	)	$	33,025	$	2,044,796



	Revenues		Depreciation and amortization		Operating income (loss)			Capital expenditures		Total assets
Three months ended September 30, 2017
Well Site Services –
Completion Services	$	61,015	$	15,679	$	(9,933	)	$	2,447	$	427,207
Drilling Services	16,162		4,454		(3,235		)	1,693		74,991
Total Well Site Services	77,177		20,133		(13,168		)	4,140		502,198
Downhole Technologies	—		—		—			—		—
Offshore/Manufactured Products	86,871		6,404		7,334			2,846		782,651
Corporate	—		251		(12,349		)	54		44,506
Total	$	164,048	$	26,788	$	(18,183	)	$	7,040	$	1,329,355



	Revenues		Depreciation and amortization		Operating income (loss)			Capital expenditures		Total assets
Nine months ended September 30, 2018
Well Site Services –
Completion Services	$	302,877	$	49,082	$	(6,538	)	$	40,430	$	540,203
Drilling Services	51,235		10,898		(7,474		)	5,737		68,444
Total Well Site Services	354,112		59,980		(14,012		)	46,167		608,647
Downhole Technologies	161,626		12,998		26,139			13,793		691,974
Offshore/Manufactured Products	298,277		17,026		32,185			10,606		703,203
Corporate	—		694		(40,248		)	720		40,972
Total	$	814,015	$	90,698	$	4,064		$	71,286	$	2,044,796

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)



	Revenues		Depreciation and amortization		Operating income (loss)			Capital expenditures		Total assets
Nine months ended September 30, 2017
Well Site Services –
Completion Services	$	167,577	$	48,400	$	(38,960	)	$	8,560	$	427,207
Drilling Services	39,120		14,283		(11,239		)	2,800		74,991
Total Well Site Services	206,697		62,683		(50,199		)	11,360		502,198
Downhole Technologies	—		—		—			—		—
Offshore/Manufactured Products	280,220		19,091		27,460			8,775		782,651
Corporate	—		778		(37,274		)	196		44,506
Total	$	486,917	$	82,552	$	(60,013	)	$	20,331	$	1,329,355

One customer individually accounted for 10% and 16% of the Company’s consolidated product and service revenue for the nine months ended September 30, 2018 and 2017, respectively, and individually represented 10% of the Company’s consolidated total accounts receivable as of September 30, 2018. For the Company’s Well Site Services segment, substantially all depreciation and amortization expense relates to cost of services while substantially all depreciation and amortization expense for the Downhole Technologies segment relates to cost of products. The Offshore/Manufactured Products segment has numerous facilities around the world that generate both product and service revenues, and it is common for the segment to provide both installation and other services for products that we manufacture in this segment. While substantially all depreciation and amortization expense for the Offshore/Manufactured Products segment relates to cost of revenues, it does not segregate or capture depreciation or amortization of intangible assets between product and service cost. Operating income (loss) excludes equity in net income of unconsolidated affiliates, which is immaterial and not reported separately herein.

As further discussed in Note 2, "Recent Accounting Pronouncements," the Company accounts for revenue in accordance with FASB issued guidance on revenue from contracts with customers, which we adopted on January 1, 2018. While the new guidance did not have a material impact on the Company's recognition of revenues, we have expanded our revenue recognition disclosures to address the new qualitative and quantitative disclosure requirements. Contractual terms may vary by contract and customer, which may impact the timing of revenue recognition under the standard in future periods.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

The following table provides supplemental disaggregated revenue from contracts with customers by business segment for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Well Site Services				Downhole Technologies				Offshore/Manufactured Products				Total
	2018		2017		2018		2017		2018		2017		2018		2017
Three months ended September 30
Major revenue categories -
Project-driven products	$	—	$	—	$	—	$	—	$	22,277	$	22,698	$	22,277	$	22,698
Short-cycle:
Completion products and services	111,669		61,015		56,571		—		27,463		29,873		195,703		90,888
Drilling services	16,920		16,162		—		—		—		—		16,920		16,162
Other products	—		—		—		—		6,707		7,908		6,707		7,908
Total short-cycle	128,589		77,177		56,571		—		34,170		37,781		219,330		114,958
Other products and services	—		—		—		—		32,987		26,392		32,987		26,392
	$	128,589	$	77,177	$	56,571	$	—	$	89,434	$	86,871	$	274,594	$	164,048



Percentage of total revenue by type -
Products	—	%	—	%	98	%	—	%	73	%	78	%	44	%	41	%
Services	100	%	100	%	2	%	—	%	27	%	22	%	56	%	59	%



	Well Site Services				Downhole Technologies				Offshore/Manufactured Products				Total
	2018		2017		2018		2017		2018		2017		2018		2017
Nine months ended September 30
Major revenue categories -
Project-driven products	$	—	$	—	$	—	$	—	$	98,301	$	89,615	$	98,301	$	89,615
Short-cycle:
Completion products and services	302,877		167,577		161,626		—		90,218		86,840		554,721		254,417
Drilling services	51,235		39,120		—		—		—		—		51,235		39,120
Other products	—		—		—		—		21,718		24,032		21,718		24,032
Total short-cycle

OIL STATES INTERNATIONAL, INC - FORM 10-Q - October 31, 2018

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