Part I [Cautionary Statement Regarding Forward-Looking Statements](index=3&type=section&id=Cautionary%20Statement%20Regarding%20Forward-Looking%20Statements) This section details forward-looking statements and associated risks, including commodity price volatility, industry cyclicality, and regulatory changes, which may cause actual results to differ materially - The report contains forward-looking statements identified by words like "may," "will," "could," "project," etc., which are subject to risks and uncertainties[15](index=15&type=chunk) - Key risk factors that could cause actual results to differ include oil and gas supply/demand, commodity price fluctuations, the cyclical nature of the industry, customer financial health, regulatory changes, and geopolitical events[17](index=17&type=chunk) [Item 1. Business](index=4&type=section&id=Item%201.%20Business) Oil States International, Inc. is a global oilfield products and services company operating across three segments, driven by a strategy of organic growth and strategic acquisitions, with its cyclical business highly dependent on oil and gas industry activity and commodity prices [Our Company and Strategy](index=4&type=section&id=Our%20Company%20and%20Strategy) Oil States International operates in three segments, providing global oilfield products and services with a long-term strategy focused on organic growth and strategic acquisitions to enhance returns - The company operates through three business segments: Well Site Services, Downhole Technologies, and Offshore/Manufactured Products[18](index=18&type=chunk) - The business strategy combines organic growth through capital spending with strategic acquisitions to expand market share and leverage its cost structure[20](index=20&type=chunk) [Recent Developments](index=4&type=section&id=Recent%20Developments) In early 2018, the company expanded operations through the acquisitions of GEODynamics for **$615 million** and Falcon Flowback Services for **$84.2 million**, funded by **$200 million** in convertible senior notes and an amended **$350 million** revolving credit facility - Closed the acquisition of GEODynamics on January 12, 2018, for total consideration of approximately **$615 million**, comprising cash, common stock, and a promissory note[22](index=22&type=chunk) - Acquired Falcon Flowback Services, LLC on February 28, 2018, for **$84.2 million** in cash to enhance its Completion Services operations[26](index=26&type=chunk) - Completed financing transactions including a **$200 million** convertible senior notes offering and an amended revolving credit facility with a capacity of up to **$350 million**[24](index=24&type=chunk)[25](index=25&type=chunk) [Our Industry](index=5&type=section&id=Our%20Industry) The company operates in the cyclical oilfield services industry, where demand is highly dependent on volatile oil and natural gas prices, with a **40%** crude oil price drop in Q4 2018 expected to cause activity declines in early 2019 - Demand for products and services is cyclical and substantially dependent on oil and natural gas industry activity levels and commodity prices[28](index=28&type=chunk) - The industry experienced a prolonged downturn from 2014, with U.S. rig counts declining **79%** from the peak before bottoming in May 2016[30](index=30&type=chunk) - A **40%** decline in crude oil prices during Q4 2018 is expected to cause customer-driven activity declines in early 2019 as customers reassess budgets[30](index=30&type=chunk) [Well Site Services](index=6&type=section&id=Well%20Site%20Services) The Well Site Services segment, contributing **44%** of 2018 consolidated revenue, provides drilling, completion, and production equipment and services, with its Drilling Services operating at **30%** average utilization in 2018 Well Site Services Revenue Contribution | Year | % of Consolidated Revenue | | :--- | :--- | | 2018 | 44% | | 2017 | 43% | | 2016 | 27% | - Completion Services are provided through approximately **45** distribution locations, serving customers in the U.S., Canada, and other international markets[38](index=38&type=chunk) Drilling Rig Utilization | Year | Average Utilization | | :--- | :--- | | 2018 | 30% | | 2017 | 29% | | 2016 | 12% | [Downhole Technologies](index=7&type=section&id=Downhole%20Technologies) The Downhole Technologies segment, formed by the GEODynamics acquisition, contributed **20%** of 2018 consolidated revenue by providing engineered products for well completion, intervention, and abandonment, with demand driven by U.S. land activity and complex completions - The Downhole Technologies segment was formed from the GEODynamics acquisition in January 2018 and contributed **20%** of consolidated revenue for the year[41](index=41&type=chunk) - The segment provides oil and gas perforation systems, downhole tools, and services for completion, intervention, and well abandonment operations[41](index=41&type=chunk) - Demand is influenced by trends toward longer lateral lengths, increased frac stages, and more perforation clusters to enhance unconventional well productivity[42](index=42&type=chunk) [Offshore/Manufactured Products](index=8&type=section&id=Offshore%2FManufactured%20Products) The Offshore/Manufactured Products segment provides highly-engineered products for offshore markets, with its revenue contribution decreasing to **36%** in 2018 and a year-end 2018 backlog of **$179 million**, reflecting a challenging deepwater market Offshore/Manufactured Products Revenue Contribution | Year | % of Consolidated Revenue | | :--- | :--- | | 2018 | 36% | | 2017 | 57% | | 2016 | 73% | Segment Backlog | Date | Backlog (in millions) | | :--- | :--- | | Dec 31, 2018 | $179 | | Dec 31, 2017 | $168 | | Dec 31, 2016 | $199 | - Approximately **78%** of the backlog at December 31, 2018 is expected to be recognized as revenue during 2019[62](index=62&type=chunk) - Halliburton Company was a significant customer, accounting for **10%** of total consolidated revenues in 2018 and **16%** in 2017[64](index=64&type=chunk) [General Business Information](index=12&type=section&id=General%20Business%20Information) The company's operations are affected by seasonality and extensive environmental, health, and safety regulations, while its full-time employee count increased to **3,926** at year-end 2018 - Operations are affected by seasonal weather, with winter conditions impacting the Rocky Mountain region and hurricanes affecting the Gulf of Mexico[65](index=65&type=chunk) - Total full-time employees increased to **3,926** at year-end 2018 from **3,077** at year-end 2017[66](index=66&type=chunk) - The business is subject to extensive environmental and safety regulations which can result in significant costs, operational restrictions, and penalties for non-compliance[67](index=67&type=chunk)[69](index=69&type=chunk) [Item 1A. Risk Factors](index=14&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including high dependence on volatile oil and gas industry spending, potential goodwill impairment, substantial regulatory changes, international operational challenges, and acquisition integration difficulties - Demand for products and services is highly dependent on oil and gas industry spending, which has been negatively impacted by lower commodity prices since 2014[75](index=75&type=chunk) - A prolonged industry downturn could negatively affect the value of goodwill and other intangible assets, which represented **32%** and **13%** of total assets, respectively, at year-end 2018[79](index=79&type=chunk) - The company faces significant regulatory risks, including potential new laws regarding hydraulic fracturing, induced seismicity, and climate change/GHG emissions that could increase costs and reduce demand[83](index=83&type=chunk)[91](index=91&type=chunk)[113](index=113&type=chunk) - International operations expose the company to risks such as expropriation, currency fluctuations, and compliance with anti-bribery laws like the FCPA[92](index=92&type=chunk)[94](index=94&type=chunk) - The inability to successfully integrate acquired businesses, such as GEODynamics and Falcon, could adversely affect operations and prevent the realization of expected synergies[119](index=119&type=chunk)[121](index=121&type=chunk) [Item 2. Properties](index=28&type=section&id=Item%202.%20Properties) The company maintains numerous global manufacturing facilities, service centers, and offices, with principal locations across its three segments in the U.S., Canada, Argentina, UK, Brazil, and Singapore - The company's principal facilities are strategically located to support its three worldwide business segments[155](index=155&type=chunk) - Key locations include Texas, Louisiana, and Oklahoma in the U.S., as well as international sites in Canada, Argentina, the UK, Brazil, and Singapore[156](index=156&type=chunk)[157](index=157&type=chunk)[158](index=158&type=chunk) [Item 3. Legal Proceedings](index=28&type=section&id=Item%203.%20Legal%20Proceedings) Details on the company's legal proceedings are incorporated by reference from Note 13, "Commitments and Contingencies," of the Consolidated Financial Statements - Details on legal proceedings are located in Note 13 of the financial statements[160](index=160&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=29&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock (OIS) trades on the NYSE, has not paid dividends since its 2001 IPO, underperformed key indices over five years, and has **$120.5 million** remaining for share repurchases - The company's common stock (OIS) has not paid a cash dividend since its 2001 IPO, and dividend payments are restricted by its Amended Revolving Credit Facility[164](index=164&type=chunk) - The 5-year cumulative total return on the company's stock was significantly lower than the S&P 500 and key industry indices[165](index=165&type=chunk)[168](index=168&type=chunk) - The Board of Directors extended the share repurchase program to July 29, 2019, with approximately **$120.5 million** remaining available for repurchases[173](index=173&type=chunk) [Item 6. Selected Financial Data](index=31&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides five-year selected financial data, showing cyclical revenues peaking at **$1.82 billion** in 2014, a recovery to **$1.09 billion** in 2018, and net losses in recent years, with total assets growing to **$2.0 billion** in 2018 due to acquisitions Selected Statement of Operations Data (In thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $1,088,133 | $670,627 | $694,444 | $1,099,977 | $1,819,609 | | **Operating income (loss)** | $(5,876) | $(73,872) | $(69,283) | $55,006 | $310,255 | | **Net income (loss) from continuing operations** | $(19,105) | $(84,850) | $(46,386) | $28,371 | $127,227 | | **Diluted net income (loss) per share from continuing operations** | $(0.33) | $(1.69) | $(0.92) | $0.55 | $2.35 | Selected Balance Sheet and Other Data (In thousands) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | **Total assets** | $2,003,821 | $1,301,511 | | **Long-term debt, excluding current portion** | $306,177 | $4,870 | | **Total stockholders' equity** | $1,439,768 | $1,132,713 | | **Net cash provided by continuing operating activities** | $103,170 | $95,382 | | **Capital expenditures** | $88,024 | $35,171 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, noting a **62%** revenue increase to **$1.09 billion** in 2018 driven by acquisitions, despite a **$19.1 million** net loss, with future uncertainty due to volatile oil prices and increased debt [Macroeconomic Environment](index=34&type=section&id=Macroeconomic%20Environment) The energy sector experienced significant volatility in 2018, with crude oil prices declining approximately **40%** in Q4, impacting customer budgets despite an **18%** improvement in the U.S. rig count, while the deepwater market remained slow - Crude oil prices rose for most of 2018 but declined approximately **40%** in the fourth quarter, with WTI closing at **$45 per barrel** on December 28, 2018[189](index=189&type=chunk)[190](index=190&type=chunk) - The average U.S. rig count for 2018 improved **18%** compared to 2017, positively influencing U.S. land-based activity[190](index=190&type=chunk) - The Offshore/Manufactured Products segment backlog decreased from a peak of **$599 million** in mid-2014 to **$179 million** at December 31, 2018, reflecting customer delays in major deepwater projects[204](index=204&type=chunk) [Consolidated Results of Operations](index=38&type=section&id=Consolidated%20Results%20of%20Operations) Consolidated revenues increased **62%** to **$1.09 billion** in 2018 due to acquisitions, resulting in a **$5.9 million** operating loss and **$19.1 million** net loss, while 2017 saw a **3%** revenue decrease and an **$84.9 million** net loss Consolidated Revenue by Year (in thousands) | Year | Total Revenue | % Change YoY | | :--- | :--- | :--- | | 2018 | $1,088,133 | 62% | | 2017 | $670,627 | (3)% | | 2016 | $694,444 | N/A | Consolidated Operating Loss by Year (in thousands) | Year | Operating Loss | | :--- | :--- | | 2018 | $(5,876) | | 2017 | $(73,872) | | 2016 | $(69,283) | [Segment Operating Results](index=41&type=section&id=Segment%20Operating%20Results) In 2018, Well Site Services revenue grew **66%** to **$480.3 million**, Downhole Technologies generated **$213.8 million** in revenue, and Offshore/Manufactured Products revenue increased **3%** to **$394.1 million**, reflecting varied segment performance Segment Revenues 2018 vs 2017 (in thousands) | Segment | 2018 Revenue | 2017 Revenue | % Change | | :--- | :--- | :--- | :--- | | Well Site Services | $480,254 | $288,714 | 66% | | Downhole Technologies | $213,813 | $0 | N/A | | Offshore/Manufactured Products | $394,066 | $381,913 | 3% | Segment Operating Income (Loss) 2018 vs 2017 (in thousands) | Segment | 2018 Op. Income (Loss) | 2017 Op. Income (Loss) | | :--- | :--- | :--- | | Well Site Services | $(17,010) | $(59,078) | | Downhole Technologies | $26,705 | $0 | | Offshore/Manufactured Products | $38,914 | $38,155 | [Liquidity, Capital Resources and Other Matters](index=44&type=section&id=Liquidity%2C%20Capital%20Resources%20and%20Other%20Matters) In 2018, the company generated **$103.2 million** in operating cash, used **$461.4 million** for investing (primarily acquisitions), and raised **$324.1 million** from financing, ending the year with **$19.3 million** cash and **$156.2 million** available credit - Net cash provided by operating activities was **$103.2 million** in 2018, compared to **$95.4 million** in 2017[250](index=250&type=chunk) - Net cash used in investing activities was **$461.4 million** in 2018, dominated by **$379.7 million** for business acquisitions and **$88.0 million** for capital expenditures[252](index=252&type=chunk)[253](index=253&type=chunk)[254](index=254&type=chunk)[255](index=255&type=chunk) - Net cash provided by financing activities was **$324.1 million** in 2018, reflecting the issuance of **$200 million** in convertible notes and net borrowings of **$136.1 million** under the revolving credit facility[259](index=259&type=chunk) - As of December 31, 2018, the company had **$136.1 million** of borrowings outstanding and **$156.2 million** available under its Amended Revolving Credit Facility[264](index=264&type=chunk) [Critical Accounting Policies](index=48&type=section&id=Critical%20Accounting%20Policies) Critical accounting policies involve significant estimates for asset valuation and impairment testing, particularly goodwill, which exceeded carrying values in the December 2018 test, alongside revenue recognition for long-term contracts, contingencies, and income taxes - Goodwill and other intangible assets represented **32%** and **13%** of total assets, respectively, as of December 31, 2018[288](index=288&type=chunk) - The annual goodwill impairment test on December 1, 2018, concluded that the fair value of the Completion Services, Downhole Technologies, and Offshore/Manufactured Products reporting units exceeded their carrying values by **8%**, **8%**, and **26%**, respectively[294](index=294&type=chunk) - Revenue for significant project-driven products is recognized over time using a cost-to-cost percentage-of-completion method, which requires significant estimates[302](index=302&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=52&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are interest rate exposure on **$136.1 million** of floating-rate debt, where a **1%** increase would cost **$1.4 million** annually, and foreign currency exchange rate fluctuations, which increased accumulated other comprehensive loss to **$71.4 million** in 2018 - The company is exposed to interest rate risk on its **$136.1 million** of floating-rate debt. A hypothetical **1%** rate increase would raise annual interest expense by about **$1.4 million**[326](index=326&type=chunk) - Foreign currency exchange rate risk is a key exposure, with reported foreign currency exchange losses of **$0.1 million** in 2018[327](index=327&type=chunk) - Accumulated other comprehensive loss increased by **$12.9 million** in 2018, primarily due to the weakening of the British pound (by **6%**) and Brazilian real (by **14%**) against the U.S. dollar[328](index=328&type=chunk) [Item 9A. Controls and Procedures](index=53&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2018, with the exception of the recently acquired GEODynamics business - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[331](index=331&type=chunk) - The assessment of internal controls over financial reporting excluded the recently acquired GEODynamics business, which constituted **20%** of consolidated revenues for the year[331](index=331&type=chunk)[335](index=335&type=chunk) - There were no changes in internal control over financial reporting during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, internal controls, other than the impact of the GEODynamics acquisition[337](index=337&type=chunk) Part III Part III incorporates information on directors, executive officers, compensation, security ownership, related party transactions, and accounting fees by reference from the 2019 Proxy Statement [Item 10. Directors, Executive Officers and Corporate Governance](index=55&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement[345](index=345&type=chunk) [Item 11. Executive Compensation](index=55&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the 2019 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2019 Proxy Statement[341](index=341&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=55&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership is incorporated by reference from the 2019 Proxy Statement - Information regarding security ownership is incorporated by reference from the 2019 Proxy Statement[342](index=342&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=55&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related transactions and director independence is incorporated by reference from the 2019 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the 2019 Proxy Statement[343](index=343&type=chunk) [Item 14. Principal Accounting Fees and Services](index=55&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the 2019 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the 2019 Proxy Statement[344](index=344&type=chunk) Part IV [Item 15. Exhibits, Financial Statement Schedules](index=56&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section provides an index to the financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate documents and required CEO and CFO certifications - This item contains an index of all financial statements and exhibits filed with the report[349](index=349&type=chunk) Financial Statements [Consolidated Statements of Operations](index=67&type=section&id=Consolidated%20Statements%20of%20Operations) The company reported a net loss of **$19.1 million** in 2018, an improvement from **$84.9 million** in 2017, driven by a revenue increase to **$1.09 billion** due to acquisitions, despite an operating loss of **$5.9 million** Consolidated Statements of Operations Highlights (In thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Total Revenues** | $1,088,133 | $670,627 | $694,444 | | **Operating loss** | $(5,876) | $(73,872) | $(69,283) | | **Net loss** | $(19,105) | $(84,850) | $(46,390) | | **Diluted net loss per share** | $(0.33) | $(1.69) | $(0.92) | [Consolidated Balance Sheets](index=69&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$2.00 billion** at year-end 2018, driven by acquisitions increasing goodwill and intangible assets, while total liabilities rose to **$564.1 million** due to increased long-term debt, and total stockholders' equity grew to **$1.44 billion** Consolidated Balance Sheet Highlights (In thousands) | Metric | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | **Total current assets** | $534,031 | $455,937 | | **Goodwill, net** | $647,018 | $268,009 | | **Total assets** | $2,003,821 | $1,301,511 | | **Long-term debt** | $306,177 | $4,870 | | **Total liabilities** | $564,053 | $168,798 | | **Total stockholders' equity** | $1,439,768 | $1,132,713 | [Consolidated Statements of Cash Flows](index=71&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) In 2018, the company generated **$103.2 million** from operations, used **$461.4 million** in investing (mainly acquisitions), and received **$324.1 million** from financing, resulting in a **$34.1 million** decrease in cash to **$19.3 million** Consolidated Cash Flow Highlights (In thousands) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $103,170 | $95,382 | | **Net cash used in investing activities** | $(461,375) | $(47,615) | | **Net cash provided by (used in) financing activities** | $324,058 | $(65,060) | | **Net change in cash and cash equivalents** | $(34,143) | $(15,341) | | **Cash and cash equivalents, end of year** | $19,316 | $53,459 |

Oil States International Inc. (NYSE:OIS) Q4 2018 Results Conference Call February 14, 2019 11:00 AM ET Company Participants Patricia Gil - IR Cindy Taylor - President and CEO Lloyd Hajdik - EVP and CFO Chris Cragg - EVP, Operations Conference Call Participants Marshall Adkins - Raymond James Stephen Gengaro - Stifel Sean Meakim - JP Morgan George O'Leary - Tudor, Pickering, Holt Ian Macpherson - Simmons Marc Bianchi - Cowen Connor Lynagh - Morgan Stanley Operator Welcome to the Oil States International Four ...