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, 2024
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _____ to _____
Commission file number: 001-16337
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
| (Zip Code) | ||||||||
| (Address of principal executive offices) | ||||||||
(713 ) 652-0582
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| ☒ | No | ☐ | |||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| ☒ | No | ☐ | |||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large 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 19, 2024, the number of shares of common stock outstanding was 64,215,204 .
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 | |||||||||||
Unaudited Consolidated Statements of Comprehensive Income (Loss) | |||||||||||
| Consolidated Balance Sheets | |||||||||||
| Unaudited Consolidated Statements of Stockholders’ Equity | |||||||||||
| Unaudited Consolidated Statements of Cash Flows | |||||||||||
| Notes to Unaudited Condensed Consolidated Financial Statements | – | 17 | |||||||||
| Cautionary Statement Regarding Forward-Looking Statements | – | ||||||||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | – | ||||||||||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | |||||||||||
| Item 4. Controls and Procedures | |||||||||||
| Part II – OTHER INFORMATION | |||||||||||
| Item 1. Legal Proceedings | |||||||||||
| Item 1A. Risk Factors | |||||||||||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||||||||||
| Item 3. Defaults Upon Senior Securities | |||||||||||
| Item 4. Mine Safety Disclosures | |||||||||||
| Item 5. Other Information | |||||||||||
| Item 6. Exhibits | |||||||||||
| Signature Page | |||||||||||
2
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, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues: | |||||||||||
| Products | $ | $ | |||||||||
| Services | |||||||||||
| Costs and expenses: | |||||||||||
| Product costs | |||||||||||
| Service costs | |||||||||||
| Cost of revenues (exclusive of depreciation and amortization expense presented below) | |||||||||||
| Selling, general and administrative expense | |||||||||||
| Depreciation and amortization expense | |||||||||||
| Impairment of goodwill | |||||||||||
| Other operating (income) expense, net | ( | ||||||||||
| Operating income (loss) | ( | ||||||||||
| Interest expense, net | ( | ( | |||||||||
| Other income (expense), net | ( | ||||||||||
| Income (loss) before income taxes | ( | ||||||||||
| Income tax provision | ( | ( | |||||||||
| Net income (loss) | $ | ( | $ | ||||||||
| Net income (loss) per share: | |||||||||||
| Basic | $ | ( | $ | ||||||||
| Diluted | ( | ||||||||||
| Weighted average number of common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The accompanying notes are an integral part of these financial statements.
3
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net income (loss) | $ | ( | $ | ||||||||
| Other comprehensive income (loss): | |||||||||||
| Currency translation adjustments | ( | ||||||||||
| Comprehensive income (loss) | $ | ( | $ | ||||||||
The accompanying notes are an integral part of these financial statements.
4
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant, and equipment, net | |||||||||||
| Operating lease assets, net | |||||||||||
| Goodwill, net | |||||||||||
| Other intangible assets, net | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | |||||||||||
| Current operating lease liabilities | |||||||||||
| Income taxes payable | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost, | ( | ( | |||||||||
Total stockholders’ equity | |||||||||||
Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these financial statements.
5
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
| Three Months Ended March 31, 2024 | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments (excluding intercompany advances) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Currency translation adjustments on intercompany advances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||||||||
| Surrender of stock to settle taxes on stock awards | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Currency translation adjustments (excluding intercompany advances) | — | — | — | — | |||||||||||||||||||||||||||||||
| Currency translation adjustments on intercompany advances | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||||||||
| Surrender of stock to settle taxes on stock awards | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
6
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | ( | $ | ||||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||||||
| Depreciation and amortization expense | |||||||||||
Impairment of goodwill | |||||||||||
| Stock-based compensation expense | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Deferred income tax provision (benefit) | ( | ||||||||||
| Gains on disposals of assets | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Deferred revenue | |||||||||||
| Other operating assets and liabilities, net | |||||||||||
| Net cash flows used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
Proceeds from disposition of equipment | |||||||||||
| Other, net | ( | ( | |||||||||
| Net cash flows used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Revolving credit facility borrowings | |||||||||||
| Revolving credit facility repayments | ( | ( | |||||||||
Repayment of | ( | ||||||||||
| Other debt and finance lease repayments | ( | ( | |||||||||
| Payment of financing costs | ( | ( | |||||||||
| Shares added to treasury stock as a result of net share settlements due to vesting of stock awards | ( | ( | |||||||||
| Net cash flows used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net change in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Cash paid (received) for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes, net | ( | ||||||||||
The accompanying notes are an integral part of these financial statements.
7
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Oil States International, Inc. and its subsidiaries (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.
In the first quarter of 2024, certain short-cycle, consumable product operations historically reported within the Offshore Manufactured Products segment (legacy frac plug and elastomer products) were integrated into the Downhole Technologies segment to better align with the underlying activity demand drivers and current segment management structure, as well as provide for additional operational synergies. Historical segment financial data and disaggregated revenue information in Note 10, “Segments and Related Information” were conformed with the current-period segment presentation.
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, 2023.
2. Goodwill Impairment and Other Charges
In 2023, the Company implemented initiatives to reduce future costs, which are continuing into 2024. These management actions included the consolidation, relocation and exit of certain manufacturing and service locations as well as the realignment of operations within two of the Company’s reportable segments. The Company has also incurred legal and other related costs to enforce certain patents related to its proprietary technologies. As a result of these actions, the Company recorded the following charges during the first quarter of 2024 (in thousands):
Offshore Manufactured Products | Well Site Services | Downhole Technologies | Pre-tax Total | Tax | After-tax Total | ||||||||||||||||||||||||||||||
Impairment of goodwill | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Facility consolidation and other charges | |||||||||||||||||||||||||||||||||||
Goodwill
The Company does not amortize goodwill, but rather assesses goodwill for impairment annually and when an event occurs or circumstances change that indicate the carrying amounts may not be recoverable. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and an impairment loss is recorded.
8
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Changes in the carrying amount of goodwill, by operating segment, for the three months ended March 31, 2024 were as follows (in thousands):
Offshore Manufactured Products | Downhole Technologies | Total | |||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | ||||||||||||||
Goodwill associated with transferred operations | ( | ||||||||||||||||
Impairment of goodwill | ( | ( | |||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||
Balance as of March 31, 2024 | $ | $ | $ | ||||||||||||||
In connection with the first quarter 2024 realignment of the composition of two of its reportable segments discussed in Note 1, “Organization and Basis of Presentation,” goodwill of $10.0
The Company also performed an interim quantitative assessment of goodwill transferred to the Downhole Technologies segment (subsequent to the realignment). This interim assessment indicated that the fair value of the reporting unit was less than its carrying amount and the Company concluded that goodwill reassigned to the Downhole Technologies business was fully impaired. The Company therefore recognized a non-cash goodwill impairment charge totaling $10.0 million in the first quarter of 2024. This impairment charge did not impact the Company’s liquidity position, debt covenants or cash flows.
Management used a combination of valuation methodologies including the income approach and guideline public company comparables. The fair values of each of the Company’s reporting units were determined using significant unobservable inputs (Level 3 fair value measurements). The income approach estimates fair value by discounting the Company’s forecasts of future cash flows by a discount rate (expected return) that a market participant is expected to require on its investment.
Significant assumptions and estimates used in the income approach include, among others, estimated future net annual cash flows and discount rates for each reporting unit, current and anticipated market conditions, estimated growth rates and historical data. These estimates rely upon significant management judgment.
3. Details of Selected Balance Sheet Accounts
Additional information regarding selected balance sheet accounts as of March 31, 2024 and December 31, 2023 is presented below (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Accounts receivable, net: | |||||||||||
| Trade | $ | $ | |||||||||
| Unbilled revenue | |||||||||||
| Contract assets | |||||||||||
| Other | |||||||||||
| Total accounts receivable | |||||||||||
| Allowance for doubtful accounts | ( | ( | |||||||||
| $ | $ | ||||||||||
| Allowance for doubtful accounts as a percentage of total accounts receivable | % | % | |||||||||
| March 31, 2024 | December 31, 2023 | ||||||||||
| Deferred revenue (contract liabilities) | $ | $ | |||||||||
9
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of March 31, 2024, accounts receivable, net in the United States and the United Kingdom represented 65 % and 15 %, 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, 2024.
For the three months ended March 31, 2024, the $5.4 million net decrease in contract assets was primarily attributable to $27.4 million transferred to accounts receivable, which was partially offset by $22.0 million in revenue recognized during the period. Deferred revenue (contract liabilities) increased by $4.8 million in the first three months of 2024, primarily reflecting $10.7 million in new customer billings which were not recognized as revenue during the period, partially offset by the recognition of $5.9 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, 2024 and 2023 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Allowance for doubtful accounts – January 1 | $ | $ | |||||||||
| Provisions | |||||||||||
| Write-offs | ( | ( | |||||||||
| Other | ( | ||||||||||
| Allowance for doubtful accounts – March 31 | $ | $ | |||||||||
| March 31, 2024 | December 31, 2023 | ||||||||||
| Inventories, net: | |||||||||||
| Finished goods and purchased products | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials | |||||||||||
| Total inventories | |||||||||||
| Allowance for excess or obsolete inventory | ( | ( | |||||||||
| $ | $ | ||||||||||
| March 31, 2024 | December 31, 2023 | |||||||||||||
| Property, plant and equipment, net: | ||||||||||||||
| Property, plant and equipment | $ | $ | ||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
For the three months ended March 31, 2024 and 2023, depreciation expense was $9.9 million and $11.0 million, respectively.
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Other intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Patents/Technology/Know-how | |||||||||||||||||||||||||||||||||||
| Tradenames and other | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
For the three months ended March 31, 2024 and 2023, amortization expense was $4.3 million and $4.3 million, respectively.
10
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| March 31, 2024 | December 31, 2023 | ||||||||||
| Other noncurrent assets: | |||||||||||
| Deferred compensation plan | $ | $ | |||||||||
| Deferred financing costs | |||||||||||
| Deferred income taxes | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
| March 31, 2024 | December 31, 2023 | ||||||||||
| Accrued liabilities: | |||||||||||
| Accrued compensation | $ | $ | |||||||||
| Accrued taxes, other than income taxes | |||||||||||
| Insurance liabilities | |||||||||||
| Accrued interest | |||||||||||
| Accrued commissions | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
4. Long-term Debt
As of March 31, 2024 and December 31, 2023, long-term debt consisted of the following (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
Revolving credit facility(1) | $ | $ | |||||||||
2026 Notes(2) | |||||||||||
| Other debt and finance lease obligations | |||||||||||
| Total debt | |||||||||||
| Less: Current portion | ( | ( | |||||||||
| Total long-term debt | $ | $ | |||||||||
____________________
(1)Unamortized deferred financing costs of $1.8 million and $1.1 million as of March 31, 2024 and December 31, 2023, respectively, are presented in other noncurrent assets.
(2)The outstanding principal amount of the 2026 Notes was $135.0
Revolving Credit Facility
The Company has a senior secured credit facility, which provides for a $125.0 million asset-based revolving credit facility (as amended, 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 (as amended, the “ABL Agreement”). In February 2024, the Company amended the ABL Facility to extend the maturity date to February 16, 2028, with a springing maturity 91 days prior to the maturity of any outstanding indebtedness with a principal amount in excess of $17.5 million.
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.
11
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Borrowings under the ABL Agreement bear interest at a rate equal to the Secured Overnight Financing 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, 2024, the Company had no borrowings outstanding under the ABL Facility and $15.9 million of outstanding letters of credit. The total amount available to be drawn as of March 31, 2024 was $86.3 million, calculated based on the current borrowing base less outstanding borrowings, if any, and letters of credit. As of March 31, 2024, 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.
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, 2024, 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 January 30, 2018, the Company issued $200.0 million aggregate principal amount of its 1.50 % convertible senior notes due 2023 (the "2023 Notes") pursuant to an indenture, dated as of January 30, 2018. The 2023 Notes bore interest at a rate of 1.50 % per year, and the outstanding principal amount of $17.3 million matured and was repaid in full on February 15, 2023.
5. 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, 2024 was $132.8 million based on quoted market prices (a Level 2 fair value measurement), which compares to the principal amount of $135.0 million.
12
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. 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 2024 (in thousands):
| Shares of common stock outstanding – December 31, 2023 | |||||
| Restricted stock awards, net of forfeitures | |||||
| Shares withheld for taxes on vesting of stock awards | ( | ||||
| Shares of common stock outstanding – March 31, 2024 | |||||
As of March 31, 2024 and December 31, 2023, the Company had 25,000,000 0.01 no
On February 16, 2023, the Company’s Board of Directors authorized $25.0 million for the repurchase of the Company’s common stock, par value $0.01 per share, through February 2025. During the three months ended March 31, 2024, there were no repurchases of common stock under the program. The amount remaining under the Company’s share repurchase authorization as of March 31, 2024 was $18.1 million. Subject to applicable securities laws, such purchases will be at such times and in such amounts as the Company deems appropriate.
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 increased from $70.0 million at December 31, 2023 to $73.0 million at March 31, 2024. For the three months ended March 31, 2024 and 2023, currency translation adjustments recognized as a component of other comprehensive income (loss) were primarily attributable to the United Kingdom and Brazil.
During the three months ended March 31, 2024, the exchange rates for the British pound and the Brazilian real weakened by 1 % and 3 %, respectively, compared to the U.S. dollar, contributing to other comprehensive loss of $3.0 million. During the three months ended March 31, 2023, the exchange rate 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.
7. Income Taxes
Income tax expense for the three months ended March 31, 2024 and 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, 2024, the Company’s income tax expense was $24 thousand on a pre-tax loss of $13.4 million, which included a $10.0 million goodwill impairment charge (approximately $7.7 million of which was non-deductible) and other non-deductible expenses. This compares to an income tax expense of $1.6 million on pre-tax income of $3.8 million, which included certain non-deductible expenses and discrete tax items, for the three months ended March 31, 2023.
13
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. 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, 2024 and 2023 (in thousands, except per share amounts):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Numerators: | |||||||||||
| Net income (loss) | $ | ( | $ | ||||||||
| Less: Income attributable to unvested restricted stock awards | ( | ||||||||||
| Numerator for basic net income (loss) per share | ( | ||||||||||
| Effect of dilutive securities: | |||||||||||
| Unvested restricted stock awards | |||||||||||
| Numerator for diluted net income (loss) per share | $ | ( | $ | ||||||||
| Denominators: | |||||||||||
| Weighted average number of common shares outstanding | |||||||||||
| Less: Weighted average number of unvested restricted stock awards outstanding | ( | ( | |||||||||
| Denominator for basic net income (loss) per share | |||||||||||
| Effect of dilutive securities: | |||||||||||
| Performance share units | |||||||||||
| Denominator for diluted net income (loss) per share | |||||||||||
| Net income (loss) per share: | |||||||||||
| Basic | $ | ( | $ | ||||||||
| Diluted | ( | ||||||||||
The calculation of diluted earnings per share for the three months ended March 31, 2024 and 2023 excluded 122 thousand shares and 209 thousand shares, respectively, issuable pursuant to outstanding stock options, due to their antidilutive effect. Additionally, shares issuable upon conversion of the 2026 Notes were excluded due to, among other factors, the Company’s share price.
9. 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, 2024 (in thousands):
| Stock Options | Service-based Restricted Stock | Performance- and Service-based Stock Units | |||||||||||||||
| Outstanding – December 31, 2023 | |||||||||||||||||
| Granted | |||||||||||||||||
| Vested and distributed | ( | ( | |||||||||||||||
| Forfeited | ( | ||||||||||||||||
| Outstanding – March 31, 2024 | |||||||||||||||||
| Weighted average grant date fair value (2024 awards) | $ | $ | |||||||||||||||
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 vest on a straight-line basis over a term of three years . Service-based stock unit awards vest over one-year , with the underlying shares issued at a specified future date. Eighty-two thousand service-based stock units were outstanding as of March 31, 2024. Performance-based stock unit awards vest at the end
14
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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 shares will vest.
The Company issued conditional long-term cash incentive awards (“Cash Awards”) of $1.5 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, 2024 and 2023 totaled $1.8 million and $1.6 million, respectively. As of March 31, 2024, there was $11.8 million of total compensation costs related to unvested restricted stock awards, which is expected to be recognized in future periods as vesting conditions are satisfied.
10. Segments and Related Information
In the first quarter of 2024, certain short-cycle, consumable product operations historically reported within the Offshore Manufactured Products segment were integrated into the Downhole Technologies segment (see Note 1, “Organization and Basis of Presentation”). Historical segment financial data and supplemental disaggregated revenue information for the three months ended March 31, 2023 (presented below) were conformed with the current-period segment presentation.
The Company operates through three reportable operating segments: Offshore Manufactured Products, Well Site Services and Downhole Technologies. Financial information by operating segment for the three months ended March 31, 2024 and 2023 is summarized in the following tables (in thousands).
| Revenues | Depreciation and amortization | Operating income (loss) | Capital expenditures | Total assets | |||||||||||||||||||||||||
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||
Offshore Manufactured Products(1) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Well Site Services(2) | ( | ||||||||||||||||||||||||||||
Downhole Technologies(3) | ( | ||||||||||||||||||||||||||||
| Corporate | ( | ||||||||||||||||||||||||||||
Total(1) | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
____________________
(1)Operating income included $1.5 million of facility consolidation charges.
(2)Operating loss included $1.0 million in facility consolidation and other charges.
(3)Operating loss included a $10.0 million non-cash goodwill impairment charge (see Note 2, “Goodwill Impairment and Other Charges”).
| Revenues | Depreciation and amortization | Operating income (loss) | Capital expenditures | Total assets | |||||||||||||||||||||||||
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||
Offshore Manufactured Products | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Well Site Services | |||||||||||||||||||||||||||||
| Downhole Technologies | |||||||||||||||||||||||||||||
| Corporate | ( | ||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
15
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following tables provide supplemental disaggregated revenue from contracts with customers by operating segment for the three months ended March 31, 2024 and 2023 (in thousands):
Offshore Manufactured Products | Well Site Services | Downhole Technologies | Total | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31 | |||||||||||||||||||||||||||||||||||||||||||||||
| Project-driven: | |||||||||||||||||||||||||||||||||||||||||||||||
| Products | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Services | |||||||||||||||||||||||||||||||||||||||||||||||
| Total project-driven | |||||||||||||||||||||||||||||||||||||||||||||||
| Military and other products | |||||||||||||||||||||||||||||||||||||||||||||||
Short-cycle products and services | |||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
Revenues from products and services transferred to customers over time accounted for approximately 67 % and 66 % of consolidated revenues for the three months ended March 31, 2024 and 2023, 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, 2024, the Company had $203.0 million of remaining backlog related to contracts with an original expected duration of greater than one year. Approximately 43 % of this remaining backlog is expected to be recognized as revenue over the remaining nine months of 2024, with an additional 33 % recognized in 2025 and the balance thereafter.
11. 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. 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 covered by insurance, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
16
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 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2024, 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 the ongoing military actions in Europe and the Middle East, 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 and consolidation 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;
•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;
•the impact of disruptions in the bank and capital markets;
•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;
17
•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 2023 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 2023 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. In first quarter 2024, certain short-cycle, consumable product operations historically reported within the Offshore Manufactured Products segment (legacy frac plugs and elastomer products) were integrated into the Downhole Technologies segment to better align with the underlying activity demand drivers and current segment management structure, as well as provide for additional operational synergies. Historical financial data, supplemental disaggregated revenue and backlog information as of and for the three months ended March 31, 2023 (presented herein) was conformed with the current-period segment presentation.
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.
18
Recent Developments
Brent and 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) | ||||||||||||||||||||||||||||||||
| 2024 | $ | 82.92 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| 2023 | 81.01 | 77.99 | 86.65 | $ | 84.01 | $ | 82.47 | |||||||||||||||||||||||||
| WTI Crude (per bbl) | ||||||||||||||||||||||||||||||||
| 2024 | $ | 77.50 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| 2023 | 75.91 | 73.54 | 82.25 | $ | 78.53 | $ | 77.56 | |||||||||||||||||||||||||
| Henry Hub Natural Gas (per MMBtu) | ||||||||||||||||||||||||||||||||
| 2024 | $ | 2.15 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| 2023 | 2.64 | 2.16 | 2.59 | $ | 2.74 | $ | 2.53 | |||||||||||||||||||||||||
________________
(1)Source: U.S. Energy Information Administration (spot prices).
On February 16, 2024, we amended our ABL Facility to extend its maturity date from February 10, 2025 to February 16, 2028.
In the first quarter of 2024, certain short-cycle, consumable product operations historically reported within the Offshore Manufactured Products segment (legacy frac plugs and elastomer products) were integrated into our Downhole Technologies segment to better align with the underlying activity demand drivers and current segment management structure, as well as provide for additional operational synergies. Historical segment financial data, backlog and other information were conformed with the first quarter 2024 revised segment presentation.
On April 19, 2024, Brent crude oil, WTI crude oil and natural gas spot prices closed at $87.96 per barrel, $83.79 per barrel and $1.43 per MMBtu, respectively. Additionally, the U.S. drilling rig count reported on April 19, 2024 was 619 rigs – comparable to the first quarter 2024 average.
Overview
Current and expected future pricing for WTI crude oil and natural gas and inflationary cost 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 and natural gas prices and levels of demand for crude oil and natural gas are likely to remain highly volatile due to numerous factors, including: geopolitical conflicts in Europe and the Middle East, along with associated international tensions; the perceived risk of a global economic recession; domestic or international crude oil and natural gas production; changes in governmental rules and regulations; sanctions; the willingness of operators to invest capital in the exploration for and development of resources; use of alternative fuels; improved vehicle fuel efficiency; timing of capital investments in alternative energy sources; a more sustained movement to electric vehicles; and the potential for ongoing supply/demand imbalances.
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.
Customer spending in the natural gas shale plays has moderated over the last ten years 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.
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 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 (and have been awarded select contracts and are bidding on additional projects) to facilitate the development of alternative energy
19
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 90% of Offshore Manufactured Products segment sales in the first three months of 2024 were driven by our customers’ capital spending for products and services 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 and services”). 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 decreased to $305 million as of March 31, 2024 from $327 million as of December 31, 2023. Bookings totaled $66 million in the first quarter of 2024, yielding a quarterly book-to-bill ratio of 0.8x. 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 | ||||||||||||||||||||||
| 2024 | $ | 305 | ||||||||||||||||||||||||
| 2023 | 316 | $ | 328 | $ | 341 | $ | 327 | |||||||||||||||||||
| 2022 | 255 | 232 | 248 | 300 | ||||||||||||||||||||||
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 internationally. 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 frac plug, toe valve and other elastomer 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.
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. drilling rig count, as measured by Baker Hughes Company, as of and for the periods indicated.
As of April 19, 2024 | Average for the | ||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | ||||||||||||||||
| United States Rig Count: | |||||||||||||||||
| Land – Oil | 492 | 483 | 579 | ||||||||||||||
| Land – Natural gas and other | 107 | 119 | 155 | ||||||||||||||
| Offshore | 20 | 21 | 19 | ||||||||||||||
| 619 | 623 | 753 | |||||||||||||||
20
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, 2024, oil-directed drilling accounted for 81% of the total U.S. rig count – with the balance largely natural gas related.
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; competitive pricing pressures; customer consolidations; 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 conflicts and 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, 2023.
21
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 “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, 2023 in order to understand factors, such as charges, credits and financing transactions, which may impact comparability of the selected financial data.
In the first quarter of 2024, certain short-cycle manufacturing operations historically reported within the Offshore Manufactured Products segment (legacy frac plug and elastomer products) were integrated into the Downhole Technologies segment to better align with the underlying activity demand drivers and the current segment management structure, as well as provide for additional operational synergies. Historical financial data and supplemental disaggregated revenue information as of the three months ended March 31, 2023 (presented herein) were conformed with the current-period segment presentation.
Unaudited Consolidated Results of Operations
The following summarizes our consolidated results of operations for the three months ended March 31, 2024 and 2023 (in thousands, except per share amounts):
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | Variance | |||||||||||||||
| Revenues: | |||||||||||||||||
| Products | $ | 94,329 | $ | 99,840 | $ | (5,511) | |||||||||||
| Services | 72,933 | 96,359 | (23,426) | ||||||||||||||
| 167,262 | 196,199 | (28,937) | |||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Product costs | 75,137 | 78,677 | (3,540) | ||||||||||||||
| Service costs | 56,814 | 72,058 | (15,244) | ||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization expense presented below) | 131,951 | 150,735 | (18,784) | ||||||||||||||
Selling, general and administrative expenses(1) | 22,496 | 24,016 | (1,520) | ||||||||||||||
| Depreciation and amortization expense | 14,195 | 15,256 | (1,061) | ||||||||||||||
Impairment of goodwill(2) | 10,000 | — | 10,000 | ||||||||||||||
Other operating (income) expense, net(3) | (203) | 317 | (520) | ||||||||||||||
| 178,439 | 190,324 | (11,885) | |||||||||||||||
| Operating income (loss) | (11,177) | 5,875 | (17,052) | ||||||||||||||
| Interest expense, net | (2,101) | (2,391) | 290 | ||||||||||||||
| Other income (expense), net | (72) | 276 | (348) | ||||||||||||||
| Income (loss) before income taxes | (13,350) | 3,760 | (17,110) | ||||||||||||||
| Income tax provision | (24) | (1,602) | 1,578 | ||||||||||||||
| Net income (loss) | $ | (13,374) | $ | 2,158 | $ | (15,532) | |||||||||||
| Net income (loss) per share: | |||||||||||||||||
Basic | $ | (0.21) | $ | 0.03 | |||||||||||||
Diluted | (0.21) | 0.03 | |||||||||||||||
| Weighted average number of common shares outstanding: | |||||||||||||||||
Basic | 62,503 | 62,825 | |||||||||||||||
Diluted | 62,503 | 63,072 | |||||||||||||||
_______________
(1)During the three months ended March 31, 2024, we recognized $0.4 million in costs associated with the defense of certain Well Site Services segment patents related to proprietary technologies.
(2)During the three months ended March 31, 2024, the Downhole Technologies segment recognized a $10.0 million non-cash impairment charge related to goodwill reassigned to the business in connection with the segment realignment discussed above.
(3)During the three months ended March 31, 2024, we recognized facility consolidation and other charges of $2.1 million associated with the Offshore Manufactured Products and the Well Site Services segments’ ongoing consolidation and relocation of certain manufacturing and service locations.
22
Unaudited Segment Results of Operations
We manage and measure our business performance in three distinct operating segments: Offshore Manufactured Products, Well Site Services and Downhole Technologies. Supplemental financial information by operating segment for the three months ended March 31, 2024 and 2023 is summarized below (in thousands):
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | Variance | |||||||||||||||
| Revenues: | |||||||||||||||||
Offshore Manufactured Products | |||||||||||||||||
| Project-driven: | |||||||||||||||||
| Products | $ | 53,137 | $ | 48,617 | $ | 4,520 | |||||||||||
| Services | 25,233 | 24,630 | 603 | ||||||||||||||
| 78,370 | 73,247 | 5,123 | |||||||||||||||
| Military and other products | 8,487 | 7,258 | 1,229 | ||||||||||||||
| 86,857 | 80,505 | 6,352 | |||||||||||||||
| Well Site Services | 47,292 | 67,058 | (19,766) | ||||||||||||||
| Downhole Technologies | 33,113 | 48,636 | (15,523) | ||||||||||||||
| $ | 167,262 | $ | 196,199 | $ | (28,937) | ||||||||||||
| Operating income (loss): | |||||||||||||||||
Offshore Manufactured Products(1) | $ | 10,603 | $ | 7,698 | $ | 2,905 | |||||||||||
Well Site Services(2) | (419) | 6,966 | (7,385) | ||||||||||||||
Downhole Technologies(3) | (12,079) | 1,873 | (13,952) | ||||||||||||||
| Corporate | (9,282) | (10,662) | 1,380 | ||||||||||||||
| $ | (11,177) | $ | 5,875 | $ | (17,052) | ||||||||||||
_______________
(1)During the three months ended March 31, 2024, we recognized facility consolidation charges of $1.5 million associated with the Offshore Manufactured Products segment’s ongoing consolidation and relocation of a manufacturing and service location.
(2)During the three months ended March 31, 2024, the Well Site Services segment recognized charges of $1.0 million associated primarily with the consolidation and exit of certain service locations.
(3)During the three months ended March 31, 2024, the Downhole Technologies segment recognized a $10.0 million non-cash impairment charge related to goodwill reassigned to the business in connection with the segment realignment discussed above.
23
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
We reported a net loss for the three months ended March 31, 2024 of $13.4 million, or $0.21 per share, which included a non-cash goodwill impairment charge of $10.0 million ($9.5 million after-tax, or $0.15 per share) and facility consolidation and other charges of $2.5 million ($2.0 million after-tax, or $0.03 per share). These results compare to net income for the three months ended March 31, 2023 of $2.2 million, or $0.03 per share.
Our first quarter 2024 results, reflect the impact of an industry-wide decline in U.S. well completions, driven particularly by weak natural gas prices (the average spot price for Henry Hub natural gas was $2.15 per MMBtu in the first quarter of 2024, down 19% from the prior-year period). The impact of the decline in investments by our U.S. customers was partially offset by growth in offshore and international project activity and associated backlog conversion. Management continues to implement measures in areas experiencing lower activity levels to reduce future costs.
Revenues. Consolidated total revenues in the first three months of 2024 decreased $28.9 million, or 15%, from the first three months of 2023.
Consolidated product revenues in the first three months of 2024 decreased $5.5 million, or 6%, from the first three months of 2023, with the impact of lower customer demand for consumable completion products in the United States, partially offset by higher customer demand for project-driven production facility and connector products. Consolidated service revenues in the first three months of 2024 decreased $23.4 million, or 24%, from the first three months of 2023 due primarily to lower U.S. land-based customer investments.
The following table provides supplemental disaggregated revenue from contracts with customers by operating segment for the three months ended March 31, 2024 and 2023 (in thousands):
Offshore Manufactured Products | Well Site Services | Downhole Technologies | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31 | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||||||||||||
| Project-driven: | |||||||||||||||||||||||||||||||||||||||||||||||
| Products | $ | 53,137 | $ | 48,617 | $ | — | $ | — | $ | — | $ | — | $ | 53,137 | $ | 48,617 | |||||||||||||||||||||||||||||||
| Services | 25,233 | 24,630 | — | — | — | — | 25,233 | 24,630 | |||||||||||||||||||||||||||||||||||||||
| Total project-driven | 78,370 | 73,247 | — | — | — | — | 78,370 | 73,247 | |||||||||||||||||||||||||||||||||||||||
| Military and other products | 8,487 | 7,258 | — | — | — | — | 8,487 | 7,258 | |||||||||||||||||||||||||||||||||||||||
Short-cycle products and services | — | — | 47,292 | 67,058 | 33,113 | 48,636 | 80,405 | 115,694 | |||||||||||||||||||||||||||||||||||||||
| $ | 86,857 | $ | 80,505 | $ | 47,292 | $ | 67,058 | $ | 33,113 | $ | 48,636 | $ | 167,262 | $ | 196,199 | ||||||||||||||||||||||||||||||||
By destination: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. land | $ | 7,055 | $ | 8,442 | $ | 35,857 | $ | 53,274 | $ | 24,170 | $ | 38,821 | $ | 67,082 | $ | 100,537 | |||||||||||||||||||||||||||||||
| Offshore and international | 79,802 | 72,063 | 11,435 | 13,784 | 8,943 | 9,815 | 100,180 | 95,662 | |||||||||||||||||||||||||||||||||||||||
| $ | 86,857 | $ | 80,505 | $ | 47,292 | $ | 67,058 | $ | 33,113 | $ | 48,636 | $ | 167,262 | $ | 196,199 | ||||||||||||||||||||||||||||||||
Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) decreased $18.8 million, or 12%, in the first three months of 2024 compared to the first three months of 2023.
Consolidated product costs in the first three months of 2024 decreased $3.5 million, or 4%, compared to the first three months of 2023 due primarily to the reported revenue decline. Consolidated service costs in the first three months of 2024 decreased $15.2 million, or 21%, compared to the first three months of 2023, due primarily to the impact of lower U.S. activity levels.
Selling, General and Administrative Expense. Selling, general and administrative expense was $22.5 million in the first three months of 2024, which included $0.4 million of costs associated with enforcing certain of our patents. Excluding these patent defense costs, selling, general and administrative costs decreased $1.2 million, or 5%, from the first three months of 2023, due primarily to reductions in short- and long-term incentive expenses.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased $1.1 million, or 7%, in the first three months of 2024 compared to the prior-year period. Note 10, “Segments and Related Information,” to our Unaudited Condensed Consolidated Financial Statements presents depreciation and amortization expense by segment.
24
Impairment of Goodwill. During the first three months of 2024, our Downhole Technologies operations recognized a non-cash impairment charge of $10.0 million related to goodwill transferred to the business in connection with segment realignment discussed above. See Note 2, “Goodwill Impairment and Other Charges,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion.
Other Operating (Income) Expense, Net. In the first three months of 2024, other operating income, net included, among other items, gains on disposals of equipment totaling $1.2 million and charges of $2.1 million recognized in connection with our ongoing consolidation and exit of certain manufacturing and service locations within our Offshore Manufactured Products and Well Site Services segments.
Operating Income (Loss). Our consolidated operating loss was $11.2 million in the first three months of 2024, which included a $10.0 million non-cash goodwill impairment charge and $2.5 million in facility consolidation and other charges. This compares to consolidated operating income of $5.9 million in the first three months of 2023. Excluding the 2024 charges, operating income decreased $4.5 million year-over-year.
Interest Expense, Net. Net interest expense totaled $2.1 million in the first three months of 2024, which compares to $2.4 million in the first three months of 2023. Interest expense as a percentage of total debt outstanding was approximately 7% in the first three months of 2024, compared to 7% in the first three months of 2023.
Income Tax. Income tax expense for the first three months of 2024 and 2023 was calculated using a discrete approach. This methodology was used because changes in our results of operations and non-deductible expenses can materially impact the estimated annual effective tax rate. For the first three months of 2024, our income tax provision was $24 thousand on a pre-tax loss of $13.4 million, which included a $10.0 million goodwill impairment charge and other non-deductible expenses. This compares to an income tax provision of $1.6 million on pre-tax income of $3.8 million for the first three months of 2023, which included certain non-deductible expenses and discrete tax items.
Other Comprehensive Income (Loss). Reported comprehensive income (loss) is the sum of reported net income (loss) and other comprehensive income (loss). Other comprehensive loss was $3.0 million in the first three months of 2024 compared to comprehensive income of $4.1 million in the first three months of 2023 due to fluctuations in foreign currency exchange rates compared to the U.S. dollar for certain of the international operations of our operating segments. For the first three months of 2024 and 2023, currency translation adjustments recognized as a component of other comprehensive income (loss) were primarily attributable to the United Kingdom and Brazil. During the first three months of 2024, the exchange rates for the British pound and the Brazilian real weakened compared to the U.S. dollar. In the first three months of 2023, the exchange rate for the British pound and the Brazilian real strengthened compared to the U.S. dollar.
Segment Operating Results
Offshore Manufactured Products
Revenues. Our Offshore Manufactured Products segment revenues increased $6.4 million, or 8%, in the first three months of 2024 compared to the first three months of 2023 due primarily to increased demand for international and offshore-project driven products and services.
Operating Income. Our Offshore Manufactured Products segment reported operating income of $10.6 million in the first three months of 2024, which included the $1.5 million in facility consolidation charges discussed above. This compares to operating income of $7.7 million in the first three months of 2023. Excluding the facility consolidation charges, operating income increased $4.4 million year-over-year.
Backlog. Backlog in our Offshore Manufactured Products segment totaled $305 million as of March 31, 2024 compared to $327 million as of December 31, 2023. Bookings during the first three months of 2024 totaled $66 million, yielding a quarterly book-to-bill ratio of 0.8x.
Well Site Services
Revenues. Our Well Site Services segment revenues decreased $19.8 million, or 29%, in the first three months of 2024 compared to the first three months of 2023, driven primarily by lower U.S. customer activity levels (particularly in natural gas basins) and competitive market conditions.
25
Operating Income. Our Well Site Services segment reported an operating loss of $0.4 million in the first three months of 2024, which included costs totaling $1.0 million associated with the exit of three facilities and the defense of patents. This compares to operating income of $7.0 million in the first three months of 2023. Excluding the costs discussed above, the Well Site Services segment’s operating results declined $6.3 million from the prior-year period, due to the reported decrease in revenue.
Downhole Technologies
Revenues. Our Downhole Technologies segment revenues decreased $15.5 million, or 32%, in the first three months of 2024 from the first three months of 2023 due primarily to lower U.S. customer demand for perforating and completion products.
Operating Loss. Our Downhole Technologies segment reported an operating loss of $12.1 million in the first three months of 2024, which included the $10.0 million non-cash goodwill impairment charge related to the first quarter of 2024 segment realignment. This compares to operating income of $1.9 million reported in the first three months of 2023. Excluding the goodwill impairment charge, the Downhole Technologies operating results declined $4.0 million from the prior-year period, due primarily to the reported decrease in revenue and lower manufacturing volumes.
Corporate
Operating Loss. Corporate expenses in the first three months of 2024 decreased $1.4 million, or 13%, from the first three months of 2023, due primarily to lower short- and long-term incentive expenses.
26
Liquidity, Capital Resources and Other Matters
Our primary liquidity needs are to fund operating and capital expenditures, new product development and general working capital needs. In addition, capital has been used to fund strategic business acquisitions, repay debt and fund share repurchases. Our primary sources of funds are cash flow from operations, proceeds from borrowings under our credit facilities and, less frequently, capital markets transactions.
Operating Activities
Cash flows used in operations totaled $11.4 million during the first three months of 2024, compared to $5.9 million used in operations during the first three months of 2023.
During the first three months of 2024, $21.8 million was used to fund net working capital increases, primarily due to the payment of accrued 2023 short- and long-term cash incentives and a decrease in accounts payable. During 2023, $25.6 million was used to fund net working capital increases, primarily due to the payment of accrued 2022 short- and long-term cash incentives and an activity-driven increase in inventories.
Investing Activities
Net cash used in investing activities during the first three months of 2024 totaled $7.8 million, compared to $6.4 million used in investing activities during the first three months of 2023.
Capital expenditures totaled $10.1 million and $6.6 million during the first three months of 2024 and 2023, respectively. These investments were partially offset by proceeds from the sale of equipment of $2.3 million and $0.2 million during the first three months of 2024 and 2023, respectively.
Within our Offshore Manufactured Products segment, we completed the consolidation of certain facilities in Houston, Texas during 2023 and are in the process of strategically relocating our Asian manufacturing and service operations from Singapore to Batam, Indonesia. With these consolidations, two facilities are classified as held-for-sale assets within prepaid expenses and other current assets as of March 31, 2024.
Including the planned construction of a new facility in Batam, we expect to invest approximately $40 million in capital expenditures during 2024. In 2024, we also expect to sell the two held-for-sale facilities (in Singapore and Houston), with proceeds totaling approximately $35 million. We plan to fund our capital expenditures with available cash, internally generated funds and, if necessary, borrowings under our ABL Facility discussed below.
Financing Activities
During the first three months of 2024, net cash of $3.7 million was used in financing activities. This compares to $14.4 million of cash used in financing activities during the first three months of 2023, which included the repayment of $17.3 million principal amount of our outstanding 2023 Notes.
As of March 31, 2024, we had cash and cash equivalents totaling $24.1 million, which compared to $47.1 million as of December 31, 2023.
As of March 31, 2024, we had no borrowings outstanding under our ABL Facility, $135.0 million principal amount of our 2026 Notes (as defined below) outstanding and other debt of $2.9 million. Our reported interest expense included amortization of deferred financing costs of $0.5 million during the first three months of 2024. For the first three months of 2024, our contractual cash interest expense was $1.9 million, or approximately 6% of the average principal balance of debt outstanding.
We believe that cash on-hand, cash flow from operations and borrowing capacity available under our ABL Facility will be sufficient to meet our liquidity needs in the coming twelve months. If our plans or assumptions change, or are inaccurate, we may need to raise additional capital. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend upon our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global banking and financial markets, stakeholder scrutiny of ESG matters and other factors, many of which are beyond our control. In this regard, the effect of multiple U.S. bank failures in 2023 resulted in significant disruptions to global banking and financial markets. For companies like ours that support the energy industry, these disruptions negatively impacted the value of our common stock and may reduce our ability to access capital in the bank and capital markets or result in such capital being available on less favorable terms, which could in the future negatively affect our liquidity.
27
On March 6, 2024, the SEC finalized rules relating to the disclosure of a range of climate-related information (the “Rules”). The Rules were temporarily stayed by the SEC on April 4, 2024 pending judicial review. While subject to ongoing litigation, these new disclosure requirements are currently effective for us beginning with the year ending December 31, 2026, phased in over a five-year period. The ultimate impact on our business is uncertain but we and our customers may incur increased compliance costs related to the assessment and disclosure of climate-related risks. We may also face increased litigation risks related to disclosures made pursuant to the rule if finalized as proposed. In addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders and lenders in restricting access to capital or seeking more stringent conditions with respect to their investments in us, our customers and other companies like ours that support the energy industry. For more information on our risks related to climate change, see the risk factors in “Part I, Item 1A. Risk Factors” included in our 2023 Annual Report on Form 10-K titled, “Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide,” “The Inflation Reduction Act of 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations” and “Increasing attention to ESG matters may impact our business.”
Stock Repurchase Program. On February 16, 2023, the Board authorized $25.0 million for the repurchases of our 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 we deem appropriate. During the three months ended March 31, 2024, there were no repurchases of common stock under the program. The amount remaining under our share repurchase authorization as of March 31, 2024 was $18.1 million.
Revolving Credit Facility. Our senior secured credit facility provides for a $125.0 million asset-based revolving credit facility (as amended, the “ABL Facility”) under which credit availability is subject to a borrowing base calculation. On February 16, 2024, we amended the ABL Facility to extend the maturity date to February 16, 2028.
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 (as amended, the “ABL Agreement”). The ABL Agreement, as amended, matures on February 16, 2028 with a springing maturity 91 days prior to the maturity of any outstanding indebtedness with a principal amount in excess of $17.5 million. See Note 4, “Long-term Debt,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding the ABL Agreement.
As of March 31, 2024, we had $15.9 million of outstanding letters of credit, but no borrowings outstanding under the ABL Agreement. The total amount available to be drawn as of March 31, 2024 was $86.3 million, calculated based on the then-current borrowing base less outstanding letters of credit.
2026 Notes. We issued $135.0 million aggregate principal amount of 4.75% convertible senior notes due 2026 (the “2026 Notes”) pursuant to an indenture, dated as of March 19, 2021 (the “2026 Indenture”), between us and Computershare Trust Company, National Association, as successor trustee. The 2026 Notes will mature on April 1, 2026, unless earlier repurchased, redeemed or converted.
The 2026 Indenture contains certain events of default, including certain defaults by us with respect to other indebtedness of at least $40.0 million. See Note 4, “Long-term Debt,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding the 2026 Notes. As of March 31, 2024, 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, our 2023 Notes matured and the outstanding $17.3 million in principal amount was repaid in full.
Our total debt represented 16% of our combined total debt and stockholders’ equity as of March 31, 2024 and December 31, 2023.
Contingencies and Other Obligations. We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters.
See Note 11, “Commitments and Contingencies,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion.
Off-Balance Sheet Arrangements. As of March 31, 2024, we had no off-balance sheet arrangements.
28
Critical Accounting Policies
For a discussion of the critical accounting policies and estimates that we use in the preparation of our condensed consolidated financial statements, see “Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023. These estimates require significant judgments, assumptions and estimates. We have discussed the development, selection, and disclosure of these critical accounting policies and estimates with the audit committee of our Board of Directors. There have been no material changes to the judgments, assumptions and estimates upon which our critical accounting estimates are based.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, which are adopted by us as of the specified effective date. Management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk refers to the potential losses arising from changes in interest rates, foreign currency exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility.
Our principal market risks are our exposure to changes in interest rates and foreign currency exchange rates. We enter into derivative instruments only to the extent considered necessary to meet risk management objectives and do not use derivative contracts for speculative purposes.
Interest Rate Risk. We have a revolving credit facility that is subject to the risk of higher interest charges associated with increases in interest rates. As of March 31, 2024, we had no floating-rate obligations outstanding under our ABL Facility. The use of floating-rate obligations would expose us to the risk of increased interest expense in the event of increases in short-term interest rates.
Foreign Currency Exchange Rate Risk. Our operations are conducted in various countries around the world and we receive revenue from these operations in a number of different currencies. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in (i) currencies other than the U.S. dollar, which is our functional currency, or (ii) the functional currency of our subsidiaries, which is not necessarily the U.S. dollar. In order to mitigate the effects of foreign currency exchange rate risks in areas outside of the United States (primarily in our Offshore Manufactured Products segment), we generally pay a portion of our expenses in local currencies and a substantial portion of our contracts provide for collections from customers in U.S. dollars. During the first three months of 2024, our reported foreign currency exchange gains were $0.2 million and are included in “other operating (income) expense, net” in the consolidated statements of operations.
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 our operating segments. Our accumulated other comprehensive loss increased $3.0 million from $70.0 million as of December 31, 2023 to $73.0 million as of March 31, 2024, due to changes in currency exchange rates. During the three months ended March 31, 2024, the exchange rates for the British pound and the Brazilian real weakened by 1% and 3%, respectively, compared to the U.S. dollar.
ITEM 4. Controls and Procedures
(i) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2024 at the reasonable assurance level.
29
(ii) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
30
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
The information with respect to this Item 1 is set forth under Note 11, “Commitments and Contingencies.”
ITEM 1A. Risk Factors
“Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 includes a detailed discussion of our risk factors. The risks described in such report are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may materially adversely affect our business, financial conditions or future results. There have been no material changes to our risk factors as set forth in our 2023 Annual Report on Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c)
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2) | ||||||||||||||||||||||
| January 1 through January 31, 2024 | 188,635 | $ | 6.59 | — | $ | 18,133,096 | ||||||||||||||||||||
| February 1 through February 29, 2024 | 218,942 | 6.10 | — | 18,133,096 | ||||||||||||||||||||||
| March 1 through March 31, 2024 | — | — | — | 18,133,096 | ||||||||||||||||||||||
| Total | 407,577 | $ | 6.33 | — | ||||||||||||||||||||||
________________
(1)All shares purchased during the three-month period ended March 31, 2024 were acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting of stock awards. These shares were not part of a publicly announced program to purchase common stock.
(2)In February 2023, our Board of Directors authorized $25.0 million for the repurchases of our common stock, par value $0.01 per share, through February 2025. As of March 31, 2024, $6.9 million of share repurchases have been made under this authorization.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
During the three months ended March 31, 2024, no director or executive officer adopted terminated
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ITEM 6. Exhibits
| Exhibit No. | Description | |||||||
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| 101.INS* | — | XBRL Instance Document | ||||||
| 101.SCH* | — | XBRL Taxonomy Extension Schema Document | ||||||
| 101.CAL* | — | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
| 101.DEF* | — | XBRL Taxonomy Extension Definition Linkbase Document | ||||||
| 101.LAB* | — | XBRL Taxonomy Extension Label Linkbase Document | ||||||
| 101.PRE* | — | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||
| 104 | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||
---------
| * | Filed herewith. | ||||
| ** | Furnished herewith. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OIL STATES INTERNATIONAL, INC. | |||||||||||||||||
| Date: | April 26, 2024 | By: | /s/ LLOYD A. HAJDIK | ||||||||||||||
| Lloyd A. Hajdik | |||||||||||||||||
| Executive Vice President, Chief Financial Officer and | |||||||||||||||||
| Treasurer (Duly Authorized Officer and Principal Financial Officer) | |||||||||||||||||
33